In 2015, the Ontario government launched an independent review of Ontario’s construction laws resulting in a report entitled Striking the Balance – Expert Review of Ontario’s Construction Lien Act.
Based on the recommendations in that report, Ontario amended, and renamed, the Construction Act, R.S.O. 1990, chap. C.30. The changes are designed to:
- modernize the construction lien and holdback rules;
- help make sure that workers and businesses are paid on time for their work; and
- help make sure payment disputes are addressed quickly and painlessly.
The changes to Ontario’s construction lien and construction lien trust rules came into effect on July 1, 2018. New prompt payment, adjudication processes, and amendments related to liens against municipalities, come into effect on October 1, 2019.
Following Ontario’s example, on November 20, 2018, the Government of Saskatchewan introduced Bill 152, the Builders’ Lien (Prompt Payment) Amendment Act. Bill 152 repeats, almost word for word, the new provisions on prompt payment and interim adjudication found in the Ontario Construction Act which we will discuss in this article.
Bill 152 is expected to receive second reading soon and be finalized by the Legislative Assembly by the end of the spring 2019 session. Development of a regulatory framework will follow, although nothing has yet been made public. It is possible the Bill could be in force as early as January 2020, but at this time the Bill remains subject to change as it is not yet law. The Government of Saskatchewan has said it does not expect the Bill to come into force before an adjudication authority is set up and no date for when the Bill will actually take effect has been determined.
Overview of changes
For the purposes of this article, the Prompt Payment Amendments or proposed amendments to the legislation of both provinces will be discussed together. Broadly speaking, the new statutes in the two provinces propose the following:
- a defined payment cycle;
- an adjudication system for resolving disputes;
- the right to suspend work; and
- the right to charge interest on any overdue payments.
Defined payment cycle and Proper Invoice
To take advantage of the prompt payment process, a general contractor (“GC”) must first submit a “Proper Invoice” to the owner on a monthly basis unless the contract provides otherwise. “Proper Invoice” and the process for “giving of Proper Invoices” is defined in the Legislation.
Under the Prompt Payment Amendments, an invoice is only a “Proper Invoice” if it contains the following information:
- the contractor’s name and address;
- the date of the invoice and the period during which the services or materials were supplied;
- information identifying the contract or other authority under which the services or materials were supplied;
- a description, including quantity if appropriate, of the services or materials that were supplied;
- the amount payable for the services or materials that were supplied, and the payment terms;
- the name, title, telephone number and mailing address of the person to whom payment is to be sent; and
- any other prescribed information.
There is currently no other prescribed information. Once submitted, the “Proper Invoice” can only be changed with the prior consent of the owner. Only the GC is required to provide a Proper Invoice. Subcontractors and suppliers have no prescribed form for their invoices but should also provide their invoices on a monthly basis in order for their invoices to be included in the Proper Invoice.
Of note for those familiar with the Canadian Construction Documents Committee (“CCDC”) standard form construction contracts, and the important role of the “payment certifier” in CCDCs, the new statutes provide that a contract provision (such as would be found in a CCDC) that makes the giving of a “Proper Invoice” conditional on the prior certification of a payment certifier or on the owner’s prior approval is of no force or effect. As such, additional amendments to the CCDC Supplementary Conditions will be required when using CCDCs in Ontario or Saskatchewan to ensure they do not contradict the legislation and, therefore, become unenforceable.
The Prompt Payment Amendments define numerous deadlines under the prompt payment process. Such deadlines are something that all parties – owners, GCs, subcontractors, and lenders – should be intimately aware of so deadlines are not missed. For example, an owner has 28 days to pay the “Proper Invoice” received pursuant to the legislation. After the owner pays the GC, the GC must pay all its subcontractors and suppliers within 7 days. They must then, in turn, pay their own subcontractors and suppliers within 7 days and so on.
If the owner disputes some or all of the amount of the “Proper Invoice”, it has 14 days following receipt of the “Proper Invoice” to give notice of any refusal to pay all or any portion of the “Proper Invoice”. This is done through a “Notice of Non-Payment”. A contractor who receives a “Notice of Non-Payment” must advise its subcontractors and suppliers of the receipt of that notice without delay. The GC then has 7 days to decide if it will issue a “Notice of Non-Payment” to its subcontractors and suppliers for their portion of the “Proper Invoice”. If a “Notice of Non-Payment” is not provided by the GC for the invoices of its subcontractors and suppliers, the GC will have to pay the full amount of their invoices in accordance with the legislated payment timeline, even if it is, itself, unpaid by the owner. This is also true for subcontractors. Each level of the construction pyramid has 7 days from the receipt of a “Notice of Non-Payment” addressed to them to provide a “Notice of Non-Payment” to their subcontractors and suppliers for their invoices, lest they be liable to pay their entire invoices despite being unpaid.
There are two kinds of notices of non-payment which a subcontractor may receive from a contractor above them in the construction pyramid. The first can be described as a “without cause” notice, where the only reason provided is the “Notice of Non-Payment” the contactor received. In essence, non-payment is not caused by any defect in the subcontractors work or unreasonableness of its invoice, but solely because the contractor is itself not being paid. That notice must be accompanied with an undertaking by the one providing it to commence an adjudication for payment of its invoice within 21 days. When served with such a notice, the subcontractor must, in order to be paid, simply await the outcome of the adjudication which the party that served the notice has promised to commence.
