On December 5, 2017, Bill 142, the Construction Lien Amendment Act, 2017 (the Bill), was passed by a unanimous vote of the Ontario legislature. The Bill incorporates almost all of the recommendations set out in an in-depth report commissioned by the Ontario government in 2015. This report arose from a broad, 14-month long industry stakeholder consultation process that sought input from owners, contractors, design professionals and others about matters affecting the financial health of the construction industry. The amendments are the most sweeping set of changes in the construction industry to date, which include the enactment of “prompt payment” provisions.
The Bill renames the Construction Lien Act to the Construction Act, which is reflective of the significant changes that impact the construction industry that go far beyond construction liens. The new Construction Act received Royal Assent on December 12, 2017. The following article serves as an update to our previous August 10, 2017 article.
When will the new rules come into force?
Upon the introduction of the Bill, the Attorney General stated that the construction industry would be given time to prepare for the changes and that the government would give the appropriate advance notice before the proposed changes come into effect. The commencement section of the Bill (section 86) provides that, for the most part, the housekeeping and non-substantive amendments come into force on the day the Bill receives Royal Assent, namely, December 12, 2017, and that the substantive amendments will only come into force on proclamation of the Lieutenant Governor.
Regulations and prescribed forms need to be developed before the Bill is proclaimed. Regulations are expected to be published for public consultation and feedback in February 2018. The regulations, once approved, will mean the law set out in the new Construction Act can be proclaimed. It is expected that proclamation of the Bill will take place in two stages: prompt payment/adjudication and everything else, including the changes to the lien periods and holdback provisions. It is not known when the prompt payment/adjudication provisions will be proclaimed but the new rules regarding prompt payment and adjudication will not apply until the Authorized Nominating Authority is established. Once the Authorized Nominating Authority is established, it will take time to certify adjudicators.
Grandfathering of existing contracts — Transition, Construction Lien Amendment Act, 2017
New section 87.3(1), introduced at the third reading of the Bill, provides that the current Construction Lien Act continues to apply with respect to an improvement regarding contracts, a procurement process or a lease that were entered into before the day that the new Construction Act is proclaimed. More specifically, section 87.3(1) provides that the current Construction Lien Act continues to apply with respect to an improvement if,
A contract for the improvement was entered into before that day, regardless of when any subcontract under the contract was entered into;
A procurement process, if any, for the improvement was commenced before that day by the owner of the premises; or
The premises is subject to a leasehold interest, and the lease was first entered into before that day.
Examples of the commencement of a procurement process, as cited in section 87.3(2), include the making of a request for qualifications, a request for proposals or a call for tenders.
Parts I.1 (Prompt Payment) and II.1 (Construction Dispute Interim Adjudication) apply in respect of contracts entered into on or after the day that the new Construction Act is proclaimed to be in force, and in respect of subcontracts made under those contracts.
By way of overview and what will be covered in this update, the notable amendments set out in the new Construction Act include:
Mandatory construction dispute interim adjudication;
Clarification of P3 or Alternative Financing and Procurement (AFP) provisions; and
Other notable amendments to lien rights, trusts, leasehold interests, holdbacks and surety bonds.
New prompt payment regime
One of the most significant changes comes in the form of the prompt payment regime that provides strict timelines for payment of contractors and subcontractors. The prompt payment provisions seek to address one of the biggest challenges in the industry by streamlining the payment process and timelines.
Prompt payment will be mandatory and unavoidable 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.
The prompt payment regime is triggered by the issuance of a “proper invoice”. The owner will receive a proper invoice on a monthly basis unless the contract provides otherwise. A proper invoice must include:
The contractor’s name or address, date of the invoice, and period during which services or materials were 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.
A contractor may revise a proper invoice after the date given to the owner if the owner agrees in advance to the revision, the date of the invoice is not changed, and the invoice continues to comply with the formal requirements of a proper invoice as set out above.
