From Bids to Bricks Part 4

AARON HUNTER: Welcome to the last session of From Bids to Bricks. I'm Aaron Hunter from Gowling WLG, and I'm filling in for Jessica Foster today. And I'm here with Kyle David from Aon. And welcome to this virtual-only session today. Thank you very much for making the time to be here. I think, looking at the weather today, it was a good decision for us to switch it to a virtual-only format.

Today's session is called Nailed it! Construction Act amendments regarding prompt payment, adjudication, and bonding. So title is pretty self-explanatory. A few notes before we get started-- just a reminder, if you miss anything today, you will find the recording and materials posted on our event portal about a week after the session. And you can share those materials with your colleagues who aren't able to join today.

There is CPD CLE credit for the session. It's accredited for up to 1.25 substantive hours. And in connection with that, you'll see a survey. You'll receive an invitation to do a survey after the session. Please take a moment to fill it out.

We're going to start today with our insurance-related segment. But prior to that, I want to take just a moment to introduce my partner, Chris Stanek, who will be presenting toward the end of the session on adjudication. Chris is a partner at Gowling WLG, as I said, and one of the leading litigators in the firm's Toronto office. Chris has a particular experience and expertise in disputes involving land, including construction, leasing, and real property disputes.

Good morning, everybody, and welcome to session four. I hope that you've been with us for the prior sessions. But if not, thanks for joining this morning. What Aaron didn't mention is that he will be also presenting this morning on prompt payment. So I'd like to give an official introduction. Aaron Hunter is a partner in Gowling WLG's infrastructure and construction group and has extensive experience in structuring, drafting, and negotiating complex commercial contracts, with a focus on the development of major capital projects.

With that, we'll be kicking off with the surety and bonding portion of the presentation. So I'd like to introduce my colleague Preya Prashad, who is a vice president in Aon's National Security and Performance Security Group. Preya brings more than 15 years of experience in the surety industry, having worked across multiple markets, with a strong focus on supporting clients throughout Ontario. Over to you, Preya.

PREYA PRASHAD: Thank you. Good morning, everyone. Aaron, if you don't mind, we can move forward a few slides. Next slide, please. Hi, everyone. Good morning. As noted by Kyle and Aaron, my contributions for this morning's presentation will be to provide a very high-level surety overview, which may be a refresher for some or most on the call for the later items in the agenda.

Going through the agenda, we're going to go through an overview of, what is the difference between surety and insurance? Who are the parties involved in a surety relationship? What is involved in the underwriting and risk management in the surety relationship? Purpose of the bonds. And what are some types of contract surety bonds? Next slide, please, Aaron. Thank you.

So surety versus insurance-- what is the difference? First, what is a surety? A surety is a company who takes responsibility for another's performance. For our discussion purposes, that will be for the performance of a construction company. So the main distinctions between surety and insurance are the parties involved. I'll get into the definitions of the various parties involved, so I'm just going to go over very briefly who those parties are for name familiarity.

Surety has a three-party arrangement. It has the principal, which is the construction company. It has the surety, which is an insurance company. And then it has an obligee, who is the owner of the construction project. Whereas, insurance has two parties involved-- the insurance company and the insured.

The purpose of surety is to guarantee performance or compliance, whereas insurance is to protect the insurer's risk. Who is protected under a surety bond is the obligee, whereas for insurance, it's the insured. Risk assumption under surety remains with the principal, whereas insurance, the risk is transferred to the insurer. If there is a claim situation under surety bond, the claims are first initially paid out by the insurance company, but then is expected to be reimbursed by the principal.

Whereas, for insurance claims, it's paid by the insurer with no expectation of reimbursement. And last but not least, premiums-- surety bonds are fees per bond. Whereas insurance, you have a policy, and you pay either a monthly or an annual premium. Next slide, please, Aaron.

And this is just a quick visual depiction of the parties involved. So as we noted, it's a third-party arrangement. The principal has a facility with surety. And that is secured by something called an indemnity agreement. It's essentially to indemnify the surety should a loss arise.

The principal is a construction company, so that could be a general contractor or a mechanical, electrical, or any sort of subcontractor. And surety issues the bonds in favor of the principal-- on behalf of the principal, but in favor of the obligee. Next slide there, Aaron.

So the surety issues the bonds. The surety issues the bonds on behalf of the principal, who has the contractual obligations between the principal and the obligee. The principal is responsible for fulfilling those obligations. But if they do not fulfill those obligations, and they're in default, the surety takes a position to step into the place of the principal. The obligee is the project owner, so that could be anything from a next tiered contracting company, so a general contractor, to a government agency, such as municipality or a city for that instance. Next slide. Thank you.

So the surety underwriting process-- the surety relationship is a facility extended, and it's a continued relationship between the contractor and the surety. It's not typically done on a standalone basis for a project by project basis. Rather, it's a longer-term relationship. And with that, there's a benefit of continuous knowledge learned over the course of the relationship, financial information that's disclosed between the two parties.

The surety underwriting process as a result is very comprehensive. The surety is conducting the risk assessment of the principal at the onset of the relationship, but throughout the duration of that relationship as well. And with this underwriting process, essentially, the surety is making decisions. And they're evaluating financial strength, construction entity, project review, and market conditions, which can usually be summarized in three Cs, which is usually what the surety notes.

