No payment, no problem – Lien Legislation reform which makes sense and saves dollars

No payment, no problem

Lien Legislation reform which makes sense and saves dollars

Preamble: One of the primary purposes of the Construction Lien Act, R.S.O. 1990, CHAPTER C.30 (the “CLA”), and General, RRO 1990, Reg 175 (the only Regulation under the CLA) is to provide a mechanism which would permit the creation of a collateral security, with respect to amounts unpaid for services and materials supplied to the improvement of land. The collateral security is created by way of a lien against the premises. However, once the prescribed period for registering a lien has expired, a collateral security is no longer able to be created. Contractors (including Subcontractors, Sub-subcontractors and Suppliers) face a conundrum when deciding whether or not to register a lien prior to the relevant expiration of their lien rights. The conundrum exists due to the fact that a progress application (or progress applications) under the contract may not be due; however, because substantial performance of the contract has been certified, if those due amounts are not received prior to the expiration of the rights to register a lien, the lien rights will be relinquished.

Potential Solutions: Two conceivable options to be considered with the intent of creating a mechanism which could ensure that lien rights do not expire during this period are Option No.1: A ‘tolling agreement;’ or Option No.2: An ‘interim lien.’ Every Province and Territory in Canada under a Common Law legal system has Provincial/Territorial Statues which are intended to provide rights and remedies for those who supply services or materials or both, with respect to the improvement of land. Throughout the Provinces and Territories, Statutes vary by title (Builders Lien Act, Construction Lien Act, Mechanics Lien Act), expiration of rights for registering a lien (30 days to 90 days), prescribed periods for retaining holdback (30 days to 60 days*)1 (Lal, 2013), and the amount withheld as holdback (ranging from 7.5% - 20%). Quebec is Canada’s only province which is not under a Common Law legal system; however, Quebec’s Civil Law legal system provides for a similar rights and remedies under the Civil Code of Quebec, a legal hypothec which is commonly referred to as a ‘construction hypothec.’ In Ontario, under the CLA, section 22 and 31 address 1) Expiration of rights for registering a lien; 2) Prescribed period for retaining holdback; and 3) Amount withheld as holdback which we would explore further.

1) Expiration of rights for registering a lien s. 31. (2) Subject to subsection (4), the lien of a contractor, (a) for services or materials supplied to an improvement on or before the date certified or declared to be the date of the substantial performance of the contract, expires at the conclusion of the fortyfive-day period next following the occurrence of the earlier of, (i) the date on which a copy of the certificate or declaration of the substantial performance of the contract is published as provided in section 32, and (ii) the date the contract is completed or abandoned.2 (Ministry of the Attorney General, 2011)

2) Prescribed period for retaining holdback s. 22. (1) Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44 (payment into court).

R.S.O. 1990, c. C.30, s. 22 (1).

Key Points

• The inherent flaws of the CLA • The need for legislative reform of the CLA • The relative ease of reforming the CLA • The negative impacts as a result of these flaws • Create greater awareness of obligations/rights

3) Amount withheld as holdback s. 1 (1) ‘holdback’ means the 10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV; and s. 22 (1), as noted in 2. Prescribed period for retaining holdback.

Lien Legislation’s Interface with

Commercial Agreements: There are a number of forms of contract which are used in the Province of Ontario between Owners and Contactors for the execution of construction projects. Often Owners in the Public and Private sectors use standardized forms of contract. One of the most widely used standard forms of contract for ‘lump sum’ agreements is the CCDC 2 - 2008 Stipulated Price Contract3 (Canadian Construction Document Committee, 2015) (“CCDC 2”). CCDC 2 contains provisions which address the payment of holdback:

GC 5.5 PAYMENT OF HOLDBACK

UPON SUBSTANTIAL PERFORMANCE

OF THE WORK, 5.5.4; [i]n the common law jurisdictions, the holdback amount authorized by the certificate for payment of the holdback amount is due and payable on the first calendar day following the expiration of the holdback period stipulated in the lien legislation applicable to the Place of the Work. Where lien legislation does not exist or apply, the holdback amount shall be due and payable in accordance with other legislation, industry practice or provisions which may be agreed to between the parties. CCDC 2 contains provisions which address payment;

GC 5.2 APPLICATIONS FOR

PROGRESS PAYMENT, 5.2.2; [a]pplications for payment shall be dated the last day of each payment period, which is the last day of the month or an alternative day of the month agreed in writing by the parties.

