On October 1, 2019, the final phase of Ontario’s recently reformed Construction Act came into force, bringing far-ranging amendments to the way construction contract disputes will be resolved in the province, as well as legislated timelines to pay for supplies and materials in the construction supply chain.
Contractors, trades, property owners, lawyers, and lenders alike will need guidance in how to adapt to the new laws and regulations. Now that construction law reform has achieved “substantial completion” in Ontario, there are a few major features of the new legislation that all lawyers should become familiar with.
Client Service Opportunities, and Professional Negligence Risk, have Grown
Opportunities to provide clients with additional services and advice in the construction law context have grown with the introduction of the new Construction Act. Alongside those opportunities, lawyers’ risk of committing professional negligence has increased significantly. As a preliminary matter, legal practitioners in Ontario will want to ensure that their construction-related advice is in sync with the correct legislation and the applicable timelines.
Despite the fact that the new Construction Act has completely come into force, previous versions of the legislation and shorter limitation periods to lien will continue to apply to certain contracts. Different versions of the Act may even apply to different contracts on the same project. Ontario’s construction law-related limitations periods remain among the shortest, most harsh and unforgiving out of many sub-specialties in Canadian litigation. Once lien rights expire, they often cannot be revived. That makes it crucial to identify relevant lien deadlines before it is too late.
Currently, one of three different Ontario construction law regimes applies to any given contract:
- the old Construction Lien Act with its short deadlines to lien;
- phase 1 of the new Construction Act, being holdback reform and lien deadline extensions; or
- phase 2 of the new Construction Act, being the entirety of the Act’s changes including prompt payment and adjudication.
Knowing which regime applies will be important when advising on contract development, compliance and other front-end work in addition to payment and construction contract disputes.
Everything Turns on the Transition Provisions
In order to determine which version of the Construction Act applies to a given contract or dispute, lawyers must keep a number of relevant concepts in mind:
- The transition provision is section 87.3: Whether phase 1 of the Construction Act, phase 2 of the new Construction Act, or the old Construction Lien Act applies depends on the application of the transition provisions in section 87.3 of the Act.
- Only the “prime contract” matters: When determining which version of the Construction Act applies, the “prime contract” between the owner and contractor is the only contract that matters for the section 87.3 transition analysis. The date of a given subcontract agreement is not relevant when determining whether the new Construction Act governs that subcontract. The applicable regime for a subcontract is determined by the “prime contract” to which that subcontract relates.
- Three features of the “prime contract” are relevant: Three features of the “prime contract” are relevant to the transition provisions: whether there was a procurement process as defined by the Construction Act, whether the “prime contract” relates to a leasehold improvement, and what date the “prime contract” was entered into.
Based on the features of the “prime contract” and the transition provisions, up to three different versions of the Construction Act may apply to any given construction law issue in Ontario, as follows:
- The Construction Lien Act: Any “prime contract” that was entered into before July 1, 2018 or had a procurement process begin before July 1, 2018, will generally be governed by the old Construction Lien Act as it read on June 30, 2018. All subcontracts that subordinate to that “prime contract” are also subject to the old Construction Lien Act. This is important, given the exceptionally short lien expiry deadlines in the old Construction Lien Act (45 days to preserve and 45 days to perfect a lien). Notably, “prime contracts” related to leasehold interest improvements will be governed by the old Construction Lien Act if the “prime contract” was entered into on or before December 5, 2018.
- When the Construction Act, phase 1 governs: For “prime contracts” related to non-leasehold interests with procurement processes that commenced between July 1, 2018 and September 30, 2019, phase 1 of the Construction Act will apply. Similarly, “prime contracts” without procurement processes entered into between July 1, 2018 and September 30, 2019 will be subject to phase 1 of the Construction Act, including holdback reform and longer deadlines to preserve and perfect liens (60 and 90 days, respectively). For “prime contracts” related to leasehold improvements, phase 1 of the Construction Act will only apply if the procurement process and/or the “prime contract” are entered into between December 6, 2018 and September 30, 2019.
- When the Construction Act, phase 2 governs: Any “prime contract” that had a procurement process begin, or was entered into, on or after October 1, 2019, is subject to the entirety of the new Construction Act. That includes the prompt payment and adjudication reforms.
Given the detailed nature of the transition provisions and number of possibilities in any given project, lawyers are well-advised to abide by the more conservative lien deadlines in the old Construction Lien Act, advise clients to exercise their section 39 rights to information early and often, and seek out construction law expert advice where appropriate.
