Ontario's Construction Lien Act reform Modernization of old tools to secure payment

by Dentons
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Dentons

[co-author: Dragana Bukejlovic - Student-at-Law]

On Wednesday May 31, 2017, Bill 142 An Act to Amend the Construction Lien Act (Bill 142) was introduced in the Legislative Assembly of Ontario. The changes incorporate the recommendations of a broad range of stakeholders commissioned by the government in 2015 to address key concerns in the construction industry. The Bill will rename the Construction Lien Act to the Construction Act (Act) -- but that is just the beginning of the changes which are expected to come into force in the spring of 2018.

Expanding lien rights

Among the key amendments to the Act introduced by Bill 142 include the introduction of a prompt payment regime, the introduction of an adjudication regime and “modernization” of the construction lien, trust and holdback rules. The new Act will extend the definition of an “owner” to include projects that have multiple owners and include special purpose entities in the public-private partnership model.

In seeking to extend lien rights, Bill 142 will extend the deadline for preservation of liens from 45 days to 60 days, and the deadline for perfection of liens from 90 days to 150 days. Capital repairs will also be included in the definition of “improvements,” which will extend the ability to lien projects where work is performed or services are provided that are meant to extend the normal life of a structure.

Among the changes to the Act introduced by the new Construction Act are the following:

  • All lien claims under $25,000 will be referred to the Small Claims Court;
  • Where a landlord has agreed to pay for all or part of the improvement to leased premises, the landlord’s interest will also be subject to the lien, subject to a maximum of 10 percent of the payment amount;
  • Liens would no longer attach to municipal lands;
  • New statutory trust fund bookkeeping requirements impose new requirements on contractors and subcontractors (but not owners) to maintain a detailed accounting of receipts and disbursements on a project-by-project basis; and
  • In recognition that many of today’s modern projects take more than a year to complete, new rules will provide for payment of holdback on an annual, phased or segmented basis.
  • Set-off rights will be limited in respect to debts, claims or damages that are related to the applicable improvements. - The Construction Act will remove the previous unlimited right of an owner pursuant to section 17(3) of the Act to set off “outstanding debts, claims, or damages” for unrelated work.
  • Mandatory construction dispute interim adjudication will apply to all contracts and subcontracts entered into on or after the date the Construction Lien Amendment Act, 2017 comes into force.

Further details of these changes are set out below:

Holdback provisions

It will be acceptable for a holdback to be maintained through a letter of credit or “demand repayment bond” in lieu of cash. Holdback release will be mandatory, once the conditions for release are satisfied, essentially as soon as the deadline to register or deliver a lien has passed.

In response to the practical issue of having to preserve a lien in order to “secure” the holdback fund from set-off claims, the new Construction Act will require the payer, who intends to withhold some or all of the payment of holdback, to publish a “notice of non-payment/set-off”, in the prescribed form, no later than 40 days after the publication of the applicable certification or declaration of substantial performance under section 32 of the Act, specifying the amount of the holdback that the payer refuses to pay. If the payer fails to publish the requisite notice of non-payment/set-off, in accordance with the requirements, there would be no right of set-off against the holdback fund, and no need to preserve and perfect a construction lien in order to secure the payment of the holdback without set-off. The new Construction Act will provide for phased and segmented holdback release for long-term or phased projects.

Surety bonds

Bill 142 proposes that where contractors perform work for the Ontario Crown, a municipality or broader public sector entity, they will be required to provide a labour and material payment bond, and performance bond, where the contract price exceeds the prescribed amount.

Trust accounting

Amendments to section 8 of the Act, which pertains to the contractor’s and subcontractor’s trust, will require a trustee (contractor or subcontractor) to maintain written records respecting the trust funds, detailing the amounts that are received into and paid out of the trust, transfers made for the purpose of the trust, and any other prescribed information” Regulations setting out what the prescribed information might entail have not yet been determined.

Of greater significance is the fact that trust funds from separate trusts that are deposited together into a single bank account in accordance with the new accounting requirements will be “deemed to be traceable”, and the depositing of trust funds in accordance with this provision will not constitute a breach of trust, provided that the record keeping requirements for the accounting of trust funds have been met. This provision has presumably been included to ensure that the beneficiaries of a contractor’s or subcontractor’s trust, do not lose out to competing claims of other creditors in a bankruptcy situation where the funds at issue are determined not to meet the requirements of a “trust” in accordance with the common law case authorities.

