Are you ready for Bill 142, Construction Lien Act Amendments

Ted:    We're going to get into everybody's favourite statute right now. Bill 142 – Construction Lien Act Amendment Act 2017. This is now coming very close to reality for our lives in the construction industry. Suddenly everybody's perking up and paying a lot more attention than they have for the last couple of months as we gear up. For those who are not aware, just a bit of brief background on this. The Act received royal assent and became law on December 12, but it's being phased in two stages, essentially. There are a bundle of changes that are coming that we loosely refer to as the modernization changes. These are coming into force July 1. This is very close now. These are changes, updates, modernization pieces, amendments that have been needed, tweaks, to the statute, which hasn't really been significantly updated or amended since it was enacted in 1983. There's been a few changes in the construction world since then and these are catching up to a lot of that. The second piece is the real culture shift that we're going to have next year. This is prompt payment and adjudication. A fast track dispute resolution tool for resolving payment disputes. Those pieces are coming in next year, October 1, 2019, and we'll talk a little bit about the transition rules because they're a bit tricky to understand, and important to understand. But those are the two pieces coming in and we're going to start talking about those in a minute. 

    Part of the modernization pieces, prompt payment and adjudication, obviously bringing in a lot of things that are not lien related. In fact, the Act is now going to be called the Construction Act to reflect the fact that while it's always dealt with things that are not just liens, it's really going to be a Construction Act. It's dealing with a lot more things than just lien rights and lien procedures and they've changed the name to reflect that. The grandfathering rules were introduced when the Bill reached its final reading in legislature. So fortunately, initially there was not going to be any grandfathering, so if you had heard that you had to get going and adapt for existing projects, they changed that rule with an amendment to Bill 142, in December. Any existing project, and that's pretty broadly defined, is going to be grandfathered and will continue to be governed by the current rules. By existing project, they define that very broadly, fortunately. Anything that has a shovel in the ground, a contract signed, an RFP or a tender already issued, or even any kind of procurement  process that's already been initiated, you will remain in the existing regime, if those were launched, if the procurement process was launched before July 1. 

    There's a question of what does procurement process mean. There's a little bit of guidance in the statute, but essentially the general sense is if you have a procurement process, a qualification let's say, request for qualification, out there in the market and it's specific to a specific project that project will be grandfathered and continue under the current rules. If it's just a general request for qualifications to put contractors or other parties on a panel or approved contractors list, but without a specific project in mind, it's probably not going to be sufficient to grandfather that project into the existing rules. We do have to pay attention. Master Sandler recently issued a notice to the sector, and at the OBA we sent out a notice to all members, announcing that the Master's Courts will expect affidavit evidence from parties showing which regime they're in, so that we can proceed more clearly. I'll get your question in one second. Just also when you're grandfather, when you're project is grandfather or not, that applies to the whole regime. The whole construction pyramid. You're not going to have split regimes in the construction period between contractors and sub-contractors and sub sub-contractors. Question at the back?

Audience:    I missed you talked about grandfathering. When did the grandfather date, if I put something out for an RFP, say July 2, would that be the grandfather date, or?

Ted:    July 1. So anything issued July 1 or after, the new modernization piece of the rules will apply. The second round of transition period will be October 1, 2019, for prompt payment and adjudication. 

Audience:    Thank you.

Ted:    Okay. So there is a lot going on with the statutes. Gowling has been very involved in this from the beginning. We've published a lot of articles and we've had many events. This particular event is being recorded so that we can put it onto our website. We've actually collected all of the materials that we've done and all of the events that we've already hosted and that we are planning to host, on to a Construction Lien Act website that we've created, our hub, for Construction Lien Act reforms, which you can go visit and encourage your other colleagues to go and collect additional information if they aren't able to attend our events. 

