Everyone knows that a lien is created when a person supplies services or materials to an improvement for an owner, contractor, or subcontractor for the price of those services and materials.[1] But what happens when the price of those services and materials is subject to a “cost-savings” provision? This was the nature of the dispute in the Dominus Construction Corporation v. H&W Development Corp.[2]
Background
H&W Development Corp., an Owner and developer (“H&W”), entered into a contract with Dominus Construction Corporation (“Dominus”) for the latter’s construction management services during the construction of a residential condominium complex in Markham, Ontario (the “Contract”). In addition to a base fee, the Contract stipulated that Dominus was entitled to a fifty percent share of any cost-savings realized upon completion from the project. Namely, Dominus was entitled to share in any net savings from the difference between the projected workable budget for the Contract and the actual total costs of same.[3]
Upon completing the project, Dominus calculated that construction was completed $13,303,493.00 under budget. Accordingly, it claimed the sum of $7,516,473.55 from H&W, being fifty percent of the costs saved. Meanwhile, H&W took the position that Dominus’ calculations were incorrect, that no costs were saved during construction, and therefore Dominus was not entitled to anything over and above its management fee.
In light of this disagreement, and despite Dominus’ actual fee for its construction management services amounting to just over $3,000,000.00, it liened the property for the sum of $7,516,473.55.
Legal Dispute and Determination
Ultimately, the legal question surrounding Dominus’ lien was two-fold: 1) were the cost-savings a portion of the Contract Price as defined in the Construction Lien Act; and if so 2) were they lienable. In October 2019, H&W brought a Motion before the Honourable Justice Casullo to discharge Dominus’ lien on the basis that it was frivolous, vexatious, or an abuse of process.[4]
At the Motion, Dominus argued that cost-saving provisions in construction contracts were inherently a part of the Contract Price in order to incentivize parties to complete their obligations in a manner that would be mutually beneficial to the parties.[5] Conversely, H&W submitted that a provision of services in and of itself does not give rise to a lien. Unless there is a specific price attached to those services, there can be no lien. Particularly, H&W submitted that profit-sharing or “bonus” arrangements, which did not represent an exact price for the supply of services or materials to a project, did not satisfy the requirements of lienability.[6] H&W further referenced caselaw where Courts previously determined that profit-sharing arrangements were not lienable.
Ultimately, H&W was not successful in its Motion. In arriving at her Decision, the Honourable Justice Casullo differentiated between profit-sharing and cost-saving arrangements. Her Honour found that cost-savings provisions were integrally linked to the “service” portion of lienability as defined in the Act – one that is reflected in the contractor’s proficiency in bringing a project to completion under budget. This was to be contrasted with profit-sharing, where an interested party receives a direct share of the profits realized.[7]
Take-Away and Implications
First and foremost, the Dominus case provides clear cut Ontario caselaw on the differentiation between cost-savings and profit-sharing. Although Her Honour indicates that that cost-savings comprises a service reflecting the contractor’s proficiency in expediting the completion of a project, it is equally important to recognize that efficiency and expedited completion of work should fall within a construction manager’s good and workmanlike obligations. If cost-savings or sharing is justified as an incentive to expedite the completion of a project, would a lack of a cost-savings provision justify potential delays on projects since contractors would not have skin in the game?
A further and obvious implication is that Owners need to anticipate liens for services that may not have initially been contemplated or budgeted. In the present case, while H&W budgeted for a $3,000,000.00 fee to be paid to Dominus, it certainly did not expect to pay out a further $7,500,000.00. It should be noted that the reported Dominus decision was only in the context of a Motion to Discharge a Lien and did not provide whether Dominus was entitled to the full quantum of its lien. Moving forward, Owners would be wise to keep clear calculations of costs and savings where such provisions exist or, alternatively, provide an outright provision in the contract capping the sharing of such savings.
All in all, I believe that the Dominus decision is one that points us in the correct direction. With the spread and popularization of Integrated Project Delivery models[8], which aim to allocate risk and share in profits, it is important to lay the foundation for which forms of risk, profit, and savings sharing will and will not be lienable.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] Construction Act, formerly Construction Lien Act, R.S.O. 1990, c. C.30, as amended, s. 14.
[2] 2019 ONSC 7235.
[3] Ibid at paras. 8-10.
[4] Ibid at paras. 14 & 28.
[5] Ibid at paras 15-16.
[6] Ibid at paras. 20-23.
[7] Ibid at paras 30-32.
[8] See more at: https://www.ccdc.org/wp-content/uploads/2019/01/CCDC-30-EN_Jan212019.pdf.
