December 20, 2017
Currently in Ontario, there is no mandatory mechanism pursuant to which a party to a construction contract can refer a dispute to adjudication. However, in response to the report titled “Striking the Balance: Expert Review of Ontario’s Construction Lien Act” delivered on April 30, 2016, the Ontario Legislature has now introduced a bill providing for numerous amendments to the Construction Lien Act, through Bill 142. It is expected that Bill 142 (which proposes a Consolidated Construction Act) will become law in the future, and it is currently at the second reading stage in the legislature.
Pursuant to Bill 142, a party to a contract between an owner and a contractor will be able refer a dispute to adjudication that relates to the payment or the valuation of services. Since the introduction of Bill 142, there has been significant discussion and debate about how adjudication will impact the construction industry. While some have expressed concerns about the potential for increased costs, the overall sentiment appears to be that adjudication will assist to move money down the construction pyramid more quickly.
In England & Wales, adjudication has been available, on all qualifying construction contracts, since 1998. To get a sense of what we can expect when Bill 142 will become law, and considering the similarities between the common law regimes in both Canada and England & Wales, we have decided to compare the adjudication model proposed pursuant to Bill 142, with the regime that is in place in England & Wales.
Does Adjudication Work?
Adjudication provides a quick, flexible and private means of resolving issues which may otherwise delay or disrupt the completion of a construction contract.
In England & Wales, adjudication has been extremely successful and is widely used within the construction industry. However, it does come with a number of caveats that are discussed below.
Overall, adjudication in England & Wales is considered more cost-effective than litigation and arbitration. This relative cost-effectiveness of adjudication seeks to balance out the financial inequalities between the various parties to construction projects and goes some way to redress the imbalance between the paying party and the payee.
One likely impact on the anticipated adjudication regime in Ontario is that it will allow a contractor (or sub-contractor) to address a payment issue more quickly, without having to incur the time and expense of proceeding through the traditional litigation process (e.g. the courts or arbitration). We anticipate that this will have a positive impact on the flow of funds from the owner to contractors and sub-contractors.
In England & Wales, there are very limited grounds upon which an adjudicator's decision may be set aside. Most significantly, it is not open to parties to seek to set aside an adjudicator's decision for a substantive error of law or fact.
Inevitably, the tight timelines inherent in the adjudication procedure mean that an adjudicator may have to make a "rough and ready" decision - on matters of considerable legal or factual complexity - which may lead to injustice.That is something that the courts of England & Wales understand and have accepted. Indeed, the Court of Appeal in England & Wales has stated:
"Adjudicators will make mistakes. Sometimes those mistakes will be glaringly obvious and disastrous in their consequences for the losing party. The victims of mistake will usually be able to recoup their losses by subsequent arbitration or litigation."
Therefore, in England and Wales, to the extent that a party believes that an error was made by the adjudicator, it would be necessary for that losing party to commence court or arbitration proceedings to correct that injustice. This is typically done at the completion of the project. However, in England & Wales, there is also some limited measures in place to protect an unsuccessful paying party who can demonstrate a real risk that the money paid pursuant to an adjudicator's decision will disappear forever (e.g. the sub-contractor is impecunious). Yet, access to these protections is carefully guarded by the courts, who must also protect the overriding "pay now and argue later" principle of the adjudication regime.
In Ontario, pursuant to Bill 142, the adjudicator's decision is binding on the parties, until a determination of the matter by a court or arbitrator is made, if necessary. So while an appeal of an adjudicator’s decision is possible, the intention of the proposed legislation is that this will not occur until the end of the contract.
Overall, the "pay now and argue later" philosophy that has been embraced in England & Wales, appears to be the approach that will be taken in Ontario.
When adjudication was first introduced in England & Wales, much was written about the possibility of the referring party “ambushing” the responding party. This was intended to mean that the referring party could spend a great deal of time preparing and refining its case before launching the adjudication process, leaving the responding party with a limited time in which to respond to the case that had been brought.
Initially, there were a number of successful challenges to adjudicators’ decisions, based on complaints of ambush. However, it is now well-established that the right in England & Wales to adjudicate any dispute "at any time" overrides any concerns relating to ambush. Whilst an adjudicator is required to comply with the requirements of natural justice (see below), they must do so within the statutory timelines.
The English courts have summarised the principles to be applied when considering allegations of ambush as follows:
- The referring party’s “ambush” does not in itself amount to procedural unfairness.
- If there is an ambush, the adjudicator can decline to accept the appointment on the grounds that justice cannot be done, or can indicate that he/she is unable to produce his/her decision within the time allowed.
- The adjudicator’s decision will not be procedurally unfair simply because the dispute is complex or involves large volumes of material.
In Ontario, pursuant to Bill 142, a party can commence the adjudication process once there exists a dispute relating to a payment issue or relating to the valuation of services. In such a regime, concerns may exist about one party being surprised or ambushed by the other party. Despite these concerns, because adjudication is intended to resolve disputes that arise over the course of one payment cycle, it is anticipated that a responding party will generally be able to adequately respond within the prescribed timeline.
