Are you ready for Bill 142, Construction Lien Act Amendments

Mark:    Good morning all. As Ted did in his welcome this morning, I want to wish you all a warm welcome, and thank you for attending. My name is Mark Crane. I'm a partner in the advocacy group here in Toronto. My focus, amongst other areas, is infrastructure and construction disputes, and I lead our firm's national arbitration group. For the next 10 minutes or so I'm going to talk to you about adjudication, which Ted's given you some context for. On this first slide I just put up some of the questions and responses that I hope I'll touch on in this time. 

    So what is adjudication? What are the policy reasons behind it? How does it actually work? What are the mechanics of it? Who are the adjudicators and how do they get to be adjudicators? Is this regime going on elsewhere? Is there something we can reflect on from what's going on in other jurisdictions and what their experience has been? 

    Let me start off by addressing the question of what is adjudication? It's intended to be a dispute resolution regime — quick and rough justice. It's intended to settle disputes from a proper invoice. You listened to Ted a few minutes ago talk about the importance of a proper invoice that's been submitted by a party to a contract that is subject to the Act, and it generally will be a dispute over an invoice, or the valuation of services, and we'll come to the specifics within the Act that sets it out. But assuming that a proper invoice over a payment cycle has been submitted, and there's a dispute, the intention is that you can try and have this dispute started and settled within about 30 days. That's the intention. It will be mandatory as will prompt payment be, and so parties to a contract cannot contract out of adjudication. It's intended to be there. It doesn't limit other dispute resolution processes, or regimes, that the parties may enter into. So you can still commence an action in the court if you want or you can still arbitrate but adjudication is not something that the parties can contract out of. It will be mandatory.

    What are some of the policy reasons behind it? When you looked at the authors of the report who made the recommendation for adjudication the intention, as you can see from the slide, it is just to keep the money moving down the construction pyramid. It's intended to, with a view to keeping the project rolling forward, and getting projects completed. Money out of the hands of owners and contractors and into the hands of contractors and sub-contractors.  Adjudication will commence on October 1, 2019, and there's still some regulations that will need to borne out that will provide some meat on the bones of the process. But we have a pretty good perspective of how it will proceed and how it is intended to proceed. 

I like this slide because I think it just gives a context for the process. Who are the adjudicators? And I'll come to the mechanics of the process in a few minutes. But the adjudicators will be individuals who will be appointed by an organization called the Authorized Nominating Authority. The ANA will oversee the appointment of adjudicators and the training of them. It will maintain a roster of who the adjudicators will be, and it will appoint adjudicators, if need be, if the parties can't come to a process where they can mutually appoint an agreeable adjudicator that is not conflicted out. Who is it expected that the adjudicators will be? What type of backgrounds that they'll have? Some of them may be lawyers but legal training won't be a prerequisite to becoming an adjudicator and, indeed, it may be not the norm as it will unfold. I think the expectation is that they'll have professional designations. So whether they'll be engineers, or architects or quantity surveyors, those are the type of people that will have the level of sophistication and experience to resolve disputes arising out of construction disputes over the process of a payment cycle. 

Let me just take you through some of the process to give you some context and then I'll come back on some of the experiences that we've seen in other jurisdictions, including the United Kingdom. At a high level, a party will commence an adjudication if there is a dispute. Who can start an adjudication? Anyone can. A contractor, an owner, a sub-contractor, anyone who's a party to a contract that's involved in the construction or adding value to services of land in a construction setting. It will be commenced at a high level by a party delivering a notice of adjudication to their contracting party with whom they have the dispute. I've got a more detailed chart here that sets out the process. It may be difficult for some people to see up on the screen but it gives you sort of the mechanics of the process. But ultimately you'll give a notice of adjudication to the other party. The next main step in the process will be either the parties agree upon an adjudicator who's been qualified by the ANA, obviously, and if not, then there will be a dispute resolution regime where an adjudicator will be appointed. Within 5 days of the adjudicator being appointed, he or she is to be delivered the notice of adjudication, the address of the parties, the contract and any documents that the moving party is intending to rely upon in the process. It's not yet borne out in the legislation but, indeed, it will be in the Regulations, what the process will be for the responding party but ultimately they'll be given an opportunity to respond, in writing, in terms of their response as it relates to the dispute. This is where you sort of cut to the chase. You've got 5 days to deliver documents to the adjudicator. Thereafter the adjudicator has 30 days to resolve the dispute with a view that the resolution will be binding on the parties, within 10 days. That's, in a nutshell, the adjudication process. You can see that in contrast to the traditional litigation regime that may otherwise would go on, it would be much quicker and provide an outcome as it relates to a payment dispute in a particular billing cycle. 

