September 28, 2017
Payment and adjudication legislation comes to Ontario
BY ROB KENNALEY AND JOSH WINTER
In April of 2016, the Ontario Minister of the Attorney General and the Minister of Economic Development, Employment and Infrastructure were delivered a report entitled Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
From that report, Bill 142, Construction Lien Amendment Act, 2017 was created. On May 31, 2017, the First Reading of Bill 142 was carried. Barring any hiccups during the second and third readings (including the potential for the forthcoming Ontario provincial election to intervene), the Construction Act may well roll out by 2018. The question to be asked within the construction industry is, what does this mean? The answer is: potentially quicker payments and a new mandatory adjudication process to resolve disputes. If nothing else, the new legislation will certainly change the construction industry as we now know it.
The proposed Construction Act will follow the United Kingdom’s model, which has been in place since 1998. The theme here, and the aim of what is to be entitled the Construction Act, is and will be promptness, and efficiency. That is, the Construction Act will require contractors and subcontractors to be paid in a more timely manner, and will also require a mandatory adjudication process for all disputes.
Under the new regime, the triggering event for payment from owner to contractor, and from contractor to subcontractor, will be delivery of a “proper invoice.” Once a proper invoice is delivered, payment must be delivered from owner to contractor within 28 days, and once that has been delivered, from contractor to subcontractor within seven days.
The system will not be without its potential problems. First, it appears subcontractors may be at the mercy of contractors, in so far as when the contractor elects to deliver a proper invoice to the owner. Also, the new regime has had to grapple with the fact that, at times, an owner or contractor may object that the person submitting the invoice is not actually owed the money they are claiming. It is to address this problem that the concept of ‘adjudication’ arises. It is through adjudication, that the Act seeks to avoid long, protracted and expensive litigation.
Adjudication and prompt payment go hand-in-hand. The mandatory adjudication process will require disputes to be diverted to an adjudicator at an early stage in the conflict. Disputes that were previously addressed through months or years of contentious litigation under the Construction Lien Act may now be amicably resolved by an expedited procedure.
A key to the regime is that the adjudication result is only binding on an interim basis. Parties can expect to obtain a determination on an interim binding basis: under the Construction Act the adjudication process is to be completed within 30 days, with the possibility that it may be extended in complicated cases by a further 14 days. The process is streamlined, and it is understood the adjudicator may not be in a position to make a final decision on the matters at issue. Nonetheless, an interim decision will be made, determining the extent to which funds will flow at that point in time. The parties are then free to revisit the dispute at the end of the project, if they believe the result of the adjudication was wrong or if they believe additional information or evidence should be brought to bear on the issue.
Consider, for example, where the owner objects to an invoice by saying, ‘There are deficiencies which will cost me hundreds of thousands of dollars to correct, though I have not corrected them and don’t even have quotes for that work.’ The new regime will not allow the owner to put off, until (potentially) the end of a trial, the question of what the contractor should be paid. Under the new regime, an adjudicator will decide, quickly, how much (if any) money should be held back from the contractor to cover the cost of deficiency rectification. While the owner is free to commence litigation to seek the cost of deficiency correction at the end of the project, the contractor will (in many cases) receive an interim payment.
The process will require the party who delivers a notice of adjudication to identify an adjudicator or proposed adjudicator in that notice. The other party in the dispute will have a couple of days to advise whether they agree or disagree with that adjudicator. If they do not agree with the selection, the parties will have a few more days to agree on an adjudicator, barring which an adjudicator will be appointed from a roster by the Authorized Nominating Authority.
Although the process may result in conflict, and the need for counsel at an earlier stage than under the Construction Lien Act, the rationale is that participants will spend less money in dispute resolution than they would in protracted litigation and that many, if not most, of the interim determinations will not be challenged at a later date. Indeed, we understand this is what has occurred in other jurisdictions where the process has been engaged.
At the end of the day, construction industry professionals want to feel confident that contracts will be honoured, and bills will be paid. The proposed Construction Act sets out to ensure that where this does not occur, remedies are available in a timely manner so that business can carry on as usual. It may very well be the end of the world as we know it. The important thing to remember, if the process comes to your jurisdiction, is that contractors and subcontractors will have to be prepared to embrace the process. This is because, while the disputes will be resolved quickly, if a participant is not prepared to ‘make his pitch’ at the adjudication table, with sufficient evidence to support his position, the adjudication may go against him and his entitlement to payment of the invoice may be lost until, at least, the end of the project.
Rob Kennaley and Josh Winter practice construction law in Toronto and Simcoe, Ont. They speak and write regularly on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca and jwinter@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.