The construction industry in Alberta is about to change. In the summer of 2021, amendments to the Builders' Lien Act are set to become law. How payments are made and their timing, along with how disputes can be resolved are about to undergo significant change.
Among the many changes that were introduced by Bill 37, the Builders' Lien (Prompt Payment) Amendment Act, 2020, new prompt payment rules and adjudication will have the most substantive impact on construction projects in Alberta.
Prompt Payment and Who it Applies To
Bill 37 introduces a strict prompt payment regime in Alberta, which will apply to all private sector and public sector projects not constructed on Government of Alberta or Federal land. The prompt payment requirements will apply to all parties in the construction pyramid, and to all sizes and types of improvements. Unlike other jurisdictions that have passed similar legislation, the Crown will not be subject to prompt payment, or any other provisions proposed in the legislation.
28 day payment cycle
The new bottom line for construction projects in Alberta: owners, contractors, and subcontractors will have 28 days to pay a contractor or subcontractor after receipt of a proper invoice. Unlike Ontario, which mandates payment from the owner to the contractor within the same 28-day clock, there is no additional 7 days for the contractor to pay its subcontractors, and 7 additional days from subcontractors to subcontractors, down the construction chain. We anticipate that we will see this additional time period provided for in the Alberta legislation through the Regulations.
Prompt payment will be mandatory for all contracts. The amended Act will deem all contracts to have monthly progress payments unless otherwise expressly set out in the contract. Parties will be permitted to establish milestones, payment schedules, or other payment structures that are not based on monthly progress payments if it is clearly set out in their contract, but the 28-day clock will start running once an invoice is received in accordance with that payment structure.
All parties to a construction project will therefore need to ensure that their accounting protocols comply with these strict statutory payment timelines.
Prohibition of "pay when paid" clauses
It is important to understand that the prompt payment rules abolish any "pay when paid" payment terms. Bill 37 proposes that "any provision of a contract that provides that a contractor or subcontractor will only be obligated to pay a subcontractor with whom they have a contract after they have received payment for work done or materials furnished is of no force or effect". A contractor, for example, must therefore pay a subcontractor pursuant to a proper invoice, even if the owner fails to pay the contractor. Unlike other jurisdictions where the contractor can give notice to an owner to dispute non-payment through adjudication and thereby temporarily place its obligation to pay a subcontractor on hold for a set time frame while it sorts out the issue with the owner, the Alberta version does not yet contain such a provision, but again we anticipate that the Regulations may address this practical step.
A "proper invoice" is defined in Bill 37 to include basic and accurate information regarding the parties, the project, the work performed and the contract. The owner and contractor will be able to agree on some details for the submittal of an invoice, including additional deliverables, but this must be set out clearly in their contract.
All parties to the construction project will need to ensure that their invoices meet these statutory requirements.
Importantly, the 28-day payment clock does not start until a proper invoice, as defined, is received.
Owners, contractors, and subcontractors will be able to dispute all or any part of an invoice, but they will need to provide a written notice of non-payment and dispute within 14 days of receiving the proper invoice from a contractor or subcontractor. The notice of dispute must be in a prescribed form and set out all of the reasons for not paying. A notice of dispute by a contractor will not allow a contractor to assert pay when paid. Further, any undisputed amounts will have to be paid.
If the notice of dispute is not delivered on time, a party must pay the full amount of the proper invoice during that payment cycle.
Fast track adjudication
The Act creates a 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. Under the Act, parties to a construction contract will be entitled to refer a dispute to adjudication that flows 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 available to all projects to which the Act applies.
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 dispute unless the parties to the construction contract/adjudication and the adjudicator agree otherwise. Currently, the parties to the dispute will have the opportunity to agree on selection of the adjudicator. The appointment of an adjudicator will only occur upon lack of agreement by the parties.
In the Ontario Construction Act, many of the procedures and timelines for adjudication are set out in the text of the statute. In Alberta, it seems these will be set out in Regulations that have not yet been issued. We will be publishing a Building Brief on adjudication soon.
Pre-approvals and pre-certification prohibited
Issuance of a proper invoice cannot be made contractually conditional upon prior certification of a person or prior approval of the owner. Consequently, certification by the project consultant cannot be a condition precedent to issuing a proper invoice. However, certification can be a requirement of payment if set out clearly in the payment terms in the contract. Certifying consultants will have to provide their review and advice within a time frame that will allow the owner or contractor to meet its obligations under the Act as the issuance of the invoice starts the 28-day payment clock. In particular, the notice of dispute has to be provided within a 14-day window of receipt of a proper invoice.
Consequences of Non-Compliance
If a party fails to pay an invoice when due under the prompt payment rules, statutory interest or the interest provided for in the contract, whichever is greater, will accrue and become due. If a party fails to pay when due after the non-payment is adjudicated, the party will be entitled to exercise is contractual rights, such as suspending work or terminating the contract.
As Bill 37 still needs to be debated in the Legislature, public consultations and the applicable Regulations developed, we anticipate that there may be more changes, and definitely will be more details, to be announced before the new legislation becomes law.
The transition rules for prompt payment are important to understand. Essentially, if a contract or subcontract is entered into before the Builders' Lien (Prompt Payment) Amendment Act comes into force then the prompt payment (and adjudication) rules will not apply. In other jurisdictions, this grandfathering includes any step in the procurement process and the rules of the prime contract between owner and contractor applied to all subcontracts.
Are you ready?
Prompt payment will undoubtedly realign the risk of non-payment in the construction industry in Alberta. Ideally cash will flow more quickly out of owner's bank accounts to contractors and then on to subcontractors.
However, there are many more issues for construction parties to consider:
- Are your contracts updated to reflect the new regime, both the timing and certification rules?
- Who in your organization needs to know about the new prompt payment rules (accounting/payables, procurement, asset management, etc.)?
- Are consultants prepared to certify completed work within 14 days before the owner must deliver a notice of dispute?
- Who is responsible for preparing notices of dispute?
- Are your payment and accounting systems set up to handle this? Are they set up to pay the undisputed portion of a proper invoice, or only whole invoices?
- If you are a contractor, if the owner doesn't pay you, are you prepared to either pay trades out of your own pocket or commence an adjudication against the owner?
Prompt payment, along with adjudication, is coming across Canada. The Federal Government, and the Provinces of Ontario, Saskatchewan, and Nova Scotia have already introduced prompt payment and adjudication legislation. Several other Provinces are considering their own legislation.
Gowling WLG can assist you to get ready
Gowling WLG has been involved in prompt payment debate in Alberta since 2013. We have been deeply immersed from the start in the prompt payment legislation in Ontario and have working knowledge of its impacts, both pro and cons. We would be pleased to share our insights with you to help you understand what is coming and how to be ready by suggesting changes to your contracts, reviewing processes and policies, drafting new template forms and checklists and answering any questions you or your team may have. We are planning educational events and workshops, and additional analysis of the impact of the amendments introduced by Bill 37, as well as the development of the Regulations over the coming months to keep our clients and industry contacts informed of these changes.
We would be happy to meet with you or your organization to discuss your questions and concerns about Bill 37 and the Builders' Lien (Prompt Payment) Amendment Act. Feel free to contact a member of our team at your convenience.
Please sign up to our Building Brief distribution list or check our Construction Law Reforms website "hub" to stay current with all Bill 37 developments.