Here I've set out the type of dispute, as set out in the legislation, of what can be referred to an adjudication. As you can see, I mention the valuation of services, but it's got to be something under a contract. If I just pause there for a moment, because I think one of the important contexts here is what's gone on and what do parties think about this? We have the benefit of having spoken with some of our colleagues in the United Kingdom where adjudication's gone on there for approximately 20 years. Here in Ontario, and particularly maybe less so today, but in the last few years parties, owners, contractors, but I think more so perhaps owners, have been nervous about adjudication because there's an impression that they may be swamped with adjudications. If there's going to be a dispute every month. That a party may be able to prepare their adjudication materials, dump them on the other party, the owner per se, and then the owner will have to turnaround a record relatively quickly and with a view that that may distract the parties from carrying on the actual business of the project. It may create time consequences and it may transition the focus away from, perhaps, project management or carrying out the project to contract administration and to managing death by a thousand swords. In the experience that we've heard back from our colleagues in the United Kingdom is that when adjudication started 20 years ago, or thereabouts, the process was a bit of a "wild west" at the front end of it and people didn't know what to expect, but as it got matured and people got experience with it, it's actually proven to be a useful dispute resolution regime. I think that with the 30 day process, the focus on contract administration and having a turnaround of record relatively quickly, I think that's quite true but you are dealing with it on a payment cycle. The documents will still be relatively fresh of mind, people's memories will be fresh of mind and when you've got the push of a 30 day limit, or an adjudicator's going to decide it one way or the other, it limits the ability of parties to posture, or delay, which are tools that are sometimes used, as you know, in the litigation process. It cuts to the chase more quickly, unless there is a legitimate reasonable dispute, one side versus the other, as to what occurred or what is owed, that as you go through the adjudication process I think the parties, oftentimes the United Kingdom, the adjudications never actually heard because the matter gets resolved before then. For that reason as the industry has matured in the United Kingdom, I think they've found it to be a useful tool and, indeed, with a view to keeping the money moving down the pyramid. 

I'll go through some of the mechanics of the legislation. I've touched on this briefly, but who can request an adjudication? Anyone. Anyone who's got a contract and who's got a dispute over an invoice as it relates to a construction dispute. When can it be commenced? It can be commenced when there's a dispute over a proper invoice that hasn't been paid. You've got to commence the adjudication prior to the completion of the contract. Other than that, you can commence it whenever you want, by anyone you want, but you've got to be a party to a contract and it's got to be over a matter that can be adjudicated. We've had a look at the list of what that is but generally it's a valuation of services or an unpaid invoice is what you would anticipate. The process for the adjudication, in terms of — you've got the 30 day window between when the adjudicator gets to the materials and when a decision needs to be rendered — what happens in that interim is subject to some flexibility. The parties may be able to lay out in their contract a proposed process for the mechanics of how the adjudication will be heard. Whether it will be heard just in writing, or whether there'll be an oral hearing on the matter in addition to the evidence, so the parties can have a role in how the process is intended to unfold and, if not it, it will be within the jurisdiction of the adjudicator to set that out. The adjudicator, as set out by the legislation, will have the discretion to probe and ask questions of himself, or herself, in order to satisfy themselves what the facts are and assist them in carrying out their mandate. So it can be inquisitorial in nature, which is unique from our court system where we typically, a judge is normally not sitting in the seat of an inquisitor asking questions, but they're rather hearing and receiving evidence and then making conclusions based on what was put before them. I think there'll be some flexibility, all with a view to getting to the bottom of it quickly and having rough justice. By rough justice I mean it's a conclusion within 30 days, and payment is to be required 10 days thereafter. That doesn't limit a party, who perhaps feels they've been wronged one way or the other from litigating the matter at the termination of the contract, but whatever's owed or not owed needs to be paid within 10 days. If you want to come back at the end of the contract and have the decision reviewed, or carry on with civil litigation either in contract or in tort, then you're entitled to do so. But as it relates to that dispute it's binding and it's final on an interim basis with a view that you can come back and resolve it at the end of the day. But it's all with a view to keeping the process moving forward. 

I've got the screen up now for who bears the cost of an adjudication. But for a few examples, and I'll come to an example, it's intended that the parties will bear their own costs for the adjudication. That too is, I think, with a view to taking out the David and Goliath factor of it all and someone can't posture an adjudication with a view to trying to have someone eat their legal fees at the end of the day, to the extent they'll have legal fees, but it's so everyone's going in with their eyes open. If there's going to be an adjudication, you're going to carry your own costs. In this process you may be able to proceed without counsel. It may be just your technical experts that will deliver the evidence. It may be adjudicated by an engineer, or an architect, or a quantity surveyor and all with a view to getting it done quickly. You'll see at 13.17 there is a provision there where if it's found that an adjudication was brought, or that the conduct has been frivolous or vexatious, then they do reserve their rights on costs but you would anticipate that to be rare. 

We've spoken about whether an adjudicator's decision is binding and I've set out here, and you can see it at 13.15, it's intended to be binding on the parties to the adjudication until a determination of the matter by a court, or any determination of the matter by a way of an arbitrator conducted by the Arbitration Act. At the end of the day you can still fight about it. It's generally anticipated, I think, in the spirit of the legislation that you do select a termination of the contract, let the contract run its course, but there is still that discretion. 

