On-demand seminar: Bill 142 - Introduction and Prompt Payment

Ted Betts

Welcome everybody to Gowling WLG and welcome back to those who are returning to our twice yearly construction law forum, here at Gowling WLG. My name is Ted Betts. I'm a partner here at Gowling WLG and the Canadian Head of the Infrastructure and Construction Group. The long 33 year wait to reform the Construction Lien Act will soon be over. When the act first became law in 1983 it was seen as a compromise, evolution of the former Mechanics Lien Act. Hasn't been significantly modernized or updated or revised since then. A lot of tinkering along the way. There's been some efforts to make some major changes to it but nothing terribly significant in all that time. Since then it's become the statute many people love to hate. In 2015 the Ontario government launched a review of the Act which culminated in a report that was published last autumn called, "Striking the Balance: Expert Review of Ontario's Construction Lien Act". With the release of that report the Province announced it would bring forward legislation based on the report in spring of 2017, which it did, on May 31 of this year. The Province of Ontario introduced some major reforms and updating of the Construction Lien Act when it introduced Bill 142, The Construction Lien Act Amendment Act. But you already knew that. That's why you're here. We are here to help guide you through the many changes that are coming with this Act. There's kind of three things that the Act, the Amendment, set out to do. One, was to modernize the Act and you'll see, if you haven't already, that there are a lot of small and technical changes throughout the entire act. Lot of definitional changes. A lot of timeline changes. All of these need to be learned and re-learned as we work through it. The second aim was to introduce prompt payment, legislation and rules. And the third was to address expedited dispute resolution processes which they've done with adjudication. So they certainly did all that they set out to achieve and more so. The report recommended 100 changes, altogether, and I think we can see that in the reflected, pretty much, I think 98 of the recommendations were incorporated into the legislation. That's going to be too much to tackle in any one program, all of those technical changes and definitional changes. We're going to try to capture most of the significant ones and dive somewhat deeply into the two big regime changes, I'll call them, the introduction of prompt payment rules and adjudication. It's going to take some time to get up to speed for everybody in the industry with all of the little technical changes because there were so many. We'll highlight those. We have a number of presenters today. The program will work with a few Gowling WLG lawyers summarizing different parts of the Act and the changes and then we will follow with a panel discussion with some people from the industry who are going to have live and breathe this a little bit more, day to day, and to talk about the impacts that they think this will have on their organizations and the changes that they're going to have to start thinking about, internally, to adapt to the new law.

That's the program. We have up, it's a little small here, but we have set up a website, a page, a hub if you will, on our website with a whole bunch of information to follow up. Just because there is so much to digest and it's a little hard in one program to absorb all of it. We will be distributing the slides to anybody who signed up and registered for the event, so you'll have that. This program will be, because there was such demand as you can see we have a packed house tonight. We are filming it and we are going to put that up on our website. That'll be up probably, I think, in a week or less. You'll be able to revisit anything that you missed and certainly we'll be around afterwards to take your questions. We'll have some time during the program today for questions and we are coming out with a series of articles and there will be subsequent events as well and I'll highlight those at the end of the program, at bit. We will have some time for questions. There's a lot that we want to cover so that everybody gets the benefit of our highlights of the changes but we will take some questions and certainly on the panel discussion we'll have lots of time for questions. We will also, before the panel, just because we have a longer program than we normally have for these things, we'll take a little short break before the panel gets going so everybody can check their phones, and in the meantime, of course, everybody's phones are completely turned off as your full attention is going to be needed because of all the changes. So, thank you very much. We'll get going with it now. We'll start with, the first bit will be me, and I'm going to be talking for the next, so there's the layout of the program. I'll start talking a little bit about prompt payment. Then we'll have Louis-Pierre talk about the adjudication rules and the fast track dispute resolution mechanisms. Neil and Natasha will talk about some of the technical changes that have been made to the Act dealing with and impacting lien rights, holdback procedures and trusts. Natasha will come back up and talk about some of the technical changes and, in particular, changes to the summary procedures. Then we'll have our panel discussion.

So, prompt payment. This whole thing starts with Bill 69, which was a private member's bill a couple of years ago, introduced in the Ontario legislature that went as far as Second Reading. Fairly unusual for a private member's bill. Bill 69 Ontario Prompt Payment Act, it was an effort by a number of industry associations and, in particular, trade associations to get cash moving quicker on projects. And get paid within a normal one month payment cycle. It had a lot going for it. It had a lot of problems with it. It eventually died on the order paper but when it died on the order paper, the Province committed to bringing some form of prompt payment legislation back, but within the context of a wider review of the whole Act, which is of course what they've done.

