Executive Summary: Key Legal and Evidentiary Issues

Whether a construction lien registered for nearly double the contract price without supporting documentation can be maintained when the lien claimant admits no agreement existed for the claimed extras. The "gatekeeping function" imposed on counsel by the Construction Act requires basic due diligence to verify lien legitimacy before registration, including inquiries about the existence of client agreements and supporting documentation. Imputation of knowledge through wilful blindness or recklessness permits liability findings where counsel deliberately avoids acquiring actual knowledge about the claim's merits. Personal liability of solicitors under section 86(1)(b) applies in rare cases where liens are pursued without foundation in the face of clear warning signs that would prompt reasonable inquiry. The quantum meruit doctrine permits claims for the actual value of services only where grounded in an express or implied promise to pay, not unilateral work performed absent agreement. A party discontinuing a construction lien action without justification or good faith must compensate the successful defendant for costs on a substantial indemnity basis.

The facts of the case

On June 1, 2020, Capital Excavating Corp. and Sandlot Capital Inc. entered into a verbal agreement for excavation work at 575–577 Tweedsmuir Avenue in Ottawa with an agreed contract price of $50,000. By September 2020, Sandlot identified several deficiencies in Capital's work and requested remediation, claiming additional costs had been incurred to address these issues. On December 28, 2020, Capital submitted its first invoice for $6,500, acknowledging that Sandlot had already paid $50,500 under the contract. Sandlot proposed to deduct $4,000 from this invoice to offset the cost of remediating the alleged deficiencies, leaving a balance of $2,500 for Capital. In response to this proposed deduction, Capital issued a second invoice on the same date in the amount of $67,235 plus HST, claiming this sum represented payment for "extras to the agreement." These two invoices—one reflecting the agreed contract price plus a balance of $6,500, and another for nearly $67,000—raised significant questions about the nature and scope of the original contract.

Counsel's involvement and lien registration

Mr. Merlo, Capital's principal, consulted with counsel in January 2021 and provided both December 28 invoices while advising that no written contract existed between the parties. On January 22, 2021, Capital preserved the lien by registering a claim for lien against the property. In the claim for lien, Capital asserted a contract price of $113,735 and claimed an amount owing of $73,735 for services or materials supplied. The lien was characterized as registered in retaliation by Sandlot on January 25, 2021, when the defendants requested its removal and alleged it was registered in response to their decision to retain part of the holdback to address deficiencies. Capital perfected the lien by commencing the construction lien action on March 10, 2021.

Discovery evidence and inconsistencies

At his examination for discovery on February 17, 2022, Mr. Merlo provided testimony that contradicted the foundation of the registered lien. He acknowledged that he did not request payment for any extras until the second invoice was submitted and testified regarding "issues with the footings," which he described as being "three feet [of] thickness." Critically, he confirmed that he had not sought additional compensation for this work. Mr. Merlo further admitted that he would not have issued the second invoice had the first invoice been paid in full, suggesting that the claim for extras was reactive rather than prospective. When asked to produce supporting documentation, Mr. Merlo produced "tickets" from Aecon, a gravel distributor, which appeared to the defendants' counsel to be unsigned quotes rather than proof of purchase or payment. Mr. Merlo undertook to provide proof of payment to Aecon, but this undertaking was never fulfilled despite the case proceeding for years thereafter.

Procedural history and discontinuance

On February 24, 2023, Sandlot served a motion to vacate the lien, alleging that Capital and its counsel knowingly participated in the preservation or perfection of a grossly exaggerated lien. At a case conference held on July 5, 2023, Associate Justice Fortier noted that the action had not been set down for trial, and when counsel for Sandlot inquired whether any steps had been taken to advance the matter, plaintiff's counsel provided no response. On May 11, 2024, Capital served a Notice of Discontinuance, with counsel advising that the plaintiff no longer wished to proceed as Mr. Merlo had retired and the business had closed. As pleadings had closed, leave of the court was required to discontinue the action. On June 20, 2024, the court granted leave to discontinue the action with prejudice and permitted Sandlot's counterclaim to proceed. The lien and certificate of action were discharged, and the question of costs was adjourned to be determined on a subsequent motion.