The next slide sets out whether you can be exempt from the adjudication provisions. Once it comes into force, you will not be exempt. As I said you cannot contract out of this and you can see what it has to say on grandfathering. I think a couple of the most important points that I wanted to make, some of the take-aways from adjudication apart from the mechanics of the process, as I look at adjudication, are how is it going to impact your organization, if at all, and what should you start thinking about. Given what I've described, I think owners, contractors and sub-contractors will need to be prepared to turn around a record relatively quickly if they're going to be responding to an adjudication. Some organizations, I think in my experience, are already there and do that very well, and some organizations could probably paper their files better, or have a better document maintenance system, a record system, so that they can pull the documents and slice and dice them in a particular manner relatively quickly. I think you should give some thought, owners and contractors, to contract administration. There may be an increased focus on contract administration with a view that you may need to respond quickly to matters over a payment cycle. It may impact how you paper the file. I think there'll be an increased focus on that. Obviously the Authorized Nominating Authority will need to populate a roster of adjudicators. I think there are opportunities for lawyers, perhaps, but more particularly I think, probably engineers, architects, quantity surveyors who are interested in becoming involved in that industry, as adjudicators. But I think it's the internalization that will go on because owners may find that they do have a regular payment cycle dispute and they're going to have to go through this every month on a particular project. I think there needs to be a focus and a thought on what those impacts will be, if any, on your organization. 

That's what I intended to cover as it relates to adjudication. 

Ted:    We're very fortunate to have Stuart Detsky from Trisura to speak to us about the details. Stuart manages surety and warranty claims for Trisura and provides general legal counsel under the direction of the Senior Vice President of Surety. He has extensive experience managing surety, warranty and other specialized insurance claims. Prior to joining Trisura, in 2014, he was the Assistant Vice President Claims for Multinational Insurance Company, where he'd worked since 2002. He holds a bachelor's degree from McGill University and was called to the Bar in Ontario in 2002 after receiving his law degree from Osgoode Hall. I'm very pleased to have an expert. In my experience, people in the construction sector negate the importance of bonding and really understanding the bonding rules that are there now, and the actual language of bonds, which are going to change. I'm going to let the expert come up. Stuart's been very involved in preparing the new rules and drafting the new forms of bonds that are going to come as well. So, Stuart.

Stuart:    Thank you Ted and good morning everyone. I don't have any slides to put up but I think that most of what I'm going to be speaking about today is pretty simple things to consider. The reason that bonds are so important in the new Act is that when… The public policy sort of basis for why some of the changes to the Act have been made is – and Minister Naqvi is really concerned about payments all the way down the line – we haven't talked about prompt payment yet; that's coming, but that was a lot of the focus. In order to sort of guarantee that prompt payment will work the experience, especially the US experience, is that mandatory bonding on public projects is necessary. I don't know if any of you people know but in the US, that's existed for a long time. All the States and the Federal government in the US all have statutes that require 100% bonds for all public projects. The Surety Association of Canada was heavily involved in the consultation process of Reynolds and Vogel when they were doing this, and as many of you might know, Bruce Reynolds is actually one of the premier experts in surety law in Canada. 

When we were – when I say "we" I'm going to talk about the Surety Association of Canada, because I was one of the three people sort of on the sub-committee dealing with this issue for the last couple of years. The Surety Association retained the Canadian Centre for Economic Analysis to research the economic benefits to the construction industry in the situation where mandatory bonding is required. I can tell you that when the Surety Association retained CANCEA, we didn't know what their conclusion was going to be. It could have been there's no advantage. We didn't know. But in fact they did conclude that there is significant advantage to the construction industry as a whole when mandatory bonding regimes are implemented. As I mentioned, I was one of three people on a sub-committee that met with various ministries, met with Reynolds and Vogel, and which were really involved, not so much in the drafting of the bonds sections but more in terms of the bond forms themselves. 

The new rules are such. All public projects, and a public project is defined in the Act, but just think tax payer money. Anything where the construction is from tax payer money. Any contract greater than $500,000.00 requires mandatory bonds, performance and payment with a minimum value of 50% of the original contract price. These bond forms are on regulated bond forms. They have to be the bond forms that the legislation sets out. As Ted mentioned, this is again going to come into force on July 1, 2018. Anything that is considered under the new Act will require these mandatory bonds. 

There are four new legislative bond forms. I've mentioned the performance and payment. There are also two other forms of bond. One, I'm not going to talk about it at all. It's a very, very specific situation but one of them is also a holdback repayment bond. As Ted mentioned, holdback has to be paid mandatorily now, but now the Act actually allows holdback to be retained not in actual cash. It can be retained via a holdback repayment bond, or, as well as a letter of credit. When an owner has a contractor, instead of taking that 10% off and holding it in their coffers, if the contractor provides the owner with a holdback repayment bond, the owner will be paying the entire amount of every invoice. The security – the holdback that the owner's retaining – is actually not cash, but actually that bond. 

But really what I'm going to focus on are the performance and payment bonds. These have massively changed from what you've seen before. I don't know if people have looked at them yet. They only came out at the end of April. I can tell you that I've been working on drafting and it really wasn't a negotiation with the Ministry. We were giving our recommendations for how the bonds should look, and how they should read, and luckily the Ministry gave the Surety Association sort of the ability to sort of put its best foot forward and draft what we thought was something the industry could support. It went back and forth a little bit and then, just like everyone else, at the end of April, we found out what those bonds look like. A key element here is that the Act does not allow modifications to the bond forms. They have to be the way they are. The legislation does open a little window to allow increases in coverage. Basically, no owner or contractor or surety can draft a bond form that includes something that has less than what is in the bonds. But there is the opening that the owner can ask for something greater than. I'll talk about that a little when we talk about things that are excluded in the new bond forms. 

