Prompt Payment and Adjudication in the Construction Lien Act

The Construction Lien Act was significantly updated and renamed the Construction Act. The changes were implemented in two phases. Phase one was implemented on July 1, 2018 and updated many of the laws that guide the construction industry. The changes are highlighted in our blog post, which is available online at https://ospe.on.ca/membership/new-construction-act/.
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Phase two was implemented on October 1, 2019 and introduced two new sections, Prompt Payment and Adjudication. Under Prompt Payment, payment deadlines are now mandated by statute, meaning the Act tells you the timeframe for payment of invoices and how invoices are to be disputed. Adjudication is a non-court-based system to enforce Prompt Payment and resolve a multitude of other issues that arise on construction projects. The goal of these two new regimes is to ensure that funds flow in a timely manner and to resolve issues on an expediated basis to ensure the timely completion of construction projects.
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If you are providing engineering services that fall under the Act, you must be aware of these two regimes as they will affect the day-to-day billing and administration of your practice. For services to fall under the Act, an engineer must have supplied “services or materials” for the “improvement” of any land, which includes: (a) any alteration, addition or capital repair to the land; (b) any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works; or (c) the complete or partial demolition or removal of any building, structure or works on the land.

When do the rules apply?

The new rules will apply if all the following are true:

a) The contract or subcontract for the improvement was entered into after October 1, 2019;

b) The procurement process for the improvement was commenced by the owner after October 1, 2019; and

c) The premises are subject to a leasehold interest and the lease was first entered into after October 1, 2019.

Prompt Payment

The Prompt Payment rules are outlined in Part I.1, sections 6.1 to 6.9 of the Act.

There are several key concepts to understand before we continue our discussion. First, a “contractor” in the Act is any individual or company, including an engineer or engineering firm that has a direct contract with the owner. A “subcontractor” is any individual or company that has been contracted by a person or company, but is not the owner. Second, only a contractor can provide a proper invoice. Third, the characteristics of a “proper invoice”, defined in section 6.1 of the Act, include: the contractor’s name and address; the amount payable; the invoice date; name, title, telephone number and address of the recipient; the period when services and materials were supplied; the authority under which the services or materials were supplied (i.e. contract, PO, extra); and description of the services or materials and payment terms. A proper invoice shall be given to an owner monthly unless the contract states otherwise.

Payment Timelines

Prompt Payment requires that an owner of a construction project pay its contractor’s invoice within 28 days after the receipt of a proper invoice. The contractor must pay its subcontractor, who provided services that were also included in the proper invoice given to the owner, within 7 days of receipt of payment from the owner or within 35 days if no payment is received from the owner. The subcontractor then must pay its subcontractor, who provided services that were also included in the proper invoice, within 7 days of receipt of payment from the contractor or 42 days if no payment is received from the subcontractor.

Notices of Dispute

Following receipt of a proper invoice, if an owner does not to pay the contractor in full, , it must send a form called an “Owner’s Notice of Non-Payment” within 14 days after the receipt of a proper invoice. If only a portion of the amount claimed is disputed, the non-disputed amount must be paid within 28 days after receipt of the proper invoice. If the owner does not pay, the contractor can send its subcontractor a form called a “Contractor Notice of Non-Payment Where Owner Does Not Pay”, similarly a subcontractor can send its subcontractor a form called a “Subcontractor Notice of Non-Payment Where Owner Does Not Pay”. If the owner pays, a contractor or subcontractor can dispute amounts owed to parties below them in the construction pyramid by sending a contractor a “Notice of Non-Payment if Dispute or Subcontractor Notice of Non-Payment if Dispute”. The forms must be in the prescribed form, which are available online at http://ontariocourtforms.on.ca/en/construction-lien-act-forms/. The forms must be delivered by certified or registered mail to the recipient’s last known address or as stated in the contract. The forms require the disputing party to specify the amount of an invoice that is not being paid and to detail the reasons for non-payment. If any party disputes payment, the matter must be referred to adjudication.

Adjudication

The Adjudication rules are outlined in Part II.1, sections 13.1 to 13.23 of the Act.

The mandatory process aims to provide a fast means to interim decisions during the completion of a construction project. The types of matters that can be referred to adjudication are outlined at section 13.5 of the Act. The government has set up an organization to carry out this program, the Ontario Dispute Adjudication for Construction Contracts (the “ODACC”), which has implemented procedures and appointed adjudicators for the program. The ODACC outlines the process and has a registry of adjudicators on its website at https://odacc.ca/en/adjudication-process/.

The Process

Pre-adjudication process – Notice of Adjudication: The claimant provides a Notice of Adjudication to the respondent and ODACC. There is no prescribed form for the Notice, but the Act requires the following information to be stated: the names and addresses of the parties involved; the nature and a brief description of the dispute, including details respecting how and when it arose; the nature of the redress sought; and the name of a proposed adjudicator to conduct the adjudication. The Notice can also select from four pre-designed adjudication processes, three of them being in writing only and the fourth requiring an oral hearing by videoconference or teleconference. A Notice can be prepared and submitted to ODACC by email or electronically directly from the ODACC’s website. The fee is $0 for disputes under $50,000 and $500 plus HST for disputes over $50,000. The cost for the adjudication ranges from $800 plus HST for disputes under $10,000 to an hourly rate of $750 for disputes over $1,000,000.

Day 1 – Appointment of Adjudicator: The respondent can agree to accept the adjudicator recommended by the Applicant in the Notice of Adjudication. If the respondent fails to respond within 4 days of receipt of the Notice of Adjudication, then the ODACC shall appoint the adjudicator. Once an adjudicator agrees to act or is appointed by ODACC, the time for the process begins and this is considered Day 1.

Day 5 – Claimant’s Documents: The claimant must provide the respondent and adjudicator with the contract/subcontract, the disputed invoice and all supporting documents being relied on in the adjudication by no later than Day 5. The supporting documents may include written arguments, photographs, witness statements, expert opinions and project documents.

Day 7 – Adjudicator’s Directions: The adjudicator shall communicate any additional steps of the process to the parties, which could include issuing directions for the adjudication process, conducting on-site inspections, obtaining the assistance of experts and requiring witness evidence. Irrespective of the pre-designed adjudication process selected, the adjudicator has the discretion to use either a pre-designed process or customized process.

Day 12 – Respondent’s Notice of Adjudication: if a respondent’s Notice has not already been provided, it must be provided no later than Day 12. In addition, the respondent must provide the claimant and the adjudicator with all supporting documents being relied upon in the adjudication.

Optional Step: Day 18 or earlier – Oral Hearing: if required by the adjudicator, the parties will make an oral presentation by videoconference or teleconference.

Day 35 – Decision: the written decision is released to all parties. The decision is interim binding on the parties until a Court or arbitration orders differently or if the parties agree otherwise. There is a certificate fee of $0 for disputes under $50,000 and $100 plus HST for disputes over $50,000.

Practical Considerations

• Invoicing will have to be timely and may require a tickler system;
• Contractors and subcontractors will have to be diligent in securing invoices from those providing services or materials to them that are to be included in a proper invoice;
• Payment efforts will have to be diligent as payment certification of the proper invoice cannot be used to extend the payment timeline unless it is a P3 project; and
• Due diligence and document collection will have to be expedited as the form for dispute of a payment requires reasons for non-payment and may be adjudicated in short order.

This article is provided for information purposes only and does not constitute legal advice. For any questions or concerns, please contact Corestone Law at info@corestone.ca.