18 minute read
Legal Corner
Roger Gillott Richard Wong Ethan McCarthy
Proposed changes to the Construction Lien Act: What do they mean for the construction industry?
The long‐awaited report (the Report) on potential amendments to the Construction Lien Act (the CLA), which was commissioned by the Ontario Ministry of the Attorney General (the Ministry1), has now been released. Among other things, the Report recommends the following: • the adoption of a prompt payment regime requiring payment within 28 days of submission of a proper invoice (subject to specific set‐off notices) • mandatory speedy adjudication of construction disputes, wherein a decision will be rendered within 30 days • mandatory holdback release (subject to specific set‐off notices), with permissible phased release of holdback on lengthy or segmented projects The current CLA was enacted in 1983 and has not undergone a holistic review since its enactment, until now. Significant lobbying efforts by the construction industry, together with developments in the industry that include the increasing popularity of public‐private partnerships, necessitated a critical appraisal of the effectiveness of the CLA in achieving its policy objectives within the modern context.
The Report was preceded by the attempted passage of Bill 69, the Prompt Payment Act, 2013 (Bill 69), which had resulted from the prompt payment movement in Ontario and other jurisdictions. While Bill 69 was not passed, the province decided that a broader review of the CLA was warranted. Extensive consultation with industry stakeholders followed, and culminated in the Report.
Issues considered by the report
The Report was undertaken with the intent to perform a thorough and comprehensive assessment of the CLA, which was reflected in the breadth and scope of the substantive issues examined.
The Report divided these issues into distinct chapters addressing: (1) lienability; (2) preservation, perfection and expiry of liens; (3) holdback and substantial performance; (4) summary procedure; (5) construction trusts; (6) promptness of payment; (7) adjudication; (8) surety bonds; (9) technical amendments; and (10) industry education and periodic review. The Report generated 100 individual recommendations.
This Osler Update will focus on the three key chapters of the Report: promptness of payment, mandatory adjudication, and holdback and substantial performance. The remaining seven chapters of the Report are significant in their own right, including recommendations such as mandatory surety bonding for all public projects regardless of size, and lengthening the time periods to preserve and perfect liens.
In fact, as a result of the breadth and scope of all of these issues, when considered together, the Report recommends replacing the CLA, which primarily focuses on liens and trusts, with new legislation suggestively titled the “Construction Act: An Act respecting Security of Payment and Efficient Dispute Resolution in the Construction Industry.”
Prompt payment
The Report recommends the enactment of a default statutory regime for prompt payment. The elements of the prompt payment regime are outlined below.
To which types of contracts would prompt payment apply?
• The statutory prompt payment regime would apply to all construction contracts at all levels of the construction pyramid, in both the public and private sectors. Parties would be free to draft their own contractual payment provisions,
provided they are consistent with the statutory regime. The mandatory provisions would be implied by law into any contracts that do not contain equivalent provisions.
What is the trigger for payment and what is the payment period?
The Report recommends the following: • Between the owner and the general contractor, payment must be made within 28 days of the submission of a
“proper invoice” as described below. • Between the general contractor and the subcontractor, payment must be made within a further seven days from the date of the owner’s payment (with an extra seven days added for each level down the construction pyramid). • Payment obligations will be triggered by the delivery of a proper invoice, which means a properly documented invoice. Proper information and documentation would be defined by the contract, or by the legislation by default. • Certification of payment by the payment certifier, if applicable, would follow submission of a proper invoice, and cannot be a precondition to the starting of the clock for payment. • Parties would have the freedom to negotiate the payment cycle, but a monthly payment cycle would be implied if they fail to do so. • Milestone‐based payment mechanisms are permissible, but must be disclosed to subcontractors during the bidding stage.
On what basis can payment be withheld, and when?
• Payers would be allowed to withhold disputed amounts (but not undisputed amounts) by delivering a “Notice of Intention to Withhold Payment,” setting out the amount being withheld and the reasons for the withholding within seven days of receipt of a proper invoice. • Payers would be allowed to set off all outstanding debts, claims or damages, but only relating to the contract at issue, and not relating to other projects as is the case under the current CLA. • Essentially, the new approach would require payers to “get on with it” – in other words, to evaluate the payment application quickly, and either pay or assert a well‐defined, specific set‐off claim.