So three Cs being Character, which is experience, the assessment of the people, the shareholders, the key personnel, the reputation, integrity, and track record of these individuals to demonstrate that they have an ability to execute projects successfully. Second is the Capital, financial strength of the organization. It pertains to the financial health of the construction company, its ability to manage their resources, to execute construction projects successfully, and meet their current and future financial obligations.

And third is Capacity. Essentially, that is their track record. Do they have ability to perform? Surety underwrites not just the construction company, but also the project specifically to ensure that there are resources in place and available to execute not just the bonded projects, but unbonded projects as well. Next slide there, Aaron.

Purpose of bonding-- so this can really be summarized in three main headers. One is, it's ensuring capable contractors are participating in the bidding process. As I noted, the surety does a very comprehensive underwriting process. And the benefit of that is it filters contractors to ensure only those capable of executing or participating are included in the bidding process.

Two, risk reduction for owners. Surety bonds offer assurance that the contractor is capable of completing the contract within the contractual terms. However, if the contractor defaults, the risk is transferred to the surety, not to the project owner. And third, verification of stability and experience. Sureties are essentially qualifying contractors verifying their capability and ability to execute projects successfully. Next slide, Aaron.

So there's really a few stages to keep in mind when it comes to contract surety. There's the pre-tendering and tendering stage, and then there's the contract performance stage. Under the pre-tendering/tendering stage, there's a few products, pre-qualification letters, consent to surety bids, bid bonds, which I'll get into the next slide.

The second is the contract performance stage. So that is when a contractor is successful on their bid, and they are executing a contract. What will be issued in place of that would be the performance bond, labor and material bond. And then there's two other products, such as the lien bond and holdback release that I'll talk to in the last slide. Next slide there, Aaron.

So pre-tendering and tendering stage. Under this, we have the pre-qualification letter. And what this can be viewed as is really a reference letter. It's not a legal binding document. It's a letter from a surety essentially confirming that the contractor is bondable. The second is the consent of surety or the agreement to bond. They're used interchangeably.

It is a legal commitment signed by the surety that confirms to the obligee that should the principal be awarded the job and execute the contract, the surety will provide the requisite bonds. And this is important because under Ontario, the Construction Act, bonds are mandated when construction projects are in excess of 500,000.

The bid bond. It's a financial pledge typically stated as a percentage of the tender price, which can be 5% to 10%. And this is really just confirming the bidders commitment to the obligee that they will follow through with their price submitted. Next slide, Aaron.

Contract Bonds. So there's really two main bonds that we speak of when we're talking about contract bonds, and that's a performance bond and a labor and material bond. The performance bond is a bond that guarantees performance, essentially, and it follows through to the contractual obligations that the principal has entered into between themselves and the project owner.

This is typically stated as a percentage of the contract price. Under Ontario, it's usually 50%. And there's a prescribed bond form that's in place, which is referred to as Form 32 under the Construction Act. Within this bond form, there's various other things included. It's a lengthy document.

But there's also remedies included under the surety should the principal default that are available to the surety, which include remedy the default, complete the contract in accordance with the terms of the contract obligations, or pay out the lesser of the bond penalty and what remains of as cost to complete.

The second product, Labor & Material Bond, essentially means that whoever is contributing on the project between the principal to execute will get paid. The other two items, lien bonds and holdback bonds, those are referred to as a financial guarantee bonds. There are demand instruments.

The Lien Bond essentially is required in place of a letter of credit, and it removes a mechanic lien if it has been placed on the project. The second, Holdback Bond-- it allows the owner to release holdback funds in place of the bond. And again, these are demand instruments.

And I believe that comes to the last of my slides, so it's a very brief and quick surety 101. If there's any questions, feel free to pop it in the Q&A. Otherwise, Aaron, I'll throw it back to you.

KYLE DAVID: I'm not seeing any questions at this time. But if anybody has any questions, feel free to put them in at your leisure. And we can get to them at the end of the presentation, hopefully.

AARON HUNTER: Right. Thanks, Kyle. I should have mentioned that as a housekeeping item right at the very beginning, that you can put your questions in the Q&A. And we can pause at the end of each segment of the presentation and address them. And then hopefully, there'll be some time at the end, too, for more of a free-for-all with questions on any of the topics we've discussed today.

One more housekeeping item before I get started-- as you can see, I'm presenting here from home. And there is a nonzero chance that some contractors are going to come in that back door. And if that happens, my dog is going to flip out.

And if that happens, I will unfortunately have to break away for a few seconds to deal with that situation. I hope it doesn't, but please forgive me if that happens. So now we're going to talk about prompt payment.

KYLE DAVID: Just stop you there for one second. And we just got two questions in the chat that maybe we can get to quick before we move on.

AARON HUNTER: Oh, absolutely.

KYLE DAVID: So the first question-- is there a percentage of cost of bonding?

PREYA PRASHAD: Yes, I saw that question as well. Thank you for that. So bonding-- I presume this is referring to the rates associated with bonds. The bond rate will be determined based on the financial strength, one, of the contractor, and the relationship and premium potential that a surety earns throughout the course of the life.

