Divisional Court confirms Superior Court’s inherent jurisdiction to award costs against a non-party in construction lien action

NOTE: An earlier version of this article appeared in the Construction Law Letter, Volume 39, Number 1 September/October 2022.

Costs are typically awarded only against parties to litigation. The Divisional Court has affirmed, in the construction lien case Marcos v. Lad, 2021 ONSC 4900 (Marcos v. Lad), that Superior Courts have the inherent jurisdiction to order costs against a non-party that has committed an abuse of process. Although the ability to award costs against a non-party is to be exercised sparingly and with caution, the decision confirms that Superior Courts of record continue to have the inherent jurisdiction to protect their own process from abuse.

Background

In 2009, Ishver and Sumitra Lad (the Lads) retained Marcos Building Design Consultants (Marcos Consultants) to design and build a custom house for them in Caledon, Ontario. When construction of the house began, the Lads and the principal of Marcos Consultants, Manny Marcos (Manny), were friends, and so dealings between them were frequently informal. As construction of the house progressed, the contract price increased from $450,000 to $540,000, which the Lads paid in full. After moving into the house, the Lads requested that a number of deficiencies be repaired, and a dispute arose between the parties over additional costs. Marcos Consultants then invoiced the Lads for more than $500,000 in additional construction costs, registered a lien against the title to the house, and commenced an action to perfect the lien. Manny was not a party to the action.

Egregious conduct by a non-party

At trial, the Lads identified 62 times where Manny’s evidence was materially inconsistent with statements he made during discovery. In numerous instances, his testimony was shown to have been substantially fabricated or deceptively manipulated. His egregious, deliberate conduct included:

• substituting altered pages into a signed contract to show a price that was nearly $280,000 greater than the agreed price;
• hiding relevant documents;
• creating a false paper trail to facilitate tax fraud;
• creating false invoices after litigation commenced; and
• passing off cost documents that were found to be unrelated to the construction of the house.

In addition to concerns about the documents produced by Marcos Consultants, there were also concerns about the timing of the documents produced. Despite a court order requiring Marcos Consultants to produce all damage documents by October 2014, Marcos Consultants submitted voluminous banking records (from 2009 and 2010) only a few weeks before the scheduled start of the trial in November 2016.

The trial judge found the Lads’ version of events more credible. The trial decision in Marcos Limited Building Design Consultants v. Lad, 2018 ONSC 3273 dismissed Marcos Consultants’ claim, and awarded the Lads the cost of rectifying deficiencies in the construction of the house, plus their legal costs. The quantum of the costs award was left to be determined at a subsequent costs hearing in front of the trial judge.

Costs against a non-party

At the ensuing costs hearing, the Lads were awarded full indemnity costs totaling approximately $579,000, on a joint and several basis, against Marcos Consultants, and against both Manny and Marcos Consultants’ project manager (both non-parties). The Lads relied upon s. 131(1) of the Courts of Justice Act (CJA), and s. 86 of the Construction Lien Act (CLA) to support their claim for costs against the two non-parties. In s. 131(1) of the CJA, the court is given broad discretion to determine “by whom and to what extent the costs [of and incidental to a proceeding] shall be paid”. Similarly, s. 86(1) of the CLA gives the court broad discretion to order costs against a person who represented a party to an action, where the person knowingly participated in the preservation or perfection of a lien where it is clear that the claim for a lien is without foundation, or is for a grossly excessive amount.

The non-parties submitted that the “person of straw” test, described in 1318847 Ontario Ltd. v. Laval Tool & Mould Ltd., 2017 ONCA 184 (Laval Tool), must exclusively determine whether or not costs may be awarded against a non-party. The “person of straw” test is a factual inquiry to determine whether: (i) a non-party had status to bring the action; (ii) a named party is not a true litigant; and (iii) a named party was put forward to protect a true litigant from liability for costs. The non-parties also submitted that the misconduct of a non-party, even if it were serious enough to amount to an abuse of the court’s process, was not relevant to the decision to award costs against a non-party.

The trial judge held that both s. 131(1) of the CJA and s. 86 of the CLA were applicable in this case. While this decision was decided under the CLA, which has since been replaced by the Construction Act, the decision is consistent with the amendment to s. 86 in the new Act. In the Construction Act, the words (with reference to preserving/perfecting a lien that…) “is for a grossly excessive amount” from the CLA are replaced by “is frivolous, vexatious or an abuse of process, or is for a willfully exaggerated amount”. The trial judge in Marcos v. Lad focused on the “abuse of process” aspect of the behaviour of the lien claimant’s principal Manny, in awarding costs against him, rather than the amount of the lien claim.

The trial judge in Marcos v. Lad analyzed the statements in Laval Tool that confirmed the inherent jurisdiction of Superior Courts of record to control their own process and to protect it from abuse. The trial judge specifically noted that. in Laval Tool, the court of appeal found “[t]he language of s. 131(1) of the CJA does not exclude inherent jurisdiction to order costs against a non-party who commits an abuse of process. It is permissive in that it confers broad discretion to make costs orders”. On this basis, the trial judge found that Manny’s conduct warranted the Lads’ requested award of full indemnity costs against Manny, as well as the corporate lien claimant, Marcos Consultants.

Interestingly, the trial judge did not award costs against the other non-party – Marcos Consultants’ project manager. Despite evidence of the project manager’s dishonest behaviour, the trial judge found the misconduct was not sufficiently related to the litigation, nor was it as egregious as Manny’s misconduct, and therefore, it did not warrant a costs award against the project manager. In recognition of the project manager’s conduct, however, the judge denied his claim for the costs of the costs hearing itself.

Appeal of the costs award

On the appeal of the costs award by Manny, the Divisional Court found the trial judge “quite appropriately” exercised her inherent jurisdiction to award costs against a non-party. From Laval Tool, the court noted “[i]n particular, apart from statutory jurisdiction, Superior Courts have inherent jurisdiction to order non-party costs, on a discretionary basis, in situations where the non-party has initiated or conducted litigation in such a manner as to amount to an abuse of process”. The court further found that “[b]ut for [the Non-Party’s] deceitful and fraudulent conduct, it is more than likely, and in fact entirely probable, that the trial of [the] action would never have been required”. The Divisional Court held that the court’s inherent jurisdiction to control its own process was sufficient to deal with the appeal, and accordingly, did not directly address s. 86 of the CLA.

Conclusion

The Divisional Court upheld the trial judge’s decision to award full indemnity costs against a non-party in this construction lien proceeding. While the Divisional Court’s commentary reinforces the inherent jurisdiction of courts to award costs against non-parties that commit an abuse of process, the extreme facts of the case must not be overlooked. To award costs against a non-party requires the court to find the non-party’s conduct during the litigation to be so egregious as to amount to an abuse of the court’s process. In civil litigation, this type of conduct is, one would hope, encountered only rarely; but should it be encountered the case serves as a reminder that the court has the ability to enforce cost consequences against those who misbehave in order to protect its process from abuse.