Ask Bruce Karn what is keeping him busy these days and the senior legal counsel at construction giant EllisDon will say it is the pending changes to Ontario’s Construction Lien Act.
The Ontario government is significantly overhauling the 35-year-old legislation in two phases, he notes. The first phase is modernizing the legislation, which comes into effect on July 1. The second and more significant reform, however, will take place in October 2019.
That’s when a new prompt payment scheme, the first of its kind in Canada, and a new adjudication system will be applied to the industry.
Karn warns that “what worked five years ago may not be appropriate now” under what will soon be known as the Construction Act.
The new law has a much broader reach and is designed to move the industry off its warring ways and focus attention on reducing fights and speeding up payments within the “construction pyramid,” so that money flows down faster from the project owner through the general contractor and on to the various subtrades.
Lawyer Chris Moran, a director at EllisDon Capital, who leads teams through the bidding and project financing on public private partnerships and alternative financing and procurement, calls the new legislation “the most sweeping change to the construction industry in the last 30 years.”
“It’s going to be a massive overhaul for people,” he says, adding that project owners will be the ones most impacted.
As such, the legislation has far-reaching effects beyond the confines of the traditional construction industry. It will impact all sorts of businesses that build new projects or carry out capital repairs on their existing operations.
Lawyers say anyone who builds, ranging from public institutions — such as municipalities, school boards and hospitals — to manufacturers, landlords and developers, not to mention construction trades, engineers and architects, will be subject to the new playing field.
Moreover, the Ontario changes are having a national spillover effect. The federal government is looking at implementing its own construction legislation, and provinces such as Manitoba and British Columbia are eyeing changes to their lien acts.
The Ontario reform has been years in the making and stems from the work undertaken by then Borden Ladner Gervais LLP lawyers Bruce Reynolds and Sharon Vogel, who were hired by Ontario in 2015 to review the Construction Lien Act, after a failed private member’s bill sought to implement reforms (Reynolds and Vogel recently moved to Singleton Urquhart Reynolds Vogel LLP).
Their 435-page report, “Striking the Balance,” which was delivered in April 2016, examined construction regimes all over the world and laid the groundwork for the new legislation.
The Ontario changes are sweeping and will impact everything from how companies manage cash flows to how they oversee their books and deal with building disputes.
Richard Wong, chairman of the construction and infrastructure practice group at Osler Hoskin & Harcourt LLP, says the province has three main goals: Modernize the legislation, speed up payments and fast-track litigation related to projects. “The reform is quite wide-ranging and extensive,” he observes.
Modernizing the legislation
For example, under the modernization reforms, the law will now take into consideration new methods of building, such as public private partnerships known as P3s. Under the old law, P3s didn’t fit neatly when it came to registering liens. Now, the legislation recognizes new forms of finance and procurement. “It’s a big and growing part of the Ontario public sector,” Wong says.
Also, important deadlines related to preservation of liens are changing. “The 45-day period everyone knows and loves is turning into 60 days,” Wong explains.
EllisDon’s Karn warns that “people need to understand the implications of that. A lot of time payment holdback will trigger off of when the preservation periods expire.”
As well, the deadline for perfecting a lien will rise to 90 days from 45, and timelines for filing court actions are extended to 150 days from 90, which provides more time for parties to settle their disputes outside of court.
However, some of the most significant changes lie ahead with prompt payment and adjudication.
This is the first time that legislation in Canada will mandate payment time frames, which is usually left to parties to sort out in their contracts. It will be a major change, lawyers say, and parties will not be able to contract out of the legislative timelines.
Under the new regime, owners must pay contractors within 28 days of the receipt of a “proper invoice.” The contractor must then pay its subcontractors within seven days of payment, and subcontractors must pay their subtrades within seven days of being paid.
Moran notes that as you go deeper down the construction payment pyramid and into subtrades, “it is somebody’s mortgage you are playing with.”
Part of the problem was that the length of time it was taking for contractors to get paid was growing. Between 2002 and 2013, the average collection period in construction rose to 71 from 57 days.
Prompt payment will reel that in by employing the notion of pay now and argue later, as opposed to the fight now, pay later mentality that exists.
In the future, if an owner wants to dispute an invoice, they will have to act quickly, lawyers note.
By the same token, if an owner advises the contractor that it is not paying within the mandatory deadlines, the contractor has to notify its subtrades that it will chase the money through adjudication.
Failure to provide the proper notices under the new regime can be fatal to claims and can impact lien rights.
“It is going to be hard for owners to get their minds around making that payment within 28 days and getting the infrastructure into place,” says Sandra Astolfo, a construction and infrastructure partner at WeirFoulds LLP. “I think the owners have to change their mindset and get a lot of systems in place to make sure they are not offside when prompt payment arrives in 2019.”
As well, the legislation also introduces new trust accounting principles to the construction business and attempts to bolster trusts to withstand scrutiny in a federal bankruptcy or a CCCA filing.
Astolfo says that in-house counsel need to consult the new trust accounting obligations to make sure their banking systems comply with the new obligations.
Moreover, lawyers warn organizations such as municipalities and boards of education could find themselves hard-pressed to get the necessary approvals to pay in the tightened time frame.
Adjudication opens up a whole new front in an effort to reduce large construction claims, which can be expensive to litigate.
A regulatory authority is now being set up to certify construction adjudicators. Once in place, adjudicators will be given the task of resolving invoice claims and fights over billings.
The notion is to provide a form of “rough justice” that keeps projects and cash flows moving. “The objective there is to nip problems in the bud,” says Ted Betts, vice chairman of the construction and infrastructure law section at the Ontario Bar Association.
Betts, who also heads up the construction group at Gowling WLG (Canada) LLP, says studies show that “when the stakes are small and not so high, people are not entrenched in the fight. You may end up with more skirmishes but fewer wars.”
The U.K. experience suggests that by addressing invoice fights early, there is less likelihood of a lingering effect. Parties move on.
However, Betts warns that the timelines for adjudication are very tight. For example, once a notice of adjudication is issued, the parties have four days to agree on an adjudicator and, within five days of that, the initiator has to provide the adjudicator with its relevant documents. Adjudicators must rule on a matter within 30 days of receiving it.
Astolfo points out that each party pays the costs of the adjudicators. “It’s going to be costly. In-house counsel have to consider how do they bake those costs into their bids.”
The “Striking the Balance Report” notes that the most popular range for a U.K. adjudication was between £2,500 and £5,000. However, a close second range was between £15,001 and £20,000.
Construction lawyer Andrea Lee at Glaholt LLP, who also sits on the OBA’s construction law section, says the plethora of changes will have a profound impact, and organizations will have to implement better controls.
“Be prepared to have a greater focus on contract administration throughout the lifetime of the project,” she warns. As well, all standard form contracts must be reviewed, she says.
Astolfo adds that “people are going to have to get their staff ready to meet these new limitation periods. There is going to be a lot of paperwork.” There are new notice requirements and forms.
One of the biggest challenges will be simply managing which law applies when. There is the possibility that three different regimes could be at play, depending on when a project was tendered and contracts were signed. Contracts and procurements in place before July 1, 2018 will be grandfathered and the old rules apply. Then there will be new deadlines for lien and holdback rules for contracts that come into effect after July 1. The third regime commences October 2019 with the introduction of prompt payment and adjudication. Keeping it all straight will require deft project management skills.
Moran says it will be the Wild West for a while until “everybody gets comfortable with it and understands the way it is supposed to work.”