Prompt Payment – Construction Lien Act Amendments
Articles,  Blog

Prompt Payment – Construction Lien Act Amendments


Prompt Payment Ted: Okay, so moving on. We’ve got a few more things on the modernization
piece then we’ll talk about prompt payment. Just so everybody’s aware the slides will
be distributed to everybody who’s given us your information. There’s a lot of information and a lot of
detail in these slides highlighting sections and language of the statute so you’ll get
that. We’re just trying to highlight the key points,
key changes, for you. Anybody a landlord or due work on leasehold
improvements here? There are some new rules that are coming applying
to leasehold interest. Right now the Act does not automatically give
a lien right on the underlying fee simple, on the underlying premises of the landlord,
when you’re doing construction work for a tenant. There’s a process that that can happen but
it doesn’t happen automatically and the landlord has the right to discharge, or avoid, any
kind of liens attaching to its premises. That won’t be the case anymore when there
is any kind of funding or a credit or rent abatement for leasehold improvements. Typical tenant improvement allowance will
automatically trigger lien rights for the benefit of the contractor on the premises
of the building. That’s a very new change and it also ties
in with section 39, Disclosure Obligations. Landlords who provide leasehold improvement
funds of any kind, and that’s very broadly defined, will also have to answer to contractor’s
request for information about the status of the lease and the payments for that leasehold
improvement. That’s a bit of a change for landlords. As Stuart mentioned, and clear from some of
the things we’ve been saying, there is a much heavier use of forms. There’s actually 18 brand new forms that are
created. A lot of these have to do with these notice
of non-payment and certainly with the prompt payment regime. But it is a more formal and formulaic prescribed
form statute now. Including a new notice of lien form. Right now notice of lien does not have any
kind of prescribed form and it’s often a question of whether this letter I received is actually
a notice of lien or not for the purposes of the Act. That’s now going to be a prescribed form so
you’ll know very clearly whether it is or not. If you have adopted or used or incorporated
into your systems and documents any of the existing standard forms that are part of the
statute you’ll have to update those. Even if it’s just to reflect the fact that
the name changed. Every form is going to be have to be updated
for that and for other reasons. Other relevant changes, as I said there is
a lot of changes, we’ve listed some of these here. I didn’t mention earlier, as well, the definition
of substantial performance is being changed slightly. It’s being updated. As those who are aware section 2 defines substantial
performance with two tests. One is a functionality test. Is it ready and built for the intended purposes
and that doesn’t change. The financial threshold test, though, which
is based on a contract value, that moves up from $500,000 tiers to $1,000,000 tiers to
reflect the fact that there’s been a little bit of inflation since 1983. I mentioned this one earlier. The notice of termination. Expiration of the lien rights is tied to the
last day of supply of any work or materials, substantial performance or abandonment. They are now adding termination. But to make that work, for calculating lien
period, they now require a notice of termination. This is a notice that is actually not just
delivered to an owner by a contractor, or an owner to a contractor, it also has to be
published. So it’s designed to start that clock ticking
and so it needs to be published so sub-contractors are aware that the lien period has started
and the clock is ticking. But there has some clear unintended consequences
of that. Right now you can have a dispute and often
you’ll have a negotiation settlement period. Somebody’s going to throw down a notice of
termination at some point and then it escalates finally up to the CEO’s of the company. They come to the table. They work things out and then everybody gets
back to work, sometimes. That’s not going to happen anymore because
you’ve now published to the world that this contract has been terminated. It will de-leverage the use of any kind of
threats of notices of termination because once you’ve published a notice your sub-contractors
aren’t coming back to the project site, your lenders are going to start to accelerate any
borrowings and trigger any defaults under their lending agreement. You’re really cornering yourself once that
notice gets issued. Liens will no longer attach the premises within
municipalities starting on October 1 of next year. And they won’t attach the public highways. There’s some procedural changes for notice
of liens on condominiums. An easier way for unit holders to discharge. I’ll just highlight. Part 8 of the Act deals with all of the different
