Ontario Divisional Court weighs in on procedural fairness in interim adjudications: Ledore Investments v. Dixin Construction

The Ontario Divisional Court has found that procedural fairness constitutes a valid reason for judicial review of a determination of an adjudicator under Ontario’s Construction Act.

Interim adjudication remains an evolving area of case law; particularly concerning judicial review. In 2023, the profession took note of the Divisional Court's decision in Anatolia Tile & Stone Inc. v. Flow-Rite Inc.,^[1] which, among other things, clarified the test for leave when seeking judicial review of an interim adjudication award.

Now in 2024, the Divisional Court has considered the question of procedural fairness as a ground for judicial review in Ledore Investments v. Dixin Construction.^[2]

The adjudication decision under review

Judicial review of an interim adjudicator's determination is only available in the limited circumstances set out in section 13.18(5) of the Construction Act.^[3] Fairness to the parties is addressed in paragraph 5, which provides that an interim adjudication decision may be set aside where "the procedures followed in the adjudication did not accord with the procedures to which the adjudication was subject under this Part, and the failure to accord prejudiced the applicant's right to a fair adjudication."^[4]

In the adjudication decision under review in Ledore Investments, the adjudicator's determination turned on a point neither party had raised nor made submissions on. The dispute before the adjudicator had concerned, materially, three invoices for which the subcontractor sought payment from the contractor.^[5] The contractor had been paid by the project owner, who was not a party to the proceedings. The contractor argued it was entitled to withhold payment to the subcontractor as set-off for deficiencies and delays. The subcontractor alleged that the contractor had not delivered a notice of non-payment within the time required under section 6.5(4) of the Construction Act, and thus was obligated to pay the invoices under the prompt payment scheme.

The adjudicator concluded that the contractor's failure to deliver notice of non-payment would have precluded them from relying on set-off, except that the contractor had not delivered a "proper invoice"^[6] to the owner. This lack of "proper invoice" – even though it was the contractor's omission and not the subcontractor's – meant that the prompt payment provisions were not engaged, and the failure to give notice of non-payment was not fatal to the contractor's set-off argument.  

The "proper invoice" issue was not raised by either party in the adjudication. This was acknowledged by the adjudicator, who commented that if the issue had been known or realized by the subcontractor prior to issuing the Notice of Adjudication, "perhaps the adjudication could have been structured in a way to deal with [the contractor]'s failure in this regard."^[7]

The Divisional Court's findings

The subcontractor sought judicial review, arguing, among other things, that there was a breach of procedural fairness. The Divisional Court allowed the application, concluding that there had been a breach of procedural fairness; and remitted the matter back to the adjudicator.

The key points from the Court's reasons include:

• Procedural fairness is available as a ground for judicial review: Even though "procedural fairness" is not expressly incorporated into paragraph 13.18(5)(5), section 13.6 provides that an adjudication shall be conducted in accordance with the procedures set out in, among other things, the regulations; which provide that the code of conduct for adjudicators shall include principles of procedural fairness. Additionally, the Court has jurisdiction to intervene with respect to serious breaches of procedural fairness.^[8]
• Some procedural fairness protections apply even in interim adjudication: While the subcontractor was not entitled to the full range of procedural protections that might apply in a final arbitration or hearing, "the right to be heard on the determinative issue is a central component of even more limited procedural protections."^[9]
• Adjudicators' power to issue directions includes the power to request further written submissions on a determinative issue: Although the interim adjudication scheme focuses on efficiency, an adjudicator, who is authorized under subsection 13.12(1) to issue directions respecting the conduct of the adjudication, is not precluded from requesting further submissions from the parties. The Court rejected the contractor's argument that an adjudicator's "inquisitorial role" empowers them to proactively determine facts and issues: "the adjudicator's entitlement to take initiative in ascertaining facts and law does not override an experienced party's fundamental right to be heard on the determinative issue."^[10]
• The appropriate remedy is to remit the matter to the adjudicator: The Court declined the subcontractor's invitation to substitute its own determination the adjudicator's. Rather, this matter was not one of the "limited scenarios" warranting departure from the general rule that the matter be remitted back to the original decision maker.^[11]

Key takeaway

For the parties involved in adjudications, this decision underscores the need to balance the "fast and informal"^[12] interim adjudication process with the reality that procedural protections inevitably involve some degree of formality and expenditure of time.

Familiarity with the process and being able to determine where efficiencies can be realized without unduly compromising fairness will be key to ensuring interim adjudication remains a useful tool for parties to deal with disputes.