So there is prescribed rates when a surety has a facility with a contractor for the 50/50% bonds and 100/100% bonds and 50% and 100% individually. Not necessarily it'll be double the rate. It's typically a couple of dollars in excess of the 50/50 bond rate. The question was, what's the difference between 100% and 50% performance bond? Is the 100% bond double the cost of the 50% performance bond? So it's not necessarily double the rates, but it is a higher rate because the exposure to the surety is greater under 50% versus 50% of the [INAUDIBLE] penalty. I hope--

KYLE DAVID: That's fair. Back to you, Aaron.

AARON HUNTER: OK, thank you very much. So on prompt payment, Jess Foster asked if I would do something of a recap of prompt payment, generally before getting into the effect of the upcoming Construction Act amendments on how prompt payment works.

And at the risk of maybe going back over some of the material that my partner Ted Betts spoke about last time when he was doing a presentation on liens, I think it was in session 3, I thought it would be good to really establish the context in which prompt payment exists and why it belongs in the Construction Act and how it's consistent with the mission of the Construction Act.

So we don't always stop and ask ourselves, why do we even have a Construction Act? what the purpose of it is. And as many of the people in this audience probably already know, it doesn't say anything about how to actually do construction or what is good construction. It's all about payment and ensuring flows of payment.

Here's a little diagram that I've used before that I like showing the pyramid or the tiers of a typical construction project. And the money is supposed to, as you know, flow down in this manner. But sometimes, it doesn't. There are many reasons.

Every project is unique, but there are lots of scenarios where the money does not flow down smoothly and uneventfully in a way that satisfies everyone. And it can cause really unfair outcomes for the people who are lower down in the pyramid, especially the ones, the subcontractors, that is, who have no privity of contract with the owner and cannot make claims directly against the owner.

And just further to that, if any person in the chain, or the pyramid rather, fails or refuses to pay the person below them, it has a domino effect. And it causes suffering all the way down. And as I said, the subcontractors have no privity against the owner. So they cannot make claims directly against the owner.

And the Construction Act and other statutes like it are an attempt to build in some protections for contractors and subcontractors to deal with this long-standing problem, which has been around for as long as the construction industry has existed. And as I understand it, I'm not a legal historian, but these protections started out in the common law, in judicial decisions, that is. But they later became codified in statutes like the Construction Act, and those get refined and amended and improved over time.

The Ontario Construction Act is the latest iteration of that in Ontario. It came into place in 2019, replacing the Construction Lien Act. And prompt payment came in with that Construction Act in 2019. And now, as many of you know, there are some amendments to the Construction Act that tweak a bunch of things, including prompt payment.

And finally, we know the date. Those are going to be taking effect, along with some related regulations, on January the 1st. And these do touch on prompt payment. So there's a very quick overview or context for prompt payment as part of the overall policy purpose for the Construction Act and similar laws.

All right, so as I mentioned, prompt payments came along in 2019 with the Construction Act here in Ontario. The basic rule is that owners have to pay within 28 days of receipt of a proper invoice. And proper invoice is a defined term, which we'll get into a bit later. But just bear in mind that it's not what you or I think of as proper. It is a defined term with a bunch of different components to it.

So you have to pay as an owner within 28 days of receipt. But of course, there's an ability to short pay or not pay if there are problems with the work or other contractual issues. And in that case, the owner has to submit a or has to prepare and issue a notice of non-payment. And you can't wait till the 28th day to do that. You have to do that within 14 days of receipt of the proper invoice.

And there's a specific form that you have to use that contains all the information that you would expect it needs to contain. And if your notice of nonpayment says, we got your invoice for $10,000, and we have a problem with $2,000 of it, then naturally, on the 28th day or by the 28th day, you need to pay the undisputed portion.

And something that comes up occasionally, parties write contracts that have different payment terms than this. And that's ineffective. You can't do that. The Construction Act is going to override any attempt to contract out of it, and this will apply regardless. So I like to make diagrams of things. This blue line here is a timeline.

So on day zero, the contractor submits an invoice. Hopefully it's a proper invoice. For purposes of this discussion, we'll say it meets all the requirements for a proper invoice. And that starts the clock running, the 28-day clock. So there's the payment deadline.

These are questions I've had. Does it apply across the board? Yes, all projects, all sizes, all types, and all owners, unless-- some projects are grandfathered and treated as if they're under the old Construction Lien Act. But it's several years later now, so that's not really much of a factor anymore, these grandfathered projects. So that's why I feel comfortable saying "all." And as I mentioned, the deadline for notice of nonpayment is on the 14th day after the receipt of the proper invoice.

So there's a lot of work to do. As those of you who are in the finance function already know, there's a lot of work to do between day 0 and day 28. The first 14 days, you really need to be looking at the work itself because you have this deadline for issuing a notice of nonpayment.

But after that 14th day passes, I guess the focus changes to the logistics and the systems or processes around payment. And depending on the organization, it can be very challenging for owners to comply. There are a lot of different cooks in the kitchen or stakeholders. There might be a payment certifier or consultant who is looking at the invoice and going to approve or certify it.

There's the accounts payable function in the owners organization. There's an ERP and other systems, internal corporate policies. You need to be coordinating with your bank. And there may be lenders involved that have their own processes that take up time in this 28-day period. So it really is a team effort and has to be done in an organized, proactive way in order to comply with the 28-day rule.