What remedies would be available in the event of non-payment?
• Late payments would attract mandatory non‐waivable interest at a rate that is the greater of the contractual rate and the pre‐judgment interest rate in the Courts of
Justice Act. • The payee’s right to suspend work would arise if the payment dispute has been adjudicated and the payer refuses or fails to comply with the adjudicator’s direction to pay.
Adjudication
The Report proposes the implementation of mandatory adjudication as a dispute resolution mechanism applicable to all construction contracts at all levels of the construction pyramid, in both the public and private sectors. In this regime, the parties would be free to negotiate contractual provisions in respect of adjudication so long as they are consistent with the statutory regime. Otherwise, the default statutory adjudication scheme (to be set out in a regulation to the CLA) would apply. The Report also recommends the creation of a single authority tasked with certifying, training and administering the appointment of adjudicators. Some of the additional elements of the adjudication regime are outlined below.
Who can require an adjudication?
• Any party to a construction contract or subcontract would be entitled to refer disputes arising under that contract or subcontract to adjudication.
Adjudications would typically involve a single issue. Multiple issues/ disputes would only be addressed simultaneously in a single adjudication with the consent of the parties. • Back‐to‐back adjudications would be permitted in respect of disputes between an owner and a general contractor that flow down to a subcontractor.
Who can adjudicate a dispute and how is the adjudicator nominated?
• Adjudicators would be members of a self‐regulating profession (e.g., lawyer, engineer, quantity surveyor, accountant or architect); have at least seven years’ relevant experience working with the
Ontario construction industry; and have completed certain standardized training and certification with the government authority. Initially, a temporary roster of highly qualified adjudicators would be selected until the authority implements the training and certification system. • Adjudicators would receive immunity from liability in respect of their decisions and not be compelled to testify in civil proceedings. • The adjudicator would be nominated when a dispute arises by the party delivering notice of the adjudication.
The parties would then agree on an adjudicator within two business days after delivery of the notice, failing which the authority would step in to appoint an adjudicator within five business days.
Which disputes get adjudicated?
• Adjudication would apply to disputes that arise from a claim for payment under a proper invoice submitted in respect of a construction contract or subcontract, including the following 1. valuations of the subject matter of the invoice 2. monetary claims made pursuant to the contract (e.g., change orders)
3. claims in relation to security held for a construction contract 4. withholding and set‐off in respect of amounts owed under the invoice 5. delay issues relating to claims for payment • It is not entirely clear from the Report which claims would be excluded from mandatory adjudication, though it appears that the intent is to exclude negligence claims against design professionals as well as delay claims related purely to schedule extensions. • Disputes under $25,000 may be referred by the parties either to adjudication or to the small claims court.
What process and at what cost?
• The default adjudication process would set out minimum standards for notice of adjudication, appointment of the adjudicator, timelines for the adjudication, duties and powers of the adjudicator (including establishing the adjudication process) and the binding interim nature of the adjudicator’s decision. • The Report recommends that the total period of time for the adjudication process would be 30 days, from the initial referral of the dispute through appointment of the adjudicator, submission of relevant documents, interviewing of witnesses, retaining of experts, submissions by the parties, holding of a hearing and rendering the adjudicator’s decision. For large and complex claims, compliance with this time period may be a challenge. • As a general rule, the parties would apportion the costs of the adjudicator equally and each would be responsible for its own legal costs, subject to the adjudicator’s ability to adjust the default apportionments based on a party’s bad faith, frivolous or vexatious conduct.
How are adjudicated decisions enforced?
• Decisions would be binding on the parties on an interim basis (i.e., until the dispute is resolved by arbitration or formal legal proceedings or until the parties agree that the adjudication decision is final and binding).