Smash and Grab
Pursuant to section 111 of the legislation in England & Wales, the payer is obliged to pay the "notified sum" (being either the sum applied for by the contractor, or certified by or on behalf of the owner/employer) on or before its final date for payment. However, section 111(3) allows the payer to give the payee notice of the payer's intention to pay less than the notified sum (a "pay less notice"). The pay less notice must be provided before the notified sum would otherwise become due for payment. If an effective pay less notice is not given, then the payee is entitled to payment in full of the notified sum, and the payer is prevented from raising any substantive defences. In England & Wales, the associated risk of windfalls is accepted as an unfortunate, but necessary, consequence.
Similar provisions appear in Bill 142, whereby an owner must "pay the amount payable under a proper invoice" unless it has provided a "notice of non-payment" (section 6.3 (1)). As provided for in sections 6.3(2)-(3) of Bill 142, the owner must issue a notice of non-payment if it disputes all or any portion of the amount claimed. The notice of non-payment must be provided within 14 days of receipt of the proper invoice, must be in the "prescribed form and manner" and must specify what portion of the proper invoice is not being paid (and explain why). The owner must then pay any non-disputed amount. There are similar provisions applied throughout the contractual chain.
In England & Wales, where the owner/employer has failed to issue a timely or otherwise compliant pay less notice, and fails to pay the full amount by the final date for payment, the payee may commence an adjudication to recover the notified sum. In any such adjudication, the owner/employer is unable to raise a substantive defence (e.g. as to the proper evaluation of the work) and will generally be required to pay the notified sum - which may simply be the amount that the contractor applied for. This type of adjudication is sometimes referred to as a "smash and grab" and it generally represents a sure-fire way of obtaining an award in the payee’s favour based, not on the value of the work done but, on purely technical arguments.
In Ontario, it is not yet certain whether our proposed legislation will be interpreted in the same way as in England & Wales. However, it is an issue that stakeholders should be mindful about.
Adjudication is intended to be a swift process and it demands a great deal of procedural flexibility. At an early stage, in England & Wales, doubts were expressed as to whether the adjudicator, in performing his/her role, was required to comply with the requirements of natural justice. The requirements of natural justice are commonly expressed as two separate rights, namely:
- The right to be heard by an impartial tribunal. This goes to the matter of bias and apparent bias on the part of a tribunal.
- The right to a fair hearing. This goes to a party’s right to put its case, and to respond to the case made against it.
Bill 142 expressly includes the first rule of natural justice. For example, an adjudicator is required to act impartially (section 13.12(5)) and the adjudicator's award can be set aside where "the procedures followed in the adjudication did not comply with the procedures to which the adjudication was subject under this Part" (section 13.18(5)) and "there is a reasonable apprehension of bias on the part of the adjudicator" (section 13.18(6)).
However, in terms of conduct "the Adjudicator may conduct the adjudication in the manner he or she determine appropriate in the circumstances" (section 13.12(4)) subject to express requirement that he/she must do so in an impartial manner (section 13.12(5)). Therefore, while there is no express reference, within Bill 142, to the requirement for the adjudicator to conduct the proceedings fairly, there is little doubt that this expectation exists – and the failure to do so would give reason for the courts to intrude.
In England & Wales, a losing party will sometimes seek to resist enforcement of an adjudicator's award on the basis that the adjudicator materially breached the rules of natural justice. Usually, the courts of England & Wales find nothing that jeopardises the adjudicator’s decision. However, some successful challenges to adjudicators’ decisions have occurred where the adjudicator:
- communicated separately with the parties;
- failed to consult with the parties (e.g. as to his proposed approach to the dispute or his/her reliance on a report/advice commissioned from a third party);
- formed (and expressed) a preliminary view on the issues in dispute, without first hearing all of the evidence;
- failed to exercise a discretion, (e.g. as to whether to take into account submissions served late);
- used their own knowledge and experience and made a decision that was not based on the evidence presented; and
- took an erroneously restrictive view of their own jurisdiction (e.g. by failing to consider part of a defence, in the mistaken belief that it fell outside the scope of the dispute referred).
In England & Wales, this area of jurisprudence continues to develop. As this is one of the only ways out of a negative adjudicator's decision, parties continue to explore novel ways to argue a breach of natural justice but - it must be said - with limited success.
While it is not yet certain whether the proposed legislation in Ontario will be interpreted by the courts in the same way, it is certainly a possibility.
There are numerous reasons to believe that the anticipated adjudication process in Ontario could develop in a similar way as has occurred in England & Wales. Of course, how precisely the legislation in Ontario will evolve (including through the Regulations), and how it will be interpreted by the courts, remain to be seen. Indeed, there will no doubt be some interesting (and unpredictable) times ahead, but having the benefit of reflecting upon the almost 20 years of the adjudication regime in England & Wales provides helpful insight.
 See section 13.18 of Bill 142, Construction Lien Amendment Act, 2017.
 Bouygues (UK) Ltd v Dahl-Jensen UK Ltd  EWCA Civ 507.
 See Bovis Lend Lease Ltd v The Trustees of the London Clinic Ltd  EWHC 64 (TCC).
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