GC 5.3 PROGRESS PAYMENT, 5.3.1; [a]fter receipt by the Consultant of an application for payment submitted by the Contractor in accordance with GC 5.2 - APPLICATIONS FOR PROGRESS PAYMENT: 1. the Consultant will promptly inform the Owner of the date of receipt of the Contractor’s application for payment, 2. the Consultant will issue to the

Owner and copy to the Contractor, no later than 10 calendar days after the receipt of the application for payment, a certificate for payment in the amount applied for, or in such other amount as the Consultant determines to be properly due. If the

Consultant amends the application, the Consultant will promptly advise the Contractor in writing giving reasons for the amendment, 3. the Owner shall make payment to the Contractor on account as provided in Article A-5 of the

Agreement - PAYMENT on or before 20 calendar days after the later of: – receipt by the Consultant of the application for payment, or – the last day of the monthly payment period for which the application for payment is made.

If the Contractor, Consultant and Owner all meet their obligations with respect to the payment process prescribed in the CCDC 2, the following timeline would apply; 1. application for progress payment submitted on January 31, 2015 2. certificate for payment issued on

February 9, 2015 3. payment made on February 28, 2015

What if the date the contract is certified to be substantially performed is January 1, 2015? 1. application for progress payment submitted on January 31, 2015 2. substantial performance of the contract certified on January 10, 2015 3. certificate for payment issued on

February 9, 2015 4. lien expires on February 24, 2015 5. payment made on February 28, 2015

In the preceding example, there is a four day gap between the expiration of lien rights, and the date in which payment for a progress application is due. Since the progress payment is for services or materials supplied subsequent to the date certified to be the substantial performance of the contract, the risk of allowing lien rights to expire would be limited to the amount which proceeded the date the contract was certified substantially complete i.e. January 1, 2015 – January 10, 2015.

In Practice, not Theory: The majority of times, the CCDC 2 is used with supplementary conditions. This holds true with Owners in the Public and Private sectors, as supplementary conditions form part of the contract, and amend the general conditions to the extent intended. Payment terms are generally one of the most amended conditions, extending the payment period from 20 days to 30, 45, 60 or even 90 days from the date or event which triggers the commencement of the payment period. Subcontractors face even longer payment periods, as Contractors generally build in additional periods to provide them an opportunity to allow the amounts to flow, following receipt of their payment in accordance with the Prime Contract. One of the most widely used standard forms of subcontract for ‘lump sum’ agreements is the CCA 1 – 2008 Stipulated Sum Subcontract4 (Canadian Construction Association, 2015) (‘CCA 1’). CCA 1 contains provisions which address payment;

ARTICLE 6 – PAYMENT, 6.2; [t]he Contractor shall pay the

Subcontractor, no later than 30 calendar days after the Submission

Date or 10 calendar days after the date of a Consultant’s certificate for payment whichever is later… Unamended by supplementary conditions, this provision adds 10 days to the payment period; therefore, in the example above, there is a 14 day gap between the expiration of lien rights, and the date in which payment for a progress application is due. If we consider a payment period of 60 days5 (Prism Economics and Analysis, 2013) in the next example, the following timeline would apply; 1. application for progress payment submitted on January 31, 2015 2. substantial performance of the contract certified on January 10, 2015 3. certificate for payment issued on

February 9, 2015 4. lien expires on February 24, 2015 5. payment made on April 10, 2015

In the preceding example, there is a 45 day gap between the expiration of lien rights, and the date in which payment for a progress application is due.

In both examples there exists a significant issue whereas services or materials supplied to the improvement of land may lose their statutory rights to attach to a lien to the premises, forming a collateral security. This issue is amplified for Subcontractors, and other supplies further down the payment chain due to extended payment periods, and generally diluted rights with the Contractor, and limited contact with the Owner. This ‘gap period’ can span several progress applications. In addition to the timelines which occur by design of the contract, there are also unintentional delays which add to the overall timeline as a result of actions or inactions of the Contractor, Consultant and Owner. As noted in the opening of this article, two options which should be considered to create a mechanism to ensure that lien rights do not expire during this period are as follows;

Option No.1: The simplest, and perhaps most effective approach to ensuring that lien rights do not expire during the gap period could be achieved by amending the CLA to provide for a mechanism which would permit an agreement to be made between the Owner and a

Contractor or a Subcontractor, which would stop the clock by suspending or extending the prescribed period.