The owner is required to pay the amount set out in the invoice within 28 days upon receipt of a proper invoice. 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 within 14 days of receipt of the proper invoice setting out the amount of and reason for the non-payment.
The contractor is then required to pay its subcontractors within seven days of receiving payment from the owner unless the contractor issues a notice of non-payment. Similarly, a subcontractor at any level is required to pay its subcontractors within seven days of receiving payment unless the subcontractor issues a notice for non-payment.
Notice of non-payment
A 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 by 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).
Upon receipt of a partial payment and subject to a notice of non-payment, the contractor is obligated to pay the subcontractors within seven days. A contractor may also refuse to pay all or any portion of the amount to its subcontractors within the prescribed timelines. These timelines range from seven days following receipt of partial or full payment from the owner, or where no payment is received, by no later than 35 days following the issuance of the proper invoice to the owner, unless the contractor delivers a notice of non-payment to the subcontractor. For further information, please refer to this chart.
Construction dispute interim adjudication
The Construction Act contains a new mandatory interim dispute resolution process to expedite resolution of disputes, and minimize payment and other disruptions to projects. The process is designed to provide quick binding decisions on an interim basis following a process that will apply to all contracts and subcontracts entered into after the legislation comes into force. Parties will be entitled to adjudication related to specific issues including: (1) the value of services or materials; (2) payment disputes, including change orders; (3) disputes that are the subject of a notice of non-payment; (4) set-off claims; (5) release of holdback claims; and (6) any other matters that the parties agree to.
If the contract or subcontract does not address adjudication procedures, or the adjudication procedures (set out in the contract or subcontract) do not comply with the requirements set out in the Construction Act, the adjudication will be subject to the Act’s adjudication procedure. In addition, a party can refer the matter to adjudication even if it is the subject matter of a court action or arbitration, unless the action or arbitration has been finally determined.
To commence the adjudication process, a party must deliver a notice of adjudication that sets out the names and addresses of the parties, a brief description of the dispute, the remedy sought, and the proposed adjudicator. A registry contains a list of adjudicators, and the parties may agree to select an adjudicator or request the court to appoint one. In addition, the new Construction Act precludes parties to a construction contract from identifying the name of an adjudicator in a contract or subcontract.
The adjudicator has broad powers to scrutinize the dispute, including requesting any documents and other actions deemed necessary, such as an on-site inspection. The adjudicator is required to render a written decision within 30 days of receiving the prescribed documents from the party that initiated the adjudication. The parties and adjudicator can extend this timeline by 14 days or as otherwise agreed. If the adjudicator does not render a decision by the above deadline, it is of no force or effect.
The decision of the adjudicator is binding on the parties until the matter is determined by a court or by way of arbitration. Where a party is required to pay money based on the adjudicator’s decision, they must make payments within 10 days. Unless the adjudicator finds a party has acted in a manner that is vexatious, frivolous, an abuse of process or other than in good faith, the parties will split costs of adjudication equally. If a party does not follow the decision to pay, the party entitled to the payment may suspend work under the contract. Furthermore, a party may file a certified copy of the adjudicator’s determination with the court and it is enforceable as if it were an order of the court.
Bill 142 provides that the Statutory Powers Procedure Act does not apply to adjudications, and that an application to set aside adjudication may only be made on certain limited grounds, if the application is brought within 30 days after the determination is communicated to the parties. Additionally, leave is required from the Divisional Court for an application for judicial review. While the basis upon which an adjudicator’s decision may be set aside is limited, the decision is only binding on the parties until the matter has been determined by a court or by way of arbitration.
Alternative Financing and Procurement arrangements
The use of the public-private partnership project delivery model known as P3 or Alternative Financing and Procurement (AFP) has grown significantly over the last decade in Ontario and other jurisdictions in Canada. The new Construction Act recognizes the emergence of large infrastructure projects and seeks to clarify much of the confusion generating by the P3 delivery model, which imposes a special purpose entity (also referred to as “Project Co”) between the “owner” and the “design-builder”.
