Laws to improve prompt payment about to take effect

More than seven years since the province first proposed legislative changes to improve prompt payment in the construction industry, amendments to address this issue are finally about to take effect.

Stage one of the newly entitled Construction Act comes into force on July 1. 

In the fall of 2019, the second stage, aimed at reducing costly payment disputes through mandatory interim adjudication, will also become law.

The legislation and the regulations to implement the changes are the first major overhaul of the construction payment framework in more than three decades in Ontario. 

Even though they are being implemented a little more than two years after the province received an expert report that was widely praised, lawyers in the field say there is still a lot of preparation needed to comply with the new requirements.

“The economy in Ontario is doing very well. There is a lot of construction activity. Infrastructure Ontario has a robust pipeline of projects,” says Richard Wong, chairman of the construction and infrastructure group at Osler Hoskin & Harcourt LLP in Toronto.

“Now that the government has the set out the policies and general rules, it will be up to the private and public sector to adjust their processes,” he says. 

“July 1 is soon. Within an organization, you will have business units that must co-ordinate their payment processes,” says Wong. “As an industry, these changes will help get the cash moving. That is generally a good thing as long as rights are not prejudiced.”

While the changes are significant, the regulations that will accompany the legislation were drafted in a fair way, says Neil Abbott, a partner at Gowling WLG in Toronto and a specialist in construction law. “The good news is these regulations were presented to stakeholders. The regulations are well thought out, but you still have to put them into practice. Even if people have been following it, once it hits, you have to deal with it, Abbott says, comparing it to when individuals start to deal with their tax returns despite knowing the deadline well in advance.

In stage one, the prompt payment framework requires a contractor to provide a “proper invoice” to the owner. The owner is then required to pay that invoice within 28 days and the contractor must pay subcontractors within the next seven days, unless there has been a notice of non-payment issued by the owner. The non-payment notice, along with reasons, must be provided within 14 days of receiving the invoice.

While the mandatory interim adjudication requirements will not take effect for another 17 months, this should not be a reason to fail to comply with the new rules on prompt payments. 

“Make sure your payment people are aware of the changes. Ignorance of it is no excuse. This is not an industry where you can stick your head in the ground,” says Abbott.

As well, voluntarily agreeing to adjudication over payment disputes before stage two takes effect is not a bad idea, he says. 

“There is nothing to stop you from doing this now. Many parties are already doing it,” says Abbott.

The new measures also expressly permit alternative forms of holdback, Wong observes.  

A letter of credit and a demand-worded repayment bond are among the other forms of holdback permitted in addition to that of holding back funds to ensure that all parties are paid.

The regulations will also require a “surety bond” for public projects of more than $250,000 in value to ensure contractor performance. “This will quite frequently be invoked,” says Wong.

The new legislation has grandfathering provisions related to procurement and contracts. 

“If you have commenced the procurement process, the contract is also grandfathered,” Wong states. 

“The section of the bill talks about it being commenced, so it will be necessary to ensure there is clarity in the documents themselves to put the bidders on notice,” he explains.

This provision might still result in confusion and disputes, however, Abbott says. 

“The question is, ‘When is the new baby born? What is the effective date of the contract?’” he asks.

There are still a number of details to be worked out in the area of mandatory adjudication before it is formally part of the process in the fall of 2019. 

The extra period before stage two is implemented is reasonable, says Wong.

“The government needs time to create this new authority. It will have to find and designate adjudicators. It does take a fair bit of time to ramp up. The industry also needs a period to adapt,” Wong says.

The amendments to the Construction Lien Act received widespread political support when they were passed late last year. 

Even if there is a change in government after the upcoming provincial election, Wong says he does not think there will be any major changes related to the construction industry and the rules around payment.

“The major victory here, in terms of those pushing for changes, is that there really was all party support,” he says.

Construction Act: A Timeline

2011: The Protecting Contractors Through Prompt Payment Act is introduced into the legislature. It dies on the order paper as a general election is called.

2013: Prompt Payment Act, 2013 is introduced. Public hearings take place, but the legislation is set aside as the government decides a more extensive review is needed to also look at delayed payment and cash flow issues.

February 2015: The expert review begins.

April 2016: The report of the panel — entitled “Striking A Balance” — is delivered to the provincial government.

May 2017: Construction Lien Amendment Act is introduced into the legislature.

December 2017: The legislation is passed by the legislature and receives Royal assent.

February 2018: The province announces a consultation process related to the drafting of the regulations within the statute.

July 2018: Stage one of the act, known now as the Construction Act, will be take effect. Stage one deals with modernization and other selected amendments.

October 2019: The prompt payment and mandatory interim adjudication of construction disputes is scheduled to take effect. A new provincial agency made up of adjudicators with experience in the construction industry will be created. 

— Shannon Kari