One of the key things, previously performance bonds, the CCDC which is most common, performance bond was one page and payment bonds were two pages. They are now 12 to 14 pages each. It sounds a lot, but a lot of this is because the legislation and the legislatures, wanted there to be a claims handling process that was legislated. There was talk about whether that's going to be in the legislation or in the bond forms themselves. I think everyone agreed it made sense to be in the bond form. Why have a bond that people are going to make a claim on and then you have to go to the Act, or the Regulations, to figure out how to make that claim? So the bonds have now been drafted and they read sort of chronologically. This is how you make a claim. This is the forms you use. The Act is very strong in terms of forms. There's a lot of new forms. So the bond themselves, part of those 14 pages, are the forms that you use… how you make a claim… the forms the surety has to respond to you with, and the forms that the surety has to give their position. The claims handling procedure is set out. A lot of people who may have, there's a lot of concern about bonds, and a lot of people have a miseducation about how bonds are used, because there is this unknown of how the claims process worked. Now, it's very, very clear. There are very clear guidelines as to what the surety has to do in the event of a claim; and there are now deadlines. Previously sureties had… there was… no deadlines in bonds. You made a claim on a bond. The surety is going to give you a position whenever it gives you a position. 

Now there are very strict deadlines: number one, for the surety to respond and acknowledge your claim and, number two, for a formal position. When I say strict I mean very strict. The surety, depending on whether it's a performance or a payment bond, the surety has three or four business days to respond. In terms of giving a formal position on the bond, for performance bonds it is 20 days after the claim was made… 20 days. For payment bond claims it is 25 days or 10 days after the documents are received. If a payment bond claimant provides all of its documents to the surety with its notice of claim, the surety has to give a formal position in 10 business days, which is very aggressive – and if anyone's made claims on bonds before, I highly doubt you've received a response in 10 days, unless it was maybe a flat out denial. These are very aggressive and I think a lot of people are sort of looking at the surety industry saying, "You've now got a windfall. You've not got all this bonding that's required where people didn't have to buy bonds before." But I don't think the sureties industry is looking at it that way. In Ontario, 90% of public projects were already bonded. You're really talking about, NTO is really the big public owner that was not purchasing bonds, although I can tell you they were moving to bonding already. Surety Association had worked for the last three to four years with NTO to draft up their own bond forms and they were about to implement that when this all came aboard. One other thing, just to mention in a general sense on the bond forms, as Natasha mentioned the Valard case, and a lot of owners who were buying bonds are concerned because they now have liability where they didn't have before. The timing of that decision was quite good for this process because what the Ontario legislators did is they removed all the trustee language from the payment bond. I'm not going to get into the legalities of the third party beneficiary rule and all that fun stuff, but suffice to say the Valard decision will have no relevance to public projects in Ontario because the bonds have no trustee language, the right for a claimant to claim on a bond is in the statute. It's not based on other language. That was timely. 

This is only for public projects. Private projects, there has been no change in terms of the bonding requirements. Private owners can purchase bonds or not purchase bonds. There is no regulated form. However, I think that private owners should really take a look at the new bond forms and consider what they usually use, which is most likely CCDC. There are a lot of advantages to every owner under these form bonds. It provides a lot of clarity. I'm not going to go through each of the bond forms. I gave a 4 hour presentation on what the forms contain a couple of days ago. It's too long for this. But take a look at the bond forms. They're pretty simple to understand and read, and there's a lot of advantages there. I think that a lot of private owners will start to move to use the same bond forms. CCDC, the committee was moving to revise the CCDC form of bonds. There was actually something drafted up that was ready to go and once this process started with the new Ontario Construction Act, that's been put on hold. CCDC's going back to the drawing board, and I think you're going to see new CCDC bond forms that look very similar to the Ontario bond forms, because it does provide a lot of clarity and a lot of guidance for what's included, what's not included. 

What about sub-trades? This requirement of bonds is just between owner and the prime contractor. It is not governed any requirement for bonding from, let's just call the general contractor down to its sub-trades. However, one key item about the new bond forms is that the payment bond is a broad form bond. Previously, CCDC payment bond, one tier. So the general contractor, the payment bond covers all the people they have direct contracts with. If they're owed money, payment bond pays. Now, very similar to the Federal form of bond, it covers the sub-trades and the second tier sub-trades. It's a limited coverage for the second tier sub-trades but there is still coverage. I think that a lot of general contractors would probably want to make sure that they're covered off for that issue because they don't have the same knowledge and understanding of whether or not sub-contractors owe money down to their substance suppliers. If they get a payment bond from their sub-contractor that will cover them for that issue. Because there'll be now two bonds covering the same liability but the case law and the practice has been that the first tier bond will always respond first. We've been telling our clients, who are general contractors, that they really should consider for their major sub-trades, getting bonds as well, because it covers them for those liabilities. 

I think that's it. I didn't want to go into all the different aspects of how the bonds changed. But if anyone has any specific questions about the bond forms, or about bonding in general, please ask.

