Construction Act Reforms: Now in Effect!

Prompt Payment Regime (S.6.1)

Bill 142 introduces a strict prompt payment regime in Ontario. It will be applied to both private and public sector projects, to all parties in the construction pyramid, and all sizes and types of improvements.

Under this system, owners will have 28 days to pay a contractor after delivery of a proper invoice, and contractors will have 7 days to pay a sub-contractor after getting paid by the owner.

...the 28-day clock will start once an invoice is submitted...

Prompt payment will be mandatory for all contracts. Parties will be permitted to establish milestones, payment schedules, or other payment structures that are not based on monthly progress payments if it is set out clearly in their contract, but the 28-day clock will start once an invoice is submitted in accordance with that payment structure. The owner and general contractor will be able to agree on some details for the submittal of an invoice but if they do not agree, they will be required to submit invoices on a monthly basis.

Notice of Non-Payment

Owners will be permitted to dispute all or parts of an invoice; however, they will now be required to deliver a notice of non-payment within 14 days of receiving the proper invoice from the contractor. The notice of non-payment must set out all of the owner's reasons for not paying. Any undisputed amounts will have to be paid.

Similarly, contractors must also deliver a notice of non-payment to subcontractors (and subcontractors to sub-subcontractors) if they do not intend to pay the full amount of the invoice. If an owner pays all or a part of the contractor's invoice, the contractor will need to deliver the notice of non-payment to that subcontractor within 7 days of receiving the payment from the owner. If the owner does not pay any part of the contractor's proper invoice, the contractor has 35 days after its proper invoice to deliver the notice of non-payment to its subcontractors.

...the prompt payment rules do not create a true “pay when paid” protection for contractors...

Contractors need to understand that the prompt payment rules do not create a true “pay when paid” protection for contractors. While s.6.4(1) provides that a contractor must pay subcontractors within 7 days of getting paid by the owner, s.6.4(4) provides that, if an owner has not paid, then within 35 days of sending in the proper invoice a contractor must either (1) commence an adjudication against the owner, or (2) pay the subcontractor (unless it has delivered a notice of non-payment). So if the contractor does not wish to commence a dispute with the owner, it will have to pay the subcontractor out of its own pocket.

Failure to Pay Consequences

If a party fails to pay when due under the prompt payment rules, statutory interest will accrue and become due on the payment. The rate of interest will be the greater of the amount set out under the Courts of Justice Act and the amount agreed to in the contract. If a party fails to pay when due after the non-payment is adjudicated, the party entitled to be paid can suspend work or terminate their contract. The prompt payment provisions will apply to payments made under contracts entered into on or after the date the amendments come into force on October 1, 2019.

Adjudication Procedures

Finally, parties to a construction contract will be entitled to refer disputes to adjudication, based on the UK model, that flow from a proper invoice under a contract, including claims for valuation of work, services and materials and other monetary claims made in accordance with the contract, as well as set-offs, deductions and delay claims. This dispute resolution method will be mandatory on all construction projects, public and private, and all sizes and types. Parties will be free to draft their own provisions so long as the provisions are consistent with the Act. These adjudication procedures will apply to contracts entered into on or after the day the amendments come into force on October 1, 2019.

Ideally, within 30 days, the adjudicator delivers a written decision.

The party with the issue will deliver a notice of adjudication to the party with whom they have a contract. The receiving party will have two days to determine if it agrees with the proposed adjudicator. Five days later, there will be a referral notice, a notice of adjudication and back-up documents from the claimant to be provided to the adjudicator. Ideally, within 30 days, the adjudicator delivers a written decision. If a decision to pay is not obeyed, the party expecting the payment would be entitled to suspend work under the contract, charge mandatory interest on late payments, or enforce the adjudicator's determination by filing a certified copy in Superior Court.

The adjudicators selected to hear these matters will be experts with extensive experience in the construction industry and experience or training in dispute resolution. They will be selected from a registry of adjudicators and may be selected by either the parties to the action or the Authorized Nominating Authority that is tasked with overseeing this adjudication regime and its adjudicators. The parties and the adjudicator may agree to the adjudicator's fees, and if they are unable to agree, the adjudicator's fees will be determined by the Authority in accordance with a fee schedule which will be publicly available. Finally, adjudicators will be required to issue a determination in approximately six weeks, which the parties will be bound to on an interim basis until the dispute has finally been resolved either by the courts or arbitration.

Adjudication Goal

The goal of this adjudication process – along with ensuring expedient payment to deserving parties – is to help reduce the burden on the courts regarding these matters. Under this system as demonstrated in the UK, only a small number of cases typically go on from the adjudication to litigation or arbitration. Reducing the number of claims that extend into lengthy affairs and reach settlements that satisfy all parties is in the best interest of everyone involved.

Authorized Nominating Authority

ADR Chambers Inc. was recently selected as the successful candidate to be designated to act as Authorized Nominating Authority under the Construction Act. ADR Chambers Inc. has significant experience delivering alternative dispute resolution services in Ontario. In its capacity as the Authority, it is responsible for overseeing the new adjudication regime by performing the duties and services set out in the Act and supporting regulations.

Some of the key services the Authority provides include:

establishing a new website to enable parties to learn about adjudication and access services,
developing and overseeing training programs for adjudicators,
qualifying individuals who meet the prescribed requirements as adjudicators,
maintaining a schedule of fees, a code of conduct for adjudicators, and a complaints procedure,
appointing an adjudicator to a dispute if requested by the parties, and
publishing educational materials regarding the adjudication process, along with an annual report containing aggregated information regarding adjudication in Ontario.

The Authority will operate independently of government and will be self-funded.

Please contact the McCague Borlack LLP Construction Group for more information about how these important changes in the law might affect your business.

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