Interestingly, the Report notes that the vast majority of adjudications conducted in the United Kingdom under a similar regime have, in practice, been accepted by the parties, effectively treating them as final. • Decisions would be enforceable by way of application to the Superior
Court of Justice in a similar manner that awards under the Arbitration Act, 1991 are enforced.
How would adjudication interface with the CLA?
• The parties’ lien and trust rights under the CLA would not be affected by the adjudication regime. Therefore, if a party elects to have a dispute resolved through a lien proceeding, it can follow the traditional preservation and perfection process under the
CLA and proceed with a lien action.
Trust claims can still be pursued through the courts, as well.
Holdback and substantial performance
In its discussion of holdback and substantial performance, the Report considered the key sub‐issues outlined below.
Amount of holdback
• The quantum of holdback would be maintained at the current rate of 10%.
Definitions of substantial performance and completion
• The substantive criteria for a contract to be substantially performed should remain the same, but the formula in section 2(1) (b) of the CLA should be amended to increase the maximum cost of completion/correction to 3% of the first $1 million of the contract price, 2% of the next $1 million and 1% of the balance. • The ‘deemed completion’ provision in section 2(3) should be similarly amended to increase the maximum cost of completion/correction to not more than the lesser of (a) 1% of the contract price and (b) $5,000 (from its current $1,000). • These changes are designed to reflect the effects of inflation over time.
QS Online Cost Consultants Inc. Halifax, Nova Scotia p. 902 405-1504 halifax@qsonlinecostconsultants.com www.qsonlinecostconsultants.com
Finishing holdback
• The finishing holdback provisions of the CLA would remain unchanged.
Mandatory release of holdback, subject to set-off
• The CLA should be changed from the current permissive release of holdback, to make holdback release mandatory. However, the payer may assert a right of set‐off by publishing a notice of non‐payment/set‐off, which specifically identifies the issues, and related dollar values, upon which the set‐off is based.
Phased, annual and segmented release of holdback
• Parties would be allowed to contract for partial release of holdback on either an annual or phased basis (only for longer/larger projects surpassing certain monetary and duration thresholds). • To address the concerns of design professionals, who have pushed for the release of the holdback on the design portion of their work, the designation of a design phase should be allowed in the contract for consulting services, but is not mandatory. This would facilitate the phased release of holdback for design professionals. • In addition, projects involving clearly separable segments, including public private partnerships and other alternative financing and procurement projects in particular, would be allowed to segment their projects to provide for segmented holdback release.
Deferral agreements
• Subject to an appropriate threshold, owners and contractors should be allowed to enter into deferral agreements, whereby portions of the work are deleted from the substantial performance calculation, for the purpose of allowing earlier certification and publication of substantial performance.
Deficiency holdback
• Parties should not be restricted from contracting for a deficiency holdback, but the CLA should not make deficiency holdbacks a requirement.
Use of financial instruments or cash for holdback purposes
• Letters of credit or demand‐worded repayment bonds should be allowed as a replacement for cash holdbacks.
Next steps
The Ministry is currently undertaking consultations with key stakeholder groups to gauge reaction to the recommendations contained in the Report. Depending in part on the outcome of those consultations, the Ministry has suggested that it may propose draft legislation as early as the spring of 2017 to address the main principles in the Report.
In the meantime, other provinces and the federal government are closely watching developments in Ontario as they unfold, including British Columbia with the law institute’s proposed reform of the Builders’ Lien Act as well as the federal government with the introduction of Senate Bill S‐224 (the proposed Canada Prompt Payment Act).
Members of our Construction and Infrastructure Group, including Roger Gillott, Richard Wong, Joel Heard, Paul Ivanoff, Andrew Wong, Tobor Emakpor, Jake Sadikman, Elliot Smith and Rocco Sebastiano, are active in various organizations, including the Construction and Infrastructure Section of the Ontario Bar Association, and would be pleased to discuss the commercial and legal implications of these and other proposed recommendations in the Report in further detail.
End Notes:
1 Together with the Ministry of
Economic Development, Employment and Infrastructure.