Christopher:    It's my duty to discuss how to get ready for the amendments and what you can't do is what the people in this picture are doing. You can't run away. Or turn your back and walk away. As you've heard what we're going to have in Ontario is three regimes for a period of time. We're going to have the old regime, the regime we're under now in the Construction Lien Act. We're going to have the post July 1, 2018 regime with all of the modernization changes that Ted talked about. And then, more than a year after that, is going to start a third regime with prompt payment and adjudication. As Ted mentioned, Master Albert has released a practice direction to lawyers who practice in this area, and what it says is when you go to court now you are going to have to show the court what regime you're in. It's probably also a good practice for each of you, as contracting parties on a construction improvement, to understand which regime you're in. Are you in the old regime? Are you in the transition regime or are you in the prompt payment and adjudication regime? Because each of them have rules that are different. The transition provisions in section 87.1 of the new Act, there's three. One is if there's a lease signed then that's when the new provisions apply. As far as they talk about the grandfather, grandparenting provisions, if there's a lease signed that's one trigger as to the date determined as to what regime you're in. The second one is if you've got a procurement project, a procurement has been commenced, is what it says. Now, Ted talked a little bit about what that might mean. We think the best view of that is procurement for a specific project rather than a general just pre-approval of contractors. And the third is when the contract is signed. Those three provisions under section 87.1 are going to be when it's determined what you're date is and whether your date falls within the old regime, the transition regime or the prompt payment and adjudication regime. You know what you're doing now, so you're in the old regime. What do you need to get ready for the modernization, being the transition regime? 

    You can review and update your contracts and supplementary conditions. Ted talked a little bit about how the CCDC contracts are intended to be national. You may want to look at what supplementary conditions would be needed in your contracts to deal with changes to the payment provisions and release of holdback provisions that are coming into force on July 1st. You may also want to review and update your forms. In particular you're going to need to have ready and handy, if you're an owner, the notice of non-payment of holdback form. As you know, on most of your projects you'll know sometime before certification of substantial what you have a question about or what you've had to fix that your contractor couldn't if the deficiencies have rectified or not. You're going to have that form ready because if you want to short pay and set off deficiencies you have to issue the form. That's coming July the 1st, so you're going to need to be familiar with that form and know the timelines as to when it's supposed to be issued. You also have to keep in mind that that notice of non-payment form has to be published. That publication is notice to all of the sub-contractors under that contractor that that contractor is going to be short paid. That will give them notification they may have to leave because they won't get paid. 

What else you need to do? You need to set up a trust account. If you're a contractor, or receiving trust funds, you need to set up a trust account and keep your back office accounting, trust accounting, record keeping protocols very, very clean. I'm asked a number of questions about how is this supposed to work in practice. I've had contractors say, "Okay. All the money I get is from a construction project, one or another. Well, isn't that my trust account my operating account?" In theory, I think that's correct. "Well, do I have to have another account to pay myself out of?" I think the answer to that is probably, yes. But I think that the more important part is the back office trust accounting. Because if you think about what mischief this is supposed to fix, it's supposed to fix the contractors it goes bankrupt. Banks owed a whack of money, come in, take all the money and a lot of that's trust funds. They don't know what's trust funds. They don't know what isn't. If the back office accounting, money in, money out, on a project-by-project basis is clear and easy to understand then any trustee, or any court, can determine what funds are trust funds and what funds aren't. What funds are properly in the hands of a trustee and bankruptcy or receiver and what funds belong to sub-contractors. You do need to set up a trust account if you're a contractor and you also need to make sure that you've got a very good accountant, on a project-by-project basis, keeping track of money in and money out. 

You consider bond-ability for public projects and pricing models. Stuart's presentation was very, very good and I think that one of the key things I took out of Stuart's presentation was that I think we all need to know what's in the new bonds. The form of bond is obtainable. It's on the Attorney General's website. One can go on. You can read it and you can see all of the steps one needs to make to a claim. All of the new requirements Stuart talked about, those things I think are important and you can do that now because that's coming in July 1st. 

You can think about changing your payment timelines for holdback. You think about milestones for larger projects so that funds can be released to sub-contractors earlier. And while you're doing all of these things to prepare yourself for the transition regime, you can also get ready for prompt payment and adjudication. I think that the reason why this has been put off to October 1, 2019, is because it is quite a bit different and I think it will induce some fairly big changes. 

I've put these under issues to consider. For owners, you should think about the potential gap in cash flow. As has been referenced, is a very clear intention in this legislation to take funds out of the hands of lenders and owners and put it in the hands of contractors and sub-contractors. With more money being in the jobs, in the hands of contractors and sub-contractors, I think that it's quite clear that owners are going to have to be better capitalized. You're going to have to have funds available other than draws from lenders. I think that that's a reality of business issue that owners need to consider. And that goes also for the potential gap and interim coverage for payment. With prompt payment, payments may be being made out, and through inadvertent contractors are more likely to be overpaid than in the past. I remember the American Bar Association construction form. We had a speaker come from Australia who talked about prompt payment. What had happened in Australia is that that notice of short payment under the prompt payment regime was being interrupted by adjudicators and courts, it was being interpreted very strictly, so that if it wasn't issued, the invoice, no matter what work was done was enforceable. The situation that created was contractors were putting in invoices for work that wasn't done, hoping that the owner was asleep at the switch, didn't put their notice of non-payment and then was an enforceable invoice even though the work hadn't been done. The same thing happened initially in the United Kingdom. They called it smash and grab. Where the invoices were all going in for work that hadn't been done. That may occur. Have to set up the procedures and the protocols so that that invoice can be considered in 14 days. So you know whether the work was done. I know that if there's consultants here that's going to put a lot of pressure on consultants to get ready to do that. Because those 14 days are going to be critical once that proper invoice is issued. 