Prompt payment

The most significant change under Bill 142 comes in the form of the prompt payment regime, which will provide strict timelines for payment to contractors and subcontractors. Bill 142 sets out specific requirements for a proper invoice, which would entitle parties to payment within the prescribed time. A proper invoice must include:

  • The contractor’s name or address, date of the invoice, and period during which services or materials supplied;
  • Information identifying the authority, contract or otherwise, under which the services or material were supplied;
  • A description, including quantity, where appropriate, of the services or materials supplied;
  • The amount payable for services or materials supplied, and payment terms;
  • The name, title, telephone number and mailing address of the person to whom payment is to be sent; and
  • Any other additional information that may be prescribed by the specific terms of the contract.

It is not clear what the term “authority, contract or otherwise” is meant to address. Presumably, a proper invoice should set out whether it is a monthly or progress billing, or a billing pertaining to an extra or change order. For example, in the case of an invoice rendered pursuant to a fixed-price contract, a proper invoice would likely not include an invoice setting out the contractor’s cost for the work being billed on a time and material basis, as opposed to the stipulated price for the goods and services provided.

Curiously, the requirement for the issuance of a proper invoice” to trigger the payment obligations is limited only to invoices issued under a contract and not a subcontract. Presumably, the rationale behind this requirement is that once a proper invoice has been issued, the payment obligations of the owner to the contractor are triggered, which leads down the construction pyramid from the contractor to the subcontractors and so on.

The submittal of a proper invoice would trigger the requirement for payment within the timelines prescribed in the section. Upon receipt of a proper invoice, the owner is required to pay the amount set out in the invoice within 28 days of receipt. The owner may refuse to pay all or a portion of the invoice so long as a notice of non-payment is issued to the contractor. The notice must outline the amount and reason for non-payment within 14 days of the receipt of the proper invoice.

A contractor will then be required to pay subcontractors within seven days of receiving payment from the owner unless the contractor issues a notice of non-payment setting out the amounts and reasons for the non-payment. Similarly, a subcontractor is required to pay its sub-subcontractors within seven days of receiving payment unless the subcontractor issues a notice of non-payment setting out the amounts and reasons for non-payment. This chart explains the timing and the impact on payment obligations arising from the delivery of a notice of non-payment.

In the event that the owner does not pay the contractor, or only pays part of the invoice, the contractor still has to pay all subcontractors whose work was included in the invoice no later than 35 days after giving the proper invoice to the owner, unless the contractor delivers a notice of non-payment to the subcontractor seven days after receiving notice of non-payment from the owner or if no notice of non-payment was given by the owner, before the date that is 35 days following the delivery of a proper invoice to the owner, provided that the contractor has delivered to the subcontractor a notice of non-payment in the prescribed form. The notice of non-payment must:

  • State that some or all of the amount payable to the subcontractor is not being paid within the time specified in subsection 6.4(4) due to non-payment by the owner,
  • Specify the amount not paid;
  • Provide an undertaking to refer the matter to adjudication under Part II.1 no later than 14 days after giving notice to the subcontractor, and
  • Provide a copy of any notice of non-payment given by the owner under subsection 6.3(2).

A contractor who simply disputes, in whole or in part, the entitlement of the subcontractor to payment of an amount under the subcontract, may refuse to pay all or any portion of the amount within the time specified in section 6.4(1) – seven days, 6.4(2) - seven days or 6.4(4) - 35 days (where the owner has not paid some or all of the proper invoice), if the contractor gives to the subcontractor a notice of non-payment, within the requisite time, namely, seven days after receiving notice of non-payment from the owner, or within 35 days of the date of the issuance of the proper invoice to the owner, specifying the amount not being paid and detailing all of the reasons for non-payment.

The prompt payment regime seeks to address one of the biggest challenges facing contractors, subcontractors and suppliers on many projects. Prompt payment will be mandatory and cannot be avoided through contract terms. However, the contractor and the owner are free to establish the date or timing of when “proper invoices” may be issued on the fulfillment of milestones, completion of phases or other events that are different from the monthly issuance of invoices. In the absence of any such agreement, the general contractor will be required to deliver invoices on a monthly basis.

