Construction Law Reform Across Canada: Prompt Payment and Adjudication

Construction law is being reformed at the federal and provincial levels across Canada. The changes will have wide-ranging impacts across the construction sector and related industries. Among the changes are “prompt payment” reforms that impose legislated payment deadlines on private and public construction contracts, as well as a new fast-track private dispute resolution regime called “adjudication.”

Any lawyer with clients in the construction supply chain ought to take careful note to avoid being caught unprepared by new deadlines and new dispute resolution forums introduced by the legislation. Alternative dispute resolution (“ADR”) professionals may also be interested in the new adjudication regimes, procedures, and decision-making bodies being created to take the place of courts in construction disputes.

Given Statistics Canada’s estimates that the construction sector employs roughly 1.437 million Canadians and makes up six percent of Canada’s gross domestic product, reforms of this magnitude will be felt from coast to coast. What follows is a breakdown of the construction law legislative developments at the federal and provincial levels across Canada.

Federal government’s new Federal Prompt Payment for Construction Work Act

Federal construction legislation does not currently exist in Canada, but a recent federal bill has received royal asset and may come into force in the near future.

On April 8, 2019, the federal government introduced the Federal Prompt Payment for Construction Work Act in its omnibus budget bill C-97. The bill has passed first, second, and third reading, and received royal assent on June 21, 2019. There has not yet been any determination as to when the Act will come into force.

After the legislation comes into force, Canada will have its first construction laws governing projects on federal lands. Provincial legislation has existed for years that sets out contractors’ “lien” rights when they are unpaid, however, those provincial statutes generally do not have jurisdiction over federal lands. The introduction of federal construction legislation will impact all construction industry stakeholders that supply or contribute to public construction projects with federal connections (e.g. military bases, airports, fisheries, and work performed on other federal Crown lands).

Notably, “lien rights” do not form a part of the federal act. Instead, the act has both prompt payment and adjudication mechanisms to enforce construction contractors’ rights to be paid in a timely fashion. The prompt payment and adjudication provisions have important similarities to the reforms adopted in Ontario and in other provinces.

Prompt payment at the federal level and in Ontario’s new Construction Act

Prompt payment reforms are legislated deadlines to pay contractors and subcontractors for supplying labour, services and materials to construction projects. While the concept is new in Canada, prompt payment laws have been in force in the United Kingdom and most jurisdictions of the United States for many years.

In both the not-yet-in-force federal act and Ontario’s new Construction Act, property owners will be obligated to pay a contractor 28 days after receipt of a proper invoice. Subcontractors are required to be paid seven (7) days thereafter. The deadline to pay further sub-levels of contractors is a further seven (7) days per level. This is intended to keep construction funds flowing down each level of the project supply chain without delay.

Several important deadlines may impact parties’ rights to dispute payments under this new regime. For example, if the property owner intends to dispute an invoice or refuse payment, a dispute notice needs to be sent to the contractor 21 days after receipt of a proper invoice. Similarly, a contractor needs to send a dispute notice to its subcontractor 28 days after delivery of the proper invoice. Subcontractors must send similar notices to their subcontractors seven (7) days thereafter. Subject to minimum requirements in the legislation and regulations, parties may agree between themselves what constitutes a “proper invoice” and timing for delivery of invoices in order to exert greater control over these timelines. However, parties may not make payment of an invoice conditional on the approval of a payment certifier or project owner.

Whether these new prompt payment laws apply depends on each statute’s transition provisions. In the case of Ontario, it varies depending on the date of the “prime contract” between the owner and general contractor, whether there was a procurement process that put the contract out to tender prior to its execution, and whether the work relates to a leasehold interest. The federal legislation appears to have a more straightforward deadline by which all contracts entered into will be considered to be subject to the new laws. That date will depend on when the federal act finally comes into force.

The transition provisions will make it critical for lawyers and construction stakeholders to request and obtain information about each project’s prime contract date in order to assess the construction laws that are applicable to each project.

Adjudication at the federal level and in Ontario

The newly legislated requirement to pay construction stakeholders promptly is not absolute. Payment demands will continue to be met with the myriad objections commonplace in construction projects: delay, deficiencies, poor workmanship, overbilling, and other contractual disputes. Owners and stakeholders across the construction supply chain have the option in the prompt payment legislation to resolve these payment disputes using a new dispute resolution process called “adjudication.”