Bill 142, which will likely become law in the first quarter of 2018, maybe into the spring. I know the government is fully behind it and they really want this passed. It's got a broad consensus, both in the legislature among all parties, and in the industry. They really want to get this through before everybody gets distracted by an election, which will come next year. They do want this to be law, and I'm pretty confident that it will unless there is some strange snap election, I don't see any reason for holding this up. We will have prompt payment rules in this Province for construction projects. This will be mandatory so there are some parts that you can structure in your contracts, and we'll get into that in a second, but you will not be able to contract out of the payment timelines for paying after you receive a proper invoice.

Basically, the new bottom line for construction projects and improvements in Ontario, there will be for owners you'll have 28 days to pay from the receipt of a proper invoice and contractors will have 7 days to pay once they get paid. We'll go into the exceptions and the qualifications to that in a second. But that's the basic new regime. Owners must pay within 28 days of the receipt of a proper invoice. That will be section 6.3 of the Act after the amendments get passed. And by the way, the Construction Lien Act will be no more. When the amendments get passed we will now have a Construction Act. Which, I think, reflects the fact that the Construction Lien Act dealt with a lot more than just lien and lien rights and it really inculcates itself in the whole industry. We will have a Construction Act. In 6.3(1) is where we have our primary obligation for 28 day payment. A couple of things to note right off the bat. It is subject to a notice of non-payment. In other words, if an owner is not paying the full amount because it disputes an amount, you can still do that but there's now a process for that. You can't just do it you have to follow the process. There's a notice requirement in 6.3(2) and there'll be a prescribed form of notice. Second, must be a proper invoice and we'll get into that in a minute and that's going to be a key difference as well. There is a definition, fairly long definition, to what is a proper invoice and if it is a proper invoice you'll have 28 days to pay. If it's not then you won't. Let's unpack some of that.

Like I said, you can dispute an invoice but you have to provide a written notice in prescribed form. That will be 6.3(2) when the amendment is passed. Won't read through that but there is, and again, you'll get slides. We'll send the slides around so you'll have the text and of course, this is legislation or draft bill, so it is online if you ever need to find a copy. A couple of notes from this. First, you don't just get to decide at some point later on that you want to dispute this. You need to be very on top of things. Much more on top of this because if you do not want to pay, if you're disputing a payment as an owner, and there are similar parallel rules for contractors but they're slightly different so we'll get into that in a minute, but you've got to give your notice of non-payment within 14 days of receipt of the proper invoice. It's got to be in a prescribed form. We don't have our forms yet. The government is working away at that. Presumably those will be all ready when the legislation becomes law and, if not, there's a lot of new forms, they may choose to hold off the effectiveness of some of the parts of the Act until all of the regulations and forms are passed. But there will be a prescribed form and a prescribed method and manner of delivering the form in order to be proper. Then lastly, you can't just decide, as sometimes happens on a project, I just don't want to pay this. I dispute it. I don't think it's right but I don't want to spend the time arguing or giving up my chance to argue something later on. Well, the legislation deliberately, sort of, hones in on that part. In your notice you're going to have to give your reasons, fairly detailed reasons, and we'll see how all of this plays out in the courts at some point. There's a lot of new law, new drafting here, there's no question a lot of this is going to get stress tested in the courts and on projects, but one of the things I've picked up on is your notice has to provide detailing all of the reasons for the non-payment. So query whether if you are delivering your notice and you exclude something whether later on you would be precluded from bringing up other arguments for your non-payment. You're going to have to be diligent up front. There is also in here no express restrictions on the reasons for non-payment. In the report, Striking the Balance, one of the particular recommendations they made was that parties on a project should be allowed to dispute payments and should be allowed to set-off for other payments that might be owing. That's not precluded here but, again, you're going to have specify that and put everything on the table when you're giving your notice. Also, to the extent that you are not disputing something, there is a mandatory obligation to pay the undisputed portion of the proper invoice.

