The construction industry is about the change. On October 1, 2019, the prompt payment and adjudication amendments to the Construction Act will become law. How, and how quickly, payments will be made and disputes resolved will experience a real culture shift.
Are you ready?
Among the many changes to Ontario's construction laws that were introduced by Bill 142, the Construction Lien Act Amendment Act, 2017, prompt payment rules and adjudication will have the largest impact on construction projects in the province. These two new legal regimes are a true culture shift in the Ontario construction sector. The rest of the country appears to be not too far behind.
Prompt Payment Regime (Part I.1, s. 6.1)
Bill 142 introduces a strict prompt payment regime in Ontario. It will be applied to both private and public sector projects, to all parties in the construction pyramid, and to all sizes and types of improvements.
28 day payment cycle
The new bottom line on construction projects in Ontario: owners will have 28 days to pay a contractor after receipt of a proper invoice, and contractors will have 7 days to pay their subcontractors after receiving payment from the owner.
Prompt payment will be mandatory for all contracts. The Construction Act will now deem all contracts to have monthly progress payments unless otherwise expressly set out in the contract. Parties will be permitted to establish milestones, payment schedules, or other payment structures that are not based on monthly progress payments if it is set out clearly in their contract, but the 28 day clock will start once an invoice is received in accordance with that payment structure.
Owners will be able to dispute all or parts of an invoice, but they will need to provide a written notice of non-payment within strict timelines. Owners will be required to deliver a notice of non-payment within 14 days of receiving the proper invoice from the contractor. The notice of non-payment must set out all of the reasons for not paying. Any undisputed amounts will have to be paid.
If the notice of non-payment is not delivered on time, owners must pay full amount of the proper invoice during that payment cycle, but may raise the dispute in a notice of non-payment on subsequent payment cycles (effectively setting off against later payment obligations).
Similarly, contractors must also deliver a notice of non-payment to subcontractors (and subcontractors to sub-subcontractors) if they do not intend to pay the full amount of the invoice.
Not true "pay when paid"
It is also important for contractors, and also for owners, to understand that the prompt payment rules do not create a true "pay when paid" protection for contractors. While s.6.4(1) provides that a contractor must pay subcontractors within 7 days of getting paid by the owner, s.6.4(4) provides that, if an owner has not paid, then within 35 days of sending in the proper invoice a contractor must either (1) commence an adjudication against the owner, or (2) pay the subcontractor (unless it has delivered a notice of non-payment). So if the contractor does not wish to pay subcontractors out of its own pocket, it will need to commence an adjudication dispute with the owner.
A "proper invoice" is defined in the Construction Act. It must include basic and accurate information regarding the parties, the project, the work performed and contract. The owner and contractor will be able to agree on some details for the submittal of an invoice, including additional deliverables, but this must be set out clearly in their contract.
Pre-approvals and pre-certification prohibited
One other significant change in the Construction Act prompt payment rules is the prohibition on any requirement for an invoice or draft invoice to be approved in advance by the owner or for work to be certified by the owner's consultant prior to the delivery of the invoice. These can be conditions for payment, but not pre-conditions for the submission of the proper invoice which starts the 28-day payment timing clock. Alternative finance and procurement projects (PPP projects) are exempt from this prohibition.
Consequences of non-compliance
If a party fails to pay when due under the prompt payment rules, statutory interest will accrue and become due. The rate of interest will be the greater of the amount set out under the Courts of Justice Act and the amount agreed to in the contract.
If a party fails to pay when due after the non-payment is adjudicated, the party entitled to be paid can suspend work or terminate their contract. The contractor would also be entitled to claim some termination costs.
The transition rules for prompt payment are important to understand. Essentially, if a procurement process has commenced, or a contract entered into, in relation to an improvement, before October 1, 2019, then the prompt payment (and adjudication) rules will not apply. A procurement process is broadly defined to include, without limitation, a request for proposals, request for qualifications, or a request for a quotation. Not surprisingly, we are expecting a lot of procurement processes to be commenced and contracts entered into by owners this summer leading up to September 30.
Are you ready?
Prompt payment is intended to bring a culture shift in the construction industry in Ontario. Cash will flow more quickly out of owner's bank accounts to contractors and then on to subcontractors.
There are many more issues for construction parties to consider:
- Are your contracts updated to reflect the new regime, both the timing and certification rules?
- Who in your organization needs to know about the new prompt payment rules (accounting/payables, procurement, asset management, etc.)?
- Are consultants prepared to certify completed work within 14 days before the owner must deliver a notice of non-payment?
- Who is responsible for preparing notices of non-payment?
- Are your payment and accounting systems set up to handle this? Are they set up to pay the undisputed portion of a proper invoice, or only whole invoices?
- If you are a contractor, if the owner doesn't pay you, are you prepared to either pay trades out of your own pocket (to keep good client relations) or commence an adjudication against the owner (to avoid having to pay)?
Prompt payment, along with adjudication, is coming across Canada. The Federal government, and the Provinces of Saskatchewan and Nova Scotia have already introduced prompt payment and adjudication legislation. Several other Provinces are considering their own legislation.
This is our new construction world. Are you ready for it? Because it is not waiting for you to be ready.
How Gowling WLG can help
Gowling WLG has been deeply immersed in the reform process. We have held several events and published several articles since the introduction of the amendments to Ontario's construction laws, and similar changes that are coming across the country.
We have also assisted many clients prepare for the new Construction Act, updating contracts, review processes and policies, drafting new template forms and checklists. We are planning several more educational events and workshops, and additional analysis of the impact of the amendments introduced by Bill 142 over the coming years to help educate and inform the industry about these changes. This includes our Spring Construction Law Forum.