Aligning contract documents and policies with new payment rules. What that means, of course, as Ted spoke about proper invoices all of the other things that go along with a progress draw, all of that is permitted in proper because it's set out in the contract. There's only a couple of areas where it's impermissible to put in sort of those conditions precedent and that is your pre-certification of invoices, pre-checking, approval of the invoice before it's submitted. Those things are impermissible. Other stuff you can write into your contract to go along with a progress draw. As usual you may want to look at whether there's any additional requirements that you may want to put into your contract to get ready for prompt payment. 

Cash flow management. I discussed this with the issue of the money being pushed down and modeling and financial ratios that may change from lenders. With more money in the system it's unknown yet how lenders will react to that because lenders are going to have to get used a regime where more money is in the hands of contractors and sub-contractors then before. As I said, that will speak to how owners are capitalized. 

Contractors will have to deal with the changes to contract documents. What happens with delay claims? As a litigator I can tell you I am absolutely certain that contractors will be putting in invoices for delay claims and saying, "See? That's a proper invoice. Meets all of these issues. Adjudicate my delay claim." How does one adjudicate a delay claim in 30 days? Those are issues I think we need to be aware are coming up and need to be prepared for those. How are contractors going to deal with an increase use of milestones? Because I think that the way owners are going to react to prompt payment is to think very creatively about what milestones are going into the contract as triggers for proper invoices. What about the contractors cash flow management? Of course, they're supposed to pay the money over to sub-contractors within seven days. Will their cash flow management practices change? Don't quite know the answer to that at this stage. Consultants are going to have to deal with truncated timelines to improve payment. Will they need more staff? I know that engineers and architects are thinking about that right now. 

Adjudication. Are owners ready for increased invoicing? As I'm sure you know in the industry, if a contractor has a chance to get paid simply by issuing an invoice, they'll simply issue an invoice. I think that's going to happen. We have to be ready for that. And what do contracts require for notice and remedies? I think that the way the regulation, and we've seen the regulations under adjudication come out, they came out the end of April, same with the other draft regulations. And what it concentrates on, in the adjudication regulation, is how the adjudicators are certified, how they're selected, how they're trained. What are their professional obligations, as far as conflict of interest and other areas like that? It doesn't speak to process. I think that the intention is that the adjudicators, once trained, will follow a process that they Authorized Nominating Authority considers to be the best practice. We also don't know right now who the Nominating Authority is going to be. It may be a private third party that applies to the government to do this. The government may do it itself if it can't find someone suitable to do it for it. There may be more than one. We don't know the answers to all of these questions quite yet but there are certainly some forms. I think forms will develop for adjudication and I think that once the Nominating Authority is struck, once adjudicators have been approved, it would be a good idea for all of your organizations to develop their own particular roster of adjudicators that they feel comfortable in certain circumstances. I think that the idea is that there's supposed to be people with specializations, specializing in certain particular areas of construction but we'll have to see. 

Okay. Does anyone have any questions for me? Or for Ted? Or for Mark? Or for Natasha?

Yes? No? I'll turn it over to Ted then.

Ted:    It's a lot to process. A lot of change coming. A lot of change to process internally in our documents and organizations. Great. Grab a question.

Audience:    What about … the adjudicator … five days of … what kind of document?

Christopher:    It's called a notice of dispute. The notice of dispute is not a prescribed form at this time. I know when I send a notice on behalf of a client that's centered on a contract I just put the title on it. So "Notice of Dispute." It has to set out what the dispute is. That's what's set out in the Act right now. It's not a prescribed form as of right now. 

Ted:    In terms of supporting documents there won't be a prescribed form either but you'll have to support you claims if the disputes about a notice of non-payment. You're going to support your reasons or the contractor's going to have to support their claim for the payment. 

Christopher:    Keep in mind, alright, for your notice of non-payment you have to set out specific reason for it. Okay. 

Audience:    You have to support that by …

Christopher:    One would hope. One would hope that you can support it with documentary evidence. And then the other side of that is, of course, is if it's going to be disputed then that would be, "No, we did do all of these things." 

Ted:    And just so you know the experience in the UK is that, probably more often than not, there's not even an actual physical hearing. It's a documentary submission to an adjudicator in some remote office who then renders the decision based on documents as opposed to proceedings and presentations.

Audience:    The documents also include emails?

Christopher:    It could. For sure. 

Unknown:    Whatever you want to rely upon to validate your claim or defense of a claim.

Christopher:    I don't think it would be particularly different than if you're trying to support a change order, for example. You put in the email saying, "You told me to go ahead and do this and you'd pay me for it. That's what supporting my invoice. There. There's my evidence." 

Ted:    I see somebody else's hand go up. Yes.

Audience:    Yes. Mark Crane had a great little flow chart that was difficult to see. Will that be available on your site?  