construction dispute procedures. We’re not going to get into the details here. First of all, most of those rules and procedures
are moved into the Regulations so they’re more easily updated later on. If you’re looking for them you’ve got to look
for the Regulations. But there are some changes there too. You can now combine without the need for leave
of court. You combine a lien claim, trust and a contract
dispute claim. You can bring some lien claims in small claims
court now. And construction claims are going to be case
managed. There are a number of changes to procedures
for claims and there are also a number of technical amendments, as I said, forms and
different processes. There are a lot of changes and it does merit
having a look at those if you’re deeply involved in using the Construction Lien Act regularly. Certainly, I think, a lot of this is only
going to be learned in the real life project when you’re faced with the actual consequences
of a claim or any procedure. We rushed through some of those changes at
the end. As I said, some of these are summarized in
the slides, some of them are in our materials that are on the website, but there are a lot. Most of those will need to be learned but
once you’ve learned them there’s not a lot more. You’ll just have to move on and that’ll be
a part of our new world. I do want to get onto prompt payment because
this is a regime change. This is going to be culture shift. Essentially, there is a new bottom line in
construction projects. Owners are going to have to pay within 28
days of receiving a proper invoice and contractors will then have 7 days to pay their contractors
once they’ve been paid. Canada’s a bit of an outlier when it comes
to prompt payment. Most jurisdictions out there, 49 States in
the US, Australia, UK, France and others have some form of legislated payment regime for
construction payments. We will now have that in Ontario and I can
tell you if you work nationally it’s coming across the country. Already there’s a senate Bill, federally. There’s a private members Bill that was introduced
a couple of weeks ago in Manitoba. Three provinces have law reform commissions
looking at this and others have committees or other sorts of review of prompt payment
regime that’s been introduced in Ontario. My view is that within 5 years we’re going
to have prompt payment and possibly adjudication across the entire country so we need to get
ready for it even if you’re are looking at projects outside of Ontario. First of all, does this apply to me? Yes. It applies to everybody. It applies to everybody in the construction
pyramid. All types of projects, public, private, conventional,
P3 projects, new build, repair, your home bathroom renovation to the construction of
a hospital. These new rules will apply to everybody. All sizes. There was some attempt to exclude small projects
and very, very large projects. The government decided nope, everybody’s in. These will apply to all payments made under
contracts entered into or after the day the prompt payment provisions of the Construction
Act come into force, which will be October 1 of next year. Can you exclude payment provisions? No. These are mandatory. They’re binding. You are allowed to structure your payments. Instead of having monthly progress payments
you are allowed, for example, put milestones into your contract. If it’s defined clearly in the contract that
you’ve got milestones, and you’ve got criteria for determining when those milestones have
been completed, that’s okay. Once those milestones have been completed
though that’s when the clock will start ticking. The 28 day clock. That’s how that will work. What you’re not allowed to do is require a
certification of the work or an approval by the owner of the invoice, or a draft invoice,
before it gets submitted. This is a bit of a change. We often see, especially when project financing
is involved or some other large project, we’ll see the draft invoice has to be submitted
first, owner approves it or the work gets certified by the consultant and then the final
invoice is submitted and then the clock starts ticking. That’s reversed now. You have a proper invoice that gets submitted
without the certification or approval beforehand. That happens within that 28 day period. That tightens things up very tight like. Let’s break this down a bit. First of all, it’s a proper invoice. This is a defined term. This is one of the places where the Province
decided not to legislate a form of invoice. They do leave that to the parties to negotiate
what other conditions and criteria, WSIB certificates, insurance certificates, whatever you want. That’s all allowed as a condition for submitting
your invoice. But there is a definition, a description,
of what a proper invoice must at least include as a minimum, so you want to make sure you’re
complying with that. Secondly, an owner is allowed to dispute payments
