January 4, 2018

Ontario’s New Construction Act:

of prompt payment and adjudication

 

On December 12, 2017, Ontario’s Construction Lien Act Amendment Act, 2017 was passed into law.  Its substantive changes will come into force on a date to be determined (or “proclaimed”) later this year.  Among other things, these will change the name of the Construction Lien Act to the Construction Act. 

 

Two of the changes, will have an extremely significant impact on the construction industry in Ontario.  These are the prompt payment requirements and adjudication procedures set out in the legislation.  Other significant changes include changes in lien procedures, longer lien timeframes and enhanced trust obligations.

 

    Prompt Payment and Adjudication:  The Problem under Attack

 

Subcontractors and contractors have long complained about payments being withheld for either no reason at all or for reasons that are groundless or unsupportable.  Often, owners or contractors refuse to release a final progress draw (or the construction lien holdback) because items remain on a deficiency list.  This can create immense pressure when unpaid contractors or subcontractors believe the deficiencies can be corrected for a fraction of what has been withheld.  Similar disputes arise over unapproved changes in the work or where

where owners or contractors withhold funds on the basis of alleged delay. 

 

Often, of course, the refusals to release progress draws, release holdback or approve changes are done in good faith.  At other times, the failures appear to be no more than bare, unsupportable allegations.  Regardless, the disputes are all too often not resolved in a timely fashion.   In the meantime, if the unpaid contractors and subcontractors have paid their employees, subcontractors and suppliers, but are awaiting payments properly due, they are essentially financing the improvement, often with money they don’t have and on punishing financial terms.  If they have been unable to pay their subcontractors and suppliers, they are subject to work stoppages, liens and litigation. 

 

Our current system has been unable to address the competing claims in a timely, efficient or proportional way.  All too often, the various claims get lumped together in protracted legal proceedings.  In the meantime, the financial pressures often do devastating harm to innocent parties and projects often grind to a halt under the pressure.  It is these problems that the prompt payment and adjudication provisions of the new Construction Act seek to address. 

 

    The Prompt Payment Provisions

 

The Prompt Payment provisions of the new Construction Act provide that once a “proper invoice” is given to the owner, the owner must either give a “notice of non-payment” to dispute the invoice within 14 days or pay the invoice within 28 days.  Thereafter, each payer in the construction pyramid will also have to either pay, or give notice of non-payment, to those immediately beneath them.  Where an unpaid party receives a notice that it is not going to be paid, it can (and sometimes must) send a dispute over the unpaid amount to “adjudication”. 

 

    The Proper Invoice

 

To trigger the 28 day requirement to pay, a proper invoice must include certain predictable information:  the date of the invoice, the contractor’s name and address, the amount payable, the terms of payment and where payment is to be sent.  In addition, the owner and contractor can agree to include additional requirements[1].  These might include statutory declarations, evidence of insurance, schedules, etc.  Contractors should take care to review proposed contract terms, as any requirements that are difficult to meet may delay the flow of funds.

 

Of note, the Act requires that a proper invoice “be given to an owner on a monthly basis, unless the contract provides otherwise”.  This is a change from the “common law”, which only calls for interim payments if the contract or subcontract calls for them.  Because the Act will continue to apply to all improvements, regardless of their scope or value, every roofer, landscaper and cabinet installer (for example) is entitled to monthly payments, unless the contract says otherwise.  In addition, the definitions of contractor and subcontractor continue to include consultants, subconsultants and suppliers.  To be clear, prompt payment and adjudication apply to these participants.

 

    Give Notice or Pay

 

The “notice of non-payment” which has to be given by an owner to dispute a proper invoice must be given in the form and manner “prescribed” (or mandated), by the Act’s regulations.   These have yet to be determined.

 

If the contractor is paid by the owner, it must pay its subcontractors and suppliers within 7 days, unless the contractor gives a notice of non-payment (again, in the prescribed form and manner) to dispute that payment.  The pattern then repeats itself down the construction pyramid:  everyone who receives payment has 7 days to pay the ones beneath them unless a notice of non-payment is given to dispute that obligation.

 

There is no expressed requirement under the Act for subcontractors to give “proper”, or any,  invoices.  The contractor is only required to pay its subcontractors for the value of the subcontractor’s work that was included by it in the proper invoice given to the owner.   However, outstanding accounts can be addressed through adjudication (which will be discussed below).

 

If an owner gives a notice of non-payment in relation to only part of an invoice, it will have to pay the rest within the 28 days.  The contractor who receives the part payment must then pay its subcontractors within 7 days unless, again, it gives a notice of non-payment.  If the contractor has more than one subcontractor, the part payment is distributed on a pro-rata basis unless the owner’s basis for disputing the contractor’s invoice can be attributed to certain of the subcontractors, in which case the funds will be withheld from those subcontractors, again on a pro-rata basis.  Once again, the same rules apply as we move down the construction pyramid.

To complicate things further, unless they give a notice of non-payment to those beneath them, first tier subcontractors will be obliged to pay those beneath them either 7 days after they receive payment or 42 days after the proper invoice was given to the owner, which ever comes first.  To allow subcontractors to know when the proper invoice was given to the owner, the contractor will have to provide that information “as soon as possible” upon the request of the subcontractor.

