Prompt Payment Overview
Late payment has become a systemic problem in Ontario’s construction industry. Over the last decade in particular, the average age of receivables in the construction industry has increased, with payers in all sectors routinely paying late, as shown in the graph below.
In an effort to curb the trend of elongated payment periods, the Act prescribes prompt payment obligations which apply to public, private, and alternative financing and procurement (“AFP”) contracts entered into on or after October 1, 2019, with some exceptions.
The new Construction Act establishes a statutory framework for prompt payment.
Adjudication is a pragmatic, swift and flexible system designed to work in conjunction with the Construction Act’s prompt payment provisions to resolve payment disputes and allow cash to flow down the construction pyramid. Adjudication is intended to achieve an efficient real-time resolution of disputes.
The adjudication regime for construction contract disputes in Ontario is administered by the Authorized Nominating Authority, which is known as the Ontario Dispute Adjudication for Construction Contracts (“ODACC”). Parties may refer disputes to adjudication and receive interim binding decisions made by qualified adjudicators with relevant construction experience. More information about ODACC is available at the following link: https://odacc.ca/en/
Prompt Payment In Practice
What triggers prompt payment?
The “proper invoice” is the trigger that starts the payment clock running. The proper invoice is, subject to certain constraints, an invoice of the general or prime contractor to the owner that conforms with all applicable provisions of the contract. It is important to note that the concept of the “proper invoice” does not apply to invoices submitted by subcontractors or by sub-subcontractors.
What is the “proper invoice”?
Pursuant to section 6.1 of the Act, a proper invoice is a written bill or other request for payment for services or materials in respect of an improvement under a contract. Proper invoices must include the information itemized in section 6.1, and, pursuant to section 6.2(3), must also meet any other requirements that the contract specifies.
The following graphic describes the minimum requirements of a proper invoice:
When is payment due?
An owner must pay the contractor within 28 calendar days of receipt of a proper invoice. Upon receipt of payment by the owner, the contractor is then required to pay its subcontractors within 7 calendar days, who are in turn required to pay their sub-subcontractors within a further 7 calendar days, and so on down the contractual pyramid.
When can payment be withheld?
The Act gives a payer the statutory right to deliver a notice of non-payment, which must comply with the requirements for such a notice. If a notice of non-payment is properly given, the payment deadlines set out above are suspended, but the party receiving the notice can commence an adjudication if it disagrees with the non-payment. Accordingly, and although the Act does not prohibit pay-when-paid provisions, conditional payments are now being regulated through a notice mechanism rather than by way of “pay-if-paid” clauses.
In order to dispute a proper invoice and refuse to pay all or any portion of the amount payable, a payer must:
- issue a notice of non-payment within the prescribed time limits;
- issue a notice in the form prescribed in the Regulations (see O. Reg. 303/18, Forms, s. 2(1.1));
- detail the amount that will not be paid and the reason(s) for nonpayment; and
- pay all amounts not subject to the notice in accordance with the prompt payment timelines.
What remedies are available in the event of non-payment?
If a payer does not comply with the prompt payment requirements of the Act, the payer is subject to mandatory interest charges and the right to initiate an adjudication becomes available to the payee. Late payments are subject to non-waivable interest that will begin to accrue on an amount that is not paid when it is due to be paid at the greater of either the pre-judgment interest rate set out under section 127(2) of the Courts of Justice Act, or the rate outlined in the contract or subcontract.
The right to suspend performance of work under the contract arises only if the payer fails to respect an adjudicator’s decision within 10 calendar days from the date the decision is delivered.
What issues can be adjudicated?
The adjudication process in Ontario is focused on resolving payment disputes. Pursuant to sections 13.5(1) and (2) of the Act, the adjudication regime applies to disputes regarding:
- 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 under Part I.1;
- amounts retained under section 12 (set-off by trustee) or under section 17(3) (lien set-off);
- payment of a holdback under section 26.1 or 26.2;
- non-payment of holdback under section 27.1; and
- any other matter that the parties to the adjudication agree to, or that may be prescribed.
In order to ensure the timely resolution of active disputes, a written determination is to be released by the adjudicator within 30 calendar days of the adjudicator having received the documents required by section 13.11 of the Act, subject to the parties granting an extension of time.
The adjudication process begins with the party to the contract wishing to refer a dispute giving written notice of adjudication, with an electronic copy to ODACC. Although there is currently no standard form for a notice of adjudication, the Act requires that it include the information identified below.
Day 1: Selecting an Adjudicator
The party delivering the notice of adjudication is required to name a proposed adjudicator, and the parties then have 4 calendar days to agree on an adjudicator, failing which one will be selected by ODACC. Day 1 of the adjudication process commences either on the day that the adjudicator consents to act, or on the day ODACC appoints an adjudicator. It is important to note that any provision in a contract or subcontract that purports to name a person as an adjudicator in the event of dispute is of no force or effect.
Days 5 and 8: Delivering the Complaint and Response
The claimant must set out its position by no later than Day 5, and must provide the respondent and adjudicator with a copy of the contract and disputed invoice, as well as any additional documents on which it intends to rely. The responding party must deliver its response and supply any supporting documents by no later than Day 8.
ODACC’s timeline recommends that the adjudicator communicate the balance of the adjudication process to the parties by Day 10. Additional processes may include the exchange of witness statements, an on-site inspection, and obtaining the assistance of a person as is reasonably necessary to enable the adjudicator to better determine any matter of fact in question.
Days 30 and 35: Releasing the Written Determination to ODACC and Parties
Pursuant to section 13.13(1) of the Act, an adjudicator is required to make a determination with reasons no later than 30 calendar days after receiving a copy of the notice of adjudication, a copy of the contract or subcontract, and any documents the party intends to rely on during the adjudication. These documents must be provided no later than 5 calendar days after an adjudicator agrees or is appointed to conduct the adjudication. The ODACC timeline recommends that the adjudicator forward the determination to ODACC for review 5 days in advance of the 30-calendar-day deadline.
If additional time is needed to make a determination, the adjudicator may request that the parties consent to an extension of no more than 14 calendar days or, on the written agreement of the parties to the adjudication, and subject to the adjudicator’s consent, for a period specified in the agreement. If a determination is delayed without a valid extension, it is considered to be invalid or of no force or effect.
Payment in Compliance with Determination
Any amounts awarded in the adjudicator’s determination must be paid no later than 10 calendar days after the determination has been communicated to the parties, less any holdback prescribed by the Act. Failure to do so will result in mandatory interest accruing on all unpaid amounts at the higher of the prejudgment interest rate stipulated in the Courts of Justice Act, or at the rate stipulated in the contract or subcontract, and will entitle the unpaid party to suspend work and recover the reasonable costs of suspension and demobilization.
Effect and Enforcement of a Determination
An adjudicator’s determination is binding on the parties until a determination of the matter by a court, by way of an arbitration conducted under the Arbitration Act, 1991, or a written agreement between the parties respecting the matter.
In the interim, a certified copy of the determination is filed with the court and is enforceable as if it were a court order.