The Construction Act clarifies that the “special purpose entity” who undertakes the project on behalf of the public sector sponsor is deemed to be the owner in place of the Crown, municipality or broader public sector organization. Furthermore, the agreement between the special purpose entity and the contractor is deemed to be the contract for the purposes of the improvement, with the ancillary holdback obligations imposed on both the owner and the contractor. Notably, the alternative financing and procurement arrangement provisions only apply to or modify certain sections of the Act.
Some AFP projects involve separate project sites under a single bundled agreement for economic reasons. The new Construction Act allows for multiple improvements under a contract; meaning, where the contract between Project Co and the contractor provides for more than one improvement and the improvement is to lands that are non-adjoining, then, if the contract provides, each improvement is deemed to be a “separate contract” for the purposes of determining substantial performance of the contract. This provision facilitates the release of holdback on a site-by-site basis.
Other notable amendments: holdbacks, trusts, liens, leasehold interests and surety bonds
There are a number of other notable amendments contained in the Act. The following section will briefly highlight some of these changes.
Expanding lien rights
The preservation deadline for liens is extended from 45 to 60 days, and the deadline for perfection of liens from 90 days to 150 days;
Capital repairs are also included in the definition of “improvements”, which extends to the ability to lien projects where work is performed or services are provided that are meant to extend the normal life of a structure;
The extension of the definition of an “owner” includes projects that have multiple owners;
Liens can no longer attach to municipal lands;
Lien claims under CA$25,000 may be referred to Small Claims Court; and
Set-off rights are limited in respect to debts, claims or damages related to the applicable improvements. The new Construction Act removes the previous unlimited right of an owner to set off outstanding debts, claims or damages for unrelated work.
In recognition that many of today’s modern projects take more than a year to complete, new rules provide for holdback payment on an annual, phased or segmented basis. It is acceptable to maintain a holdback though a letter of credit or “demand repayment bond” in lieu of cash. The release is mandatory once the conditions are satisfied, which is essentially as soon as the deadline to register or deliver a lien has passed. However, the payer may withhold some or the entire amount if the payer publishes the notice required by the regulations in the prescribed manner. If the payer fails to publish the requisite notice of non-payment/set-off, in accordance with the requirements, there is 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 requires a trustee (contractor or subcontractor) to maintain written records respecting the trust funds, detailing the amounts received into and paid out of the trust, transfers made for the purpose of the trust, and any other prescribed information. The government has not enacted regulations setting out what the prescribed information might entail.
Of greater significance is the fact that trust funds from separate trusts are “deemed to be traceable” when deposited together into a single bank account, in accordance with the new accounting requirements. In addition, depositing trust funds in accordance with this provision will not constitute a breach of trust, as long as the record-keeping meets the requirements for the accounting of trust funds. 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.
Section 19(1) of the Construction Lien Act, which permitted contractors to lien a landlord’s interest in land by providing written notice of improvements to be made and which allowed landlords to disclaim responsibility for those improvements by delivering a written notice to the contractor within 15 days of the contractor’s notice, is being repealed. Section 19(1) of the new Construction Act makes a landlord’s interest in the land subject to the lien against the owner’s interest, to the extent of the 10 percent holdback amount, when payment for the improvement is wholly or partially accounted for under either the terms of the lease or an agreement connected to the lease to which the landlord is a party. Landlords should keep this new holdback obligation in mind where they have agreed to finance tenants’ improvements.
When 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 a performance bond where the contract price exceeds the prescribed amount.
These changes to the Construction Lien Act were required to address the massive changes that have occurred in the construction industry. The new Construction Act will apply to all contracts and construction projects, generally in Ontario once the new Construction Act is in force. These changes are expected to reduce payment delays that were identified as the biggest barrier to investment, improve productivity, and increase employment in the construction industry in Ontario. Dentons will continue to monitor the progress of the new Construction Act and will continue to keep you informed.