    Getting on to the modernization piece, generally I look at these changes and I kind of put them into three buckets. There's a whole bunch of changes, which are just kind of learn it, know it and remember it next time you get into a project. Not a lot of complexity to it. Little change in the definition or what have you and move on. Then there's a bunch of changes that will require some sit back and thinking, "Okay, do we need to change our documents to reflect this? Is there some tweak that we need to do in our procedures or certificates or anything like that?" Then there's a few changes that are really quite monumental and require organization. Really step back and think, "Do we actually need to buy some document management systems? Or do we have to do some more training? Or do we have to actually go out and hire somebody to manage this new process? Because they're quite more significant and involved". A lot of the changes, and there are a lot of changes that are coming, fall into the first bucket, fortunately. But there important to know and I think a lot of the focus in a lot of the programs that I've been to, or articles that I read, focus on the prompt payment and adjudication piece because they are big and they do involve a lot of changes in the industry and different organizations. We flipped it around and we're going to focus today on starting off on the modernization pieces and reforms because those are coming soon. There's a lot of them and we're going to cover some of the more, I think, important ones. But it does merit some good sitting down and reading through of articles or whatnot to cover all of them because we just don't have the time to cover all of them. Bill 142 came out of a report, an expert review report that was provided to the province that made 101 recommendations. Actually, in fact, within that there is even more recommendations. So we have a lot of changes to grapple with and I think we just need to get right into them and start off.

    As many will have heard the lien periods have extended. As Natasha mentioned, we now have a 45-day lien period from substantial performance, last day of supply or abandonment. We now will have a 60-day lien period from substantial performance, last day of supply or abandonment, and we're also adding a fourth criteria from termination. That 45-day period of preservation of your lien rights is now extended by 15 days to 60 days. Part of the idea here is to give parties more time to work out disputes, settle change orders that are not agreed and avoid bigger disputes and lien claims during that period. It was thought that 60 days would be more adequate time. You're talking about two payment cycles, roughly, there and so that's more time to work out disputes. 

    Similarly, the perfection period, so the preservation period is when you have to file a lien claim, are on title, go in and register that against title to the property. The next step to keep your lien rights is to actually issue a written notice of lien to the owner. This period, which is currently 45 days from the end of the first 45-day period, is now extended to 90 days after the end of the lien period. That's a total of 150 days before claims really have to get going and lien claims are fought out. Again, that is giving parties a lot more time to work out disputes and changes in the effort to avoid going to court. If you have procedures and documents that refer to 45-day window of payment of holdback, or if you've got systems where you're checking title on the 45th day, you're going to want to change those to update to the current, the new time periods. And do you have extra cash flow in your organization for those extra 15 days? Because we're now two payment cycles out. And do your contracts need to be updated to reflect the new regime? I get asked often, "Do the standard forms CCDC contracts need to be updated for all the Bill 142?" In some ways they don't because the CCDC documents, if you use them, you know they're national documents. These laws are all just Ontario and so they are designed to be a little bit generic. They speak to the end of the lien period as opposed to a specific 45-day period. But if you do have supplementary conditions, as many people do, or you have your own standard form documents and they refer to a 45-day period, you're going to want to go back and update those for sure. A lot of people have their own systems internally for tracking lien time periods, you're obviously going to want to update those to 60 days as well. 

    There are a number of changes to the holdback regime. Not just the pushing back to the 61st day. Right now the Lien Act actually does not stipulate that you must pay the holdback. It simply says that the owner is not allowed to pay the holdback until the end of the lien period, which is 45 days now. We will now have a rule that the owner must pay on the 61st day the holdback. So this is now a mandatory obligation that cannot be avoided in contract, and the owners will have to comply and pay on that 61st day, at the end of the lien period. That's a big change for a lot of people. The current regime allows you to set off against any holdback. You've always been allowed to set off for deficiencies or other claims that an owner might have against a contractor. That doesn't change, but what does change with that is now you're going to have to actually give a formal notice. It's in a prescribed form. If you, as an owner, are intending not to pay the full amount of the holdback to your contractor, you're going to have to issue a notice, publish the notice and it has to be published 45 days after substantial performance. This is actually a bigger change, frankly, then the mandatory payment, I think, because owners, if they miss this date, they have to pay the full amount. Even if they have deficiency and off set claims. Owners have to pay attention. They have to get their mind around what amounts of the holdback are in dispute, issue the notice, and of course, the notice is published so all the sub-contractors on the project are going to be aware of it as well. The idea here is we're going to put all our cards on the table. We're not going to have any last minute surprises with the extended lien periods and the requirement for a published notice of non-payment. We're trying to avoid that perennial stand-off at the end of the project where contractors want payment or else they'll lien and owners say they won't pay if there is any liens. We're tilting it a little bit in favour of the contractor here because they're going to know how much money they're going to get and whether there is something in dispute. 

    We also have an extra 20 days as a result. Once we know what the situation is in terms of how much holdback is going to be released we know what money's coming and we've got that 20 days to settle the disputes with knowledge. Obviously we'll have to check our contracts and make sure that to the extent that they have anything other than a payment the day after expiration of the lien period, those contracts will have to be updated. The publication has to go into a daily construction newspaper. Right now that's only the Daily Commercial News. 

