Co-authored by Andrew O’Brien – Director, Surety Risk, Travelers Insurance Company of Canada.
This article was originally published in the January/February 2020 issue of the Construction Law Letter.
The prompt payment and adjudication provisions under the Construction Act came into effect on October 1, 2019, and Ontario’s construction industry is now preparing itself for the paradigm shift associated with the new adjudication rules and regulations. Since the announcement of this shift and related amendments to the Act over two years ago, there have been a number of articles published that broadly consider what adjudication means, to whom it applies, how it works and the impact it can have in relation to the successful completion of construction projects. In this article, we consider what the successful party is entitled to do after an adjudicator decides in their favour but the other party is either unable or unwilling to comply. In other words, what can you do when you “win” an adjudication but nevertheless remain unpaid?
For purposes of illustration, it may be helpful to provide an example. A subcontractor submits a payment application for a billing cycle in the amount of $100,000. Following a series of steps (including the issuance of notices of non-payment), the subcontractor learns it will only be paid $50,000 of the $100,000 it invoiced to the general contractor. The subcontractor commences an adjudication for the disputed amount, the parties agree to an adjudicator (or have one selected for them), they exchange documents, and undergo the adjudication process set out by their adjudicator. The adjudicator provides his or her decision to the parties (within his or her allotted timeframe, i.e., 30 days after receiving the documents) which stipulates that the subcontractor is entitled to payment from the general contractor of a further $25,000. The subcontractor expects payment within 10 days of the adjudicator’s determination being communicated to the parties (as set out under s. 13.19(2) of the Act). Eleven days have now passed, and no payment has been received. Communications have broken down. Now what?
Based on a general review of other jurisdictions that have implemented adjudication, the most commonly cited reasons for non-compliance with an adjudicator’s determination are:
• the unsuccessful party does not have the means to pay; • the unsuccessful party wants to stall for time, while preparing to launch some sort of belated counter-offensive, e.g., another adjudication or action; and • the unsuccessful party disagrees with the determination and wants to challenge the decision (i.e., by judicial review).
Regardless of the reason, if the unsuccessful party does not pay, the successful party will need to enforce the decision.
Generally speaking, and as discussed below, following an adjudication under the Act, a successful party has a number of tools at its disposal after the communication of an adjudicator’s determination.
Enforcement as an Order of the Court
First and foremost, pursuant to s. 13.20(1) of the Act, a party seeking to enforce an adjudicator’s determination can do so by filing a certified copy of the determination with the court. This step must be taken within two years of the communication of the determination (or in cases where a determination is subject to judicial review, two years from the dismissal or final determination of that application) (s. 13.20(2)). On its filing with the court, the adjudicator’s determination is enforceable as if it were an order of the court. The filing party must also provide notice to the other party of that filing within 10 days (s. 13.20(3)). Of note, while the party is engaged in enforcement proceedings, s. 13.20(4) of the Act operates to defer payment obligations to parties below. In our example, the subcontractor’s obligations to pay its subcontractors and/or suppliers would be deferred pending the outcome of the enforcement proceedings.
Once the adjudicator’s determination is an order of the court, Ontario’s Rules of Civil Procedure would apply. Specifically, under r. 60.02, an order for the payment or recovery of money can be enforced in in the following ways:
• Writ of Seizure and Sale (r. 60.07) • Garnishment (r. 60.08) • Writ of Sequestration (r. 60.09) • Writ of Possession (r. 60.10)
A judgment creditor (in our case, the subcontractor) can also conduct a debtor examination to identify exigible assets (r. 60.18).
Each of the above remedies are significant and provide more immediate consequences than construction industry participants may be accustomed to as compared to, for example, the lengthier construction lien processes and traditional litigation. The consequences may also be serious when considering how construction industry payors typically operate their businesses. For example, a Writ of Seizure and Sale under r. 60.07 allows the sheriff to seize real estate and personal property owned by the debtor (in our case, the general contractor) and to sell it. The proceeds are applied against the amount owed to the creditor. This remedy, if applied, could be significantly detrimental to a general contractor whose assets would otherwise not be available as part of a contractual dispute over payment. As well, the creditor may wish to engage r. 60.18 to examine the debtor. In that regard, it would be entitled to broadly examine the debtor (or persons other than the debtor in certain circumstances) in respect of: reasons for nonpayment, debtor’s income and property, debts owed to and by the debtor, disposal of property, present/past/future means to satisfy the order, whether the debtor intends to obey the order or has reasons for not doing so, and any other matters pertinent to the enforcement of the order. Such an examination would be onerous, to say the least.
