February 7, 2018
In its pending changes to the Construction Lien Act (the “CLA”), Ontario will be introducing a new mechanism to ensure prompt payment and dispute resolution on construction projects. The new legislation has passed third reading and received royal assent just before Christmas. However, the major changes will not come into effect until an as-yet unknown date, expected to be later this year. The name of the legislation will change to the Construction Act. Dropping the word “lien” from the title may seem insignificant, especially given that lien rights will continue to exist, but this name change is a signal that the new legislation is intended to have application throughout the entire life of every construction project.
Currently, very little attention is paid to the CLA during the typical construction project. Most labour and material suppliers down the construction pyramid know of the requirement to hold back 10 per cent of every progress payment, and many contracts include a clause to that effect (though the holdback requirement applies no matter what the contract says). Most suppliers are also aware of the tight 45-day timelines to register claims for lien to protect payment. However, most subcontractors do not look to the CLA until a dispute arises – when payment is not received, and negotiation has failed – at which time the lien provisions of the CLA are used. The lien right under CLA is often called the “nuclear option,” with almost no chance that the parties will be able to work together to complete a project once invoked. Counterclaims in lien actions are almost a given, as is the fact that funds will stop flowing for months, if not years.
Prompt Payment – the Mechanics
Under the new regime, the Construction Act’s strict payment rules will influence a project almost immediately once contract work starts. The prompt payment provisions kick in when the contractor issues a “proper invoice” to the owner. Unless there is a contractual provision to the contrary, the owner will have to be billed monthly. Once the owner has received a proper invoice, strict payment terms are triggered, and the owner has 14 days to raise any objections with the invoiced work. If no objections are raised, the owner will have 28 days to pay the invoice. Once the funds are received by the contractor, the contractor then has seven days to pay the subcontractors. However, if the owner raises an objection, it can refuse to pay the amount objected to, but must pay the balance. A contractor who receives one of these objection notices from an owner can give notice that it is passing that objection down and refuse to pay the responsible subcontractor. Everyone else has to be paid within seven days.
If the contractor was not paid by the owner but did not receive notice from the owner of a problem or concern with the invoice, the contractor still has to pay the subcontractors 35 days from the date the “proper invoice” went up to the owner, unless notice is given of the owner’s failure to pay. This is, in essence, a statutory enshrinement of “pay when paid,” but comes with a very important caveat; the contractor has to undertake to start an adjudication against the owner for the unpaid funds, and that adjudication has to start within 14 days.
This is a brand-new concept virtually unheard of in North America, though it has been in place in the UK for almost two decades. It joins negotiation, mediation, arbitration and litigation as dispute resolution tools, and is sometimes described as a mix between mediation and arbitration, though it is deserving of its own category. Adjudication is not a negotiation or a mediation using a neutral mediator, and it does not depend on the parties deciding on the terms of the deal. It is more like an arbitration, in that a decision is imposed by a neutral third party, though with the possibility of a relaxed procedure, with very tight timelines, and with the ability for a losing party to go to court to seek a different result.
One of the key features of adjudication is the timelines. From the time a notice of adjudication is delivered by one contracting party (adjudications can only happen between parties who have a contract), the adjudication will have to take place, and the adjudicator must deliver a decision with written reasons, within 46 days. This is the longest that an adjudication can take (unless the parties agree between them to extend the time), even in situations where the parties are unable or unwilling to agree at the outset on who will conduct the adjudication and have to have one appointed by a to-be-established Adjudication Nominating Authority.
The adjudicator will be given wide discretion on establishing the adjudication procedure, including the time to deliver a response, whether any oral evidence will be presented and how submissions are to be made, or if the entire hearing will be done in writing.
The adjudicator’s decision is binding, but only on a temporary basis. “Temporary” in this case means that any party can start an action in court (including a lien action) or go to an arbitration (if there is a contractual provision allowing arbitration), and the issue will be decided afresh. “Binding” means that until the court or arbitrator finds to the contrary, if a party is ordered by the adjudicator to pay but does not pay within 10 days, then the adjudicator’s decision can be enforced as if it were a court order (writ of execution, garnishment, etc.). Also, the Construction Act will allow an unpaid party (following adjudication) to suspend its work, and the costs of suspension and remobilization are the responsibility of the defaulting party.
Introducing prompt payment and adjudication is meant to keep funds flowing down the construction pyramid in the event of a dispute. A common description of the procedure is “pay now, argue later.”
Using the example of the unpaid subcontractor, if the owner did not pay the contractor, and did not give notice of a problem, then the contractor either has to pay the subcontractor out of its own pocket or give notice to the subcontractor that it is not paying because funds were not received by the owner, and at the same time take on the obligation of adjudicating the issue with the owner. If an adjudicator finds that funds are owing, they will have to be paid to the contractor within 10 days (and down to the subcontractor seven days after), with significant consequences for non-payment.
If, however, the owner gives the contractor a notice alleging a problem with the subcontractor’s work, and does not pay for that work, and if the contractor passes down the objection to the subcontractor, the subcontractor can adjudicate the issue with the contractor (but not with the owner, because the subcontractor does not have a contract with the owner), and try to convince the adjudicator that the objection is improper or unfounded. If the contractor is forced to pay, it can adjudicate non-payment with the owner (though the subcontractor must be paid in the interim). This is a significant departure from what has become the norm, where the subcontractor is usually asked to wait until the owner and contractor have ironed out their issues (which typically takes months) before the subcontractor gets paid.
Of course, at any time before, during or after adjudication, the subcontractor can proceed with a parallel lien claim, and nothing in the new Construction Act forces the subcontractor to choose adjudication over a lien claim, or vice-versa.
The prompt payment and adjudication provisions of the new Construction Act will provide a mechanism with real teeth to keeping funds flowing on a project. The timelines are very tight and failing to meet a notice deadline will be problematic. Everyone on the construction pyramid will have to know the deadlines, and make sure they are met, failing which an unsuspecting contractor or subcontractor may be required to fund payments out of their own pocket, and chase payment from the party above
Chad Kopach is a partner at Blaney McMurtry LLP and is a certified specialist in construction law, specifically in navigating the pitfalls of the Construction Lien Act. Chad represents all levels of the construction pyramid, from owners to material suppliers. He also represents secured lenders in priority disputes. He can be contacted at 416-593-2985 or by visiting www.blaney.com/lawyers/chad-kopach.