The court's analysis of lien foundation

The court concluded that Capital's lien was clearly without foundation under section 14 of the Construction Act. That section creates a lien for persons who supply services or materials to an improvement and provides that lien claimants have a right upon the owner's interest in the premises for the "price" of those services or materials. The term "price" is defined as the contract or subcontract price agreed upon between the parties, or, where no specific price has been agreed, the actual value of the services or materials supplied. While the "actual value" definition permits reliance on the equitable doctrine of quantum meruit, such claims must be grounded in a promise—express or implied—to pay for the value of the work. In this case, no such promise existed. Mr. Merlo had admittedly performed the alleged additional work for free and did not request payment for extras until after Sandlot asserted an offset for deficiencies. The second invoice represented the first time he requested payment for work he claimed was done without any prior agreement or understanding that he would be compensated.

Counsel's breach of gatekeeping function

The court found that Capital's counsel failed in the "gatekeeping function" required under section 86 of the Construction Act. This function reflects the dual responsibilities of solicitors in lien proceedings: the duty to zealously advocate for their clients and the duty to the administration of justice. The extraordinary nature of unilateral lien registration—which effectively encumbers legal title and restricts property owners' ability to deal with their land without prior judicial authorization—requires solicitors to act as gatekeepers, preventing non-existent or grossly inflated liens from entering the system. The court noted that while counsel need not take on only strong cases and honest errors in judgment are not penalized, the threshold for liability is breached when a solicitor proceeds without making basic inquiries that would reveal whether a claim has foundation.

Capital's counsel was presented with two invoices dated the same day: the first reflecting the agreed $50,000 contract amount with an acknowledgment that $50,500 had been paid, leaving a $6,500 balance, and the second claiming $67,235 for undocumented extras. Faced with this glaring discrepancy, counsel ought to have inquired whether Sandlot had agreed to pay for extras, whether it had been advised of the unforeseen conditions, when Capital indicated additional charges would apply, and whether Sandlot knew the work was being performed and consented to payment. These inquiries would have immediately revealed that no such agreement existed. Mr. Merlo's failure to seek any supporting documentation—no invoices from suppliers, no proof of payment, no timesheets, no diaries—despite claiming $14,000 in material costs and $45,400 in labour should have triggered investigation. That counsel accepted two invoices dated the same day without scrutiny and proceeded to register a lien for an amount nearly double the agreed contract price, coupled with the complete absence of corroborating documentation, constituted wilful blindness.

The court distinguished this conduct from that found acceptable in comparable cases, such as the Viceroy decision, where counsel had taken active steps to verify the lien's legitimacy, sought and repeatedly requested supporting documentation both before and after perfecting the lien, and when the client failed to produce promised documents and portions of the lien became indefensible during cross-examination, counsel advised voluntary discharge and ultimately withdrew from the record. Capital's counsel did none of these things.

The ruling and outcome

The court granted the defendants' motion and awarded them costs on a substantial indemnity basis. The defendants were found entitled to costs of the discontinued action under Rule 23.05 of the Rules of Civil Procedure, as the action was commenced without justification and in the absence of good faith. Additionally, Capital's counsel was held personally liable for the defendants' costs pursuant to section 86(1)(b) of the Construction Act, finding that counsel knowingly participated in the preservation and perfection of a lien that was clearly without foundation. The court ordered that the defendants, Sandlot Capital Inc. and Arjun Patil, are the successful parties and were awarded costs in the amount of $33,862.36 on a substantial indemnity basis, made jointly and severally against Capital Excavating Group, its principal Frank Merlo, and its counsel of record. This rare imposition of personal liability on counsel reflects the serious breach of the gatekeeping function and the obligation to uphold the integrity of the construction lien system.