And with these new amendments that are coming on January 1, it's going to get a little bit tougher for owners, in fact, because there's this new thing in the amendments that says, if somebody gives you an invoice on day 0, you only have until day 7 to tell them, no, this is not a proper invoice. This does not meet the requirements for a proper invoice.

And if you haven't told them that by day 7, it will be deemed to or will automatically be considered to be a proper invoice. So that changes the nature of the work during these first 14 days. In this first week, the emphasis, as I see it now, will have to be on looking at the invoice itself to make sure it checks all the boxes.

And then, in that second half, from day 7 to 14, then you can pivot and look more at the work because you still have that deadline on day 14 for a notice of nonpayment. So this is going to make life just slightly more difficult for owners.

Some basics here-- prompt payment applies to everybody who has lien rights. And that's something that Ted covered for you last time. I don't propose to go back over it, but it's a broad category, anybody who's supplying services or materials to an improvement.

The default understanding in the act is that payments are happening on a monthly basis. But as we know, that is not always the case. There are milestone payment structures, and you're allowed to use those. It's fine. The Act just says you have to set them out clearly in the contract. And even if you're using a milestone payment structure, the 28-day rule still applies. Like, the clock still begins on the date of receiving the proper invoice.

And another important point to note, another protection for contractors, is that the owner is not allowed to game the system by requiring a contractor to get its approval or some third party's approval before submitting the proper invoice.

So back to my diagram from a minute ago, we've talked a little bit about the first tier between the owner and the prime contractor, and how prompt payment works there. But what about this level between the prime and the first tier of subcontractors? And indeed, what about that level? So how does prompt payment work on those levels of the pyramid?

The general rule is that contractors have to pay subs within seven days after receiving payment from the owner. Now, contractors may be dissatisfied with the work that subcontractors do, so they have the same right to issue notices of nonpayment. But there's timing that has to be observed, and there's a form that has to be used.

And again, similar to what the owner has to do, you have to pay the undisputed portion. If an owner only makes partial payment, there are rules about how that partial payment needs to be allocated by the contractor as between the subs. I won't get into the weeds on that, but the Act spells out what you do in that case of partial payment.

And a question that comes up frequently is, OK, well, this sounds like "pay when paid." So we can use "pay when paid," which is what we want to do, which is what we're accustomed to doing in other jurisdictions. It's not "pay when paid." It looks like it at first glance, but I'll explain why that is not really the case.

So it's not "pay when paid," because even if an owner does not pay the contractor within 28 days of the proper invoice, the contractor still-- the default situation is the contractor still has to pay the subcontractor within 7 days after that 28th day, unless the contractor tells the subcontractor, listen, I haven't been paid. And I'm commencing an adjudication against the owner. So it's not straightforward "pay when paid."

Back to my familiar diagram. When things are going smoothly, and everybody's getting paid in full on a timely basis, so it's 28 days on that top tier, then 7 days after receipt of payment from prime to subcontractor. And it keeps going in that manner all the way down.

But as I said, it's not as simple as "pay when paid" because the default situation is the prime contractor has to pay by day 35, even if it hasn't been paid by the owner, unless it takes certain steps. And that applies all the way down.

The first-tier subcontractor has to pay by day 42, even if it hasn't been paid by the prime, unless it takes certain steps. And the same all the way down for however many tiers you've got. As you know, in a very large, complicated project, there might be several tiers. And it's turtles all the way down-- same thing.

So that's the core of prompt payment. I'll talk briefly now about proper invoices. As I said at the beginning, a proper invoice is something-- it's defined in the Construction Act. It's not anybody's subjective opinion about what a proper invoice looks like.

It's a list of required items. And I'm not going to spell it out, because it's a lot of obvious stuff, like your invoice should have a description of the work that's been done that's covered by the invoice. And interestingly, in the Act, it does have a catch-all. It says, and it has to meet any other requirements that the contract specifies.

And I've put a boring one here. I could have made up something more interesting. But if the contract says the invoice has to be sent by email to a certain person in PDF, then that's a legitimate piece of the definition of proper invoice that the owner can hold the contractor accountable for. But as I said, the owner can't prevent the contractor from submitting a proper invoice with some kind of approval or certification requirement. That would defeat the purpose of prompt payment.

And there are some things to note about the amendments coming in on January the 1st. There's some new wording that makes milestone payments a little easier to understand how they fit into a prompt payment proper invoice. So there's a recognition then by the government that milestone payments are a thing.

And there's this new requirement or part of the definition that says, you need to include any other information necessary for proper functioning of the owner's AP system. And I don't know the full background for why that made it in. I would have thought that it would be covered by any other requirements wording that you see above on this slide. But I guess the intention here is that the owner can at any time make these additional requests relating to its payment process.

And as I've already said, an invoice is deemed to be a proper invoice if you don't say anything as an owner after seven days of receipt. You only have those first seven days to identify deficiencies and say, listen, the 28-day clock has not started. This isn't even a proper invoice. You have to submit a new invoice.

And the last thing I'm going to do, especially briefly, is talk a little bit about bonding requirements for public projects. And I know there are people on the line today, in the audience, that know a lot more about this topic than me. So I'm going to limit myself strictly to the basic concept here and not get into the details or the intricacies.

