July 28, 2017
About this seminar
Louis-Pierre Grégoire, partner in Gowling WLG’s Ottawa office, provides an in depth summary of adjudication including how it works, comparison to the UK’s model and its limitations.
Good morning everyone. I'm going to take a stab at that question about where you have, possibly, your subcontracts are going to be entered into after the Act comes into force and you have the general contractor signing the prime contract before. What do you do in that situation? I come from the different perspective from Ted where as I'm a litigator at heart. I get in the trenches and try to solve problems like that when they arise. My first reflex there is to go look at the actual language that was used in the Act and they use the language "entered into". When the contract was entered into. So, what does that mean? As a litigator I'm going to get creative and I'm going to suggest, well, what does the contract say? Most contracts are very careful to say, "This contract was entered into on this day". As opposed to when the contract was signed. When the contract was signed can become problematic when you have party A signing it on the first of June and the Act comes into force on the second of June and then party B signs it on the third of June. What do you do, right? I think as a prudent practice there, for your contracts, would be just to set out at the beginning this contract was entered into on this date. I think, prudently, you'd go with the date of the RFP, how it was structured and so on so forth and you'll have the prime contract entered into the date before the Act comes into force. Then I think by then on a tendered process most of your subs will be locked in or you will have had some discussions with them before that process came into place. It will be fair to say that those contracts with the sub you can say they were entered into before the Act came into force. That's my creative spin on this as a litigator and until we see the regulations, because there might be some added information in the regulations that deals with this, that's my suggestion for you on that. Very good question. Thank you.
I'm a partner in the Gowling WLG office. I'm also a civil engineer by training so I have a, I like to say, that I have a particular way of looking at problems and I spend most of my days solving what I call complex problems that straddle the construction world and the legal world. I practice in both languages, in French and in English and I act for pretty much everybody in the construction pyramid. From contractors, subcontractors, trades, owners, developers, insurance companies, engineers and architects. So today my topic is adjudication and that's something that's been near and dear to my heart for almost 10 years now. I heard that there was this model, a different way of doing construction litigation in the UK, and 10 years ago I just said, "Oh wow. This is a great model." and I just happened to have a project that would lend itself to that type of resolution. I tried it. I was able to convince my opposing counsel and we customized the UK adjudication for our particular project. It worked really well and we've been replicating it ever since. I can say, practically speaking, it works. And now it's going to be legislated and it's going to be mandatory in Ontario.
So, what is adjudication? Bottom line is that it is a new mechanism that's going to, or is designed to, free up cash flow and resources on a project. It's going to empower that cash flow and hopefully productivity on construction projects. The effect is going to be swift resolution and the dates that have been proposed, or the timelines that have been proposed so far, they're not in the Act per say, they'll hopefully appear in the regulations, provides for very, very tight timelines within which to adjudicate or conduct your dispute. Whereas a typical piece of litigation, I think the average in Ontario is 2 years, adjudication is designed to give you a result, a decision from an adjudicator, within 28 to 43 days. 28 to 43 days. So, that's going to have some people ramping up really quick to get their claim package and response put out to their responding party.
We started with a report. There's a report that was years in the making and then we get to Bill 52, Bill 142, pardon me. Some of the recommendations, almost all the recommendations that were in the report, found their way into the Bill. Some will hopefully see in the regulations but the cornerstone of the recommendations from the report, the creation of this entirely regime that's going to be very flexible to deal with disputes. It's going to provide a regulatory body that's going to have these qualified persons that are going to be the adjudicators. So, a different label, if you will, for an arbitrator. I mentioned that decisions will have to be rendered within a stipulated timeframe and the decisions will be binding. If we drill down in the details we could be here for quite a while talking about adjudication. My time is very limited with you so I'm going to focus on a couple of the promised sections. First of all, you would find the adjudication provisions in the Act. They will be squeezed into part 2.1 of the Act. So just after the breach of trust provisions and they'll be labeled section 13.1 to 13.24. The first one that I want to bring to your attention is, I think, the most important one, is 13.5. I'm going to read it to you because it's so important. So it says, "a party to a contract may refer to adjudication a dispute with the other party to the contract respecting any of the following matters:…" So before I describe the matters that are enumerated, I'm going to pause on that first phrase, "a party to a contract". Who's the regime of adjudication going to apply to? A contract is defined in the Act as an agreement between the owner and the contractor. So this adjudication regime is going to be limited to that level of contract. Now there's another provision that make the adjudication regime also applicable to contracts below. So, subcontractor to subcontractor and so forth but those are the people, those are the persons, to whom the adjudication regime is going to apply. Now if I go back to this very important section, 13.5, the enumerated matters that are going to be caught are:
- The valuation of services or materials provided under the contract.