About the authors:
Roger Gillott is a partner in Osler’s Construction & Infrastructure Group. Educated at Oxford Law School, Roger has been practicing exclusively Construction Litigation, Arbitration and Dispute Resolution for over 20 years. He has represented all players in the construction industry, on projects including nuclear reactors, subway stations and major industrial projects.
Richard Wong is a partner and co-chair of Osler’s Construction & Infrastructure Group, advising clients on project development issues from procurement to disputes. Richard has spoken at CIQS/RIQS events in 2015 and 2016 and is also engaged by Professional Engineers Ontario (PEO) to evaluate P.Eng Professional Practice.
Ethan McCarthy is an associate in Osler’s Construction & Infrastructure Group and a P. Eng (Civil). The key focus of his commercial practice is construction, infrastructure and energy, and has advised clients including Bruce Power, Atomic Energy of Canada Limited, and Pattern Energy.
Lien preservation rights under the Construction Lien Act
Maurizio Artale
wners believing that contractors who have ceased work on a project, stand to lose their lien rights after 45 days, should think again. Ontario’s Construction Lien Act (the “Act”), provides that the time limit permitted for the preservation of a contractor’s lien rights is 45 days from the date of completion or abandonment of a contract, but something more is required to constitute abandonment and trigger the 45 day period, under the Act. If a contractor intends or reasonably believes that they will return to complete the project, the courts may consider that abandonment as defined under the Act, has in fact not occurred. It may be that the contractor intended to return once its account was paid, or following a holiday break.
The most recent case of Avision Construction Group Inc. v. The Trustees of Siri Guru Shaba of Cambridge, 2016 (“Avision Construction”), confirms the view taken by Ontario’s courts on this issue.
This matter concerned the construction of a temple in Cambridge, Ontario, beginning in 2013. The plaintiff, Avision Construction Group Inc. (“Avision”), was hired by the defendant owners to construct the temple. After the plaintiff had retained subcontractors and commenced work, however, the owners advised that they did not have sufficient funds to carry on with the project and would have to acquire financing to continue.
The last day that Avision was on the project was on November 12, 2015, although it performed no further work after May of 2015. As a result of its outstanding accounts, Avision wrote to the owners on November 30, 2015, advising that further work would not be carried out unless payment was received. However, Avision never indicated any intention to abandon the project at the time. Rather, it was ready and willing to continue following payment. Correspondence between the parties’ lawyers continued into April 2016, to try to resolve the matter, after which, having heard nothing further from the owners’ lawyer, Avision registered a lien on the project on May 20, 2016. The owners brought this motion for summary judgment to have the lien vacated.
In defence of its lien action, Avision’s position was that as a contractor, the 45 days permitted to preserve its lien rights under section 31(2) of the Act,
Odid not begin to run until at least April 2016, as it had not abandoned the project but was always willing attempt to arrive at a resolution up until this time. Avision maintained therefore, that its lien was registered on time. Avision relied on the seminal Supreme Court of Canada case of Dieleman Planer Company Ltd. v. Elizabeth Townhouses Ltd. (1974) (“Dieleman”), for defining what constitutes abandonment. In this case, the Supreme Court opined that cessation of work and abandonment were not necessarily co-existent. The court stated that in order to constitute abandonment, a cessation of work would have to be permanent in nature, in the sense that the contractor did not intend to carry the project to completion. This case concerned a British Columbia lien action, based on the province’s Mechanics’ Lien Act of the time. Dieleman has generally been followed since. It has been referred to most recently in Ontario in RSG Mechanical Inc. v. 1398796 Ontario Inc. (2013), Khalimov v. Hogarth (2015), and Centrum Renovations & Repair Inc. v. Ditta (2016), among others. In his review of the defendants’ motion, Justice Sloan agreed with Avision, concluding that although work had ceased,
GSNH Construction Law Group
Stanley Naftolin, Q.C., C.S. naftolin@gsnh.com Maurizio Artale artale@gsnh.com
Brian Campbell campbell@gsnh.com
Colin Campbell ccampbell@gsnh.com Leonard Finegold finegold@gsnh.com
Lori Goldberg goldberg@gsnh.com
Paul Hancock hancock@gsnh.com
Irwin Ozier ozier@gsnh.com Catherine Willson willson@gsnh.com
480 University Ave., Suite 1600 Toronto, ON M5G 1V2
www.gsnh.com
GSNH
We’re social. Follow Us.
