Prompt Payment and Adjudication in Canada
Kevin O’Neill, Operations Director Driver Trett Canada asks if the new legislation is really needed and how do we prepare?
Is there really a need for legislation imposing prompt payment measures and interim adjudication on construction contracts in Alberta (and by extension, Canada)? That was a question posed to me (rhetorically) at a recent panel discussion. Aren’t the parties to a construction contract free to contract with each other, and to abide by the conditions of the contract? Haven’t both parties agreed that the determinations made by the consultant (architect, engineer, contract administrator, payment certifier, as the case may be) are fair and binding? Haven’t the parties agreed to implement the determinations made by the consultant?
Thankfully, the questioner immediately provided the answer. No, the administration of construction contracts, in a large percentage of cases, does not conform to the letter or the spirit of the contract. Consultants are not seen, in many cases, as being impartial when the matter at hand is a variation to a contract caused by poorly coordinated construction drawings, and its client, the owner, is the party picking up the tab. Owners are not seen as processing regular progress payments in a timely manner, using every trick in the book to avoid paying for work done and equipment procured on its behalf. General contractors are no different, deciding which sub-trades to pay on time, and which to delay. And so it goes down the payment pyramid, each party holding back on payment to the next level.
The provincial and federal governments across Canada are now legislating, or at least considering, statutory prompt payment provisions for construction contracts. In addition, the availability of interim adjudication of construction disputes as the enforcement mechanism for prompt payments is coming into play. Most provinces have examined or enacted prompt payment and interim adjudication to some extent while updating their respective lien legislation.
Let’s look at how it is being addressed across Canada.
As we have previously discussed (Digest Issues 14 and 15) prompt payment and interim adjudication were introduced in updates to the Ontario Construction Lien Act (now the Construction Act). Initial updates to the lien legislation were put into effect in July 2018. Since that time several revisions to the Act have been instituted by the provincial government to clarify issues regarding the transition period and other housekeeping matters. In October 2019 the prompt payment and interim adjudication regulations will come into effect, but only for projects where the procurement process started on or after October 1, 2019 (S87.3 (4) 2). Consequently, the implementation of prompt payment and interim adjudication will be rather slow. Of course, the dispute must be sufficiently valuable to warrant the expense of an adjudication process. It may be that the first adjudication will not be seen before the summer of 2020.
In Manitoba, two separate private members’ bills were introduced (February 2018 and June 2019). Neither bill passed. The Manitoba Law Reform Commission, in a study of Manitoba’s construction remedies legislation (The Builders’ Liens Act: A modernised approach, November 2018), did recommend a system similar to the Ontario Construction Act. To date, no legislation has been passed in Manitoba.
Saskatchewan passed Bill 152, the Builders' Lien (Prompt Payment) Amendment Act, in May 2019, which provides for statutory prompt payment and available interim adjudication along the lines of the Ontario Construction Act. The regulations concerning the act have not yet been developed or agreed, but the government is planning for implementation in early 2020.
In Nova Scotia, amendments to the Builders' Lien Act were implemented though Bill 119, which received Royal Assent in April, 2019. Although seemingly based on the Ontario legislation, interim adjudication is available only for those issues subject to a notice of non-payment. It will be interesting to see if this restriction acts as a deterrent to the use of adjudication.
New Brunswick has reviewed its existing lien legislation and has published a Law Reform Note in May 2018 recommending the implementation of prompt payment regulation and adjudication. The note questions whether the full Ontario-based legislation is appropriate for a small province like New Brunswick.
Quebec has embarked on a pilot project to test various implementations of prompt payment, adjudication, and reporting measures.
Alberta has implemented specific language in its own contracts with construction service providers to invoke a prompt payment scheme but, has not addressed any adjudication provisions, nor extended these requirements to the wider construction industry.
In British Columbia a private member’s bill was introduced in May 2019 to implement a prompt payment regime. However, the Bill did not provide for adjudication of payment disputes and is not expected to pass in the legislature.
Except for Ontario, the rules and regulations still need to be developed for all the legislation. There is a belief that those rules and regulations will fall in line with Ontario, providing some consistency across the country.
The relatively small scale of the construction industry in the smaller provinces, the lack of experienced industry professionals to act as adjudicators, the high likelihood of conflicts of interest, and a possible lack of specialised knowledge (such as northern climate construction) among the adjudicators is a common theme in commentary from the legal and construction communities. However, since most adjudications will take place in writing, by telephone or by video conference, the need for geographic proximity is not required. Recommendations include that the smaller provinces seek bi-provincial or national agreements to access a larger pool of qualified adjudicators.
On the national scene, the Federal Prompt Payment for Construction Act, designed to apply to all Federal construction projects, received Royal Assent on June 21, 2019. As is the case with most jurisdictions, the regulations have yet to be developed and agreed, and Cabinet has not yet set a date for this law to becomes effective.
In a curious departure from the Ontario transition provisions, the Federal legislation calls for a delay in implementing the Act of 12 months from the date of coming into effect. At that point, all ongoing contracts will be subject to the new prompt payment and adjudication legislation; there will be no gradual implementation. One hopes that the thousands of Change Orders to be issued across the country do not implement different provisions for ongoing contracts.
How do we prepare?
We have seen wide variations in the knowledge and understanding of the Construction Act in Ontario in our ongoing discussions with clients, and the construction community in general. Subcontractors are, at times, gleefully rubbing their hands at the prospect of being paid what they are owed within 35 days of submitting their invoice or are completely oblivious to the fact that the legislation has undergone such radical change. Many general contractors believe that life will go on as it always has. In their view, the size of the disputes related to prompt payment will not be large enough to justify a referral to interim binding adjudication until the end of the project, as is now the case with current lien legislation. They may very well be right.
In the meantime, the new legislation in Ontario and, by its seeming adoption across the country, in Canada is a disruptive event: an opportunity for the construction industry to streamline and modernise their internal processes. First and foremost, contractors and sub-contractors should update their invoicing and payment procedures to suit the new prompt payment timelines. Secondly, payors (owners and contractors) must streamline their invoice review processes to ensure non-payment notices are issued, whenever appropriate, in a timely manner. Thirdly, a general move to online invoicing and payment systems seems inevitable, to meet the very ambitious timeframes set out in the legislation.
In respect of interim adjudication, the need for improved record keeping cannot be understated. Contractors, or subcontractors, can assemble the documentation and prepare the referral documents to initiate an adjudication procedure at their convenience. A poorly documented notice of adjudication is destined to fail.
On the receiver’s end, that a dispute has crystallised regarding payment or withholding of monies, etc., should never be in question. A well designed and executed record keeping system is the best defence. Once the referral documents are submitted the responding party must determine its response within days; usually no more than a week. There is no time to hunt through unorganised drawers. In adjudication, as in claims: “The party with the best documentation wins”.