Ted:    It is in the slides that are going to get distributed. It's really there to show you that we've got some complexity. The question for those on the phone is the flow chart of an adjudication proceeding that we put into the slides, is that going to be available and it is in the slides that we're going to distribute to everybody. It's partly there just to show you the complexity now of actually getting through an adjudication. We're actually working on a similar type of flow chart for prompt payment. It's just so much more complicated when you actually get into the weeds of the process and if this happens or that, if you're paid or not paid, if you get the notice on time or you don't, we're finding it quite complicated to draft a similar easy to look at flow chart for prompt payment. But we'll have that available by the spring as people really start to focus in on these two new regimes. 

Christopher:    That flow chart, by the way, first appeared in Reynolds and Vogel's report. It's in there. I think they took it from somewhere else, as well. 

Ted:    Right. We don't claim authorship.

Christopher:    Yeah. 

Ted:    We can get a copy. 

Christopher:    Yeah. Question at the back?

Audience:    I just had a couple questions … section 27.1 and the … I was just wondering (a) how that applies where substantial is not declared and how this … finishing work … you have to issue 40 days of the certification.

Ted:    Right. So the question is how does the notice of non-payment on a holdback apply when substantial is not declared, or presumably certified, and secondly, how does it apply to finishing? On the first question, there's now four triggers for the calculation of the lien period and therefore the release of the holdback. The holdback is tied to the end of the lien period and the expiration of the lien rights. What triggers that? If you don't have certification of substantial and there's no publication of the certificate of substantial performance you're not left out in the dark yet. You could have the owner and the contractor declare that substantial occurred at a certain point in time. Or you could have a declaration of last date of supply. But the Act will calculate the 40-day period from the substantial. 

Audience:    … to dispute payment, manage or payment.

Ted:    Right. I'm sort of trying to give the context because they're tied. You've got substantial performance, which can be certificate and the certificate gets published or your declaration of substantial performance signed by an owner and a contractor. That's what will trigger your 40 days. 

Christopher:    The Act also right now has a provision so that if there's a certification of holdback, there's a request for certification of holdback. It's mandated that that needs to be dealt with and if there's a certificate, anyone can publish. It doesn't have to be the owner. So if you're a contractor waiting to get paid those are the steps you can take to get your holdback. 

Audience:    If I'm the owner who does not want to pay.

Ted:    Right.

Audience:    And I want to not pay the full the holdback, but I can't issue a notice of non-payment under section 27.1, because it's not within the 40-day period of substantial. 

Ted:    So you've missed your 40-day window? Is that what you're asking? 

Audience:    If it's for the finishing work section 27 also refers to section 27.1. It is unlikely that I will have all the finishing work done within the 40 days. So if the finishing work itself is not done until much later, and there are deficiencies and I don't want to pay my finishing holdback, what am I supposed to do? Because I already missed the 40 days from substantial. Or alternatively there's never substantial and the projects done and I'm forced under section 26 to release the holdback, I also have a 40-day window to say I'm not going to pay. 

Ted:    So the finishing holdback regime would apply just the same. You've got your substantial performance, you've got 40 days to give that notice. If you miss that you're obliged to pay the full holdback on the 61st day. It doesn't mean you lose your right to claim. If you feel like there's actually some deficient work here, or there's some punch list items that weren't fixed, doesn't mean you lose your right to make that claim. You just on that 61st day you have to pay the full holdback. You can start an adjudication. You can start a claim.

Audience:    So you're saying I have to pay first?

Ted:    Right. If you have other payments that are owing, maybe on the finishing holdback, you're going to set off against that. 

Christopher:    You're holdback's not going to be due unless there is a triggering event. And when that triggering event occurs

Audience:    It's just weird that section 27 refers to section 27.1 when it's unlikely that it's going to apply. Anyway, I just … it's too bad to pay and then you have to fight about it.

Ted:    That's right. 

Audience:    My other question relates to 27.1, it is only for deficiencies? Are those the only reasons why an owner might …?

Ted:    There's no restrictions on why you don't pay. If somebody has defaulted under the contract, and they owe you money, then you have a right to set off under the Act. There is a slight little change from what was there before. Before you could set off any debt. Now you can only set off debts on the same project. So, if you've got a contractor on multiple projects and they owe you money over here, and you owe them money here, you could before, or now, set those off against each other. But going forward the statutes being amended so that your set off is only within the same project. 

Audience:    My question, does it have to only be related to set off or could it be there's some other contractual term that's not been complied with?

Ted:    No. Any claim.

Audience:    And therefore holdback not's payable at all?

Christopher:    The Act says a reason. It doesn't have to be a good one. 

Ted:    Yes. Question?

Audience:    Is that set off on the same project or the same project?

Ted:    Well it's the same project. Same improvement. It's got to be related to the same improvement.

Audience:    I had one where they did cladding work. And then they were asked to do some landscaping on the side and they did the landscaping and they did it through the same company. When the holdback came they said, "Oh you messed up the landscaping so we're setting off." It was a different contract. It wasn't really the same project but it was the same premises. 

Audience:    Sounds like a George Carlin thing.

Ted:    Yeah. You're going to get into some nitty gritty or fact-based analysis there because is the landscaping the same improvement?