    Some other changes on holdback. Right now the Act only allows an early release of holdback if a sub-contract is fully completed and the owner and contractor agree or the architect certifies that the sub-contract is fully completed. Part of the whole exercise here with these amendments is to get cash flowing in a project quicker. One of the things they've done is they've said, "Well, look. We have large projects that go on for years and we have large projects that have multiple phases that really are almost full projects onto themselves. So we're going to allow parties to release holdback early, on an annual basis, and on a phased basis. "If the project is a large project over $10,000,000.00 and there's no liens registered on title and your contract explicitly allows for the early release of holdback, then you'll be allowed to release holdback on an annual basis on a calendar year, or on a phased basis. In other words, if you've got milestones, we're going to release holdback and explicitly say in your contract, we're going to release holdback at the completion of the pouring of the concrete. We're going to release holdback at the completion of the podium of the tower and we're going to release holdback when you complete floors 1 through 6 of the condo above it. Then holdback on floor 7 through 10. You'll be allowed to and release holdback early for those contractors and sub-contractors who are on the project, more or less, from the beginning all the way through to the end. This is going to free up a lot of cash on the holdback for the benefit of sub-contractors and suppliers in particular. But it must be explicitly in your contract and there can't be liens when you release that. 

    Another change they're adding, right now they current act looks at a project and kind of defines a project by virtue of a contract, through the prism of a contract. If there's one contract between an owner and a contractor then we're going to treat that as one project. Any work under that one contract is deemed one project, which means there's one date of substantial performance, one date for the expiration of the lien period and one date for holdback release. But the reality is, more and more, we have bundled projects, especially on big infrastructure projects where the owner will hire somebody to do more multiple improvements on different lands and really they're stand-alone projects in a lot of ways. Two or three schools will develop or hire somebody to come in and install brand new HVAC's in all of their different buildings. If it's one contract you have to treat that as one project. There will be a new rule that will allow you to treat each of those projects as separate contracts for purposes of the Act, which means you've got a separate substantial performance date, separate lien period and a separate holdback release date for each of those separate projects as long as they are fully separated lands, non-contiguous lands, is the language that's used, and you've spelled it out in your contract that you're going to do that. Again, we'll be able to release some funds earlier and get cash flowing on the project sooner with these rule changes. 

    What's not clear though, to me, is what happens when those terms in the contract aren't passed down fully to the sub-contractors and suppliers. I'd like to flag this because it's not clear to me how this is going to work out in reality on projects. The statute says that the owner and the contractor can do this, but what if the contractor doesn't pass down that express permission, or definition, of different projects in their sub-contract and you've got one supplier, or one electrical contractor, who's doing all the work on all these different projects? How does that play out in reality when that sub-contractor doesn't get paid? Do they have a claim against all the properties or just the one for which the work was being performed? That's not perfectly clear to me at this point. It's something to pay attention to. 

    Some new trust accounting rules. This is actually a subtle change that I think goes under the radar for a lot of people but it actually could have a very big impact for a lot of different organizations. Right now the Act specifies that anybody who receives any money on a project that's payable to somebody else on the project, there's an automatic and statutory trust that applies to those funds. There's not much else in the Act than that. It's essentially relying on hundreds of years of case law that says once there's a trust you've got all sorts of common law obligations, fiduciary obligations with those trust funds. You can't use the funds, for example, other than for the purposes they're intended. You can't take those trust funds and go pay off your mortgage or go pay off your debts on another project. You have to use them for the project, so that rule has always been there and that doesn't change. What does change now is that contractors and sub-contractors will now be obliged to put those trust funds into a trust account. No longer will you be able to hold those in your general operating accounts and, secondly, once it's into the trust account you have to apply trust accounting rules and bookkeeping procedures. You have to treat all the funds. You are allowed to have one trust account as an organization for all of your projects. You don't need to have a separate trust account for every project but every dollar that's in that trust account you need to keep separate books for. The idea here is to keep your funds traceable. This is a result of 10 years of a bankruptcy case law where a trustee in bankruptcy has come along and said, "I see a lot of money in this general operating account. I can't tell what's a trust fund and what's just general revenue because it's all commingled and so I'm going to take it all." Notwithstanding that some of its holdback, or other monies that are owing to a sub-contractor= because the funds are commingled and because federal bankruptcy laws have paramount over the provincial construction laws and priority rules in the Construction Lien Act, the trustee's been able to do that and the courts have enforced that. The attempt here is to segregate out as much as reasonably possible, the funds, so that they're a lot more traceable. There's a lot of concerns that arise from that. Certainly with smaller contractors, are they ready and aware of this need? Have they set up the trust accounts? There is a lot of concern in the lending world about just how strong the receivables are and are they taking the right reserves for this? There's a concern that borrowing basis have been calculated based on receivables that included trust funds, perhaps. Now that's going to be a lot harder to do. What is the real financial strength of their borrowers? There's certainly a lot of concern that contractors, especially smaller contractors are just going to ignore the rule. Remember, every payment to a contractor is included, both fees and profits that they get to keep, as well as trust funds. How much of the fees are in these amount and what are they doing with them? That's going to play out for a little while. I think we're going to see a few cases, and then people will start to wake up to the reality and will start to evolve best practices, I would expect, that dictate owners will want to pay directly into trust accounts rather than to operating accounts or other procedures that protect them from claims from sub-contractors who won't get paid. I've just put this up just to show you the rules are at 8.1(1) for the trust accounting rules. We don't need to go through that here but this is an important one to note. Are you ready for accounting on these trust funds? Are you ready with your trust account? Ready for the new projects coming after July 1. 

