Under Construction: Major Reforms Coming To Construction Lien Act
The Ontario government has tabled Bill 142, which if passed will result in fundamental changes to the Construction Lien Act (the Act) and will have a significant impact on payment and dispute resolution practices within the construction industry.
The most significant of the proposed amendments to the Act is the introduction of a mandatory prompt payment regime. Prompt payment regimes have been in place for decades in some other jurisdictions including the U.K., and there have long since been calls for Canada and Ontario to adopt a similar model.
The impetus in adopting a prompt payment regime within this unique sector is to curb the systemic plague of gridlock on construction projects which arise due to payment disputes and lack of payment which lead to project disruptions – a chronic industry phenomenon. The regime will also serve to protect the most vulnerable segments of the sector such as subcontractors, who can often face bankruptcy where failure to receive payment on time. The issue arises from the simple fact that payment on construction projects occur in a pyramid structure and there are too many hands through which the funds must trickle down before subcontractors, often small businesses, are finally paid.
The pyramid structure also lends itself significantly to disputes, whether it be from the owner, the general contractor, the architects and design firms involved, or higher up trades who take issue with quality of work by sub contractors lower on the pyramid. As a result, the amendments also come with a new mandatory interim adjudication regime which works in conjunction with the prompt payment regime.
Once the Act is in force all contracts signed after that date will be subject to the regime. Industry participants will have to carefully consider how contracts that are executed both before and after the in force date may be affected by the transition period.
Here’s the most important things industry participants need to know:
The new prompt payment regime means that contractors can expect prompt payment when their invoices are submitted every 30 days.
Once an owner on a construction project has been supplied with a valid invoice from the general contractor, the owner has 28 days within which they must pay the invoice.
The general contractor in turn has 7 days to pay their direct subcontractors, and those subcontractors have a further 7 days to pay their subcontractors, this continues until all subcontractors have been paid.
Under the new rules an Owner cannot impose any requirements before a valid invoice can be submitted by the general contractor. Although U.K. practice has suggested that parties will remain open to contract around the prompt payment regime, so long as all parties agree, it remains to be seen whether courts in Ontario will follow suit.
In the ordinary course where there are no disputes as to workmanship or delay, the prompt payment regime will result in the free flow of revenues down the construction pyramid chain, so that no participants face being cashflow starved on any projects.
Things get a little bit trickier when an owner takes issue with the value for services performed. In the situation where an owner disputes the general contractors invoice for any reason (i.e. delay, poor workmanship, liquidated damages, etc.) once the general contractor submits the invoice the owner has 14 days within which to provide a Notice of Non-Payment which stipulates the amount the owner is refusing to pay along with the reasons. Any amount not in dispute remains subject to the timelines as set out in the prompt payment regime outlined above, and must be paid.
If the Notice of Non-Payment relates to the work of any subcontractors, the general contractor has 7 days to forward the Notice on to their direct subcontractors and those subcontractors have a further 7 days to pass the notice on. This continues until all affected subcontractors have been notified.
When an invoice has been submitted to the owner which becomes subject to a Notice of Non-Payment the parties must move to adjudication and a decision must ordinarily be rendered within 30 to 44 days from the date the invoice was submitted to the owner, as proposed by the new amendments.
Once a party refers the matter to adjudication, this triggers an additional set of strict timelines for selecting a mutually agreed upon adjudicator within 4 days, or having one selected by a government authority (to be determined) within 7 days, for a total of 11 days within which an adjudicator must be appointed.
The referring party then has 5 days to provide the Adjudicator with a Notice of Adjudication, a copy of the relevant contracts and any other documents they intend to rely upon at the Adjudication. The Adjudicator must render a decision within 30 days of receiving the documents (subject to extensions as may be agreed upon by all parties involved and the adjudicator).
The decision rendered by the adjudicator is binding on the parties on an interim basis. If the ruling requires the owner to pay the amount in dispute, the owner has ten days within which to provide the payment and the general contractor has 7 days to forward any payment owing to subcontractors, who have a further 7 days to pay their subcontractors, this continues until all subcontractors affected by the non-payment are paid. If the owner fails to make payment pursuant to the adjudicators decision, the contractors affected are entitled to suspend work on the project until they are paid, and where failure to pay is prolonged, pursue their lien rights and ordinary course legal proceedings under the Act.
If either any contractor or the owner disagrees with the interim decision, they must still comply with the decision on an interim basis. However, either is welcome to pursue ordinary course legal proceedings under the Act over the disputed amount after the project is completed, including any applicable lien rights.
The intent of the legislation is to put an end to gridlock which occurs because of payment disputes in the industry, by providing prompt adjudication and resolution mechanisms and strict timelines for payment.
The proposed amendments include many other changes to the Act, including an extension of timelines for preservation and perfection of liens. The lien preservation timeline will be increased from 45 days to 60 days and the perfection timeline will be extended from 45 days to 90 days. The legislature has also introduced other trigger mechanisms for lien rights.
The bill is still in the process of consideration by the Ontario legislature, and may be subject to several other amendments and revisions before it receives Royal Assent. There will likely also be several regulations which will fill in any gaps within the proposed legislation as issues come to the fore.
This model has been seen as largely successful in the U.K. and many other jurisdictions around the world that have adopted a similar prompt payment regime for quite sometime. It remains to be seen how industry players in Ontario will adapt to these new requirements and the effect it will have on local industry.
For more information on these developments check out the Ontario governments website on the proposed amendments.
Need help understanding how this may affect your participation in the construction industry? We can help you navigate through the changes so that you are ready when the changes to the Act come into force.