And this ties back a little bit to Preya's presentation. She mentioned the bonding requirements, for public projects that is. So most of you are familiar with the general idea of performance security and the fact that there are different types. The type that we're going to talk about is, of course, the first one, surety bonds.

Usually in contracts for projects, the performance security is a negotiated item. And it's whatever the owner can get through negotiation and leverage. But when a contractor enters into a public contract, and the price of that public contract is, as Preya mentioned, $500,000 or higher, the Construction Act actually spells out what's required, steps in and says, here is the security that is required.

We should pause, though, to talk about what the definition of public contract is. I guess not surprising, it's where the owner is the crown, a municipality, or a broader public service organization. And broader public service organization is an amazingly complex definition.

But I mean, for our purposes, we can say, it's all hospitals. It's all universities. It's all colleges. It's a bunch of government institutions. But there are important exclusions and carve-outs. It's a whole thing. And it could be the subject of its own discussion, which we won't get into today. But I think we all understand the basic point that it's a contract for a public good.

So what is the requirement if there is a public contract for $500,000 or More It's a performance bond, which Preya told us about, for 50% of the contract price and a labor and material payment bond for 50% of the contract price, so two surety bonds, two different kinds, but both for that same amount.

Here's a grab bag of other points to keep in mind. The bonding requirements don't apply to architects and engineers. It's meant to be about construction, actual construction work. The owner, whoever the public authority or agency or municipality is, can, of course, ask for more security than that minimum or other types. Nothing is stopping them from doing that, but that this is the floor or the minimum. The bonds have to be in the forms that the Construction Act provides through its regulations.

So contract price and the Construction Act as it was, or as it has been, it assumes that every contract is a fixed price contract, which is, of course, not true. And people were left to wonder, well, what do we do if it's a cost-plus project or a time and materials contract? How do we know if we're going over the $500,000 threshold and bonding is required for this public project?

And the common practice evolved of just using the budget number that people had at the outset for the project. We thought, or at least I thought, that the Construction Act amendments were going to address this and put this issue to bed. But as it turns out, they didn't do that. So I suppose we're going to have to continue with this idea of using the budget number.

And finally, on this grab bag slide of things to keep in mind about bonding requirements, for P3 infrastructure projects, the agreement between ProjectCo, the special purpose entity that is, and the contractor is deemed to be a public contract, even though ProjectCo itself is not a public entity. But for the purpose of P3 projects, it's deemed to be a public contract, triggering the bonding requirements. And the contractor in that case must provide bonds for the benefit of the owner, who is the public owner or the proponent of the project, above the above the ProjectCo.

So that was a very quick look at bonding requirements for public projects. And I'm going to have a quick look at the chat now. But that's everything that I have, and I'm happy to take any questions that people have. Oh, it looks like there are some questions.

For the seven-day period, to say it's not a proper invoice, is email sufficient? Yes, so the Act and its regulations don't spell out any particular process for-- oh. I hope everybody can hear me. I'll start that answer again, just in case there was a problem.

The question was, if you, as an owner, want to say that an invoice is not a proper invoice, and you have the seven days in which to do that before it's deemed to be a proper invoice, is email sufficient? I would say, yes, because the Construction Act does not provide for any other process for doing that. There's no form that's spelled out that you need to use.

And the regulations don't touch on this. So I would say yes, if you are complying with the notice requirements in the applicable contract, and it's in writing, and it follows whatever rules are in the contract, then, yes, email would be good enough.

Regarding prompt payment, can an owner make payment adjustment in subsequent payment cycle if owner finds issues in prior payment invoice? Yeah, I would think this would be something that would have to be spelled out or contemplated by the contract.

I'm trying to think if the Act itself, including the amendments, touches on this idea of making adjustments. I would normally see that handled contractually. Or I mean, it can just be handled informally as part of the business relationship. But it's not something that is a feature of prompt payment under the law.

CHRISTOPHER STANEK: Aaron, if I can assist, what I've seen and what people often do is on the subsequent invoice, the reason for short paying that invoice can be deficiencies on the prior invoice.

AARON HUNTER: Oh, is that you've seen? OK.

CHRISTOPHER STANEK: That's what I've recommended to clients because the way that will get sorted out will be in a disputes process, because they've issued you an invoice. There's deficiencies with respect to that work. So in the subsequent invoice, your notice of short payment under the proper payment regime will include deficiencies discovered from prior invoice. And then that can go to an adjudicator, and that can be sorted out.

AARON HUNTER: Thanks, Chris. That makes a lot of sense. Just scanning down the remaining questions. Can owner make payment adjustment in subsequent payment cycle? Oh no, that's what we just did. Can a subcontract limit the frequency or timing for when the subcontractor can deliver a proper invoice?

So as I said, the contract can spell out something other than a monthly invoicing and payment cycle, and whether it's the prime contract or a subcontract. So yes. I would say, yes, if you don't want to be receiving monthly invoices from the prime contractor, if you're the owner or from the subcontractor, if you're the prime contractor, then the contract can spell out the cadence or the milestones. And that will be binding.

But when proper invoices are submitted, that's when the clock starts. And the prompt payment rules would kick in. But one thing you can't do, as I mentioned, is you can't put up artificial obstacles to the contractor submitting it's invoices once you've agreed in the contract on the milestones or monthly or what have you. So you can't require the contractor to get the approval or the certification before submitting the proper invoice.