- Payment under the contract, including in respect of a change order, whether approved or not, or a proposed change order.
- Disputes that are the subject of a notice of non-payment under Part 1.1. So that's the prompt payment regime that Ted explained a few moments ago.
- Amounts retained under section 12. So that's set-off by trustee and under the subsection for lien set-off.
- Non-payment of holdback.
There's a sixth one which I'll get to in a second but the point I want to make about these first 5 enumerated matters is that not only adjudication now restricted to a particular level of contracting party in the construction pyramid, now the subject, or the content of the dispute, is also restricted. Essentially to matters of payment. It's a bit of an open question whether we'll be able to deal with delay claims by way of adjudication. Litigators like me could probably spend the next 15-20 minutes talking about ways that it might be possible or might not. But I put that to you as a question mark. There's going to be certain types of disputes that are not going to be obviously caught by this regime. Now the sixth item in the enumerated list is:
6. Any other matter that the parties to the adjudication agree to, or that may be prescribed.
This might show up in the regulations to come or the parties can agree to it. If they want to adjudicate a delay claim, so be it. There are two open questions about the adjudication regime is, and the way it's designed, the way it's set up, it's set up to deal with one issue at a time. So parties that are going to have several issues are going to have to either agree to it or otherwise they will have to do one adjudication per issue. That can lead to potential abuse, or at least that's the fear or one of the concerns, but if I have time I'll get to sharing a bit of our UK colleagues. So Gowling WLG's in the fortunate circumstance that we've got colleagues in the UK that have been practicing this for 30 years. We've got a wealth of resources to tap into to see, well, okay these concerns, how does it play it out over there? How did it play out? We've got the benefit of experience to inform us in answering some of these questions. The fear that this system could be abused and we would have a serial claimant issuing notice of adjudication after notice of adjudication for a list of issues has revealed itself in our UK experiences as not really an issue because of the amount of time and effort needed to bring this forth. It just doesn't lend itself to that kind of abuse.
The second major section that I want to bring to your attention is section 13.7. And that's the provision for dealing with notice of adjudication. Essentially to give a notice of adjudication is very simple. You have to identify a few simple things. I'll just read you the section because it's fairly clear. It says:
"A party to a contract or subcontract who wishes to refer a dispute to adjudication shall give to the other party a written notice of adjudication that includes,
(a) the names and addresses of the parties;
(b) the nature and a brief description of the dispute, including details respecting how and when it arose;
(c) the nature of the redress sought; and
(d) the name of the proposed adjudicator."
So, two take aways there. One, is the notice itself is not too onerous. The full back up detail comes a bit later but the other component is the person serving the notice of adjudication has the first right to pick the adjudicator. That's very important. You can't put it in the contract at the outset that the parties mutually agree the adjudicator is going to so and so. The party who will start the adjudication process at that time picks the adjudicator. So if the in the contract, earlier on is set out an adjudicator, that section is not enforceable and can't be used. That is to address a perceived imbalance of power because most often times for subcontractor the terms of the subcontract are imposed upon it. So to have imposed the contractors preferred adjudicator could lead to perceived imbalances. The flip side of the story, when let's say the contractor receives the notice of adjudication proposing a certain adjudicator, if it doesn't agree with that proposal then the parties refer the matter to the regulatory authority that is going to be created. It's going to be called the Authorized Nominating Authority, "ANA" for short, and they will choose an adjudicator for the parties. Much like in the context in Ottawa where the Mandatory Mediation Office assigns a mediator if the parties can't agree to a mediator.
So, I'll get to touch upon a few more policy reasons on my last slides but essentially in the two sections that I've identified for you I've answered most of these questions. Who can request the adjudication? Any party to a contract or a subcontract. When can the adjudication be commenced? At any point in time when the contractor or subcontractor, and so forth, can satisfy one of the enumerated items that I identified for you. There's an end point. You can no longer commence the adjudication process once the contract is completed. The rights to adjudication end when that contract is completed. How is the adjudication commenced? By the simple act of delivering that notice that contains the four bits of information that we discussed. Very important one, who bears the cost of an adjudication? The Act is proposing that the cost, there are two costs to talk about here. There's the cost of the adjudicator and there's the parties legal costs. So the cost of the adjudicator will be split between the parties and the parties own legal costs will be borne by those parties. That's a bit of a shift in the way we do regular litigation here in Ontario where there's a bit of an expectation where the winner will be able to have recovery of some of his legal fees. Then the next question is are the decisions binding? Yes they are. Not only will they be binding but there's mechanisms provided in the Act to enforce those decisions. Once an adjudicator makes an award, the person from whom payment was sought, has 10 days to make that payment. It's very important for that payment to be made because there's several sanctions that will come into play if they don't. There's stipulated penalty interest, if you will, that will run from the date when the payment was due and that will be the Courts of Justice Act which fluctuates over time. Or the interest rate found in the contract. If you don't pay within 10 days then the person who sought payment will also be entitled to interest. Here's the real kicker, if the payments not made, the person to whom the payment was supposed to be made, can stop work. That is in the Act. They can stop work, and not only they that, they'll be entitled to mobilization costs once they get a payment and come back on site. That's fairly significant. I think it's going to change the dynamics and create an incentive to make that cash flow which goes back to the whole, or one of the raisons d'etre, one of the reasons why this regime is coming into play. Ultimately, payment can be enforced just like one enforces an arbitration aware. You go to court and you show you've gone through the process and you get an order from the court allowing you all those other civil remedies to go collect.