Christopher:    Yeah.

Ted:    Because you can have on one parcel of land you can have multiple projects ongoing at the same time. And you can have multiple projects by the same people at the same time. Usually that's aligned with the contract. The contract's going to be looked at to say, "Okay, what was the project? What was the improvement?" If you've got multiple phases and a phase of the improvement is the landscaping, but it's really all part of the same improvement, you can show that with the facts and support that claim then you're going to be able to say, "I can set this off." If, on the other hand, the contractor says, "Wait a minute. That's an add-on. It's not the same improvement. It may on the same premises. It may be part of some overall loosely defined project that the owner is financing, but it's not the improvement within the Act." Then the contractor's going to win and you're not going to be able to set off. It's going to get complicated. There's a lot of new language in this statute coming. This hasn't been litigated yet. We don't know the full answer on that but that's how I would interpret it right off the bat. We're going to have, I think the next four or five years, we're going to have a bit of a wild west. There's going to be a lot of people pushing the envelope. A lot of people trying to get away with the old regime and the new regime and just trying to mess around with the rules a little bit. It's going to take a while to sort through. Unfortunately, when the Act came in in 1983, we all ran off to court and we got all these court decisions and we all knew what the interpretation of the new words were. Nowadays you're going to have a lot more adjudication and arbitration, which is private and we won't know those rulings. I think it will actually take a little bit longer. Plus we've got so many changes that will have to disputed and litigated before we really understand the full interpretation of all the new wording. I think it's going to take quite a bit of time before we're really settled. That's just what's coming. 

Christopher:    Just the word improvement has been litigated. A lot. It would be difficult to prove that two different jobs on the same premises are different contracts. I think that if the word improvement usually means improvement to that particular parcel of land. I'm not saying it's impossible to prove that they're two different projects but it's more likely than not that it would be. 

Ted:    Okay. I think we'll take one last question and then we'll close it.

Audience:    … adjudicator if the Nominating Authority hasn't been formed yet?

Ted:    I think they're planning to form it this summer and into the fall because they want a good long time to prepare the procedures. To prepare the certification program. To get enough adjudicators through the certification program so that when this is live they've got enough adjudicators to actually make this work because if they don't, it doesn't work. 

Audience:    … 

Ted:    I'm going to let Chris answer that. But I'll just repeat the question. The question is how does adjudication and other dispute resolution procedures, like arbitration or courts, fit together?

Christopher:    Okay. There's a couple of things involved in answering that. Number one, because adjudication is tied to a proper invoice it's designed to be an invoice-by- invoice process. The parties would have to agree to have them combined. Okay. Now, as far as how it works with adjudication and litigation. The adjudicator's decision is binding but it's binding on an interim basis. It's binding unless an arbitrator or a judge overturns it. So it doesn't restrict access to arbitration or litigation. Now, would an arbitrator or a judge give deference to the adjudicator? We don't know yet but there's likely at least some deference that they would give. There's also a provision for appealing an adjudicator's decision. That's included in the legislation. My question is why would you appeal if you could just sue anyway? But the answer to that may be because the adjudicator's going to be given deference. It doesn't restrict your access to the traditional modes of dispute resolution. It's sort of an interim step before that but there are rules and it's binding on an interim basis that if you don't pay there's all the sanctions that Mark talked about. 

Audience:    … pay up front …

Ted:    That's right. 

Christopher:     And then sue to get it back.

Ted:    And they have to pay up front because …

Audience:    …

Ted:    Right. And, in fact, as an owner you're going to want to because if you don't then you're giving your contractor a right to terminate or suspend until you do. So you want to protect yourself. It's just tilting the balance a little bit for the contractor in the interim. The experience in the UK is that they always had the right to go back to court on these but, in fact, the construction arbitration industry has basically disappeared in the UK because nobody does. They have the right to re-litigate the claim but most people are quite content to have it resolved and move on. Many more adjudications so you end up with many more skirmishes, small fights, but you never go to war. You never go to the big cases anymore.

Mark:    But you may still have, just to be clear, your traditional breach of contract claims on a global scale.  A delay claim, a sophisticated delay claim that extends beyond a payment cycle. A negligence action or any other tortious misconduct if you'd otherwise see infrastructure disputes. 

Ted:    Yup. That's right. So, we're just a little past 10:00. We're just a little bit over budget but we are on time. I thank everybody for coming. There's a lot to process here. There's a lot of work that needs to be done to make sure everybody's ready. That's why we've been holding these events. We have been retained by a number of clients to review their documents, update and catch up to the new rules. Get them ready for adjudication and prompt payment. Provide some analysis, internally, about what resources they need. I know a lot of people in the market are looking at this and getting their counsel involved to help them get ready for this. I think, and hope, that everybody is at least teed up to know that they've got to back and do some prep time. Thanks everybody. We appreciate seeing everybody every time we have these construction law forums. The next one will be in the fall and we'll probably find that we've been spending a lot of time looking at Construction Lien Act amendments and Bill 142 over the last few years. There has been a body of case law coming up on bids and bid processes and bid shopping. We're going to be looking at that in the fall and new procurement rules coming in. As well as just do a little catch up on Bill 142 and how all these July 1 changes are affecting the market. Thanks very much everybody. See you soon.