Construction dispute interim adjudication

In order to address significant delays in dispute resolution for construction projects, Bill 142 also proposes to make dispute resolution through interim adjudication mandatory for both public and private construction projects. The process will provide for quicker dispute resolution, and will apply to all contracts and subcontracts entered into on or after the date the legislation takes effect. Where a contract is silent with respect to adjudication or the adjudication procedure, the provisions of the new Construction Act will be triggered. Parties will be entitled to adjudication for all disputes that deal with specific issues; namely, the value of services or materials, payment, challenges to non-payment notices, set-off and release of holdback. Parties to a contract may include other issues to fall under the applicable adjudication procedures should they so choose. Bill 142 proposes that disputes must be heard by registered adjudicators and the parties will not be free to specify the name of adjudicators in advance.

The party bringing forth the dispute will deliver a notice of adjudication where they must propose an adjudicator, and if the other side does not agree, an adjudicator may be appointed. Essentially, this must occur within 11 days of the delivery of the notice of adjudication. The moving party must, within five days of the appointment of the adjudicator, provide documentation and information as requested by the adjudicator. The adjudicator is granted broad powers to scrutinize the dispute, including requesting any documents and other actions deemed necessary, including an inspection of the improvement. The adjudicator is required to render a written decision within 30 days of receiving the prescribed documents from the party which initiated the adjudication. The timeline may be extended by a maximum of 14 days, provided that the parties consent to the extension.

The decision of the adjudicator is binding on the parties: until the matter is determined by a court or by way of arbitration, and where a party is required to pay money based on the adjudicator’s decision, they must make payments within 10 days. If the decision is not followed and a party does not pay, the party entitled to the payment may suspend work under the contract.

Where the adjudicator determines that a party has acted in a manner that is frivolous, vexatious or an abuse of process, the adjudicator may order, as part of their decision, that the party pay some or all of the other party’s costs or the adjudicator’s fee amount.

Bill 142 provides that the Statutory Powers Procedure Act does not apply to adjudications, and that an application to set aside an adjudication may only be made on certain limited grounds, provided that the application is brought within 30 days after the determination is communicated to the parties, namely;

  • A party participated in the adjudication while under a legal incapacity;
  • The contract or subcontract is invalid or has ceased to exist;
  • The determination dealt, in whole or in part, with a matter that may not be the subject of adjudication under this Part, or with a matter entirely unrelated to the subject of the adjudication;
  • The adjudication was conducted by someone other than an adjudicator;
  • The procedures followed in the adjudication did not comply with the procedures to which the adjudication was subject under this Part;
  • There is a reasonable apprehension of bias on the part of the adjudicator; and
  • The determination was made as a result of fraud.

In short, the basis upon which an adjudicator’s decision may be set aside is limited; however, the decision is only binding on the parties until the matter has been determined by a court or by way of arbirtration.

Construction trade newspaper

The definition of construction trade newspaper will be repealed and replaced. As such, certificates of substantial performance and notices of intent to register condominiums will no longer need to be published in a construction trade newspaper, but rather as prescribed by the regulations.

Changing definitions and thresholds for substantial performance

Bill 142 has altered the definition of “price” in a significant way, such that it specifically includes any direct costs incurred as a result of an extension of the duration of supply of services or materials to the improvement, for which the contractor or subcontractor is not responsible, essentially confirming standard industry agreement that “delay claims” based on lost productivity claims are not “lienable”.

Under the new provisions of the Construction Act, the “financial” part of the test for substantial performance will be raised from $500,000 to $1,000,000, while the deemed completion threshold will increase to the lesser of 1 percent and/or $5,000.

Multiple improvements under a contract

The changes to the Act will also reflect that if more than one improvement is made under a contract to lands that are not contiguous (i.e. multiple locations under the same contract), then, if the contract so provides, each improvement will be deemed to be under a separate contract.

When will these changes impact the construction industry once Bill 142 becomes law? The amendments will apply to all contracts and the construction projects generally in Ontario; however, certain provisions, namely, the adjudication and prompt payment provisions, will only apply to contracts entered into after these amendments become law.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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