Judicial Review Of Adjudicator’s Determination Granted By Ontario Divisional Court – Real Estate

Earlier this year, the Ontario Divisional Court released its
first decision allowing an application for judicial
review of an adjudicator’s determination. In doing so, the
Divisional Court provided some guidance on the circumstances in
which judicial review of adjudication determinations may be
successful.

Background

Lambton College (the College) engaged Dixin Construction Ltd.
(Dixin) as a contractor to perform certain improvements to the
College’s campus at the west entrance and campus bookshop (the
Project). Dixin retained Ledore Investments Limited, carrying on
business as Ross Steel Fabricators and Contractors (Ross Steel), as
a subcontractor.

The Project was delayed because Ross Steel was approximately
five months late in supplying steel it was required to provide
under its subcontract. The Divisional Court noted Ross Steel blamed
unforeseen global steel supply chain issues for the delay, but
Dixin blamed Ross Steel.

Dixin provided Ross Steel with a notice of default, and
terminated Ross Steel’s subcontract, claiming that Ross Steel
had failed to agree to a schedule for the performance of the
subcontract, had failed to perform the subcontract in a timely
manner, and that its work also required repair. Dixin also claimed
set-off against Ross Steel for costs related to delay on the
Project.

The underlying adjudication

Ross Steel commenced an adjudication seeking, among other
things, payment of three invoices (and related holdback) for a
total of $349,263.57. Ross Steel also disputed Dixin’s claims
for set-off.

The Divisional Court noted that Ross Steel had delivered its
three invoices to Dixin, and Dixin was paid by the owner, the
College, for the amounts owing to Ross Steel. Dixin did not deliver
to Ross Steel a “notice of non-payment” within the
time-period required in the prompt payment provisions under the
Construction Act,^[1]but nevertheless refused to “pay
down” the invoices to Ross Steel.

The Divisional Court acknowledged Ross Steel’s argument on
the adjudication with respect to the three invoices was
straightforward: Dixin had given no notices of non-payment in
respect of any of the three invoices to Ross Steel within the time
required by the Construction Act, and Ross Steel therefore
claimed Dixin was required to pay the invoices.

Dixin countered that even though it had not issued any notices
of non-payment, it was entitled to withhold payment of the invoices
as set-off because Ross Steel’s work was deficient and had
caused delay to the Project. Dixin also argued that the holdback
amount associated with the three invoices was not yet payable, and
noted that Ross Steel had still not supplied some of its steel to
the site as required under its subcontract.

The adjudicator found Dixin was not required to pay Ross Steel
for the three invoices, but the Divisional Court noted the
adjudicator’s reasoning turned on a point that neither party to
the adjudication had raised.

The adjudicator relied on the finding that the invoices Dixin
provided to the College were not proper invoices and the prompt
payment provisions had not been engaged, despite the fact that
neither party raised that issue, and Dixin did not even file the
invoices in its materials. The adjudicator noted in his
determination that if the Dixin invoices to the College had been
proper invoices, he would have found that the Ross Steel invoices
must be paid.

The Divisional Court’s decision

In its decision, the Divisional Court addressed three issues
raised by the application (1) whether judicial review of the
adjudicator’s decision was available in this case under one of
the prescribed grounds under the Construction Act (2) if
judicial review was available, whether there had been a breach of
procedural fairness by the adjudicator, and finally (3) if a breach
of procedural fairness had occurred, what was the appropriate
remedy.

Issue #1 – Availability of judicial review

The Court found that judicial review was available under the
Construction Act in this case because the adjudicator had
breached the principles of procedural fairness.

The Divisional Court indicated that although the
Construction Act does not expressly refer to the
principles of procedural fairness, it does provide that
adjudications shall be conducted in accordance with the procedures
set out in the regulations to the Construction Act (among
other things). The regulations provide that the “code of
conduct for adjudicators shall include principles of procedural
fairness”.

Issue # 2 – Breach of procedural fairness

Dixin tried to argue that there was no breach of procedural
fairness in this case, because, in the context of interim
adjudications, the parties are entitled to limited procedural
protections.

In response to this, the Divisional Court found that Ross Steel
was not entitled to the “full range of procedural protections
that would apply, for example, in a final arbitration or a court
hearing”; however, “the right to be heard on the
determinative issue is a central component of even more limited
procedural protections”.

In this case, the Divisional Court noted that there were many
areas in which Dixin and Ross Steel, experienced players in the
construction industry, could have offered valuable insights for the
adjudicator’s consideration had submissions been invited from
the parties about the correct interpretation of the
Construction Act, including

1. whether, even though Dixin had received payment from the
   College, its failure to issue a “proper invoice” to the
   College should allow it to withhold payment to Ross Steel




2. what, if anything, in the Construction Act required
   the use by a Contractor of a “proper invoice” to an owner
   to engage the rest of the prompt payment scheme




3. what effect a requirement to issue “proper invoices”
   to engage the prompt payment provisions would have on the policies
   and legislative choices that lie behind Part I.1 of the
   Construction Act

The Divisional Court held that “the procedural entitlements
in this case were not so low as to eliminate the fundamental right
to be heard on the dispositive issue”.

While adjudication determinations are interim, they are still
important, as they are binding pending a final determination. A
party that loses an adjudication is required to pay the
determination within 10 days, and this is enforceable by court
order. Further, the Divisional Court held that the statutory
scheme, while focusing on efficiency, does not preclude the
adjudicator from requesting further written submissions on
determinative issues.

Ultimately, the Divisional Court emphasized that it is
“fundamentally unfair” for a losing party to not have the
opportunity to address a determinative issue.

Issue # 3 – Appropriate remedy

Ross Steel argued that the Divisional Court should set aside the
adjudicator’s determination and substitute its own analysis.
The Divisional Court did not accept that it should do so.

Even where a Court finds a decision unreasonable on judicial
review, it most often will be appropriate to remit the matter to
the administrative decision maker to have it reconsider its
decision with the benefit of the Court’s reasons. In this case,
the Court noted that the adjudicator had expertise in the
construction industry, and that he should be allowed to reconsider
his decision in light of the parties’ submissions and any
additional evidence relating to the dispositive issue, regardless
of any delay that might add.

Key takeaways

To date, parties exercising their right to apply for leave to
seek judicial review at the Divisional Court generally have been
unsuccessful (as discussed in our previous blog post).

This decision indicates that this will not always be the case.
The Divisional Court’s reasoning highlights that, while
adjudication is intended to be an abbreviated, interim process,
parties to an adjudication still have some important procedural
rights, which will be protected. Further, the Divisional Court has
added further clarity for adjudicators surrounding the proper
bounds of their authority and their inquisitorial powers, including
to invite submissions.

As the number of adjudications, as well as the amounts ordered
to be paid, have increased in Ontario (see our previous blog post), it is important for parties to
know their rights under the Construction Act. This
decision adds another element for parties considering whether to
bring an application for judicial review of an adjudicator’s
unfavorable determination.

Footnote

1 Under the Construction Act, once an
owner receives a “proper invoice” from its contractor,
the owner has 28 days to pay its contractor or 14 days to issue a
“notice of non-payment” to the contractor in the form
prescribed under the Act. If the owner pays the contractor in full,
the contractor must either pay its subcontractor no later than
seven days after receiving payment, or issue a “notice of
non-payment” to the subcontractor in the form prescribed under
the Act no later than 35 days after giving the proper invoice to
the owner.