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Contractor payment protection in the modern era
Contractor payment protection in the modern era1
Since the beginning of the 20th Century, Canadian provinces have had some form of security for parties in the construction industry, through construction (or mechanic’s) lien legislation (‘Liens’) . Liens are generally limited to the amount of money owed to contractors that improved the property under a contract or in quantum meruit . Liens sought to encourage construction in developing economies allowing landowners to use their land as security for improvements, at a time when credit was limited, whilst permitting contractors the right to secure payment if the landowner failed to pay by enacting the lien . Liens are alien in most common law jurisdictions except for the US2, where the concept originated, because of the maxim quicquid plantatur solo cedit3 and privity to contract.
Liens provided protection to the economically weaker party but brought about risks to the landowner if a dispute arose between the contractor and a party in its supply chain . To combat this, landowners sought bonded contracts to protect against unpaid subcontractors and suppliers from asserting lien claims over a project . Today’s construction market is now partly regulated by surety bond underwriters, pre-qualifying potential bidders using bonds, which in effect creates barriers to entry .
While revolutionary at the time, lien legislation is now generally seen as outdated, complex, costly and time consuming to enforce . It doesn’t seem to have solved the problem of delayed payment, where cashflow is the lifeblood of the industry . 4 Holdbacks, lien trusts and bonds only prevent default of payment, all essentially an after-the-fact remedy .
International experience
Delayed or disputed payment within in the industry is a global issue . In the past, construction disputes only had the mechanisms of mediation, arbitration, and litigation to resolve disputes . The UK identified that delayed payment was hindering progress within its industry, introducing legislation in 1998 to address payment delays and improve the flow of money . The HGCRA 19965 provides entitlement to staged payments, prohibiting ‘pay-when-paid’ provisions, the right to refer disputes to adjudication, and suspension of performance for non-payment on construction contracts . Other common law jurisdictions swiftly adopted similar security of payment provisions, although the payment and adjudication provisions are slightly different in each jurisdiction .
Reform in Ontario
Lien legislation didn’t address the practical issues of timing of payments or dispute resolution, there was a clear gap in this legislation . In 2015 Ontario, as the first province, instructed an expert review of the effectiveness of the Construction Lien Act 1990 (‘Act’) in achieving its policy objectives within a modern context . The consequent report6 confirmed that there was consensus in retaining existing lien remedies by stakeholders at all levels, albeit requiring more effective amendments . Clearly lien protection is sacrosanct to parties down the supply chain and too extreme an amendment to remove .
The Report recommended lien modernisation provisions, a new statutory system for prompt payment and targeted adjudication framework to resolve payment disputes quickly . These formed the basis to Bill 142-Construction Lien Amendment Act, 2017, being ‘the biggest change in construction law in over 34 years’ . 7 Amendments of the Act are in effect since 1 October 2019 .
(i) Lien modernisation
Significant amendments: increasing the time for lien claimants to preserve and perfect their lien rights, holdbacks can now take permissible forms such, as letters of credit or a bond, and mandatory progressive release of holdback in certain cases .
(ii) Prompt payment and adjudication;
The prompt payment provisions are a ‘cascading’ (28-7-7-7 days) flow down the supply chain . 8 Interestingly it allows the ‘paywhen-paid’ concept to operate through the supply chain, if an adjudication is commenced regarding a payment dispute, with a determination in 30 days on the referred dispute . Adjudication supports the prompt payment provisions, possibly encouraging disputes to be resolved through negotiation as a more collaborative and less adversarial approach . A fast and relatively inexpensive mechanism to resolve disputes, with the protection of the court system may stimulate this . The threat of adjudication should change prevalent behaviours and practices within the industry .
Nothing in the Act restricts an unsatisfied payee to an adjudication determination from pursuing a lien claim on the same dispute . The new provisions account for the interface between the two systems, allowing a claimant sufficient time to preserve their lien rights . The rights granted by the Act essentially allows a party three avenues for dispute resolution, adjudication during a project, lien litigation at the end of a it, and traditional litigation or arbitration as a last resort .
Conclusion
Ontario has led the way in construction law reform in Canada . Nearly all provinces and the Federal Government have considered aspects of Ontario’s legislation by reviewing or modifying their lien legislation . Alberta is the latest province in October 2020, introducing a Bill9 with similar provisions to Ontario’s . There is a movement to bring Canadian construction laws up to date with modern practices, as exemplified in other common law jurisdictions . The amendments have created a legislative framework where ‘frontier’ and modern security of payment provisions will co-exist . If the prompt payment and adjudication provisions work effectively, then there should be a reduced demand for lien litigation .
Notwithstanding the complexities in conforming with the provisions of the Act, arguably, Ontario’s Construction Act is now the most comprehensive piece of security of payment legislation for construction in any common law jurisdiction . It provides a wide range of security through prompt payment, targeted adjudication, and lien provisions . Only time will tell if Ontario’s approach is the right template for rest of Canada as the Act will need to be increasingly adopted and tested in operation .
Footnotes
1 The article is based on a dissertation completed in
September 2019 by the author as part of the fulfilment of the MSc degree in Construction Law & Dispute Resolution,
King’s College London, UK . 2 In 1987 NZ repealed its lien act due complexity enforcing a lien and its limited use/effectiveness in Australian states although none are comparable to rights granted in US and Canada . 3 Whatever is affixed to the soil belongs to the soil, which transfers risk like a “pay-when/if-paid” clause between a contractor and subcontractor .
About the author
Chris Kelly, PQS, recently completed a MSc . in Construction Law and Dispute Resolution at Kings College London, UK . He has broad experience in estimating, project controls, contract and claims management for EPCMs, contractors and consultants . Chris has worked on mining, oil, and gas projects in western Canada; infrastructure projects in the UK and Singapore; and now for Ballymore Group, a property developer in London .
4 Prism Economics and Analysis, The Need for Prompt
Payment Legislation in the Construction Industry, 2013 . 5 Housing Grants, Construction and Regeneration, Act 1996, amended by Part 8 of the Local Democracy, Economic
Development and Construction, Act 2009 . 6 Striking the Balance: Expert Review of Ontario’s Construction
Lien Act (2016) . 7 Naqvi, Y, Official Report of Debates (Hansard) No .130,
Legislative Assembly of Ontario (4 Dec . 2017) . 8 Only once a ‘proper invoice’ is submitted to an owner . 9 Bill 37 The Builders’ Lien (Prompt Payment) Amendment
Act, 2020 .
QSM
MECHANICAL AND ELECTRICAL COST CONSULTING
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