End of the Construction Gridlock – Anticipated Legislative Changes

Nelligan O’Brien Payne gratefully acknowledges the contribution of Amanda Le, Student-at-Law in writing this blog post.

The long-awaited overhaul of the Construction Lien Act (“the Act”) is expected to happen soon. Here is what you need to know.

On May 31, 2017, the Ontario government introduced Bill 142, which seeks to modernize the Act. The Bill has passed first reading and will undergo the next legislative steps this fall. Subject to any amendments, it is expected to pass into law by year-end. If passed, the Bill will bring long-sought reforms to the construction industry.

Why change?

On April 30, 2016, the Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure released its report, Striking the Balance: Expert Review of Ontario’s Construction Lien Act (the “Review”) in response to industry concerns about the Act’s efficiency and effectiveness. These concerns include the need for a quicker dispute resolution mechanism, as well as a means of enforcing prompt payment to protect contractors, subcontractors, and suppliers. For more information, take a look at our article from February 2016 on the Review’s background and the stakeholder positions.

What are the changes?

The Bill includes most of the Review’s recommendations. Amongst other changes, it introduces an interim adjudication mechanism, mandatory timelines to ensure prompt payment, extended timelines for preserving and perfecting liens, and new holdback rules.

Interim adjudication

This new dispute resolution mechanism provides both the speed and enforceability needed to address construction gridlocks. The procedure is available up until a contract is completed (or terminated) if the dispute involves: the valuation of materials or services; contract payments (including those arising from change orders); holdback releases; notices of non-payment; set-offs; or other agreed upon matters.

The parties split the adjudicator’s cost and otherwise pay for their own legal expenses. After receiving the initiating party’s documents, the adjudicator must decide within 30 days (unless extended on consent or otherwise agreed by the parties). A party may re-litigate the decision through arbitration or litigation. Up until such re-litigation, the adjudicator’s decision is binding and enforceable by courts. Costs are only awarded in exceptional circumstances, such as where a claim was vexatious or frivolous.

Any amount payable is due within 10 days of the decision date. Any unpaid amounts past the deadline will accrue interest. Significantly, such unpaid contractors and subcontractors will have the right to suspend work and will be entitled to the reasonable costs of suspending or resuming work.

Prompt payment

Mandatory payment timelines provide further protection for contractors and subcontractors. Parties will not be able to contract out of the prompt payment provisions, but will be able to establish payment structures that are not monthly.

After receiving a “proper invoice”, owners must pay contractors within 28 days, unless a non-payment notice with a specified amount and reasons is delivered within 14 days. Where an owner pays a contractor on time, the contractor must pay subcontractors within 7 days of receiving payment, subject to the contractor issuing its own notice of non-payment.

Where an owner does not pay a contractor on time, the contractor must still pay subcontractors within 35 days of delivering the “proper invoice” to the owner, unless within 7 days of receiving the notice of non-payment from the owner, the contractor delivers a notice of non-payment to the subcontractor notifying the subcontractor of the shortfall in payment from the owner and undertaking to refer the matter to adjudication within 14 days.

The same provisions apply down the construction pyramid to sub-subcontractors.

The requirements for a “proper invoice” include: a) the contractor’s name and address; b) the date of the invoice and the period during which the services or materials were supplied; c) information identifying the authority under which the services or materials were supplied; d) a description, including quantity where appropriate, of the services or materials supplied; e) the amount payable; and f) the contact information of the person to whom payment is being sent.

Other Proposed Changes

The Bill also includes other changes, such as:

• The deadline for preserving liens is extended from 45 days to 60 days. The deadline for perfecting liens is extended from 45 days to 90 days.
• Holdback may be held in non-cash forms. Mandatory payment of holdback is required where liens are expired, unless a notice of refusal is published.
• How the Act applies to the public-private partnership project delivery model is clarified.
• Actions that fall within the monetary jurisdiction of the Small Claims Court may be referred to deputy judges of that Court.
• Routine maintenance or repair work is not subject to the lien provisions.
• Trustees have additional record-keeping obligations.
• The Act’s title is shortened to the “Construction Act”.

All of these changes are subject to potential amendments in the upcoming months based on industry stakeholders’ feedback. Rest assured that the lawyers in the Commercial Litigation Group will keep you in the loop on the results.