If the contractor submits an invoice ahead of the end of the month, but based on work projected to be completed by the end of the month, OK, well, that happens. That's not unusual. Does the clock start ticking on the day of receipt or the end of the month? So great question.

I mean, on its face, the law would say that the proper invoices is-- the day that it's received is the key day, and the deadline for payment is 28 days after that. The Act doesn't say anything or doesn't contemplate the idea of an invoice that has this projection for the stub period until the end of the month.

So I mean, conservatively, I would be advising my clients that, no, it's the day of receipt. And a couple more-- I'm not going to deal with these last two or three that I see in the chat right now, because I want to make sure that Chris has enough time. Although, I will return to these if we've got time at the end when we can do a little bit more of a free-for-all with questions on all the topics. So I'm going to hand off to Chris now for his presentation on adjudication.

CHRISTOPHER STANEK: Thanks, Aaron. I'm going to answer a couple of questions here before I-- I will have enough time to be able to do this. As far as the invoice being issued for work done in advance, I think it's open to the owner, or whoever's receiving the invoice, to, again, object to the invoice and short pay that invoice if the work hasn't been done yet. I think that that's how the act deals with that.

And then the next question-- we're seeing newer collaborative contract models, such as PDB, becoming more common. How does the Construction Act and mandatory bonding for contracts over $500,000 change during the design development between DevCo and owner? That's one-- and if Aaron or Preya would like to answer that one, it's fine. I'm going to still have enough time to do my part.

AARON HUNTER: I'd like to chew on that one and think about it a bit before offering an answer. I'm not a PDB guy, so this is something I may suggest that Jess or one of the others would have a better answer for.

CHRISTOPHER STANEK: OK. And the last question in the list here, what are the main differences here between a performance letter of credit and a surety bond performance letter of credit? A letter credit is issued by a financial institution, so that. And it's enforceable according to the terms set out in it. A surety bond is a prescribed bond form under the Act.

They're both acceptable, but they're slightly different in that a letter of credit-- there's a whole bunch of rules connected with the enforceability of letters of credit in law that are not connected with the surety bond. The surety bond is simply under the Construction Act. Preya, did you have anything you wanted to add to that?

PREYA PRASHAD: Oh, yes. Thank you. And I just want to touch on LC and performance security. With the performance security, such as performance bonds, it provides the owner a different type of recourse. Should the contractor default, the surety steps into the place of the contractor. And there's various remedies available. Whereas, a letter of credit is a demand instrument. The owner does get funds, but the project is still incomplete.

Secondly, it depends on the size of the project. I'm going to speak more to private projects because I think this is probably where this question is tailored to. Why would a owner determine what performance security to utilize on a private project LC versus performance bond? It depends on the size and the leveraging. An LC typically is dollar for dollar. So when a contractor goes in, wants a letter of credit, they typically has to show that they have those cash funds available to get the letter of credit or some sort of balance sheet that strengthens to that avail.

Whereas, performance security and performance bonds, the leveraging is different. A contractor can leverage their balance sheet differently, depending on what scope of work they're doing. So it allows them to have the flexibility, one, to get to complete projects that they would not have the ability to complete if they had to have dollar-for-dollar balance sheet.

And then two, it allows them flexibility on resources. Instead of tying their resources to performance security in the form of a letter of credit, they're able to utilize their resources for their projects and for their company operations and so on and so forth. So in terms of the contractor, it's better for their balance sheet. And then two, for the owner, there's different resources under a performance bond that would not be available under an LC.

CHRISTOPHER STANEK: OK, great. So I'm going to move to the adjudication amendments. And if we can go to the next slide, Aaron, we may recall having seen this diagram at some point over the past five, six, seven years since the Act was amended in 2018. We've had adjudication with this for about five-plus years now. And this chart is a summary of the adjudication process.

Some reminders-- the adjudication process gives the jurisdiction to an adjudicator under Section 13.1 of the Construction Act. It's a statutory jurisdiction, and the adjudicator doesn't have any other jurisdiction other than what section 13.1 has granted them. And what is that jurisdiction? This is to determine payment under a proper invoice, which is why the proper invoice amendments as to what a proper invoice is matters, which is also is why the objection matters.

So if there's an objection to the proper invoice, that can't properly go to adjudication now, because the jurisdiction of the adjudicator is in question. Can that be determined by the adjudicator? Yes, I think the answer to that is yes. So these amendments, including that one, come from a review that Duncan Glaholt did in 2024, which was incorporated into a budget bill, Bill 216. We'll get to that a bit in a second.

Now, those recommendations by Mr. Glaholt were a result of what they'd seen in the adjudication process. I'm just going to go through that briefly using this slide. That comes from the notice of adjudication, which starts the process, has to be a proper invoice. The proper invoice is then adjudicated.

Originally, the idea was that each invoice would be adjudicated separately. And that led to a lot of, in my view, silly arguments. Like, for example, an adjudication that I did, there was delay claimed. And that was delayed with respect-- and my client wanted additional time and additional money. And the response was, well, you can claim for the money, but you can't claim for the time.

Those types of silly kinds of arguments are-- the adjudicater rejected that. But some of those types of things were addressed in the amendments. If you've done an adjudication, you know that it's commenced by going on the ODAC website. And then there's a form that it has to be filled out.