Legislated Deadlines to Pay Contractors and Subcontractors
A major feature of the new Construction Act is the introduction of legislated “prompt payment” deadlines for owners to pay contractors, and for contractors to pay subcontractors. Prompt payment was intended to shorten the payment timelines for construction stakeholders. Contractors’ invoices may no longer be made conditional on the approval of a property owner or certification by a payment certifier. Similarly, payment of subcontractors’ invoices cannot be conditional on the approval of a contractor or payment certifier.
Instead, the timelines to pay contractors and subcontractors are legislated in the Construction Act and are triggered upon delivery of a “proper invoice” as defined by the Act. Additional requirements for a “proper invoice” may be agreed upon by the parties to a construction contract as long as those requirements remain consistent with the Act.
As a result, “pay when paid” clauses that make payment to lower-tier stakeholders conditional on receipt of payment from upper levels of the construction pyramid are unlikely to be compliant with the new Act.
Phase two of the Construction Act requires property owners to pay contractors 28 days after receiving a “proper invoice”. Contractors in turn are required to pay subcontractors 35 days after the relevant “proper invoice” has been delivered. Another seven days is added for every further sub-level of subcontractor down the supply chain. Subcontractors and suppliers may wish to build in contractual requirements to be informed of when a “proper invoice” is delivered so that they may calculate relevant dates to be compliant with the Construction Act.
If owners, contractors, or subcontractors dispute all or part of an invoice, they have very short legislated timelines to serve a “notice of non-payment” to the party who delivered the subject invoice, as follows:
- Owners must deliver a notice of non-payment 14 days after receiving a “proper invoice.”
- Contractors must deliver a notice of non-payment 35 days after giving a “proper invoice.”
- Subcontractors have a further seven days to deliver a notice of non-payment to the trade below for every sub-level (e.g. 42 days for subcontractor level 1, 49 days for subcontractor level 2, and so on).
Serving a notice of non-payment obligates a party to refer the matter to adjudication in order to resolve the dispute. The obligation is to commence an adjudication 21 days after serving the notice of non-payment. Lawyers are well-advised to remember that parties continue to have lien rights under the new Construction Act. Lien rights ought to be diarized and exercised in parallel with the prompt payment and adjudication process to avoid their untimely expiry.
Adjudication is Unique and Features Exceptionally Tight Turnaround Times
Adjudication is a fast-track dispute resolution process similar to private arbitration. Adjudications are intended to be “interim” and may only be exercised as a remedy prior to the completion of a given contract. Matters that are properly subject to adjudication are defined in the Construction Act, and include, among other things: the valuation of services or materials provided, matters related to change order approval and payment of change orders, disputes that are the subject of a notice of non-payment, amounts retained by way of set-off, payment or non-payment of holdback, and any other matters that the parties agree to adjudicate.
After a notice of adjudication is served, the Construction Act triggers very short and specific timelines for an adjudicator to be appointed and for parties to participate in the adjudication process. The Act and its regulations may apply to require an adjudicator to be appointed and render a decision in as few as 30 to 44 days.
A new administrative body called Ontario Dispute Resolution for Construction Contracts (ODACC) has been appointed to manage the appointment, qualification, and training of adjudicators in Ontario. An initial list of adjudicators has been published on ODACC’s website. Adjudicators are not required to have legal training outside of the ODACC orientation process and may come from diverse professional backgrounds within the construction industry. Lawyers and paralegals participating in adjudications will have to anticipate a learning curve as adjudicators from non-legal backgrounds adapt to their new roles.
Reforms Substantially Complete, but Interpretive Work Has Only Begun
The Construction Act reforms may now be fully in force, but the work has only begun for lawyers, paralegals, adjudicators, and construction stakeholders in Ontario to interpret its provisions and apply them to on-the-ground realities in construction. Gaps and ambiguities will continue to emerge as parties consider detailed provisions of the Construction Act and test out their opposing theories in adjudications.
In the same way that construction projects considered “substantially complete” may still leave finishing work, deficiencies, holdback, and set-off issues to be determined before the job is truly considered finished, the interpretation and finer details of the new Construction Act will remain a work in progress over the coming years. Meanwhile, lawyers in Ontario ought to guard themselves against potential claims by taking a well-researched and conservative approach to advising on construction-related issues.
About the author
Ivan Merrow is a construction lawyer and litigator at Glaholt LLP, located in Toronto, Ontario. Ivan works for clients at every level of the construction supply chain, and regularly writes and speaks on topics related to the construction industry, ethics and professionalism.