Ontario Divisional Court further clarifies the role and jurisdiction of an adjudicator under the Construction Act

On Oct. 4, 2022, the Ontario Divisional Court in Pasqualino v. MGW-Homes Design Inc., 2022 ONSC 5632 ("Pasqualino") further defined the scope of an adjudicator's role and jurisdiction under the Construction Act. In Pasqualino, the Court dismissed a motion for judicial review to set aside an adjudicator's determination.

Background

The plaintiff, Domenic Pasqualino ("Mr. Pasqualino"), entered into a fixed-price contract with MGW-Homes Design Inc. ("MGW") to perform certain renovations to Mr. Pasqualino's home.

In late 2021, a dispute arose between the two parties and MGW registered a lien on Mr. Pasqualino's home property in the amount of $169,184.94.  MGW issued a Statement of Claim shortly thereafter. In response, Mr. Pasqualino obtained an order vacating the lien by posting $211,481.18 as security with the Ontario Superior Court. Mr. Pasqualino then issued his Statement of Defence and Counterclaim.

In further response to Mr. Pasqualino's actions, MGW filed a Notice of Adjudication as set out under the Construction Act. Mr. Pasqualino agreed to the adjudication and both parties participated in the adjudication process. In early 2022, the adjudicator determined that Mr. Pasqualino pay $119,314.00 to MGW, inclusive of Harmonized Sales Tax.

Mr. Pasqualino did not pay MGW in response to the adjudicator's decision and therefore sought judicial review to set it aside.

The Divisional Court's analysis

The Court first noted that a review of an adjudicator's decision can only be made to the Divisional Court in limited circumstances, as set out under section 13.18(5), which reads as follows:

13.18(5) The determination of an adjudicator may only be set aside on an application for judicial review if the applicant establishes one or more of the following grounds:

1. The applicant participated in the adjudication while under a legal incapacity.

2. The contract or subcontract is invalid or has ceased to exist.

3. The determination was of a matter that may not be the subject of adjudication under this Part, or of a matter entirely unrelated to the subject of the adjudication.

4. The adjudication was conducted by someone other than an adjudicator.

5. 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.

6. There is a reasonable apprehension of bias on the part of the adjudicator.

7. The determination was made as a result of fraud.

Mr. Pasqualino submitted that two criteria applied in this case: (1) the impugned "contract or subcontract is invalid or has ceased to exist" because it was abandoned or terminated; and (2) "The determination was of a matter that may not be the subject of adjudication under this Part, or of a matter entirely unrelated to the subject of the adjudication." Specifically in relation to the second criterion, Mr. Pasqualino submitted that he and MGW were no longer parties that could be the subject of a construction dispute interim adjudication proceeding as the process was commenced after MGW registered the lien and the lien was subsequently bonded off.

The Court first considered whether a contract ceased to exist between the parties. The Court stated that this is an issue of jurisdiction which Mr. Pasqualino did not challenge. Rather, Mr. Pasqualino agreed to the adjudicator's jurisdiction and thus failed to raise an issue of jurisdiction before the adjudication, which he now tried to argue before the Court.

The Court looked to the reasoning provided by the Supreme Court of Canada in Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34: "an arbitrator has the jurisdiction to determine the issue to be arbitrated should be raised with the arbitrator."[1] The Court held that the Dell reasoning equally applies to adjudication under the Construction Act. As such, Mr. Pasqualino did not raise an issue of jurisdiction – i.e., that a contract did not exist between the parties before adjudication.

The Court next also noted that it is not the role of an adjudicator to determine whether a contract was abandoned or terminated. On this point, the Court expressly stated:

Adjudication process was not intended to require an Adjudicator to delve into making factual and legal determinations on whether a contract was abandoned or terminated, whose fault it was, did it amount to a repudiation, is the claim advanced by the innocent party and such types of determinations. The simplified and expeditious process of adjudication would be defeated if the Adjudicator was required to consider and decide such issues.[2]

The language of the Construction Act does not contain the words "abandon" or "terminate" as a ground under section 13.18(5) for judicial review. The Legislature specifically chose the words "cease to exist" and thus construction does not have to be ongoing for adjudication to be available. When a contract has been abandoned or terminated, the contract still exists since the innocent party can still sue for breach of contract damages. Performance of a contract may be at an end but this does not mean a contract ceased to exist. Parties acquire rights during performance that survive termination or abandonment of a contract. The Court held that Mr. Pasqualino's argument was rather ironic on this point given his Counterclaim seeking damages, arising from the very contract he argued did not exist.

The Court further stated that Mr. Pasqualino's interpretation of the Construction Act would defeat the purpose of its adjudication provisions. The purpose of adjudication under the Construction Act is to "provide a quick, efficient, interim determination allowing funds to flow down the contractual "pyramid.""[3] Mr. Pasqualino's interpretation would render adjudication meaningless as an allegation of a contract being terminated or abandoned would result in such a contract "ceasing to exist" in which adjudication would then not be possible—parties would have to resort back to the lengthy process of litigation in the courts. 

Lastly, the Court analyzed and rejected Mr. Pasqualino's second ground for judicial review: that there was an existing lien, which was subsequently bonded off prior to adjudication. The Court quickly rejected this argument in holding that section 13.5(5) of the Construction Act expressly allows for adjudication regardless of whether there is an existing court action dealing with the same subject matter. Despite the adjudication decision, Mr. Pasqualino still retains the right to reduce the amount of the lien via section 44(5) of the Construction Act—as such, Mr. Pasqualino still has the right to defend the lien claim and the right to argue his Counterclaim. Mr. Pasqualino would not be paying "twice" since he can still seek a final determination on what was claimed for in the lien.

Key takeaways

1. The Pasqualino case illustrates the importance of raising an issue of jurisdiction before adjudication commences under the Construction Act—as adjudicators are granted the power to determine issues of jurisdiction before them.
2. Termination or abandonment of a construction contract, even if it amounts to repudiation, does not mean that a contract ceased to exist.
3. The role of an adjudicator under the Construction Act is not to determine the factual and legal issues as to whether a contract was abandoned or terminated—rather, the role of an adjudicator is to provide a timely and cost-effective determination of the issues.
4. This decision acknowledges that adjudication may operate concurrently with an ongoing court action dealing with the same subject matter.

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