Judicial review of adjudicator’s determination granted by Ontario Divisional Court

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.