Anyone who's done it, as I have, the best way to do it is, of course, is to print out what's on the website, think about what you're going to put in, and then put it all in. Because on the ODAC website, once you leave, you can't go back in and finish it. Everything disappears. So you have to do it all at the same time. So there's a practice tip for you.

So once it's commenced, then you have to determine who your adjudicator is going to be. You have to select your adjudicator and your process when the adjudication is commenced. The other side gets to object to an adjudicator. And if they object, they will propose a new one.

I'm told by the ODAC people, because I've trained as an adjudicator, that most adjudicators are appointed by ODAC. Most adjudications I've done, the parties have agreed on who the adjudicator is. But once the adjudicator is selected, and you see-- you move down to the adjudicators appointed confirms no conflict after the very quick two or five business days time lag, then you get the referral notice, which includes the notice of adjudication and the documents.

Now, the documents will be either the process that's been selected when the form is originally filled out. Or just, about everybody's doing now is they pick custom process. Custom process allows the adjudicator to have the parties decide on what the process is going to be, how many documents are going to be submitted, and how long the written submissions are going to be.

There is a very clear preference in the adjudication process that everything be done in writing by written submissions. In fact, in the adjudications I've done, about five or six now, there has never been oral submissions. The adjudicators don't say they don't need them, and I don't think they want them, because I think that it makes the process longer.

So it's generally done almost entirely in writing, relying on the documents that are submitted and written submissions. And then 30 calendar days, the adjudicator, under the Act, is supposed to make a decision. Now people have been writing into their contracts additional adjudication provisions. In fact, I had one contract we dealt with, where it was an entire schedule of additional adjudication provisions was added to the contract.

Now, it's very difficult for an adjudicator to ignore provisions that the parties have agreed are to apply to adjudication. So those contractual addenda have been used to extend the time periods and to expand the rights. And it's within the jurisdiction of the arbitrator to apply-- or the adjudicator to apply those things because, again, the jurisdiction comes from section 13.1.

And what it says is the adjudicators to determine proper invoices under a contract. So the contract does and can provide the scope of what the adjudicator does in the adjudication. Once the decision is reached and issued, it's binding on an interim basis. It doesn't prohibit anybody from suing. But as you'll see in these slides, there has been some case law interpreting the impact and effect of the adjudicator's decision and how it can be judicially reviewed.

So if we go to the next slide, the amendments originally-- then these are all going to go into effect January 1, 2026. That includes Bill 216, which were the original amendments based on Mr. Glaholt's report, as well as Bill 60, which just received royal assent November 27. That made a couple of changes to the original amendment. So there were the changes in 216 and then Bill 60, the changes to the changes, all of which are going to go into effect January 1.

So if we go to the next slide, what the amendments did is it expanded the scope and flexibility of adjudication. So private adjudicators are now permitted with fees negotiated between the parties. One of the problems ODAC was having was getting qualified adjudicators because the rates were so low.

And larger projects were not using adjudication. They're, instead, going to arbitration because it allowed them the flexibility of the process. The idea behind these amendments is to try to build more flexibility into the process so that adjudication and the truncated timelines, the very short period of time in which the decision is to be made, can be available to the parties on a construction project.

So private adjudicators are now permitted. And fees negotiated between the parties-- there's now in the act two definitions. There's a private adjudicator or a registry adjudicator. There are defined terms now. Secondly, regulations to provide a broader range of adjudication issues, including cross contract disputes. Again, this is to get out of the problem where there was this very pedantic, oh, you can only have one issue adjudicated.

If the parties are willing, of course, to have all of their matters adjudicated more efficiently, the Act now allows them to do that. And now the new rule, any party can request a consolidated of related disputes. Previously in the original act-- and I used this provision twice-- the general contractor, who's in the middle, subcontractor-- it starts an adjudication. And of course, the general contractor passed the claim up to the owner. The owner denied it.

So you have the general contractor being in the middle. Previously, the general contractor could commence after the subcontractor commenced an adjudication. The general will commence an adjudication against the owner and then request consolidation. Then everything would be heard together.

Now, any of those parties can request consolidation, not just the general contractor. And certain new provisions, parties can object to an adjudicator's jurisdiction or claim they exceeded their jurisdiction. Again, one of the ways that you can object to that would be saying that there wasn't a proper invoice.

Keep in mind that the issues that an adjudicator can adjudicate are set out in Section 13.1 of the Act. And another new provision is a request for corrections to decisions allowed with five days to correct errors or injustices, which a lot-- if there's just simple mistakes, mistakes in addition, mistakes in an issue that is dealt with in the body of a decision but not-- if it doesn't find its way into a conclusion, those sorts of things, which are obvious and can be corrected, can be corrected without the need to going to judicial review.

OK, that's what was in Bill 216. If we go to the next slide, there's only a couple small changes to the adjudication provisions for changes to Section 13.4, basically as to who administers the act. The biggest changes in Bill 60 were two changes that were originally referenced. I don't think anyone's dealt with today. And they have to do with the annual holdback. Both have to do with holdback.

First of all, the ability to apply holdback to deficiencies, that was going to be removed. After, I think, some-- I get commentary, to be generous. They've now changed it in Bill 60 so that an owner can apply holdback to deficiencies if the contract is abandoned or terminated.