Adjudication has been a key dispute resolution mechanism of the United Kingdom construction law field for many years. Similar to arbitration, adjudication is intended to be a flexible “fast track” process to resolve disputes among parties in the construction supply chain.

Both the federal legislation and Ontario Construction Act contain legislated requirements to give notice prior to referring a dispute to adjudication. The acts also provide a framework for the process to appoint and select an adjudicator.

Ontario’s Construction Act goes further and sets legislated timelines to provide an adjudicator prescribed documents and for adjudicators to make a decision. The decision turnaround times under the act are exceptionally short. Adjudicators may be required to release a decision as quickly as 30 days after receiving the documentation prescribed by the act. The regulations have set out further details including, among other things, the experience requirements to become an adjudicator, adjudicator powers, and the consolidation of adjudications.

Ontario’s nominating authority for adjudicators, Ontario Dispute Adjudication for Construction Contracts (“ODACC”), recently previewed five adjudication processes and an example adjudication timeline as part of the application package to become an adjudicator. The pre-determined processes range from adjudications in writing only to 30-minute oral submissions for each side by way of webcast. Adjudicators will also have discretion to determine a custom procedure in consultation with the parties to the dispute.

The short deadlines and turnaround times in the federal act and Ontario’s new Construction Act will no doubt cause challenges. Information disparities between each level of the construction supply chain may make applicable deadlines difficult to assess. For example, without the date of the prime contract or the submission date of a proper invoice by the contractor, subcontractors may remain in the dark about whether the new legislation applies and when applicable notice deadlines expire.

Notwithstanding the anticipated growing pains, the implementation of Ontario’s Construction Act is well underway. The province’s rolling transition provisions have created a shifting landscape whereby different provisions will apply to different contracts in the industry well into the foreseeable future. Adjudication is scheduled to roll out in Ontario starting on October 1, 2019. How the process unfolds may influence how quickly and to what degree adjudication is implemented in other provinces across Canada.

Prompt payment and adjudication across the provinces from coast to coast

Prompt payment and adjudication laws are under contemplation or underway in an additional six provinces. The legislation being contemplated tends to adopt and/or share features with the laws already in force in Ontario and introduced at the federal level, as follows:

• On April 12, 2019, Nova Scotia gave royal assent to Bill 119 to amend the Builders Lien Act, which includes provisions for prompt payment deadlines, “proper invoices” and adjudication. The amended act has not yet come into force. Notably, no transition provisions are included in order to “grandfather” old contracts under the old act.
• On May 15, 2019, Saskatchewan gave royal assent to Bill 152 to amend The Builders’ Lien Act, which includes provisions for prompt payment deadlines, “proper invoices” and adjudication. The amendments are not yet in force. Transition provisions will allow contracts entered into prior to the “in force” date to ignore the amendments and proceed under the previous act.
• On May 23, 2019, British Columbia introduced Bill M223, the Builders Lien (Prompt Payment) Amendment Act, 2019, which includes provisions for prompt payment deadlines and “proper invoices”. BC’s Bill M223 is currently in first reading and may be modified as it makes its way through the legislature. The current language of the bill does not currently provide for an adjudication process.
• On June 3, 2019, Manitoba introduced private member’s Bill 245, which proposes the creation of The Prompt Payments in the Construction Industry Act. This bill follows an earlier prompt payment regime that died after second reading in the province’s legislature in 2018. Manitoba’s legislation similarly provides for prompt payment deadlines, “proper invoices” and adjudication. The adjudication provisions are optional, minimalistic and refer to regulations to be drafted.
• New Brunswick and Quebec have also begun investigating prompt payment as a potential policy to adopt in the future.

Given the speed and breadth of change across Canadian jurisdictions in the construction sector, legal practitioners would be well advised to stay informed of future developments. Opportunities will continue to emerge for ADR professionals interested in resolving disputes in the construction arena as an adjudicator. Overall, the implementation of these new laws, transition provisions that vary by province, and the impact of contractual idiosyncrasies will continue to make construction law an interesting space for the foreseeable future.