Update: Upcoming Changes to the Construction Act
By Brendan Bowles, partner at Glaholt LLP and Madalina Sontrop, associate at Glaholt LLP
In the year since its enactment, Ontario’s new Construction Act has already made a noted impact on the practice of construction law in the province. The amendments to the previous Construction Lien Act (“CLA”) were to be implemented in two phases: Phase 1, the modernization provisions, effective July 1, 2018; and Phase 2, prompt payment and adjudication, effective October 1, 2019.
Transition: The Biggest Challenge
Since Phase 1 was implemented July 1, 2018, the transition provisions have proven to be an immediate challenge. Which statute applies? Simply put, if the contract was entered into on or before July 1, 2018, the CLA applies, although we have already seen cases where counsel have wrongly assumed the new Construction Act applies and have allowed their clients’ liens to expire. Moreover, the Toronto Construction Lien Masters have issued guidelines to assist counsel as to the application of s. 87.3, and determining which legislation applies. For the foreseeable future, given the gradual nature of the transition, the safest course of action is to assume the 45-day deadlines to preserve and perfect liens continue to apply.
With Phase 2 of the Construction Act now imminent, transition will remain a challenge. It is important for counsel to understand not only how prompt payment and adjudication work, but also how the transition provisions for Phase 2 will work, so they can advise clients whether they are in fact subject to this new regime. The adjudication and prompt payment provisions come into force the day subsection 11(1) of the Construction Lien Amendment Act, 2017 (“Amendment Act”) comes into force – in other words, on October 1, 2019. Subsection 87.3(4), a proposed October 1, 2019 amendment to current section 87.3 of the Construction Act, will determine whether prompt payment and adjudication are available to the parties governed by a construction contract. Subsection 87.3(4) states that prompt payment and adjudication are available and apply to contracts and subcontracts, if the contract is entered into or after October 1, 2019, and the contract’s procurement process, if any, was commenced on or after October 1, 2019.
Simply put, counsel need to know when the contract covering the client’s work was entered into or procured. Did either of these events occur prior to July 1, 2018? If so, the CLA applies in its entirety. Did entry into or procurement of the contract occur on or after July 1, 2018, but before October 1, 2019? If so, the modernization provisions, including extended lien preservation periods apply, but not adjudication or prompt payment. It is only for contracts that are procured, or if there is no procurement process, entered into on or after October 1, 2019 where adjudication and prompt payment will apply. Indeed, due to the gradual nature of these transition provisions, it will be sometime before the Construction Act applies universally.
Prompt payment provisions, as set forth in sections 6.1 – 6.9 of the Construction Act, set out to streamline payments and thereby expedite dispute resolution. In fact, such provisions work in unison with the adjudication process, a framework which seeks to resolve disputes in a timely, less costly, and ultimately less litigious manner.
Prompt payment will apply to all public and private sector construction contracts, including Public Private Partnership (P3) agreements, the exception being any portion of P3 agreements which provide for the operation or maintenance portion of such projects. The prompt payment regime is meant to be a solution to an industry that has become burdened by elongated payment cycles. The key elements to prompt payment include: a proper invoice to trigger payment deadlines, and integration with adjudication. Under the regime, the owner is required to pay the general contractor within 28 days following the submission of a “proper invoice” or a properly documented invoice. The Construction Act provides specifics as to what a proper invoice should contain. However, elements of a proper invoice may be dictated by the contract as well.
Adjudication and prompt payment are, in certain ways, co-dependent. Following from a process that has been in place for well over 20 years in the United Kingdom, the enactment of adjudication in Ontario will be the first of its kind in Canada. As outlined in Part II.1, section 13 of the Construction Act, adjudication is a mechanism that enables parties to resolve their disputes outside the court system. With a decision-making timeline of around 45 days, the adjudication will be carried out by an authorized adjudicator. Adjudication is meant to be a “quick and dirty” determination of the dispute and provides an interim binding decision.
Adjudication does not preclude a lien or a court action. It this sense, it is important to note that while lien rights are maintained, the deadline to lien is affected by adjudication under section 34.10 of the Construction Act. Where the matter that is the subject of a lien, which has not expired, is also the matter that is the subject of an adjudication, then, for purposes of section 34.10 only, the lien is deemed to have expired on the later of either the date on which it would expire under section 31, or 45 days after receipt of documents by the adjudicator under section 13.11 of the Construction Act. In other words, adjudication has introduced a concept that was previously foreign to the lien statute in Ontario: the extension of lien rights due to an intervening event, in this case, adjudication. It can be anticipated that this introduction of a new element to the deadlines for lien registration will be the source of some confusion and counsel relying on an adjudication process to allow more time to preserve a lien will need to carefully diarize the date of receipt of the documents by the adjudicator and the corresponding 45 day period from then to preserve the lien.
While the adjudicated decision is only binding on an interim basis, this decision may be set aside by a judge only if one of five specific factors is established by the challenger, pursuant to subsection 13.18(5) of the Construction Act, thereby setting a high standard for judicial review of the adjudicator’s determination.
These two processes—prompt payment and adjudication—are supposed to make the resolution of disputes in the construction industry quicker, more efficient, and inexpensive. Their true impact, however, ought to be assessed gradually in light of the transition provisions deferring the actual application of these regimes to post October 1, 2019 contracts. Furthermore, as with any other significant change to a familiar way of doing things, it will likely take some time before counsel and clients are truly comfortable resolving construction payment disputes through the new regime and there is widespread acceptance of adjudication as the preferred means of resolving construction industry payment disputes. If there is something to learn from the UK equivalent, it’s that although change was not perfect, these two regimes were, nevertheless, an appropriate approach to a significant access to justice problem: the inability of our court system to provide timely and cost-effective resolution of construction industry payment disputes.