When is the end?

“This is the end, beautiful friend
This is the end, my only friend
The end”

The Doors

The purpose of adjudication under the Construction Act of Ontario (“the Act”)¹ is to resolve on site disputes on an interim basis so that trades are paid what they are due and projects continue on, uninterrupted. It follows that after the trade’s contract is complete, adjudication serves no purpose as the trade is no longer needed on the project, and more traditional remedies can avail the trade without delaying the project as a whole. Therefore s. 13.5(3) of the Act provides that “An adjudication may not be commenced if the notice of adjudication is given after the date the contract or subcontract is completed, unless the parties to the adjudication agree otherwise.” The same logic applies if the contract is not fully completed, but if it is at an “end” for any other reason. Indeed, even if the parties were to agree otherwise, an adjudication in these circumstances really makes no sense. Accordingly, the Act provides that adjudicator has no jurisdiction if “The contract or subcontract … has ceased to exist.”²

Does that mean a party can terminate or abandon a contract and thereby avoid adjudication? Given a purposive approach once the trade abandons or is kicked off the site, adjudication serves no purpose and the trade should be left to their traditional remedies, and on the other hand, this interpretation invites a “loophole” for an owner or contractor intent on avoiding trades and intimidating trades from availing themselves of the adjudication process for fear of wrongful termination of their contracts.

The Construction Act (“the Act”) refers to completion, abandonment, or termination of a contract in s.27.1, 31 (2), (2.1), (3) and (6). The terms are not synonymous with each other. Section 2 (3) of the Act defines completion. “Abandonment” is an inference that is drawn where an “inordinate” length of time has been allowed to elapse, during which the parties have not attempted to perform the contract or called upon the other to perform. Abandonment is a matter of fact to be inferred from an objective assessment of the conduct of the parties.

“Termination” is by agreement of the parties. It can occur in two separate forms. If one party fundamentally breaches the contract, the innocent party may choose to treat the contract as terminated rather than waive the breach and hold the contract open. If the innocent party elects to terminate the contract, its right to sue the party in breach is preserved. The second form of termination does not require a breach of contract, and simply involves the parties agreeing to treat the contract as terminated as a matter of contract, either oral, written or implied by conduct.

So will any form of abandonment or termination of a contract oust the jurisdiction of an adjudicator? In Pasqualino v. MGW-Homes Design Inc³ the Divisional Court provides much needed guidance on this issue.

In this case Pasqualino (“P”) was a homeowner who hired MGW Home Design Inc. (“MGW”) as his contractor. A dispute arose and MGW registered a lien for approximately $170,000. A month later the lien was perfected and then vacated by payment into court. Thereafter MGW filed a Notice of Adjudication and adjudication followed without objection. The adjudicator awarded MGW approximately $120K, and then moved to enforce the Adjudicator’s award. P then sought leave to appeal the award to the Divisional Court, arguing that the lien claim and ensuing litigation meant the construction contract ceased to exist, and with it any entitlement to adjudicate.

The Divisional Court refused leave to appeal because:

1. No jurisdictional issue was raised before the adjudicator, and since the parties were free to adjudicate “any other matter that parties to the adjudication agree to”⁴ this issue could not be raised for the first time before the Divisional Court. Challenges to an adjudicator’s or arbitrator’s jurisdiction have to be raised at first instance in order to preserve the argument for appeal.
2. Whether the contract was abandoned or terminated is not a matter for the adjudicator. The process is a quick and dirty interim process that would be thwarted by the adjudicator having to do a “deep dive” into the circumstances underlying the dispute, whose fault it was, and whether it was sufficiently grave as to amount to a repudiation. As the court notes, “the simplified and expeditious process of adjudication would be defeated if the Adjudicator was required to consider and decide such issues”⁵ before an adjudication could proceed.
3. Whatever the policy considerations, the legislation does not admit to an interpretation that only permits adjudications “while construction proceeds.” Nor does it use words like “termination” or “abandonment:” The words used are “cease to exist.” Termination or abandonment may excuse the innocent party from continuing its performance, but they do not affect their right to sue their counterparty for breach of contract. P’s position that the contract “ceased to exist” is untenable because he countersued in the lien litigation alleging damages for the very same contract that he alleged ceased to exist.
4. Policy considerations required that a party not be able to unilaterally avoid adjudication, and timely payments, through unilateral actions and allegations of termination or abandonment. One of the fundamental objectives sought by the new legislation is, as its name suggests, “prompt payment,” and any contrivance or loophole that would return construction disputes to the prior world of slow and expensive litigation should be avoided.
5. The Adjudication provides for an interim determination and the lien lawsuit provides for a final determination. There is no conflict between the two parts of the Act. Section 13.15 of the Act provides that, “The determination of a matter by an adjudicator is binding on the parties to the adjudication until a determination of the matter by a court, a determination of the matter by way of an arbitration conducted under the Arbitration Act, 1991, or a written agreement between the parties respecting the matter [and] nothing … restricts the authority of a court or of an arbitrator acting under the Arbitration Act, 1991 to consider the merits of a matter determined by an adjudicator.”

As a result, an owner cannot avoid the prompt payment provisions of the Act by terminating the contract before completion, either rightfully or wrongfully. To do so would provide the owner with an option to avoid the legislation that the legislation does not contemplate. The claimant therefore has the ability to rely on the adjudication provisions after the termination of the contract so long as it was not completed within the definition of that term in the Act. The context of the Act as a whole reveals that the termination of a contract was not intended to prevent a contractor from commencing an adjudication to enforce payment of a proper invoice.

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David Debenham is an arbitrator, a construction adjudicator, a construction law specialist, a CPA, and a forensic accountant.