If the contract is not abandoned or terminated, holdback cannot be applied to deficiencies. So that's the effect of Bill 60's change to Bill 216. The second one had to do with annual holdbacks. As Aaron mentioned, there's release of holdbacks on an annual basis for long-term contracts. Originally in 216, there was this concept that lien rights would expire annually because the holdback was to be distributed annually.

And in 216, there was a hold amendment to the lien rights section. That's been changed. So now that there isn't a change to lien rights, so your lien rights exist as they did before. You don't have to lean annually when you've got annual release of holdbacks.

Your lien rights-- as they did since 1982 when the Act came in and Construction Lien Act came in, your lien rights start when the shovel goes in the ground, and your lien rights expire when you leave the site, when you're terminated, when the contract is abandoned. So those are the significant changes the way Bill 60 changes Bill 216. If we go to the next slide.

So starting January 1, parties can select a registry adjudicator, which is the one selected by the nominating, I should say, authority or a private adjudicator as defined by the Act. Any party may request consolidation, and parties can object to an adjudicator's jurisdiction and request for corrections to be within five days. I see that there's, yeah, two questions. Now, the first one-- is there a limitation period associated with the adjudication process? Aha! Let's go to the next slide.

Adjudications may now be commenced up to 90 days after the end of the claimant's contract, so terminated, abandoned, or completed. Previously, you couldn't start an adjudication if you were no longer on the job. Now, you can do it 90 days. So there is a limitation period. It's 90 days after you leave the job, which is essentially when your lien rights start. And you guys got here, parties can agree to multiple disputes.

Another question-- can an owner unilaterally decide that a contract has been terminated or abandoned? Does this apply to a subcontract, too? I think that whether a contract has been terminated or abandoned, terminated and abandoned are both terms under the Act. Because I'm a litigator, those to me are determined on evidence.

If they're still on site, then I would say it isn't terminated or abandoned. I understand that that's a moving target. Somebody left their tools on site, but they haven't shown up in a month. I think somebody can say that that contract's been abandoned. But again, these are issues, I think, to be determined each on their own facts.

And owner's unilateral determination as to whether a contract is terminated or abandoned-- while it may carry some weight, I don't think that it would be determinative as to whether the contract has actually been terminated or abandoned. And I think the same would apply to a subcontract. And are annual holdbacks required? The new provisions do provide that the annual relief that there is a requirement that holdback be released annually on certain jobs as set out in the Act.

Now, back to the slides. The next slide, adjudication amendments. If we go to the next slide. Adjudicators determinations may be filed with the court as enforceable. See, I referenced before that there has been some case law in determining the enforceability of adjudicators' decisions. Can be judicially reviewed by the divisional court.

And an appeal of an order of enforcement of an adjudicator's determination lies to the divisional court, not the Ontario Court of Appeal. That was in the Pasqualino case in 2024. So it goes to divisional court. But go to the next slide. There's a key thing here. The decision is still binding, even if it's been appealed. And that's the holding of the SOTA Dental group and Andrid Group.

In that case, the owner thought that they could avoid paying the amount that was determined by simply appealing or judicial review. What the court found is that that makes a mockery the provisions of the act. So even if you appeal or judicially review an adjudicator's decision, you have to pay it. And as you may recall, under the Act, the contractor can abandon the project and still collect. They can stop work.

So there's rights that are given here that are enforceable, that are not suspended if an adjudicator's decision is reviewed or appealed. And we've got, can the other party object to this? I'm not sure I understand. So this is our whole annual holdbacks are required if it applies to the holdback requirement, if it's in the act, no, it can't be objected to.

So the final slide is, who bears the cost of an adjudication? It's confirmed by the Bill 216 amendments. The costs are still set by the nominating authority, except if you're using a private adjudicator. Parties usually split the adjudication fee equally. I have not seen an adjudicator deviate from that in the adjudications that I've done.

Usually, the parties will bear the adjudication costs equally, even if there's been an order to pay. So that's the adjudication amendments and a little bit more about the differences between the Bill 216 and Bill 60. Anyone has any questions, I'd be happy to answer them. Otherwise, I'll turn it back over to Aaron and Kyle.

AARON HUNTER: Thanks very much, Chris. I think that we are-- oh, are there some new questions? No, I think that you are caught up to all the questions, Chris, that we've addressed everything that's come up. And in that case, it's for me to say this has been the fourth and final session in the Bids to Bricks Series. And we thank you all very much for coming along with us on this journey.

Kyle and Preya, thanks to Aon for your support and for coming together to co-chair this and make it happen. And I'll pass it to you in a sec, Kyle. But on behalf of Gowling WLG, we hope that everyone on the line here today-- we wish you all a happy and restful holiday season. Kyle?

CHRISTOPHER STANEK: Thanks, Aaron. Yeah, not much else to say that Aaron didn't cover off the plan for session model. But if you have any ideas following these sessions of anything else that you'd like to highlight or expand upon, feel free to reach out to myself or Jess. And we'll be looking at other sessions potentially in the new year. So with that, thank you very much. And thanks for joining. Have a great day.

AARON HUNTER: Bye now. Thank you.

[AUDIO LOGO]