In J. Lepera Contracting Inc. v. Royal Timbers Inc. the Ontario Divisional Court recently dealt with a claim in unjust enrichment by a contractor who had done work for the purchaser of land. The purchaser had agreed to buy the land under an agreement of purchase and sale, but later defaulted under that agreement, and then failed to pay the contractor for its work. The land reverted to the selling owner on the purchaser’s default, together with the improvements made by the contractor.

The court concluded that the contractor had no claim against the selling owner under the Construction Lien Act of Ontario because the selling owner had not requested the work. The court also concluded that the contractor had no claim in unjust enrichment against the selling owner because the building contract between the purchaser and the contractor provided a “juristic reason” for the selling owner’s benefit and the contractor’s detriment.

Is this result fair? Should the contractor at least have a lien claim in respect of the greater value of the land due to its work? And if the contractor’s claim does fall outside the lien statute, should the existence of the contractor’s contract with the purchaser entitle the owner/vendor to the benefit of the improvements without payment, and impose that detriment on the contractor?

Background

Royal Timbers owned two plots of land, Lot A and Lot B. It agreed to sell Lot B to Sonoma. Royal Timbers was going to develop Lot A and Sonoma was going to develop Lot B. Royal Timbers and Sonoma hired the same architect who sent out an invitation to tender for work on both lots. The invitation to tender stated that the invitation was being issued by Royal Timbers for Lot A and Sonoma for Lot B. Lepera was the successful bidder for the work to install services on both lots.

Lepera entered into a contract with Royal Timbers to do the services work on Lot A, did that work and was paid by Royal Timbers for that work. Lepera entered into a contract with Sonoma to do the services work on Lot B, did that work and submitted its invoice to Sonoma for the work, and was not paid by Sonoma for that work as Sonoma had defaulted on its agreement to buy Lot B from Royal Timbers.

Lepera filed a lien claim against both Royal Timbers and Sonoma in respect of Lot B. Lepera also asserted a claim in unjust enrichment against Royal Timbers in respect of the work that Lepera had done on Lot B.

The trial dismissed Lepera’s lien claim against Royal Timbers for the work done by Lepera on Lot B on the ground that Royal Timbers had not requested the work to be done on Lot B and was, therefore, not an “owner” of that lot within the meaning of the Construction Lien Act.

The trial judge dismissed Lepera’s unjust enrichment claim against Royal Timbers on the basis that Royal Timbers had not caused the deprivation of Lepera, but rather, the deprivation was caused by Sonoma’s breach of its contract with Lepera.

The Divisional Court’s Judgment

  1. Lien Claim

The Divisional Court upheld the trial judge’s decision with respect to the lien claim. It held that Royal Timbers was not an “owner” with respect to Lot B because Sonoma, not Royal Timbers, had requested that the work be done on Lot B.

The Divisional Court agreed with the trial judge that the invitation to tender established separate tenders for the two lots, and did not constitute a request by Royal Timbers for work on Lot B. In addition, the trial judge was correct in finding that the surrounding facts did not establish a request by Royal Timers with respect to the work on Lot B.

  1. Unjust Enrichment Claim

The Divisional Court disagreed with the trial judge on the role of causation in the law of unjust enrichment. The Divisional Court held that there is no need for the defendant to cause the claimant’s deprivation. The Court said:

“While the deprivation must be linked to the benefit received by the defendant, based on a straightforward economic approach, none of the cases require that the defendant must have caused it.”

However, the Divisional Court upheld the trial judge’s decision on the basis that there was a juridical reason for the deprivation suffered by Lepera, namely, its contract with S. It said:“Lepera’s claim for unjust enrichment cannot succeed on the basis that Lepera’s claim for the monies owing for work it did on Phase 1 arises from its contract with Sonoma. In my view, that contract constitutes a juristic reason sufficient to defeat Lepera’s claim against Royal Timbers in unjust enrichment…Further, on the facts as found by the Trial Judge, it is clear that the reasonable expectations of the parties at the time that the work began was that Lepera would be paid by Sonoma for the work done by it on Phase 1 in accordance with their contract and not by Royal Timbers, with whom it had a separate contract for the work on Phase 2.”

Discussion

This decision raises important issues about the policies underlying the Construction Lien Act and the law of unjust enrichment, and the proper intersection of those policies. If a contractor does work for someone who has agreed to buy land from the owner, should those policies mean that the contractor has neither a construction lien claim against the land nor a claim in unjust enrichment, at least to the extent of the increase in value of the land due to the contractor’s work?