Legal Corner
the plaintiff had intended to resume work once the defendant overcame its financial problems and Avision received payment. Neither party ever terminated the contract in his view, and there was an intention until at least April 11, 2016, by both parties, to resolve their dispute and complete the contract. As such, he found Avision’s lien to have been registered on time. The defendants’ motion was dismissed.
Avision Construction and Dieleman speak to the preservation of contractors’ lien rights under section 31(2) of the Act. Section 31(3) instead refers to the preservation of the lien rights of other persons (i.e. subtrades, suppliers, etc.). For these parties, the courts have suggested other circumstances by which lien rights may continue to run in the face of a cessation in work. A subtrade or suppliers’ 45 day period may not begin to run if they intend to return to the project, and/or have undertaken preparatory work in anticipation of returning to the Project. The recent cases of Toronto Zenith Contracting Limited v. Fermar Paving Limited et al. (2016), and Mike Oram, as agent for the Trustee of Local 353 I.B.E.W. Trust Funds et al. and Triple‑ A‑Electric and Mechanical Corporation (2004), are illustrative of this. The courts here found that despite a winter break, preparatory work prepared by the lien claimants prior to returning to their respective projects, and prior to being told that their respective contracts were terminated, was work found to continue to add value to the projects and thus lien rights continued to run.
The recently released report of the Attorney General of Ontario respecting proposed reforms to Ontario’s Construction Lien Act, proposes among other things, that the time period permitted to allow for the preservation of a lien should be extended from 45 days (calendar) to 60; and termination of a contract should be added to the list of events triggering the commencement of the time period for preservation of a lien. This should not affect the ability of some contractors however, depending on the circumstance, to continue to enjoy lien rights without the triggering of the 45 (or 60) day preservation period under the Act, if they have a continued intention to return to complete their contracts.
Owners should therefore be mindful of this when dealing with any disputes or work stoppages by contractors. A stoppage of work beyond 45 days may not necessarily mean that a contractor’s lien rights have expired. However, every situation is different. Owners confronted with situations of this nature, would therefore best be advised to consult with their lawyers about what lien rights may apply.
About the author
Maurizio Artale, Construction Law Group, Goldman Sloan Nash & Haber LLP. Maurizio’s practice includes commercial litigation with a focus on construction law. Maurizio represents owners, general contractors, subcontractors, project managers and suppliers in lien, contract, collection, insolvency, negligence and breach of trust actions.
Connect with our advertisers
Company
Alpha Cost Consultants Inc. Altus Group CB Ross Partners CONECON Consultants Inc. Exactal
Page
9 32 16 14 2
Finnegan Marshall Inc. George Brown College Goldman Sloan Nash & Haber LLP 13 3 29
Insite SiteWork 15
Lakeland Consulting Inc. LCO Construction and Mgmt 31 4
Macogep
21 Ontario General Contractors Association 8 QS Online Cost Consultants Inc. 27 QSM – Mechanical Quantity Surveying 13 TD Insurance 4
Phone #
Website/E-mail
289-845-3594 www.alphacostcon.com 905-953-9948 www.altusgroup.com 416-487-3330 www.cbross.ca 604-522-8970 www.conecon.ca 512-768-8111 www.exactal.com 416-929-0006 www.finneganmarshall.com 800-265-2002 www.coned.georgebrown.ca 416-597-9922 www.gsnh.com 877-746-7483 www.insitesoftware.com 905 829 4000 www.lakelandconsulting.com 514-846-8914 www.lcogroup.com 514-223-9001 www.macogep.com 905-671-3969 www.ogca.ca 902 405-1504 www.qsonlinecostconsultants.com 416-949-8540 www.qsmcon.ca 866-269-1371 www.melochemonnex.com
