A recent development that likely has the full attention of the Ontario construction industry is the May 16, 2013 second reading, with the support of all three provincial parties, of Private Member’s Bill 69 – An Act respecting payments made under contracts and subcontracts in the construction industry. The proposed legislation has now been referred to committee before it can be eligible for third and final reading and passage into law. If enacted, Bill 69 will have a dramatic impact on the terms of construction contracts, the day-to-day administration and flow of funds on large and small public and private projects and the types of claims that arise. In other words, this is definitely a matter worth studying for both construction lawyers and industry participants.
The Concerns Giving Rise to the Proposed Prompt Payment Legislation
For many years now, a hot topic of debate within the Ontario construction industry has been whether the Construction Lien Act adequately addresses the demands of increasingly complex construction projects.
One of the classic complaints of payees (i.e. contractors, subcontractors and suppliers) is that although the Construction Lien Act stipulates a mandatory holdback retention period, it does not contain a positive obligation for holdback funds to be released immediately following the expiry of construction lien deadlines. Absent a contract provision addressing this issue, the payee who is concerned about the receipt of its holdback funds is therefore left with two options: (i) lien before the deadline in order to preserve its claim against the holdback funds; or (ii) allow the lien deadline (and therefore its security) to lapse and hope that the holdback funds will follow.
Both options have drawbacks.
The first scenario would conceivably result in the registration of liens on every project. In addition to freezing the flow of project funds altogether, this practice would obviously not be a good long term strategy for any contractor or supplier who is eager to build lasting business relationships.
In the second scenario, the payee essentially gives up its security by waiting for its lien deadline to lapse and then hoping for the best. In my experience, however, the holdback funds are ultimately released in the overwhelming majority of cases. If that were not the case, it is difficult to imagine that anything would ever get built.
Another concern is the perception that while the CLA addresses outright payment defaults, it does not really offer a practical solution for late payments. Although lien rights arise from the date that a party commences its supply of services or materials (section 14), it would generally not be wise for a contractor or supplier to lien every time a payment is a few days late, or even a few weeks late.
Ostensibly in order to address these and other issues, Bill 69 was put forward after lots of industry discussion, including among representatives of a broad spectrum of the contractor and trade side of the construction industry – the National Trade Contractors Coalition of Canada and the Ontario General Contractors Association. As noted above, the Bill has passed its first two readings and will now be scrutinized at the committee level before third reading and the potential passage of the Bill into law.
The concept of prompt payment in exchange for work that is properly done and approved should not on its own be controversial. The questions that may arise in connection with this draft legislation include whether: (i) the proposed legislation achieves the industry’s objectives; and (ii) whether it is consistent with the contracts that are now being entered into on large, complex construction projects.
Without providing an exhaustive summary of the Bill, here are some of the highlights:
- All contracts and subcontracts will be deemed to be amended as required in order to conform to the legislation;
- Holdback would be due and payable within one day after it is no longer required to be retained under the Construction Lien Act;
- No funds are permitted to be withheld by a payer from a payee other than as permitted by the proposed legislation (see the reference to unapproved payment applications below) or the Construction Lien Act;
- If a contract or subcontract does not provide for progress payments every 31 days after services or materials are first supplied to a project, then a contractor would be entitled under the Act to payment within 20 days after submitting a progress payment application following the conclusion of a monthly payment period and a subcontractor would be entitled to payment within the later of 10 days after a payment certificate is issued or 30 days after submitting a progress payment application;
- A payee who is not paid in accordance with the timing prescribed by the legislation would be entitled to suspension and termination rights as the result of same (upon providing seven days' notice of same in accordance with the relevant provisions of the Act);
- The legislation imposes a specific mechanism for final payment under a contract or subcontract where the contract or subcontract itself does not provide for same;
- A payment application is deemed to be approved 10 days after it is submitted unless a written notice that all or part of the application is being disapproved or amended is issued in accordance with the Act;
- Where a payment application is not approved for final payment, the payer would be entitled to withhold only the portion of the payment that is disapproved or amended; and
- Prior to the commencement of a project, an owner would be obliged to provide financial information for the purpose of demonstrating the financial ability of the owner to make contract payments.
Potential Impact of the Proposed Prompt Payment Legislation
The above summary touches on only some of the highlights of Bill 69. Developers, project owners, contractors, trades and supplies would all be well-advised to review the Bill carefully and consider how they might be affected (see here).
In the current infrastructure environment, it is not uncommon for parties to negotiate payment mechanisms that are not necessarily consistent with what is proposed by Bill 69. In addition, payments may be tied to the requirements of the project lender or whatever financing arrangements have been negotiated by all of the major parties involved in a project. Public-private partnership (P3) projects in particular are known to include complicated payment provisions.
It appears that the proposed legislation could therefore have a significant impact upon, among other things: (i) negotiated payment provisions that are tied to milestones rather than monthly deadlines; (ii) contract clauses permitting set-off or the withholding of funds for deficient work or delays; (iii) "pay-when-paid" provisions (i.e. contract clauses stating that a payer is not obliged to make a payment to its payee until the payer itself is in receipt of the money that is owing to it for the corresponding work); and (iv) liquidated damage clauses.
Regardless of whether Bill 69 is passed into law, the debate will certainly be an interesting one to follow.