The Ontario Superior Court of Justice’s recent decision Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312 (“Backyard”) clarifies that the Construction Act^[1] (the “Act”) does not permit a non-party to be added by way of counterclaim or third party claim except for a true claim for contribution or indemnity within the meaning of Section 4 of the Act’s procedural regulation.^[2]

Background

The defendants and moving party owners, Mirella Cesario-Valela and Vito Valela (the “Owners”), sought leave to issue a third party claim against Garrison Creek Construction Inc. (“Garrison”). The Owners alleged that Garrison is an alter ego of the plaintiff contractor, Backyard XP Inc. (“Backyard”). The Owners wished to advance claims against Garrison on the basis that Garrison and Backyard are related corporations.

Decision

The Court determined that, despite the judicial efficiency of the Owners’ approach in advancing claims against Backyard and Garrison concurrently, a claim against Garrison was not procedurally available under the Act.^[3]

In arriving at this decision, the Court examined Section 4 of the Act and identified three requirements for motions for leave to bring third party claims under the Act:

1. The motion must be on notice to the owner and all persons;
2. The proposed claim must be for contribution or indemnity and not a veiled claim for damages; and,
3. The court must be satisfied that the trial of the proposed third party claim will not (i) unduly prejudice the third party or of any lien claimant or defendant, or (ii) unduly delay or complicate the resolution of the action.^[4]

The decision turned on the second requirement. Prior to the hearing, the Owners refused all questions during cross examination about the nature of the claims they intended to bring against Garrison, and did not file a draft third party claim as part of their motion materials. During the motion hearing, the Owners conceded that the purpose of the proposed third party claim was to advance their claims against Garrison as a proper party. The court held that the Owners’ claim against Garrison was effectively a claim for damages.^[5]

The Court distinguished this case from Art Nouveau Inc. v. Razumenko, 2011 ONSC 420 (“Art Nouveau”) in which leave for a third party claim against two individuals alleged by the defendants to be the true contracting parties was granted.

In Art Nouveau, the third party claim was granted nunc pro tunc where the third party claim had already been issued at the time the motion was brought, the statutory restriction of contribution or indemnity was not referred to or discussed, the defendants denied a contract with the plaintiff and alleged that the contract was with the third parties. As none of these facts in Art Nouveau were present in Backyard, the Court concluded that the express requirements for third party claims in Section 4 in the Act’s procedural regulation, O. Reg 302/18, applied.^[6]

Furthermore, the Court held that parties cannot be added to a lien action by way of counterclaim per s. 2(1)(a) of O Reg 302/18 that limits the scope of a counterclaim to only “against the person who named the defendant as a defendant in respect to any claim that the defendant may be entitled to make against that person, whether or not that claim is related to the making of the improvement” (emphasis added by the Court).^[7] This means that while the Owners may counterclaim against Backyard, they are not entitled to counterclaim not against other parties, including Garrison.

Importantly, the Court also found that it had no discretion to grant leave to issue a third party claim other than as set out in the Act’s procedural regulation in Section 4 (for contribution or indemnity) or Section 2 (a counterclaim against the person who named the defendant as a defendant).^[8]

Key Takeaway

Third party claims that are not for contribution or indemnity and counterclaims against non-parties cannot be made in Construction Act actions – they must proceed in separate ordinary actions.

[1] RSO 1990, c C 30.

[2] O Reg. 302/18.

[3] Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312 at para. 3.

[4] Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312at para. 5.

[5] Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312at para. 15.

[6] Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312at paras. 9-13.

[7] Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312at para. 16.

[8] O. Reg. 302/18 ss. 2 and 4; Backyard XP Inc. v. Cesario-Valela, 2023 ONSC 6312 at para. 17.