This type of agreement is commonly referred to as a ‘tolling agreement,’ and exists under other Provincial /

Territorial Statutes. In Ontario, the

Statute is the Limitations Act, 2002,

S.O. 2002, CHAPTER 24 Schedule

B, and a tolling agreements is addressed under s.22 (3); [a] limitation period under this Act, other than one established by section 15, may be suspended or extended by an agreement made on or after

October 19, 2006. 2006, c. 21,

Sched. D, s. 2; 2008, c. 19, Sched.

L, s. 4 (1). If a similar provision was included in the CLA, standard forms of contract such as the CCDC 2 and the CCA 1 could easily be amended to include the change. Option No.2: Another fairly simple and effective approach to ensuring that lien rights do not expire during the gap period, could be achieved by amending the CLA to provide for a mechanism which would permit an ‘interim’ lien to be registered. The current process for registering a lien is onerous, costly and time consuming. There are a number of mandatory steps in the process including title searches, lien preservations, lien perfections and ultimately, the commencement of a lien action. An interim lien could be used as a ‘place holder,’ with a less complicated registration process i.e. issuance by registered mail to the Owner or to the Contractor with copy to the Owner (in the instance of a Subcontractor, Sub-subcontractor or Supplier), reduced features i.e. not cut-off the flow of funds to others, and a prescribed expiration period i.e. 60 days from the date of registration. An interim lien would simply dissolve if a related lien was subsequently registered or upon its expiration. In addition to ensuring that the right to register a lien does not expire, and of greater fundamental importance, both options provide an opportunity for the people involved to rectify any issues which may lead to the registration of a lien by providing additional time, and a less adversarial approach. The provision for

a tolling agreement or an interim lien could help avoid costly lien actions and litigation, and countless other time and cost consuming activities for the people tasked with pursuing a lien, and those tasked with defending a claim. Lien actions also cost our legal system a considerable amount of money in addition to the costs borne by the commercial participants, and ultimately have a negative impact on the total costs of construction for the end users. Either of the aforementioned options would significantly improve the way business is conducted in the Canadian Construction Industry with respect to lien legislation, and would ultimately lead to less reliance on the legal system and lower construction costs for all parties involved in the process.

About the author:

Arran D.J. Brannigan, MBA, LL.M (Deg Cand), PQS, CCCA, GSC, is a senior construction executive whose principal focus has been on General Contracting in the Industrial, Commercial and Institutional sectors of the Canadian Construction Industry.

1 *Saskatchewan: When the contract price is greater than $25 million and the contract provides for a completion schedule longer than 1 year, the holdback period is 40 clear days after the yearly anniversary. *Newfoundland and Labrador: If the value of the project is greater than $20 million or the contract is longer than 1 year, 30 days after last services or material s are provided. 2 The Construction Lien Act, R.S.O. 1990, CHAPTER C.30, s.31(2)(b) deals with; “services or materials supplied to the improvement where there is no certification or declaration of the substantial performance of the contract, or for services or materials supplied to the improvement after the date certified or declared to be the date of substantial performance” s. 31(3) deals with; “the lien of any other person”, provides similar language to that of s.31(2), and also provides for a ‘forty-five day period.’ 3 The Canadian Construction Documents Committee (CCDC) is a national joint committee responsible for the development, production and review of standard Canadian construction contracts, forms and guides. Formed in 1974, the CCDC includes two owner representatives from each of the public and private sectors, as well as appointed volunteer members of the following four national organizations: 1) Association of Consulting Engineering Companies-Canada; 2) Canadian Construction Association; 3) Construction Specifications Canada; and 4) Royal Architectural Institute of Canada. 4 Established in 1918, Canadian Construction Association’s (CCA) vision is to build Canada with ethics, skills and responsibility. CCA’s mission is to be the national voice for the Canadian construction industry. 5 The average payment period is approximately 60 days, considering the majority of Public and Private

Owner contracts researched. Findings of this survey are a result of population sampling over an extended period of time. In addition, a paper by Prism Economics and Analysis (2013) The Need for

Prompt Payment Legislation in the Construction Industry, cited the Average Collection Period (Days) for

Receivables: Construction Industry compared to All Non-Financial Businesses, 1999-2011 (Canada)

Based on Statistics Canada, CANSIM, Table No. 180-0003, was 69.2 days in 2011.

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