Under construction

A statute that governs the construction industry in Ontario is set for a major overhaul for the first time in nearly 35 years. The proposed changes to the Construction Lien Act, which could become law later this year, are an attempt to modernize the payment and dispute resolution systems in the industry and bring the statutory framework in line with jurisdictions in other countries. If successful, it could be a model for other provinces in Canada. At the same time, industry participants say these changes will require all sides to ensure that a comprehensive project management system is in place right from the start to minimize the chances of adverse rulings down the road.

“These changes are needed,” says Neil Abbott, partner and construction law specialist in the Toronto office of Gowling WLG. “The Act has not been substantially updated since 1983. We are behind the world.”

The Construction Lien Amendment Act was introduced by the Ontario government into the provincial legislature in the spring. It has received first reading and is expected to move through the legislature this fall. There are numerous changes in the bill to the existing statute, including re-naming it The Construction Act.

Some of the most significant proposed changes have to do with prompt payment requirements, a new adjudication system to deal with disputes while a project is ongoing, clarifying who is the “owner” in public-private partnerships and longer time periods for preserving and perfecting liens.

Sharon Vogel, who heads the national construction group at Borden Ladner Gervais LLP, says the changes are an attempt to benefit all parties in a project. “The overall policy goal is to improve the efficiency of the construction industry,” she says.

Vogel and Bruce Reynolds, chairman of the international construction projects group at the firm, were retained by the Ontario government to conduct an extensive review of the existing legislation. Nearly all of the 100 recommendations in their report entitled “Striking the Balance” were adopted by the province. “The policy objective was to protect the most vulnerable in the construction pyramid,” says Reynolds. Sub-contractors may benefit the most from “an accelerated mode of resolution” in payment disputes, he suggests.

New prompt payment requirements are aimed at assisting all levels of contractors in any project. Once an owner receives a “proper invoice” from a contractor, that amount must be paid within 28 days. If an owner has reasons for non-payment of any or all of this invoice, it must give notice and reasons within 14 days. A contractor is also required to pay a sub-contractor within seven days of receiving payment from an owner. “There are minimum requirements,” to fit the definition of a proper invoice, says Reynolds. “It is not particularly onerous.”

Prompt payment legislation has been in place in the United Kingdom for several years. In the United States, there are similar rules in place in every state except New Hampshire. The review conducted by Vogel and Reynolds notes that the most common time period for payment in the U.S. is 30 days.

The prompt payment timelines in the proposed Ontario legislation are a good idea, says Abbott. At the same time, he notes that for some types of owners, especially in the public sector where there may be more layers to the payment process, changes will have to be made. “You will need to be more nimble. You might have to hire more project consultants,” says Abbott. He notes though that the amendments allow for some flexibility for parties when they enter into a contract. “The Act sets principles. You can modify the application of the principles,” he says.

The new payment timelines are going to require some adjustment, suggests Drazen Bulat, national leader of construction and infrastructure law at Miller Thomson LLP. “A lot of owners pay after 45 days or 60 days,” he notes. “I thought there might be a government carve out,” adds Bulat, given that the public sector is often slower to pay. For private owners, the timelines will be a factor in financing. “Borrowers will have to make sure it is very clear in their financing arrangements,” he says.

Along with the prompt payment requirements, the proposed change that received some of the most attention during the review process is the mandatory interim dispute resolution process. Contractors’ organizations were generally in favour of some form of adjudication. A number of public sector entities were more wary, especially when a public-private partnership is used for a project.

The bill introduced by the Ontario government permits parties to a contract or sub-contract to seek adjudication of various matters, including payments, value of services or materials and the release of any holdback funds. The parties can also contract to resolve disputes over other issues in this manner. Adjudicators will be selected from a provincial registry of qualified individuals. They will be appointed no later than seven days after a “notice of adjudication” has been filed. An adjudicator then has 30 days to make a decision after receiving documents from the party making the claim. That deadline can be extended by 14 days at the request of the adjudicator, if the parties consent. The decision of the adjudicator is binding unless there is a subsequent decision by a court or an arbitrator.

The adjudication process is based on the system that has been in place since 1998 in the United Kingdom, with some differences for the Ontario market. “The goal is to prevent projects from getting gridlocked,” says Vogel. “You give people the opportunity to go to an experienced adjudicator. Payments can flow,” she says.

The terms “rough justice” and “pay now, argue later” have been used to refer to the U.K. model. However, the most recent data available indicates a very small percentage of decisions there are being appealed. As well, the review report says that as of 2010, only about five per cent of rulings by adjudicators required enforcement proceedings.

The U.K. process “experienced some growing pains, but by and large it appears to be successful,” observes Roger Gillott, a litigation partner at Osler Hoskin & Harcourt LLP in Toronto who specializes in the construction sector. Still, the tight timelines in the proposed Ontario legislation raise some concerns. “A quick adjudication of a relatively small issue can work,” says Gillott. “For ongoing infrastructure projects, I am not sure if this fits well. It will be a challenge for the legislation,” he adds.

The requirement for a decision within 30 days after receiving the applicant’s documents also may not give time for the responding party to put its own proper record before the adjudicator, Gillott notes. “For general counsel, they are going to have to be ready along the way for any claim that might come up. The documentation will have to be carefully prepared right from the beginning of any project,” says Gillott.

Disputes over who is responsible for delays in projects “are among the most costly and complicated claims,” says Bulat. The adjudicator model may not be the best for resolving these issues, but since it is an interim ruling, he says it may be a good compromise. “Let’s deal with this result, but at least it will keep the project going and you will still have the ability to litigate later,” says Bulat.

Abbott says he believes the U.K. model is a good one to bring to Ontario and other jurisdictions in Canada. As well, the interim adjudication system does not have to be onerous. “This is a record-keeping exercise. Make sure your accounting system is up to date, your forms are appropriate. Have a team in place that can assist in the adjudication process,” says Abbott.

The changes in the proposed legislation help clarify who is the “owner” in public-private partnerships for contract issues and which entity is required to hold back funds for contractors. Another amendment in this section makes it easier to release funds on each site in an infrastructure project such as the construction of nearly 20 provincial police detachments in Ontario that are part of a single bundled agreement.

Deadlines to preserve a lien have been extended to 60 days from 45 days. There are then another 90 days to perfect a lien, which the province says is designed to encourage more out-of-court settlements of disputes. The review report notes that the mean time permitted in Canada to perfect a lien is 208 days. Increasing the total amount of time to 150 days in Ontario brings it closer to other jurisdictions in the country, without reducing the “sense of urgency” that the report says should be associated with the process.

In seeking to balance the interests of all parties in the construction sector, there is still significant “freedom to contract” within the amendments, says Reynolds. He agrees that it may initially require a bit of a different mindset, if the measures become law later this year, as expected. “The participants in the industry are going to have to adapt their processes to a certain extent,” he says.