Of course, each of these remedies has been tested in the courts in relation to civil litigation matters; however, they will be new to many construction industry participants in the context of adjudication. In that regard, there is no current directly related experience to draw from, and other jurisdictions provide context.
While directly relevant experience is not available to us, we can nevertheless consider how enforcement of an adjudication is dealt with elsewhere. In the U.K. (where adjudication originated), enforcement proceedings are battlegrounds where adjudicators’ determinations are challenged. While consideration of the U.K.’s approach to enforcement could be the subject of an entire article, in brief we note that U.K. courts have generally applied a supportive and purposive approach to enforcement (i.e., narrow grounds to refuse enforcement such as a breach of natural justice and/or a misapplication of jurisdiction).
While the commencement of adjudication in the U.K. was met with a surge of challenges, it is anticipated that, relatively speaking, there will be less challenges to the enforcement of adjudicator determinations in Ontario. That is because in Ontario, the process for enforcement of an adjudicator’s determination (and the ability to review such determinations) has been limited under the Act. Grounds for judicial review are narrow and the right to enforce the determination as an order of the court is simplified.
In that regard, subject to the limited circumstances where a judicial review of an adjudicator’s determination is successful, we optimistically anticipate that courts will respond as they did in the U.K. by supporting the enforcement of adjudicator’s determinations, allowing the determinations to be treated as orders of the court when properly filed, and engaging with those who seek to apply the remedies described above.
One powerful right of a party that has not been paid following receipt of an adjudicator’s determination is the right to suspension of services under s. 13.19(5). The right of suspension under the Act now arises 10 days following receipt of an adjudicator’s determination if the paying party fails to comply. In relation to a suspension, once it arises, not only would the payor party have to pay the amount of the adjudicator’s determination, but it could also be exposed to interest accrued on the late payments of the adjudicated amount (at the prejudgment interest rate determined under subs. 127(2) of the Courts of Justice Act — currently two per cent), and reasonable costs incurred as a result of the suspension (i.e., demobilization). As well, the suspending party, if it were to return to work, would be entitled to its reasonable costs for remobilization. Specifically, under s. 13.19(6), a contractor or subcontractor who suspends work is entitled to payment by the paying party of any reasonable costs incurred as a result of the resumption of work following the payment of the adjudicated amount and interest.
Default under the Contract
Failure of a party to pay an adjudicator’s determination may also trigger the default mechanism of a construction contract depending on the wording of the contract at issue. This remedy will be contract-specific, such that it is important to review the contract carefully in relation to how non-payment of an adjudicator’s determination may or may not trigger the ability to declare the non-paying party in default (in our example, the general contractor) and perhaps be entitled to proceed to terminate the contract if the payment default is not rectified.
As well, failure of a general contractor to pay its subcontractors following an adjudication (or generally) may constitute a default under the prime contract.
Surety Bond Claims
Another option available to the party seeking payment following receipt of an adjudicator’s decision is in relation to surety bonds. If a sub-contractor or supplier had not already done so, it would be in a position to claim on the Labour & Material Payment Bond. Such parties should already have requested a copy of the Labour & Material Payment Bond at the outset of the project; however, if they did not, they can request that information from the general contractor and/or the owner. Once they have the bond, they can file a claim with the bonding company (surety), attaching the determination of the adjudicator, and any other supporting documentation that may assist in the investigation of their claim. We note that the determination against a general contractor is not binding on the surety. If for some reason the surety denies the claim, that subcontractor or supplier can initiate an adjudication against the surety, as above, and pursue the outstanding amount to judgment against the surety.
Each of the above alternatives is significant in that it allows a party to enforce its rights in circumstances where non-payment arises following an adjudicator’s determination. These remedies are intended to bootstrap the adjudication regime and promote commercially reasonable behaviour. Given that all of the aforementioned remedies have the potential to “inflict pain” on the non-compliant payor, the existence of the remedies themselves should hopefully spur parties into reasonable negotiations and enable reasonable outcomes following an adjudication.
That said, much remains to be seen in relation to how construction industry participants, their respective counsel, and the judiciary all react to the new adjudication regime and its interplay with the existing legislative and judicial frameworks that previously governed construction projects.
This article was originally published in the January/February 2020 issue of the Canadian Law Letter.