I'm going to add another question. Will current projects be exempt or grandfathered? So this ties in a little bit to your question that dealt with what happens if I have contracts before and after on a particular project. The answer is, yes, to a certain degree. The current projects are grandfathered because the Act, as identified, uses the words "when the contracts are entered into". A contract that is ongoing is going to be permitted to continue but certainly will have to address, creatively, subsequent subcontracts on a major project if you are near the end, if you have to hire other forces to do xyz, then that's going to have to be dealt with.
Here I have a reproduced a diagram that comes from the report that led to Bill 142. Bill 142 proposes the language that will go in the Construction Act and a lot of details are left to the regulations. This flow chart is what was proposed as the deadlines, the timelines, on once you deliver a notice how many days does the responding party have to agree or disagree to that choice of adjudicator. Well, it's 2 days. This flow chart is found on the report. It's very difficult to see here and it would take an entire 20 minutes to go through it. The long story short is we're going to get those details of the timelines in the regulations. Hopefully they mirror what was set out in the report. I commend you to the report and the flow chart if you want to know more about it. But the whole process basically breaks down to notices given, 2 days to respond, if the response rejects the adjudicator then a request to the Authorized Nominating Authority is made and an adjudicator is appointed within 5 days, then within a subsequent 5 days the party who started the process submits his package of information or claim, then the adjudicator decides his process but ultimately renders a decision within 28 or 30 days. That's the end posts of the timeline for an adjudication.
I have three more slides. But I'm going to go faster or have less content with those slides. The adjudicators are going to be persons who are going to be qualified through this new regulatory body that I've called the Authorized Nominating Authority or "ANA" for short. The ministry's going to be responsible for that regulatory body. It's expected that the ministry's going to, at the beginning, is going to select a first tranche of eminently qualified people and set up key centers in Ottawa, Toronto, London and Windsor. The persons that are going to be qualified and chosen for this are going to be taken out of the professional and the self-regulatory bodies such an engineers, architects, accounts, lawyers and quantity surveyors. Ultimately, the adjudicators are going to have to be responding to a set of criteria. They're going to have 7 years of relevant working experience. They're going to have to complete regular training and thus be certified.
Just to touch upon the question of how long has adjudication been in place in the UK and how's it been received? I think I mentioned it. It's been in place for about 30 years. Our colleagues in the UK tell us that it's been a game changer for the construction industry and very well received. There were a lot of fears or concerns that were raised in the UK, and they were raised in this context here in Ontario when the report came out and with all the consultations that were done, people thought that people were going to use the adjudication regime to ambush their responding party. It's going to bog down the construction and it's going to be rough justice because it's so quick. People are not going to be able to flesh their full rights. The experience in the UK has been very positive and is dispelled, or minimized those concerns, we're being told not to pay too much concern to those comments.
This is my last slide. As I mentioned adjudication is meant to be binding on the parties. That means that following the decision of the adjudicator they're going to have to abide by it. I've identified the 10 day period to pay and consequences if you don't. You can't contract out of that. The parties will have, however, the freedom of contract to agree to certain provisions in terms of the timing, the amount of powers that they impart on the adjudicator, and to a certain degree, that enumerated list that I identified for you at the beginning, if the parties at the outset want to set out in the contract that delay claims are fair game to be dealt with by way of adjudication, that adjudication can also deal with multi issues. All those things can be set out by contract. If parties don't take the opportunity to set out their particular expectations in the contract then what will appear in the regulations will be imposed upon them in a mandatory way.
I've touched upon of what some of the advantages are for Ontario. We've talked about speed of dispute resolution. What that necessarily means is reduced costs in litigation and greater certainty for enforcing contracts. With that I turn the mic over to Neil and Natasha.
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