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What does the new Construction Act mean for you and your business?

in Construction Lien by Sharon Sam / September 26,2019

You’ve likely heard that there have been changes to the Construction Act (formerly the Construction Lien Act). The Act was revamped in order to:

  1. make sure parties are paid on time and
  2. address payment disputes more efficiently and effectively.

Amendments to the lien and holdback rules took effect in July 2018. The last set of amendments will be coming into force very soon on October 1, 2019.

The most significant changes are summarized very generally below. Please refer to the Construction Act and consult a lawyer to determine how you and your business may be affected.

What is it?

  1. New rules for owners, contractors and sub-contractors in the construction industry
    • To make sure you get paid on time for work you do
    • To address payment disputes more efficiently and less painfully
  2. Phased amendments to give everyone time to adjust to the changes:
    • Phase I: On July 1, 2018, new lien and holdback rules took effect
    • Phase II: As of October 1, 2019, the new prompt payment and adjudication process, and amendments related to liening municipalities will take effect

Why the changes?

  1. The old Act was dated and needed to be modernized
  2. It took a long time to get paid
  3. To address payment disputes promptly and efficiently

 What does this mean for you?

  1. Ensure your payment processes comply with new timelines
  2. Consider how you administer your construction contracts
  3. Consider whether your construction contract documents need revising to accommodate the new rules and changes
  4. Review all your current contracts and ensure your systems keep track of important dates
  5. Consider your contractual provisions and policies regarding dispute resolution
  6. Familiarize yourself with the new rules, procedures and timelines

Do the changes affect my project?

The old rules will continue to apply to your project if:

  1. The contract for improvement was entered into before July 1, 2018, regardless of whenever any subcontract was entered into;
  2. The procurement process for the improvement was commenced before July 1, 2018; or
  3. The premises are subject to a leasehold interest that was first entered into before July 1, 2018.

If in doubt, comply with the stricter timeframes under the old Act and consult your lawyer.

As the Phase II amendments are coming into October 1, 2019 – let’s start there.

PHASE II: PROMPT PAYMENT, ADJUDICATION, MUNICIPALITIES

The following amendments will come into force on October 1, 2019.

Will the prompt payment and adjudication rules apply to your project? (section 87.3(4))

The new prompt payment and adjudication rules do not apply to:

  1. Contracts entered into before October 1, 2019
  2. Contracts entered into after October 1, 2019, if the procurement process was commenced before October 1, 2019
  3. Subcontracts under contracts, above.

Prompt Payment (Part I.1)

The new prompt payment rules will likely impact how you draft your contracts and will impact how your contractors or subs get paid!

  1. The new rules are designed to make sure that contractors, subcontractors and workers are paid on time
  2. All payment timelines stem from delivery of the “proper invoice”, i.e. the invoice by the contractor (not the sub- or sub-sub-contractors)
  3. Contractors will be required to submit invoices to the owner on a monthly basis, unless otherwise agreed
  4. Within 28 days of receiving an invoice, owners will pay the contractor. Parties CANNOT contract out of the prompt payment rules.
  5. Within 7 days of being paid, the contractor will pay subcontractors
  6. Within 7 days of being paid, subcontractors have to pay other subcontractors
  7. Contractors and subcontracts will be entitled to charge mandatory interest on late payments when the amount becomes due. Interest can either be at the contractual rate or the prejudgment rate under the Courts of Justice Act

Payment disputes

  1. Non-payment:
    • If owners dispute the amount owed or quality of work, they can deliver a notice of non-payment within 14 days of receiving an invoice
    • Within 7 days of receiving that notice, contractors can deliver a notice of non-payment to their subcontractors; within 7 days of that, subcontractors may deliver notice of non-payment to their subcontractors
    • Unless a contractor delivers a notice of non-payment, it will be required to pay each of its subcontractors within 35 days of delivery of the proper invoice
    • Within 21 days of issuing a notice of non-payment to its subcontractors, a contractor must refer the matter to adjudication with the owner
  2. Partial payment:
    • If the owner disputes a portion of the amount owing, the owner delivers a notice of non-payment disputing that portion and pays the undisputed portion within 28 days
    • Within 7 days of being paid, contractors will pay their subcontractors, and so on, down the line. Payments to subcontractors will be rateable (or not) depending on whether they are involved in the dispute

