ONTARIO’S NEW CONSTRUCTION ACT – SUMMARY OF CHANGES
After 25 years, the act governing construction in Ontario, the Construction Lien Act, RSO 1990, c C.30 (the “Construction Lien Act”), is being amended to address dissatisfaction with its shortcomings.
The Ontario government task force delivered a densely packed 435-page report in 2016 after surveying practices from a variety of countries, including the United States of America and the United Kingdom. Its two key recommendations were the institution of a Prompt Payment system and an adjudication process
As a result, the Ontario legislature has thoroughly amended the Construction Lien Act. The new act will be called the Construction Act (the “Construction Act”), which is available on Ontario’s e-Laws website at: https://www.ontario.ca/laws/statute/90c30.
On July 1, 2018, several major changes will be implemented, including:
- definition of capital repairs;
- new rules regarding multiple improvements;
- procedures for liening condominium projects;
- procedures for liening leasehold premises;
- landlords’ lien liability for improvements to leasehold premises;
- references of lien actions to the Small Claims Court; and
- new rules regarding holdbacks.
On October 1, 2019, the remaining major changes will be implemented, including:
- prompt payment; and
- adjudication mechanism.
Please see below a more detailed overview of these key highlighted amendments.
WHAT TO EXPECT AS OF JULY 1, 2018
Name Change from the Construction Lien Act to the Construction Act
The name change indicates that it aims to relegate liens to a secondary role. Liens will still be available, but the intention is to reduce the frequency of recourse to liens, and to rely more on a faster and more cost-effective alternative, using relatively quick adjudication, in the form of specialized construction arbitration.
The definition of an “improvement” is being revised to include the term “capital repair”, instead of only the word “repair”. Its meaning will include any repair intended to extend the normal economic life or to improve the value or productivity of the land or any structure on it, but it would not include maintenance work performed in order to prevent the normal deterioration of the land or structure on it or to maintain the same in a normal, functional state.
Newly introduced section 2(4) provides that, if a contract so provides, when multiple improvements are made under the same contract, each improvement, for the purposes of determination of substantial performance and completion would be deemed to be under a separate contract, provided that each of the improvements is to lands that are not contiguous.
Liening Condominium Projects
An owner of an individual condominium unit may file an ex parte motion to remove the registration of the common elements lien from title to their respective unit by paying into court or posting security in an amount equal to the pro rata share of the claim for lien plus the lesser of the amount of $250,000, or 25% of the above pro rata share, as security for costs.
Liening Leasehold Premises
If a landlord pays for all or part of the improvement of the leased premises under the terms of the lease, its renewal, or any agreement connected to the lease to which the landlord is a party, then the landlord’s interest is also subject to the lien, to the extent of 10% of the amount of such payment. This is a significant difference to the previous regime where the contractor could not generally lien the freehold interest of the landlord, unless the landlord was provided prior written notice and did not object within 15 days.
Changes Affecting Holdback
The changes to the holdback provisions are aimed to make the holdback process more flexible. In particular, holdbacks may, instead of being retained in the form of funds, be retained in various forms, including a letter of credit or a demand-worded holdback repayment bond.
With respect to large-scale projects (where the contract exceeds $20,000,000, and where the contract specifically provides for such an option), the holdback may be paid out annually or upon completion of work phases, provided that as of the payment date there are no preserved or perfected liens, or all liens have been satisfied, discharged or otherwise provided.
After the lien period expires, the owner will be required to promptly pay the holdback funds, unless, no later than 40 days after publication of the applicable certification or declaration of substantial performance, the owner publishes a notice, in a prescribed form, specifying the amount of the holdback that the owner refuses to pay, and the owner notifies the contractor of the publication of the notice.
The key holdback principle currently stipulated in s. 22(1) of the Construction Lien Act that each payer upon a contract or subcontract under which a lien may arise shall retain a 10% holdback, remains unchanged.
Small Claims Court
Parties may request that a judge refer construction lien claims under $25,000 to the small claims court.
WHAT TO EXPECT AS OF OCTOBER 1, 2019
The second – but not less important – set of amendments should become effective on October 1, 2019, and relate primarily to Prompt Payment and Adjudication.
The new prompt payment provisions are meant to address complaints from contractors and subcontractors that they often wait months to be paid, whether the customer is in the public sector, or the private sector. The private sector customers often have cash flow problems that cause them to delay payments. In the public sector, funding is rarely a problem, but bureaucratic procedures in checking on the quality of work may be quite slow.
The Construction Act sets firm time limits for payment. An owner is required to pay no later than 28 days after being presented a “proper invoice” which must comply with the requirements of the Construction Act, and the contractor is in turn required to pay its subcontractors within seven days after receiving payment from the owner. However, a payer who disputes the validity of the invoice, or the quality of the work, may delay payment pending adjudication, but must file its dispute within 14 days of receipt of the proper invoice, setting out the amount not being paid and the reasons for non-payment.
The situation for a contractor or subcontractor who intends to refuse to make a payment is slightly different than that of the owner. If a contractor or subcontractor intends to refuse to make payment, then they must elect to base their refusal either on: (i) not having received funds themselves due a non-payment; or (ii) disputing the entitlement of their payee. This election has important implications. If contractors or subcontractors refuse to pay on the basis that they were not paid themselves, then they must pay through any amounts they receive and provide an undertaking to refer the matter to adjudication within 21 days of providing notice to their payee (unless such an undertaking was already given by a party higher in the payment chain). Conversely, if they choose to dispute the entitlement of their payee, they do not need to pay through amounts received or refer the matter to adjudication, but they must provide a notice of non-payment specifying the amount not being paid and detailing the reasons for non-payment.
