A Review of the Intent and Operation of the Transition Period in Ontario’s Construction Act
As the roll out of the modernization provisions of Ontario’s newly named Construction Act (the “Act”) approaches on July 1, 2018, stakeholders have advised that they feel slightly lost in relation to the transitional elements of the legislation (i.e. Section 87.3) Concerns have been raised about what is changing under the new provisions and when those changes will take effect. While we certainly recommend speaking with a lawyer in relation to particular fact scenarios arising during this transition phase, below is a summary of the intent and operation of the transition period.
The amendments to the Act are to be implemented in two phases. Phase I (amendments related to modernization of the lien and holdback rules) takes effect on July 1, 2018. Phase II (amendments related to prompt payment, adjudication and municipalities) does not take effect until October 1, 2019.
One key reason for this two phased approach is that time is needed to set up the Authorized Nominating Authority (to support the adjudication process) through a government run application process. To set up the Authority and to produce an initial cohort of adjudicators with appropriate training and certification will take time. It is currently anticipated that this process will be administered in the fall of 2018. Industry participants also need time to adjust their contract forms to account for the new provisions taking effect, and to prepare for prompt payment and adjudication.
When considering Phase I, we note that the modernization provisions include all of the updates to the definitions, the lien and trust provisions, and the provisions in relation to surety bonds. Of particular importance are the following changes:
- The change to the definition of “price” to include certain direct costs (s. 1(1));
- The addition of definitions of “capital repair” and Direct costs (s. 1(1.1) and (1.2));
- The introduction of AFPs under Section 1.1 and related provisions (e.g. deeming the SPV as owner)(s. 1.1);
- The increase in dollar values in respect of when a contract is substantially performed and deemed completed (s. 2);
- The addition of further duties on contractors regarding trust funds (i.e. the New York style bookkeeping requirements)(s. 8.1);
- Allowing certain contracts to provide for payment of holdback on a phased or annual basis (ss. 26.1 and 26.2);
- The increase in the time for preserving a lien from 45 to 60 days (s. 31);
- Modifications to the provisions for wilfully exaggerated or false claims (s. 35);
- The increase in the time for perfecting lien from 45 to 90 days (s. 36);
- The addition of clarity in respect of the meaning of the term “state of accounts” (s. 39);
- The movement of Court Procedures from the body of the Act to the Regulations; and
- The addition of Part XI.1 re: mandatory Surety Bonds.
Section 87.3 of the Act describes the transitional period new legislated amendments to the Construction Lien Act. Section 87.3 (1) and (2) provide as follows:
87.3 (1) This Act, as it read immediately before the day subsection 2 (2) of the Construction Lien Amendment Act, 2017 came into force, continues to apply with respect to an improvement if,
(a) a contract for the improvement was entered into before that day, regardless of when any subcontract under the contract was entered into;
(b) a procurement process, if any, for the improvement was commenced before that day by the owner of the premises; or
(c) the premises is subject to a leasehold interest, and the lease was first entered into before that day. 2017, c. 24, s. 61 (1).
Examples, procurement process
(2) For the purposes of clause (1) (b), examples of the commencement of a procurement process include the making of a request for qualifications, a request for proposals or a call for tenders. 2017, c. 24, s. 61 (1).
As noted above, the relevant date for the transition is the “day subsection 2(2) of the Construction Lien Amendment Act, 2017 came into force”. Subsection 2(2) of the Construction Lien Amendment Act, 2017 (i.e. Bill 142), relates to the repeal of the definition of “construction trade newspaper” in subsection 1(1) of the Act. In this regard, subsection 1(1) of the Act indicates that the definition of construction trade newspaper is repealed on July 1, 2018. While somewhat technical to follow, we understand that this form of ‘placeholder’ is common in legislative drafting for transition purposes.
On April 25, 2018, Yasir Naqvi (the Attorney General of Ontario) released an e-mail update to stakeholders intended to clarify the transition provisions and in particular, to remind the industry that “transition rule follows the long-standing presumption of statutory interpretation that legislation is not given retroactive effect, unless made so expressly.”
In other words, the “old legislation” will still apply in those circumstances set out under Section 87.3(1) and (2), i.e.:
- the contract for the improvement was entered into before July 1, 2018, regardless of when any subcontract under that contract was entered into;
- a procurement process (i.e. request for qualifications, a request for proposals or a call for tenders), if any, for the improvement was commenced before July 1, 2018 by the owner of the premises; or
- the premises is subject to a leasehold interest, and the lease was first entered into before July 1, 2018.
It is important for clients and lawyers to be aware of these provisions when taking steps to enforce their rights under the Act. When determining whether a 45 or 60 day lien preservation period applies you will want your lawyer to review the date on which the contract was entered into in order to determine which rules apply to your matter. If the prime contract was entered into on June 30, 2018, you can expect to be operating under the old legislative regime. However, if the prime contract was entered on July 2, 2018, the new rules apply unless the procurement was commenced prior to July 1, 2018.
Out of an abundance of caution, or where there is any lack of information or clarity, lien claimants may choose to continue to assume a 45 day preservation period, at least for the time being.
To address such issues, on May 18, 2018, the Toronto Construction Lien Masters issued a notice to construction practitioners that provided as follows:
Significant sections of the new Construction Act are proclaimed into force effective July 1, 2018. The court will require evidence concerning the transition provisions (Construction Act, section 87.3 (1)) on all motions and proceedings where the transition provisions are relevant. This applies in particular to motions under sections 44, 45 and 47.
The Masters added that, in essence, “affidavit evidence will have to include the facts relied on when asserting that the old or the new rules (as the case may be) apply.” In this regard, on relatively routine motions, counsel will be required to provide affidavit evidence in relation to, for example, the dates contracts were entered into or procurements commenced.
While we continue through this initial adjustment phase of the Act, it is also important to be aware of the implementation of Phase II on the horizon. In that regard, Section 87.3(3) describes when the prompt payment and adjudication provisions of the Act come into effect as follows:
(3) Parts I.1 and II.1 apply in respect of contracts entered into on or after the day subsection 11 (1) of the Construction Lien Amendment Act, 2017 comes into force, and in respect of subcontracts made under those contracts. 2017, c. 24, s. 61 (2).
As noted in this provision, Parts I.1 and II.1 (i.e. prompt payment and adjudication) apply in respect of contracts entered into on or after October 1, 2019 (as that is the date specified by the subsection 11(1) placeholder noted above). Importantly, this provision does not apply in the same manner in which Section 87.3(1) applies in that the transition applies only in relation to when a contract is entered into and has no relation to the commencement date of a procurement, if any. For example, should a procurement be initiated prior to October 1, 2019, that will have no bearing on whether or not the Phase II provisions of the Act apply. Adjudication and Prompt Payment will only apply to contracts that are entered into on or after October 1, 2019.
These provisions are complex but navigable with the assistance of counsel.