The second kind is a “with cause” notice. That kind of notice includes causes for non-payment which have to do with disagreements over the subcontractor’s or supplier’s invoice itself. In order to obtain payment, the subcontractor or supplier who receives such a notice will have to commence its own adjudication contesting the “Notice of Non-Payment” it has received.
A contractor who receives partial payment of its own “Proper Invoice” must use those funds to pay its subcontractors and suppliers the amount of their invoices on a proportionate basis. However, if the amount unpaid by the owner relates to services or materials supplied by one or more subcontractors in particular, the contractor must first pay the other subcontractors in full. The contractor can then use the remaining funds to pay the subcontractors who are implicated in the dispute on a proportionate basis.
The most significant change arising with the Prompt Payment Amendments is the introduction of the adjudication system. Both provinces are currently setting up a process for training and appointing adjudicators who will be authorized to act under the new legislation. A Nominating Authority will be designated and required to establish continuing education programs, a code of professional conduct, and a registry of approved adjudicators.
To be an adjudicator, an individual must:
- have at least 10 years of relevant professional experience in the construction industry;
- have successfully complete the required training programs;
- not be an undischarged bankrupt;
- not have been convicted of a criminal offence in Canada or a comparable offence elsewhere;
- pay the Authority the applicable fees for his training and qualification as an adjudicator; and
- agree in writing to comply with the requirements applicable to certificate holders.
A person holding a certificate of qualification as an adjudicator must successfully complete the continuing education programs, comply with the code of ethics, pay the applicable fees, and comply with legislation, the regulations, and the Authority’s directions or requirements.
In Ontario, during the transition period after the proposed legislation comes into force, an adjudicator will be authorized to act even if he has not taken the mandatory training, provided he is otherwise named by the designated Nominating Authority and given approval. We do not yet know if Saskatchewan will allow something similar.
Under the new legislation, parties can refer the following matters to adjudication:
- the valuation of services or materials provided under the contract;
- payment under the contract, including in respect of a change order, whether approved or not, or a proposed change order;
- disputes that are the subject of a “Notice of Non-Payment;
- amounts retained following set-off by a trustee or a lien set-off;
- payment of a basic holdback;
- non-payment of the basic holdback; or
- any other matter that the parties to the adjudication agree to or that may be prescribed.
The adjudicator may then render interim decisions. Interestingly, a party to a contract or subcontract may refer a matter to adjudication even if the matter is the subject of a court action or arbitration proceeding. However, adjudication cannot be commenced once a contract has been completed.
The issue of whether an invoice is in fact a “Proper Invoice”, is not specifically provided for in the Prompt Payment Amendments as being an issue that can be decided by adjudication. However, according to common law principles, an adjudicator has reasonable discretion to determine the disputes they can hear. In our opinion, the adjudicator will implicitly have the right to decide whether an invoice is “proper” within the meaning of the legislation. If the adjudicator has to decide this type of issue to determine whether they have jurisdiction to settle a dispute, we expect the courts will defer to this decision over their jurisdiction so long as it is reasonable.
The legislation provides that adjudication will be very quick. Once an adjudicator is chosen by the parties (or the Authority if the parties cannot agree), the party referring the dispute to adjudication will have 5 days to submit copies of all relevant documents to the adjudicator. Once the documents are submitted, the adjudicator will have 30 days to make a written determination. If the parties agree, that date may be extended by 14 days at the adjudicator’s request. The parties may also agree to another deadline with the adjudicator’s consent. A determination made by the adjudicator after the prescribed time will be of no force or effect.
Once the determination is made, the party who is found liable to make a payment must pay the amount no later than 10 days after the determination is made. A party who has not been paid can file the determination with the court to have it enforced as a court order for up to two years.
The adjudicator’s determination and the ensuing payments are only interim. If one of the parties is not satisfied, it can start a court or ordinary arbitration proceeding. The circumstances in which a party can appeal an interim adjudicator’s determination are limited to serious errors of procedure, such as the legal incapacity of one of the parties, the invalidity of the contract, or adjudication by a person who is not certified. Any disagreement with an adjudicator’s determination on the merits will have to wait for a determination by a court or regular arbitration tribunal.
To address concerns that the adjudication system may be misused, if an adjudicator determines that a party to the adjudication has acted in a manner that is frivolous, vexatious, an abuse of process, or other than in good faith, the adjudicator may provide, as part of his determination of the matter, that the party be required to pay some or all of the other party’s costs, any part of the fees that would otherwise be payable by the other party, or both. Therefore, ample consideration should be given prior to refusing to make a payment or proceeding to adjudication for a particular project.
Right to suspend work after adjudication, determination and non-payment
After the adjudication process is complete, and a determination is made, if an amount deemed payable is not paid within 10 days, only then can a contractor or subcontractor suspend work. A contractor or subcontractor does not have a de facto right to simply send an invoice and then suspend work for failure to pay. However, if a contractor or subcontractor follows the process correctly, and does suspend work in accordance with the new legislation, then the contractor or subcontractor is entitled to reasonable costs incurred, including interest, costs of suspending the work, and costs of resuming the work.
Interest on late payments
Interest begins to accrue on an amount that is not paid when due at the pre-judgment interest rate in effect pursuant to the Ontario Courts of Justice Act or the Saskatchewan Pre-judgment Interest Act. If the contract or subcontract specifies a different interest rate for the purpose, that rate will apply. Interest also accrues on amounts deemed payable by the adjudicator in a similar fashion.