Canada: It's Finally Here! Ontario Reforms The Construction Lien Act

In 1983, Ontario introduced the Construction Lien Act to the construction industry. It was the new law that many in the industry loved to hate. Now, after 34 years, the Act is undergoing its biggest change, and it is in many ways a sea change.

On May 31st 2017, new legislation, Bill 142, Construction Lien Amendment Act, 2017 (the Amendment Act) was introduced at Queens Park with the goal of modernizing the Construction Lien Act, introducing a mandatory prompt payment regime, and implementing a mandatory fast-track dispute resolution process. The Construction Lien Act regulates how payments are made, to help ensure that workers who have provided services or materials during a construction project are paid for their work.

The amendments to the Construction Lien Act (which will now become the Construction Act) represents the materialization of the Province's intention to modernize provincial construction laws to improve efficiency and competitiveness for construction businesses. This new legislation will bring significant changes: not only a mandatory prompt payment regime and adjudication of construction disputes, but changes to lien rights and to the holdbacks, changes to summary procedures, updating the definition of substantial performance and completion, changes to the trust provisions, and many other changes.

Here are some of the key takeaways and highlights:

Prompt Payment Regime (s. 7 of the Amendment Act)

  • Bill 142 introduces a strict, prompt payment regime in Ontario. It will be applied to both private and public sector projects down the contract stream, triggered by delivery of a proper invoice.
  • The owner will have 28 days to pay a contractor after delivery of a proper invoice.
  • A contractor will have 7 days to pay a sub-contractor, but only after being paid.
  • Prompt payment will be mandatory and you will not be able to freely contract out of the prompt payment provisions, but will be permitted to establish milestones or other payment structures that are not monthly.
  • The owner and general contractor will be able to agree on some details for the submittal of an invoice but if they do not agree, they will be required to submit invoices on a monthly basis.
  • In cases where there is a dispute about the amount owed or the quality of the work, owners would be permitted to deliver a notice of non-payment within 14 days of receiving the invoice. Successive payers would be permitted to deliver a notice of non-payment within seven days. Any undisputed amounts will have to be paid.
  • The prompt payment provisions will apply to payments made under contracts entered into on or after the date the amendments come into force (s. 6.8).

Cheap & Quick Interim Adjudication: Targeted Interim Binding Dispute Resolution (s. 8 of the Amendment Act)

  • This dispute resolution method will be mandatory on all construction projects, public and private.
  • Parties to a construction contract will be entitled to refer disputes to adjudication (based on the UK model) that flow from a proper invoice under a contract, including claims for valuation of work, services and materials and other monetary claims made in accordance with the contract, as well as set-offs, deductions and delay claims.
  • Parties will be free to draft their own provisions so long as the provisions are consistent with the Act.
  • The party with the issue will deliver a notice of adjudication to the party with whom they have a contract. The receiving party will have two days to determine if it agrees with the proposed adjudicator. Five days later, there will be a referral notice, a notice of adjudication and back-up documents from the claimant to be provided to the adjudicator. Ideally, within 30 days, the adjudicator delivers a written decision.
  • If a decision to pay is not obeyed, the party expected the payment would be entitled to suspend work under the contract.
  • In the experience of the UK, only a small number of cases go from the adjudication to litigation or arbitration.
  • The adjudication procedures will apply to contracts entered into on or after the day the amendments come into force (s. 13.6).

Greater Lien Rights (ss. 12-16 and 27-31 of the Amendment Act)

  • The timeline for contractors and subcontractors to register a lien is extended from 45 days to 60 days.
  • The subsequent timeline to perfect a lien by commencing an action is also extended from 45 days to 90 days.
  • The definition of "improvements" is expanded to include capital repairs that extend the normal economic life of a structure. This means that lien rights are also expanded.
  • Frivolous, vexatious or abusive liens will be a discharged in whole or in part.
  • Minor errors to liens will not automatically mean a lien invalidation.
  • Forms will be standardized, including written Notices of Lien.
  • Lien claims under $25,000 to be referred to the Small Claims Court.
  • Time limit to register liens would be extended to encourage parties to first attempt adjudication.

Holdbacks (ss. 17-25 of the of the Amendment Act)

  • Holdback will remain at 10% of the value of the improvement, but security can be offered in lieu of cash holdbacks.
  • The release of holdback will be mandatory: the owner will be required to publish a notice of non-payment/set-off to interdict the obligation to pay holdback where the owner in good faith intends to assert set-off.
  • The holdback funds will have to be paid as soon as the deadline to register liens has passed.
  • Release of holdbacks will be permitted on a phased basis for longer or phased projects.

Updated Definitions (ss. 1-2 of the Amendment Act)

  • Substantial performance financial threshold tiers will increase from $500,000 to $1,000,000
  • Total completion will be increased to lesser of 1% or $5,000
  • The Amendment Act introduces many new, updated or replacement definitions to take into account modern project structures, including "owner", "contractor", "subcontractor", "broader public sector organization", "improvement", "municipality", "capital repair", and "price" among others.

New Trust Fund rules (s. 8 of the Amendment Act)

  • The Act will not implement a requirement for project-specific bank accounts, but there are some new rules relating to the deposit, administration, recording and traceability of project trust funds

These changes will have a profound impact on the Construction Industry. From liens, to holdbacks, to dispute resolution, the new Bill will alter all of them dramatically. We optimistically believe that these alterations represent a step in the right direction. If everything goes well, next year we could be dealing with these new changes. Our suggestion? Get ready!

What Happens Next?

Bill 142, Construction Lien Amendment Act, 2017, was recently introduced by Attorney General Yasir Naqvi, on May 31st 2017. For this Bill to become law, there are numerous steps left to be completed. Bill 142 will have to make its way through the second and third reading and most likely committee study before receiving Royal Assent, the last step required for a Bill to become a law. At any time during this process, amendments to the Bill could be proposed.

The Ontario Legislature has adjourned until September 11, 2017. This means that it is only on September 11, 2017 that regular business will restart at Queen's Park in order for the Legislature to take the next step on the road to this Bill becoming law.

That being said, what we know is that the Bill will most likely become law as the government does have a majority at the Legislative Assembly. If the Bill is passed, the Attorney General anticipates that the legislative and regulatory changes will come into effect in 2018.

Is my project affected?

Once Bill 142 becomes law, the amendments will apply to all contracts. However, the prompt payment, and the adjudication provisions will only apply to contracts entered into on or after the date those amendments become law. In addition, many provisions will only become effective after related regulations are adopted and proclaimed in force by the Lieutenant Governor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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