With respect to the Act, if the lien claimant seeks to impose its lien on, and obtain priority against, the seller’s interest in the land, the lien claimant must establish that the seller was an “owner” under the Act by reason of a “request” for the improvement. There are many cases on this point. The present facts seem to cry out for the application of the lien legislation. If the purchaser defaults on the purchase agreement, the lands revert to the seller, and the seller gets the services on the purchased parcel free of charge. According to the logic of the court’s decision it could be the seller that defaults on the purchase contract; the seller would still get the services free of charge on the parcel agreed to be sold.

However, since as early as 1917, in the 3-2 judgment of the Supreme Court of Canada in John A. Marshall Brick Co. v. York Farmers Colonization Co., 1917 CarswellOnt 18, 54 S.C.R. 569, it has been held that a selling owner in this circumstance is not an “owner” under the Act because it did not request the work.

In the John A. Marshall case, the Supreme Court held that, although the contractor could not succeed in its claim that the seller was an “owner’” under the Act, the contractor could assert an alternative claim that the seller’s interest was that of a mortgagee, due to the provisions of what is now section 78(3) of the Act. Accordingly, the contractor was entitled to assert a lien on the increased value of the property after the first lien arose. That issue was not discussed in the present case.

So far as unjust enrichment is concerned, there are cases which hold that a direct contract between the parties may constitute a justification for the detriment to the claimant. But in the present case, there was no direct contract between the selling owner Royal Timbers and the contractor, Lepera.

There are also cases which hold that a subcontractor cannot assert a claim for unjust enrichment against the owner when the subcontractor has a contract with a superior contractor through whom the monies cascading down from the owner are to flow. The contract with the superior contract, and the payment and holdback regime in the lien legislation, have been held to justify any deprivation to the subcontractor if that subcontractor fails to use the lien legislation to protect its interest and assert its claim.

But the present situation does not involve the cascading of money down from the owner in the typical payment and holdback scenario existing in construction projects. Here, the contractor’s contract is with a purchaser of the property and is outside any such cascading or pyramid payment arrangements with the owner. In that scenario, why should the contract with the would-be purchaser be justify the selling owner (to whom the land reverts on the purchaser’s default) obtaining the improvements without paying for them, and for the contractor’s deprivation?

No explanation was provided by the Divisional Court for why Lepera’s contract with Sonoma should be a justification which can be asserted by the selling owner, Royal Timbers, for the deprivation imposed on Lepera and the benefit obtained by Royal Timbers. If the statutory scheme to protect the contractor does not apply, as the court found, should that be the very situation in which unjust enrichment principles should apply?

There are two decisions of the Ontario Court of Appeal on point. In Nicholson v. St. Denis, 1975 CarswellOnt 831, 8 O.R. (2d) 315, the Ontario Court of Appeal held that a contractor who had done work for a purchaser of land did not have an unjust enrichment claim against the selling owner. In that case, however, the selling owner had no knowledge of the improvement made by the contractor, and the contractor had not asserted any lien rights. On the other hand, in Dixon Roof Truss & Building Components Ltd. v. High Street Construction Ltd., 1983 CarswellOnt 730, 43 O.R. (2d) 691, the Ontario Court of Appeal held the selling owner liable to the contractor who had done work for the purchaser, both under the lien legislation and on the basis of unjust enrichment.

In Von Muenchhausen v. S.A. Taylor Building Ltd., 1995 CarswellNB 159, 23 C.L.R. (2d) 177, the New Brunswick Court of Appeal held that the contractor’s contract with A for the construction of a foundation for a house was not a juristic reason for denying an unjust enrichment remedy against B who benefited from the construction.

Since a claimant in unjust enrichment must show that the defendant was enriched, the claimant will have to show that the improvement made by the contractor actually increased the value of the land to the selling owner to whom the lands revert on the purchaser’s default. That may not always be the case since the improvement made for the purchaser of the land may be of no use to the seller of the land. But in the present case, the work was for services to the land and those services seem to have been valuable to the seller. In this respect, it may be that the claim in unjust enrichment arrives at the same result as the alternative lien claim outlined in the John A. Marshall decision, namely, that in each case the contractor has priority over, and a claim against, the increased value of the land after the first lien arises, due to the contractor’s work. That possibility was not explored in the present case.

It is hoped that in the near future appellate courts will explore these potential and alternative claims to the increased value of the land, and also revisit the issue of whether a contract between a contractor and a purchaser of land under an agreement of purchase and sale is, or is not, a good reason to deny the contractor’s claim in unjust enrichment.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 10, part 4 and chapter 16, part 4(a)(iv).

J. Lepera Contracting Inc. v. Royal Timbers Inc., 2016 CarswellOnt 15319, 2016 ONSC 2909 (Ont. Div. Ct.)

Construction lien – request by owner for improvement -unjust enrichment – justification for deprivation

Thomas G. Heintzman O.C., Q.C., FCIArb                                   January 22, 2017

www.heintzmanadr.com

www.constructionlawcanada.com