The prompt payment and adjudication amendments to the Construction Act (the "Act") came into force and effect on October 1, 2019.
Among the many changes to Ontario's construction laws that were introduced by Bill 142, the Construction Lien Act Amendment Act, 2017, prompt payment rules and adjudication will have the largest impact on construction projects in the province of Ontario. These two new legal regimes are a true culture shift in the Ontario construction sector. The rest of the country appears to be not too far behind.
The Act implements a mandatory fast-track dispute resolution process designed to get cash flowing more quickly on the projects and to reduce the cost of large and lengthy disputes. This article sets out how adjudication will apply to all new construction projects unless a procurement process (RFP, RFQ, request for quotation) has been commenced or a contract has been entered into for that project prior to October 1, 2019.
Adjudication: An Overview
Under the Act, 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. This dispute resolution method will be mandatory on all construction projects, public and private, and all sizes and types. Parties will be free to draft their own provisions so long as the provisions are consistent with the Act.
Adjudication is similar to a mandatory arbitration and will provide a fast means to get an interim decision by an adjudicator of any matter that falls within Part II.1, of the Act and if one party is not satisfied with the adjudicator's decision, the party can proceed with a court action, application or an arbitration to reverse what the adjudicator has decided. In the interim; however, the adjudicator's decision must be followed immediately. Moreover, the adjudication may only address a single matter unless the parties to the construction contract/adjudication and the adjudicator agree otherwise.
What disputes can be adjudicated?
The following disputes can be adjudicated:
- the valuation of services or materials provided under the construction contract;
- payment under the construction contract, including in respect of change orders, whether they are approved or not, or of a proposed change order;
- disputes that are subject of a Notice of Non-Payment under Part I.1;
- amounts retained under Section 12 (set-off by Trustee) or under Section 17.3 (lien set-off);
- payment of a holdback under Section 26.1 or 26.2;
- non-payment of holdback under Section 27.1; and
- any other matters to which the parties to the adjudication agree, or that may be prescribed.
How is adjudication commenced?
A party to a construction contract can only commence an adjudication against a party with whom it has a contract. An adjudication has to be started before the date the construction contract between the parties is completed, unless the parties to construction contract agree otherwise. A party who wishes to refer a dispute to adjudication gives the other party a written notice that includes:
- names and addresses of the parties;
- nature and a brief description of the dispute, including details respecting when and how it arose;
- nature of the redress sought; and
- name of a proposed adjudicator to conduct the adjudication.
How is the adjudicator selected?
The adjudicator must be selected from the registry of qualified adjudicators maintained by the Authorized Nominating Authority (the "Authority"). Under the Act, the Authority will certify and maintain a registry of qualified adjudicators. Adjudicators will not need to have a legal background, and their requisite 10 years or greater of construction industry experience may come from working as an architect, engineer, quantity supervisor, etc.
The parties to a construction contract are prohibited from agreeing on the adjudicator in advance. The Act states that there is a four-day deadline for the adjudicator to agree to take on the adjudication, which implies that the parties to a construction contract have to agree on the adjudicator prior to that.
What if the parties cannot agree on an adjudicator?
If the parties cannot agree on an adjudicator, or if the adjudicator does not agree to conduct the adjudication, within four days of the notice of adjudication, then the referring party must request the appointment of an adjudicator by the ANA, and the ANA must make the appointment within seven days of receiving the request.
What are the timelines for an adjudication?
Within five days of the selection of the adjudicator, the party who started the adjudication must provide to the adjudicator and the responding party copies of the contract in question, and any documents the referring party intends to rely on. The adjudicator must release his/her written decision within 30 days of receiving the documents. The time may be extended at the adjudicator's request, with the written consent of the parties, for a period of no more than 14 days, or upon written agreement of the parties, with the adjudicator's consent, for the period specified in the agreement. Otherwise, if it is made after the determination date, it is of no force or effect.
These timelines provide that absent an extension of time, the adjudication will be determined within 46 days of the adjudication being commenced. Once the adjudicator has made a determination, a party required to pay must do so within 10 days.
What is the adjudication procedure?
The adjudication is subject to the adjudication procedures set out in the construction contract (if they comply with Part II.1 of the Act). However, if the contracts do not address adjudication procedures, or if the procedures set out do not comply with the requirements of Part II.1 of the Act, then the procedures set out in the Act govern the adjudication.
What are the powers of an adjudicator?
The adjudicator may conduct the adjudication in a manner he/she determines to be appropriate in the circumstances, and shall conduct the adjudication in an impartial manner.
An adjudicator may exercise the following powers and any other power of an adjudicator that may be specified in the contract or subcontract:
- Make directions respecting the conduct of the adjudication.
- Take the initiative in ascertaining the relevant facts and law.
- Draw inferences based on the conduct of the parties to adjudication.
- Conduct an onsite inspection.
- Obtain the assistance of a merchant accountant, actuary, building contractor, architect, engineer, or other person in such a way as the adjudicator considers fit to enable him or her to determine better any matter of fact in question. The adjudicator may fix the remuneration of the expert and who will pay it.
- Make a determination of the adjudication.
- Any other power that may be prescribed.
Who pays for the adjudication?
The parties to the adjudication will each be responsible for an equal share of the adjudicator's fees, and each party will bear its own costs, regardless of the result. However, the adjudicator may exercise his discretion and award costs against another party, if the adjudication makes a finding that the party acted in a manner that was "frivolous, vexatious, an abuse of process or bad faith".
How can the adjudicator's determination be enforced?
Once the adjudication is completed, either party to the adjudication can bring an application to the court for an Order enforcing the adjudicator's determination. Once the court order is made, it can be enforced like any other court order, including by way of writ of execution or by garnishment.
Additionally, if an adjudicator's decision to pay is not obeyed, the party expecting the payment would be entitled to suspend work under the contract or terminate. In the experience of the UK, only a small number of cases typically go from the adjudication to litigation or arbitration.