All right, for contractors, you've got 7 days after receiving payment. That will be in section 6.4(1). Couple of things to note here as well. It's subject to non-payment as well so you can dispute an invoice from a subcontractor and the key part, it's a pay when paid clause. There's some exceptions to this, some process, we'll get into that but you are not under an immediate obligation to pay if you haven't been paid as a contractor. Whether or not paid by the owner contractors can dispute a subcontractor's invoice but, again, you must provide the notice of your dispute in the prescribed form. That's in 6.4(6). Couple of things to note. This applies whether the owner has paid or not. If you're disputing a subcontractor's invoice, if the owner has paid you as a contractor, you've got to give the notice within 7 days of receipt. In other words, if you don't give the dispute you've got to pay within 7 days. Or, you give a notice to your subcontractor that you're not paying because you're disputing something in their invoice. If the owner has not paid you've got an option here. You can give a notice of dispute within the 7 days after receipt of the owner's notice. So the owner gives you a notice that they're not going to pay and once you receive that you have 7 days to provide notice to your subcontractors that you're not going to pay, or, if you never got that notice from your owner you've got 35 days to dispute with your subcontractor after your own proper invoice. It gets pretty technical and if, then, this, that, which is why we're laying it out here and highlighting this. The bottom line is there is a process here to dispute. If you're deciding not to pay your subcontractor you're going to need to follow the process otherwise you will not be incompliance with the Act. You could place extra interest or other remedies that the subcontractors may have. Again, there is a prescribed form and a prescribed manner of delivery. Like with the owner, you have to specify the amount in dispute and the reasons and all of the reasons and you must pay the undisputed portion of the invoice.

Okay, if the owner is not paid by the owner, this I already mentioned. If the owner has not paid you as a contractor, you either have to dispute the non-payment, you're looking at three different things that you have to consider. Looking down the chain, at subcontractors, you either have to dispute the subcontractor's invoice or you have to pay within 35 days after giving your proper invoice. At the same time, the first bit there, you can dispute the non-payment. This is in 6.4(4) and to note, right, if you are disputing you must dispute and commence adjudication process with the owner. If the owner has given you a notice of non-payment, you just don't have to accept that, you can start the adjudication process. But you must start the adjudication process. If you don't then you owe your subcontractor within 35 days of the submission of your own invoice to the owner.

Okay, big question. What's a proper invoice? This was a recommendation from the expert review that timing should be attached, not just to a general invoice, but a proper invoice. They've tried to provide some definition in 6.1 about what this means. I won't read through it all here but it's a lot of basic information so that we're just kind of formalizing certain parts of this. This does not preclude you from including in your invoice requirements other things. Deliverables, in clarifying what you need to see. Maybe you've got a project financing and they need certain documents to be delivered. That's okay. There's limits here. It's not clear where the limits are going to be until we've really stress tested this out there, about how far, and you have no doubt that some owners are going to push this further than others. You're going to have a requirement but there is a rule that if you try to implement a pre-approval, or a pre-certification, into the invoicing process, that won't be allowed. It's really just invoicing for the work. If the work's done, they submit their invoice, the certification process is going to run beside that. It's not a condition for the submission of an invoice. Big question, what happens if you don't pay? Well, there's now a statutory interest penalty, if you will, starting from the moment that the payment was due. That will be a floating rate based on the Courts of Justice Act. That's at section 6.7.

Okay, so there's a lot of different owners. A lot of different projects. A lot of different contracts. A lot of different types of work. Does it apply to me? Prompt payment's going to apply to every construction project. Every improvement that they Act covers. That means all projects and improvements, public sector or private sector, doesn't matter. Conventional, normal construction projects, P3  projects, doesn't matter. New build, repair work, capital repair work, all applies. It wouldn't apply to maintenance work and the Act does try to make a better distinction between ordinary repair and maintenance and capital repair, not sure if it gets us all the way there, but there is ordinary maintenance, cleaning, that's not going to be attracted by the Act or the payment provisions, but everything else will. All sizes of projects, with some debate about carving out residential renovations, super huge projects, we don't have that in there. All owners, contractors and subcontractors.

Now, key part, and everybody is wondering, "Is this going to affect my existing projects?"  The answer is no. It's only projects and contracts that get signed on the day, or after the day, that this all becomes law. You've got a window until this gets passed and then we're into the prompt payment regime. There is no retroactive effective of the legislation. Can I exclude the payment provisions? As I said before that is a big no. Prompt payment regime is a mandatory legislative regime for payment, however, you can structure your project the way you would normally structure a project. If you typically would have milestones, for example, or different phases in your project and that's the trigger for a payment, you can structure the triggers for payment and if you put that in your contract, it must be in your contract, and once it's in your contract then the payment regime and the timelines take over. You're not allowed to invoice us until you've completed the whole laying of the foundation and then you can invoice us the first milestone payment. So they do. They invoice you and then you've got 28 days to pay.  The Act is also introducing, and allowing, phasing of projects so structuring your projects in different phases. Again, that will be allowed and payments tied to that as a trigger, but your payment timelines will still apply once the proper invoice is provided. That's all we had for prompt payment. There's a lot to digest and start to think about. I know we're going to talk about prompt payment with our panel discussion and the impact and organizations in dealing with that. And then we will also be here afterwards if you have any further questions. So with that, I'll introduce my partner, LP Gregoire, who is going to talk to us about adjudication.