    Anybody work in the P3 world here? A few hands. So, right now because of this rule I mentioned before, one contract, one project, that also means one owner. Typically we kind of don't realize in the P3 world that ProjectCo is actually a contractor under the Act and the design build contractor's actually, technically, a sub-contractor. Because ProjectCo doesn't have an interest in the lands and so by virtue of the definitions of the Act they're actually a contractor and not the owner, even though they really are the owner of the project. A small change but a fairly significant one for P3 projects is that the Act will deem ProjectCo, a special purpose vehicle established for the purposes of that project, to be an owner for the purposes of the Act. Even though they don't have an interest in the premises of the project. That will clean things up a bit in how P3 projects work with the Act and have a better tie in with the Act and how the completion and progress of the construction. To the extent that anybody tried to fix this in their own contracts you'll have to catch up on those as well. Make changes to your documents and forms. 

Ted:    Okay, so moving on. We've got a few more things on the modernization piece then we'll talk about prompt payment. Just so everybody's aware the slides will be distributed to everybody who's given us your information. There's a lot of information and a lot of detail in these slides highlighting sections and language of the statute so you'll get that. We're just trying to highlight the key points, key changes, for you. 

Anybody a landlord or due work on leasehold improvements here? There are some new rules that are coming applying to leasehold interest. Right now the Act does not automatically give a lien right on the underlying fee simple, on the underlying premises of the landlord, when you're doing construction work for a tenant. There's a process that that can happen but it doesn't happen automatically and the landlord has the right to discharge, or avoid, any kind of liens attaching to its premises. That won't be the case anymore when there is any kind of funding or a credit or rent abatement for leasehold improvements. Typical tenant improvement allowance will automatically trigger lien rights for the benefit of the contractor on the premises of the building. That's a very new change and it also ties in with section 39, Disclosure Obligations. Landlords who provide leasehold improvement funds of any kind, and that's very broadly defined, will also have to answer to contractor's request for information about the status of the lease and the payments for that leasehold improvement. That's a bit of a change for landlords. 

As Stuart mentioned, and clear from some of the things we've been saying, there is a much heavier use of forms. There's actually 18 brand new forms that are created. A lot of these have to do with these notice of non-payment and certainly with the prompt payment regime. But it is a more formal and formulaic prescribed form statute now. Including a new notice of lien form. Right now notice of lien does not have any kind of prescribed form and it's often a question of whether this letter I received is actually a notice of lien or not for the purposes of the Act. That's now going to be a prescribed form so you'll know very clearly whether it is or not. If you have adopted or used or incorporated into your systems and documents any of the existing standard forms that are part of the statute you'll have to update those. Even if it's just to reflect the fact that the name changed. Every form is going to be have to be updated for that and for other reasons. 

Other relevant changes, as I said there is a lot of changes, we've listed some of these here. I didn't mention earlier, as well, the definition of substantial performance is being changed slightly. It's being updated. As those who are aware section 2 defines substantial performance with two tests. One is a functionality test. Is it ready and built for the intended purposes and that doesn't change. The financial threshold test, though, which is based on a contract value, that moves up from $500,000 tiers to $1,000,000 tiers to reflect the fact that there's been a little bit of inflation since 1983. 