Resolving disputes: Adjudication (Part II.1)

  1. ADR Chambers Inc., is the designated Authorized Nominating Authority. It will oversee the adjudication process for your construction disputes, as well as train and qualify adjudicators
  2. Disputes will be heard by an adjudicator, selected by the parties or the Authority
  3. A decision will be released within 30 days, which will be binding on the parties on an interim basis, until finally resolved by the court or arbitration or by agreement of the parties. The parties may agree to treat the adjudicator’s determination as final
  4. If the party determined to owe money refuses to comply with the determination, the party who is owed money may stop work; charge mandatory interest on late payments; and enforce the determination by filing a certified copy at court
  5. While a determination cannot be appealed, it can be challenged on certain grounds such as bias, fraud, contract invalidity, legal incapacity, etc.

 

Taking a step back – below is a refresher on the Phase 1 amendments.

PHASE I: MODERNIZATION AND HOLDBACKS

Amendments to the lien and holdback rules came into force on July 1, 2018.

What’s new?

  1. Extended timelines: 60 days to register a lien; 90 days to start a court action
  2. Requirement to pay holdback (basic and finishing holdback) once timeline to file liens has passed
  3. Amended definitions which may impact lienability (“improvement”, “price”, “contractor”, “subcontractor”)
  4. A number of new definitions (“capital repair”, “direct costs”)
  5. Substantial performance has changed. It will occur when the improvement or a substantial part thereof is ready for use. In addition, under the new Act the cost of known defects or corrections has increased from $500,000 to $1,000,000.
  6. Mandatory surety bonds for contracts with the public sector
  7. Rules pertaining to Alternative Financing and Procurement arrangements, i.e., project agreements with the Crown or other public sector entities

Liens

  1. An “improvement” now includes a “capital repair” to land, i.e. any repair intended to extend the normal economic life of the land or structure, but does not include maintenance work
  2. “Price” means the contract price agreed upon, or if no agreement, the actual market value; and, includes any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor is not responsible
  3. A “contractor” and “subcontractor” now include joint ventures
  4. If there are multiple improvements under a contract and the improvements are to lands not contiguous, the contract may deem each improvement to be under a separate contract (section 2(4)), the practical implication being to affect all the timelines related to liening holdbacks, and substantial completion, etc.
  5. Extended lien period: 60 days to register a lien; 90 days to start a court action
  6. Termination is now included as a triggering event for preserving the lien
  7. A party may be liable for “wilfully exaggerated claims” (section 35)

 Holdback

  1. The holdback must now be retained in funds (cash), a letter of credit, or holdback repayment bond (section 22)
  2. Mandatory release: The payment of the holdback (basic and finishing) is now mandatory once all liens have expired, been satisfied, discharged or otherwise provided for (ss. 26, 27)
  3. Partial and phased release: The holdback may be released on an annual or phased basis if certain conditions are met, including: the contract provides for such payment; the contract price is over $10 million; there are no preserved or perfected liens or all liens have been satisfied, discharged or otherwise provided for under the Act (ss. 26.1, 26.2)
  4. Notice of Non-payment: An owner may refuse to pay the holdback if he publishes a notice of non-payment no later than 40 days after publication of certification or declaration of substantial performance; and notifies the contractor of the publication of the notice in writing (electronic or paper format) within three days of publication. (section 27.1)

Bookkeeping rules

  1. All amounts received by an owner, contractor and subcontractors, whether due or payable, are trust funds. Owners, contractors and subcontractors are required to deposit trust funds into a bank account in their name; maintain written records of trust funds, including the amounts received into and paid out of the funds and any transfers made; trust funds of multiple trusts may be deposited into a single bank account (section 8.1)
  2. Set-off by trustee: Set-off must be related to the improvement. An owner, contractor or subcontractor may set-off (retain from trust funds) an amount owing from a person it is liable to pay under a contract related to the improvement. The exception is where a contractor or subcontractor becomes insolvent. If insolvent, set-off does not need to be related to the improvement (section 12)

 Surety bonds (section 85.1)

  1. Contractors that contract with the Crown, municipality or public sector entity will be required to provide a labour and material payment bond and a performance bond where the contract price is $500K+
  2. The limits are different in relation to Alternative Financing and Procurement projects

 

Thanks for reading!

Sharon Sam