Prompt payment provisions are in widespread use in the United States. There, the statutes impose interest penalties for late payment that are frequently as high as two percent per month. The Construction Act, by contrast, imposes an interest penalty equal to the “prejudgment interest rate” determined under subsection 127 (2) of the Courts of Justice Act, which is currently about 1 percent per annum (however, higher interest rates are allowed to be set by contract). Therefore, the prompt payment legislation lacks some teeth as a result of the low default interest rate. It is to be hoped that the mere existence of the prompt payment requirement may have a morally persuasive effect, particularly for large contractors and public sector entities that might be embarrassed about being in violation of the law.
Adjudication in Preference to Liens
The most significant feature of the Construction Act is the new provision that adjudication is to be conducted by qualified adjudicators with expertise in construction issues. It establishes an “Authorized Nominating Authority” (the “Authority”) that will:
- develop and oversee programs for the training of persons as adjudicators;
- qualify persons who meet the prescribed requirements as adjudicators; and
- establish and maintain a publicly available registry of adjudicators.
In addition, the Authority will name an adjudicator to act in a dispute if the parties cannot agree among themselves on an adjudicator. The adjudicator will inspect documents and visit the construction site to determine the proper amount to be paid to resolve the dispute. The process is intended to be fairly quick, with the adjudicator ordinarily required to render a decision within 30 days. The decision is binding on the parties. However, a party that wishes to dispute the adjudicator’s decision can go to court to seek to have it overturned, and has 30 days to file an application for this purpose.
Once an adjudication decision is final, the party that is owed money under it may move to have it enforced by a court order.
Existing Lien Remedies
The original remedy of registering a lien will still be available. Under the Construction Lien Act, a lien had to be preserved (i.e. by registering on title) within 45 days after substantial completion of the work or when the contract was completed or abandoned (depending on whether it was a contractor’s lien or a subcontractor’s lien), and a court action had to be commenced within 90 days of that same original date, to prevent the lien from expiring (which is called perfecting the lien).
Under the Construction Act, the deadline for registering a lien will be extended to 60 days, and an additional 90 days will be available to commence a court action, resulting in the extension of the combined preservation and perfection period from 90 days to 150 days.
If adjudication has been commenced, there will be a 45-day period after the delivery of documents to the adjudicator, before the deadline for registering a lien expires. The hope is that the adjudication process will allow more disputes to be resolved without the need to prosecute a lien action, which has become time-consuming and costly.
Adjudication will not entirely eliminate the need for liens, but may solve the dispute if the issue is a technical disagreement about how much is due. However, particularly if the general contractor is insolvent, the subcontractors will still want a lien against the subject property to gain access to the funds held back by the owner.
The costs of the adjudication will be split among the parties. To the extent that it keeps disputes out of the court system, the government also benefits by shifting the cost of the legal process to the private sector.
Adjudication has been found to work well in the United Kingdom, where it originated. It has since spread to a number of other countries, such as Australia, New Zealand, and Ireland. Its success will hinge on the quality of implementation, and in particular, on how well the Authority carries out its functions.
The Construction Act does not repeal the Construction Lien Act, but instead amends it, clause by clause. A significant portion of it is devoted to the new prompt payment and adjudication features. In addition to these two new features, the Construction Act implements numerous technical changes to the lien and holdback rules. Even those familiar with the old rules will need to go to some effort to understand what effect of the new provisions will have on their previous practices.
With respect to public sector projects, there will be a requirement for contractors to provide both a labour and material payment bond and a performance bond will be required if the public contract price is $250,000 or greater. The regulations to the Construction Act require that the minimum coverage for each bond will be 50% of the contract price up to a maximum of $50 million in coverage (reached at a contract price of $100 million).
The Construction Act authorizes the Ministry itself to fulfill the adjudication function on an interim basis. Four new regulations for the operation of the amendments introduced by the Construction Act have been posted on the government’s website in February 2018, and recently, on April 23, 2018, they have been finally approved and filed:
- Forms (prescribes 18 new forms to support the introduced amendments);
- Procedures for Actions under Part VIII (contains procedural provisions that were removed from Part VIII of the Construction Lien Act);
- General (sets monetary threshold for surety bonds on public sector construction projects and for the annual and phased release of holdbacks); and
- Adjudications under Part II.1 of the Act (sets rules on implementation of the newly introduced adjudication process).
The new Regulations will take effect at the same time as the amendments they support.
As a transitional provision, the new rules will only affect contracts entered into after the applicable section of the Construction Act has been proclaimed. Any subcontract under an existing contract will continue to be governed by the old rules, regardless of when it was entered into, as long as the main contract was executed prior to the proclamation date.
* * * * *
THIS ALERT IS FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR ANY OTHER PROFESSIONAL ADVICE. ADVICE FROM A QUALIFIED CONSTRUCTION LAWYER SHOULD BE SOUGHT IN RELATION TO YOUR PARTICULAR SITUATION.
Should you have any questions on the above, please do not hesitate to contact any of the following lawyers at Friedman Law Professional Corporation:
William Friedman E: [email protected] / T: (416) 496-3340 ext. 199
Judy Hamilton E: [email protected] / T: (416) 496-3340 ext. 136
Patrick Bakos E: [email protected] / T: (416) 496-3340 ext. 192
Mark Russell E: [email protected] / T: (416) 496-3340 ext. 119