I mentioned this one earlier. The notice of termination. Expiration of the lien rights is tied to the last day of supply of any work or materials, substantial performance or abandonment. They are now adding termination. But to make that work, for calculating lien period, they now require a notice of termination. This is a notice that is actually not just delivered to an owner by a contractor, or an owner to a contractor, it also has to be published. So it's designed to start that clock ticking and so it needs to be published so sub-contractors are aware that the lien period has started and the clock is ticking. But there has some clear unintended consequences of that. Right now you can have a dispute and often you'll have a negotiation settlement period. Somebody's going to throw down a notice of termination at some point and then it escalates finally up to the CEO's of the company. They come to the table. They work things out and then everybody gets back to work, sometimes. That's not going to happen anymore because you've now published to the world that this contract has been terminated. It will de-leverage the use of any kind of threats of notices of termination because once you've published a notice your sub-contractors aren't coming back to the project site, your lenders are going to start to accelerate any borrowings and trigger any defaults under their lending agreement. You're really cornering yourself once that notice gets issued. Liens will no longer attach the premises within municipalities starting on October 1 of next year. And they won't attach the public highways. There's some procedural changes for notice of liens on condominiums. An easier way for unit holders to discharge. I'll just highlight. Part 8 of the Act deals with all of the different construction dispute procedures. We're not going to get into the details here. First of all, most of those rules and procedures are moved into the Regulations so they're more easily updated later on. If you're looking for them you've got to look for the Regulations. But there are some changes there too. You can now combine without the need for leave of court. You combine a lien claim, trust and a contract dispute claim. You can bring some lien claims in small claims court now. And construction claims are going to be case managed. There are a number of changes to procedures for claims and there are also a number of technical amendments, as I said, forms and different processes. There are a lot of changes and it does merit having a look at those if you're deeply involved in using the Construction Lien Act regularly. Certainly, I think, a lot of this is only going to be learned in the real life project when you're faced with the actual consequences of a claim or any procedure. 

We rushed through some of those changes at the end. As I said, some of these are summarized in the slides, some of them are in our materials that are on the website, but there are a lot. Most of those will need to be learned but once you've learned them there's not a lot more. You'll just have to move on and that'll be a part of our new world. 

I do want to get onto prompt payment because this is a regime change. This is going to be culture shift. Essentially, there is a new bottom line in construction projects. Owners are going to have to pay within 28 days of receiving a proper invoice and contractors will then have 7 days to pay their contractors once they've been paid. Canada's a bit of an outlier when it comes to prompt payment. Most jurisdictions out there, 49 States in the US, Australia, UK, France and others have some form of legislated payment regime for construction payments. We will now have that in Ontario and I can tell you if you work nationally it's coming across the country. Already there's a senate Bill, federally. There's a private members Bill that was introduced a couple of weeks ago in Manitoba. Three provinces have law reform commissions looking at this and others have committees or other sorts of review of prompt payment regime that's been introduced in Ontario. My view is that within 5 years we're going to have prompt payment and possibly adjudication across the entire country so we need to get ready for it even if you're are looking at projects outside of Ontario. 

First of all, does this apply to me? Yes. It applies to everybody. It applies to everybody in the construction pyramid. All types of projects, public, private, conventional, P3 projects, new build, repair, your home bathroom renovation to the construction of a hospital. These new rules will apply to everybody. All sizes. There was some attempt to exclude small projects and very, very large projects. The government decided nope, everybody's in. These will apply to all payments made under contracts entered into or after the day the prompt payment provisions of the Construction Act come into force, which will be October 1 of next year. 

Can you exclude payment provisions? No. These are mandatory. They're binding. You are allowed to structure your payments. Instead of having monthly progress payments you are allowed, for example, put milestones into your contract. If it's defined clearly in the contract that you've got milestones, and you've got criteria for determining when those milestones have been completed, that's okay. Once those milestones have been completed though that's when the clock will start ticking. The 28 day clock. That's how that will work. What you're not allowed to do is require a certification of the work or an approval by the owner of the invoice, or a draft invoice, before it gets submitted. This is a bit of a change. We often see, especially when project financing is involved or some other large project, we'll see the draft invoice has to be submitted first, owner approves it or the work gets certified by the consultant and then the final invoice is submitted and then the clock starts ticking. That's reversed now. You have a proper invoice that gets submitted without the certification or approval beforehand. That happens within that 28 day period. That tightens things up very tight like. 

