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.