An overview of the recent and upcoming provisions Ontario’s Construction Act
It was in 1983 that Ontario established the Construction Lien Act to regulate payments in the industry. Given the complexity and sheer volume of payment disputes in the industry today, this legislation proved to be painfully outdated, and overdue for an overhaul. It was evident that the Act was in need of restructuring to better serve all parties in the supply chain.
Over the past two decades, prompt payment legislation for the construction sector has been adopted in many other jurisdictions including the UK, Australia, Ireland and New Zealand. Recently, the European Union also adopted a motion requiring members to enact prompt payment legislation. Ontario has been able to look to these diverse experiences when developing legislation for the province.
Ontario’s Construction Lien Amendment Act, 2017 was passed last December and the provisions of the new act, now called the Construction Act, was introduced on July 1st this year. Amendments to modernize the lien and holdback process are now in effect. To allow sufficient time to put into place a new adjudication system, prompt payment rules and a new adjudication process will come into effect on October 1st, 2019.
The following provides an overview of the recent and upcoming provisions.
Ontario Construction Act Provisions: As of July 1st, 2018
The following provisions of the Construction Act came into force on July 1st, however, these apply in cases where a contract for the improvement is entered into after July 1st, 2018, or the procurement process (e.g. RFQ, RFP) for a project is commenced after July 1st, 2018.
Changes to holdback rules provide more payment certainty
There’s now certainty about the timing of release of holdback payments. Project owners and other payers are now required to to release to contractors and subcontractors the 10% holdback requirement when the timeline to file liens has passed. More good news: holdback does not need to be retained as cash, but may also be in the form of a holdback bond, letter of credit or some other types of security
More time for preserving and perfecting liens
The period for contractors and subcontractors to register a lien has been increased from 45 days to 60 days. As well, the period to perfect a lien by commencing an action has been extended from 45 days to 90 days. Claimants now have up to 150 days to register and perfect a lien. Claims under $25,000 will now be referred to the Small Claims Court.
Stricter trust fund requirements
For contractors and subcontractors who are trustees of project trust funds, there are new obligations relating to deposit, administration, recording and traceability. For example, trustees are now required to deposit funds received on account of their contract/subcontract price into a bank account in the trustee’s name. They must also maintain written records of the amounts received, transferred or paid out of the trust funds.
Ontario Construction Act Provisions: Beginning October 1st, 2019
The most significant changes to the Act, the prompt payment and dispute resolution provisions, will come into force next fall. This will likely make profound changes to the culture and behaviour of developers, general contractors and sub-contractors alike.
Many of these changes are intended to address issues regarding cash flow. Poor cash flow has been a significant contributor to insolvencies in the industry. To protect their cash flow, companies sometimes defer payments for an extra week, month, or more. When an amount is disputed, typically the disputed amounts are set aside until the end of a construction project. By that time, numerous disputes may have accumulated, people have changed employers, and businesses may have changed hands, all of which serves to make dispute resolution more difficult.
With strict payment time frames, however, the new legislation seeks to end this practice. The following prompt payment requirements will be mandatory for all contracts and will apply to public as well as private sector construction projects, to all types and sizes of projects and to all parties in the supply chain.
Prompt payment requirements between owners and contractors
Between 2002 and 2013, the average collection period in the construction industry increased from about 57 days to 71 days 1. To spur more timely payments, the legislation requires owners to pay contractors within 28 days after receiving a proper invoice. This means an invoice that includes, among other requirements, a description of the services or materials supplied, the period during which they were supplied, and the authority under which they were supplied, after being paid by the owner, contractors will have seven days to pay its sub-contractors. Owners will be able to dispute all or part of an invoice, but to do so, must deliver a notice of non-payment within 14 days of receiving it. This notice must describe all of the reasons for not paying. The owner would also have to pay any undisputed amounts.
Prompt payment requirements between contractors and sub-contractors
When contractors receive payments for an invoice, they will be required to pay subcontractors within seven days. If they don’t intend to pay the full amount, they too must deliver a notice of non-payment to subcontractors who must, in turn, do the same for sub-subcontractors. The contractor must deliver this notice within seven days of receiving payment when the owner pays all or a part of the contractor’s invoice, or within 35 days of submitting the invoice when the owner does not pay any part of the contractor’s invoice.
Adjudication process to fast track dispute resolution while work continues
Adjudication is intended to fast track dispute resolution, enabling cash to flow and work to continue. In fact adjudication must be initiated before the date the construction contract between the parties is completed, unless agreed otherwise between the contracting parties. Since adjudication works in concert with the lien provisions, the parties involved can preserve and perfect a lien while concurrently pursuing adjudication.
A party that wishes to refer a dispute to adjudication delivers a written notice of adjudication to the other party. Types of disputes could relate to valuations of work, services, or materials; set-offs, deductions, delays and other issues. Both parties may agree on an adjudicator, or request the body that will oversee adjudication to appoint one. Adjudicators won’t need to have legal training but will have construction expertise and will likely be members of a regulated profession within the industry such as architects, engineers and quantity surveyors.
The adjudicator will review the contract and other documents and may visit the construction site to determine the amount to be paid to resolve the dispute. The adjudicator will typically render a determination within 30 days and the party that is required to pay must do so within 10 days. The costs of adjudication will be shared equally. The determination is binding until ruled on by a court or arbitrator, or until it is overturned following a judicial review. Note that leave is required for judicial review, and is granted on limited conditions.
For more information on the Construction Act visit: https://www.ontario.ca/laws/statute/90c30
1 Modernizing Ontario’s Construction Laws: New Legislation Would Address Payment Delay and Improve Dispute Resolution Process; May 31st, 2017; Ministry of the Attorney General