Let's break this down a bit. First of all, it's a proper invoice. This is a defined term. This is one of the places where the Province decided not to legislate a form of invoice. They do leave that to the parties to negotiate what other conditions and criteria, WSIB certificates, insurance certificates, whatever you want. That's all allowed as a condition for submitting your invoice. But there is a definition, a description, of what a proper invoice must at least include as a minimum, so you want to make sure you're complying with that. Secondly, an owner is allowed to dispute payments they just have to dispute within 14 days of receiving that proper invoice. If they want to shortchange on an invoice because they think there's deficiencies or the work hasn't been completed fully, to the extent the contractor claims, that's fine but they need to provide a notice of non-payment within 14 days of receiving their proper invoice from the contractor. Not only that, but they have to issue this notice in the prescribed form. It can't be just an email or a letter and they have to state all their reasons and they have to give details. That will become important in the adjudication that Mark's going to talk about in a few minutes. If you've not included all your reasons and you try to introduce new reasons in front of an adjudicator I expect the adjudicator will say, "I'm not listening to you." and you're stuck. Now this doesn't mean you lose your right to dispute a deficiency if you miss the time period. You're just going to have to pay, if you miss that 14 day window, at the end of the payment period you're going to have to pay the full invoice and raise the set off on the next invoice cycle. So it defers but think about it for a second. If you've got some kind of project funding, and you miss your notice and you find out on the 20th day that you've got a deficiency, your lender's not going to advance the funds but you're going to have a payment obligation. So you've got a real gap there and you've got to find the money somewhere. It's not good enough for the lender to say, "Well, just pay me the full advance now and then we'll draw a shorter amount next month." because the lender wants to know the works been done properly. So we've got a bit of a gap there. 

And you must pay any undisputed portion on that 28th day. So if you don't get your notice in, or if you're disputing only 25% of an invoice, you still have to pay the balance of what you don't dispute. Similar rules to apply to the contractor. First of all, if they are paid they must their sub-contractors within 7 days unless they deliver their notice of non-payment within that 7 day window. And a bona fide reason for not paying is that I haven't been paid. Or I've received a notice of non-payment from the owner and so you're not going to get your money either. Their notice is in prescribed form as well and they have to set out all the reasons. Sorry. That should say the 7 day and not 14 days. They also must pay any undisputed amount. 

It seems like pay when paid and that's what the Vogel Reynolds report had recommended but, in fact, it's not quite a true paid when paid. For contractors, if they get paid, they have to pay within 7 days. However, if they don't get paid by their owners, there's a 35 day period that starts from their proper invoice, at the end of which they have to either pay their sub-contractors out of their own pockets, or they have to start a fight with the owner. They have to commence an adjudication. So that's a bit of a change and it puts pressure on the contractors and the likelihood that we'll see a lot more adjudications so contractors can avoid the obligation of pay. 

There is a definition in 6.1 of a proper invoice. We don't need to go through that there but that is the definition. You'll want to make sure that any form of application for payment or invoice you have meets with that description. I'll point out item 7. Any other Information that may be Prescribed, when the Regulations came out nothing else was prescribed so you're just looking at the whole definition there. 

So what happens if you don't pay on time? Either a contractor doesn't or an owner doesn't pay within the stipulated times. First of all, interest is going to start to accrue. Statutory interest at a prescribed rate in the Courts of Justice Act. You are allowed to agree to a higher amount but you are not allowed to agree to a lower amount than what's in the Courts of Justice Act. Secondly, if you don't pay, and you go to adjudication and an adjudicator renders a decision, a determination, and you still don't pay, you're giving your contractor a statutory right to suspend work or terminate your contract with costs. And certainly costs for remobilization as well. So we now have the contractors and sub-contractors with a very powerful statute enforced rule and right to terminate if they're not paid. This can't be waived in contract. 

That's prompt payment. It's very tied up with adjudication so now we'll move to Mark Crane, my partner Mark Crane, who's at the back coming forward now, who's going to talk about adjudication for the next couple of minutes. These rules, prompt payment and adjudication, are coming in next year. These are the kinds of things that we think need some very thorough looking at. After Mark speaks my partner Chris Stanek's going to step up and start to talk about some of the practical things that organizations need to think about when it comes to prompt payment and adjudication and all of the other changes. 

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.