 

Where a contractor or subcontractor has not been paid, it can give a notice of non-payment to those below to explain the non-payment on that basis.  It will, however, have to undertake to bring the person above them to adjudication within 21 days.

 

If a payor misses a deadline to pay and does not give a notice of non-payment, the Act provides that the payer will have to pay interest, either at “Courts of Justice Act” rates (which are paltry) or the rate set out in the applicable contract or subcontract.  Some have suggested that this is not good enough, and that the absence of express enforcement provisions is problematic.  We do not disagree.    However, we also believe that the unpaid contractor or subcontractor adjudicate upon the unpaid statutory obligation to pay and, on that basis, obtain an Order that is enforceable. 

 

    The Adjudication Procedures

 

A notice of non-payment does not send a dispute to adjudication.  If a contractor or subcontractor does not wish to accept a non-payment, they will have to give a further notice:  the ‘written notice of adjudication’. 

 

The matters that can be submitted to adjudication go beyond what might be raised in a notice of non-payment of funds claimed in a proper invoice.  The matters that can be submitted to adjudication (even if they are already the subject of ongoing court or arbitration proceedings): 

 

  • the valuation of services or materials provided;

  • whether a payment is due, including under an unapproved or proposed change;

  • the reasons for non-payment given under a notice of non-payment; and

  • the payment or non-payment of holdback.

 

An adjudication may not, however, be commenced after the contract or subcontract at issue is completed, unless the parties to the adjudication agree otherwise. 

 

An adjudication is triggered by way of written notice of adjudication.  The notice must include, among other things, a brief description of the dispute (including how and when it arose), what the party is asking for and the name of the adjudicator the party is proposing.  Significantly, however, an adjudication may only address a single matter, unless the parties and the adjudicator agree otherwise.  This will help to have issues resolved expeditiously.

 

The adjudicator has to be on a roster to be approved by an “Authority” to be created by the Province.  Parties to an adjudication can agree to an adjudicator, but he or she cannot be named in the contract or subcontract.  If the parties cannot agree on the adjudicator, or if the adjudicator named does not agree to act within four days after the notice is given, the party who gave notice must ask the Authority to appoint one.  The Authority then has seven days to make the appointment.

 

Within five days of the adjudicator’s appointment the party who gave the notice must give the adjudicator, among other things, any documents the party intends to rely on during the adjudication.  This might be a difficult task.

 

The parties can set-out the adjudication procedures in their contract or subcontract, so long as they comply with the Act.  If they do not, the procedures will be established by way of regulation.  It is not, at this point, clear if the adjudications will proceed in writing or if witnesses will be examined and cross-examined under oath.  The role of counsel in the proceedings is also unclear.  All of this may be left up to the individual adjudicators.  It is clear that the Act will give adjudicators wide powers to conduct the adjudication as he or she sees fit, if the parties don’t agree to processes in their contract or subcontracts. 

 

The adjudicator’s fees will be paid equally by the parties, unless the adjudicator determines a party’s claim or conduct to be frivolous, vexatious, an abuse of process or not in good faith.

 

The adjudicator is required to make a determination within a mere 30 days after receiving the documents from the party who gave the notice of adjudication, unless the deadline is extended by the written consent of the parties and the adjudicator. Importantly, if an adjudicator is late making a decision “it is of no force or effect”.

 

The adjudicator’s decision must in writing and include reasons for his or her decision.  A successful party can enforce the decision as it would a Judgment of the Ontario Court.  It may also suspend work under a contract or subcontract until it is paid the amount owing, plus interest and any reasonable demobilization and other costs incurred as a result of the suspension.  Upon returning to work, it is entitled to remobilization costs. 

 

The decision is, however, “interim”:  parties are free to commence or continue Court or arbitration proceedings in relation to the same issues.  The adjudicator’s decision will be binding and enforceable until a Court or Arbitrator makes a final decision on the matter.  The adjudicator’s decision is thus not subject to appeal in the usual sense.  A party can ask for the decision to be “judicially reviewed”, but this will occur only on grounds of fraud, the adjudicator’s jurisdiction, principals of natural justice and (interestingly) the “validity of the contract or subcontract”.

 

    The Culture Shift

 

In 2014, the Supreme Court of Canada called for a ‘culture shift’ in the way we, as lawyers, practice law.  The prompt payment and adjudication procedures are consistent with, and advance, these goals.  Construction industry participants, however, will have to put systems in place if they are to manage, and take advantage of, the changes.  Participants will have to consider the new provisions in tendering or negotiating contracts and subcontracts.  They will have to become much better prepared to support their claims on very short notice and will have to have systems in place to meet the Act’s strict notice requirements.  In the end, the new provisions will offer timely and efficient resolutions for those who are prepared to embrace them.  On the other hand, the changes offer interim decisions against to the unprepared.

 

[1] other than a requirement that payment be certified by a payment certifier or approved by the owner, in most circumstances

This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation.  Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.