they just have to dispute within 14 days of receiving that proper invoice. If they want to shortchange on an invoice
because they think there’s deficiencies or the work hasn’t been completed fully, to the
extent the contractor claims, that’s fine but they need to provide a notice of non-payment
within 14 days of receiving their proper invoice from the contractor. Not only that, but they have to issue this
notice in the prescribed form. It can’t be just an email or a letter and
they have to state all their reasons and they have to give details. That will become important in the adjudication
that Mark’s going to talk about in a few minutes. If you’ve not included all your reasons and
you try to introduce new reasons in front of an adjudicator I expect the adjudicator
will say, “I’m not listening to you.” and you’re stuck. Now this doesn’t mean you lose your right
to dispute a deficiency if you miss the time period. You’re just going to have to pay, if you miss
that 14 day window, at the end of the payment period you’re going to have to pay the full
invoice and raise the set off on the next invoice cycle. So it defers but think about it for a second. If you’ve got some kind of project funding,
and you miss your notice and you find out on the 20th day that you’ve got a deficiency,
your lender’s not going to advance the funds but you’re going to have a payment obligation. So you’ve got a real gap there and you’ve
got to find the money somewhere. It’s not good enough for the lender to say,
“Well, just pay me the full advance now and then we’ll draw a shorter amount next month.” because the lender wants to know the works
been done properly. So we’ve got a bit of a gap there. And you must pay any undisputed portion on
that 28th day. So if you don’t get your notice in, or if
you’re disputing only 25% of an invoice, you still have to pay the balance of what you
don’t dispute. Similar rules to apply to the contractor. First of all, if they are paid they must their
sub-contractors within 7 days unless they deliver their notice of non-payment within
that 7 day window. And a bona fide reason for not paying is that
I haven’t been paid. Or I’ve received a notice of non-payment from
the owner and so you’re not going to get your money either. Their notice is in prescribed form as well
and they have to set out all the reasons. Sorry. That should say the 7 day and not 14 days. They also must pay any undisputed amount. It seems like pay when paid and that’s what
the Vogel Reynolds report had recommended but, in fact, it’s not quite a true paid when
paid. For contractors, if they get paid, they have
to pay within 7 days. However, if they don’t get paid by their owners,
there’s a 35 day period that starts from their proper invoice, at the end of which they have
to either pay their sub-contractors out of their own pockets, or they have to start a
fight with the owner. They have to commence an adjudication. So that’s a bit of a change and it puts pressure
on the contractors and the likelihood that we’ll see a lot more adjudications so contractors
can avoid the obligation of pay. There is a definition in 6.1 of a proper invoice. We don’t need to go through that there but
that is the definition. You’ll want to make sure that any form of
application for payment or invoice you have meets with that description. I’ll point out item 7. Any other Information that may be Prescribed,
when the Regulations came out nothing else was prescribed so you’re just looking at the
whole definition there. So what happens if you don’t pay on time? Either a contractor doesn’t or an owner doesn’t
pay within the stipulated times. First of all, interest is going to start to
accrue. Statutory interest at a prescribed rate in
the Courts of Justice Act. You are allowed to agree to a higher amount
but you are not allowed to agree to a lower amount than what’s in the Courts of Justice
Act. Secondly, if you don’t pay, and you go to
adjudication and an adjudicator renders a decision, a determination, and you still don’t
pay, you’re giving your contractor a statutory right to suspend work or terminate your contract
with costs. And certainly costs for remobilization as
well. So we now have the contractors and sub-contractors
with a very powerful statute enforced rule and right to terminate if they’re not paid. This can’t be waived in contract. That’s prompt payment. It’s very tied up with adjudication so now
we’ll move to Mark Crane, my partner Mark Crane, who’s at the back coming forward now,
who’s going to talk about adjudication for the next couple of minutes. These rules, prompt payment and adjudication,
are coming in next year. These are the kinds of things that we think
need some very thorough looking at. After Mark speaks my partner Chris Stanek’s
going to step up and start to talk about some of the practical things that organizations
need to think about when it comes to prompt payment and adjudication and all of the other
changes.

Leave a Reply

Your email address will not be published. Required fields are marked *