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How should owners, contractors and subcontractors prepare for the new prompt payment and adjudication provisions in the Ontario Construction Act, which start taking effect on Oct. 1?
Lawyers speaking at an Ottawa Construction Association (OCA) symposium on Feb. 27 said that there isn’t a panic to prepare for the new rules because, even though the they will go into effect in about six months, the construction legislation’s transitional provisions mean that it will be several months after that before projects that are affected by the prompt payment regime will be under way.
The modernized law sets out specific notice requirement and payment and dispute resolution systems. Under the new legislation, owners must pay their general contractors’ “proper invoices” within 28 days, unless they serve formal dispute notifications within 14 days of receiving the proper invoice.
Meanwhile, general contractors have seven days to pay their subs and they in turn have seven days to pay their sub-subs and suppliers and so on.
Andrew Ferguson, a lawyer with MBC Law and Shawn O’Connor from Kelly Santini LLP shared observations about the seven ingredients within a “proper invoice”. These include some obvious details including:
- The contractor’s name and address;
- The date of the proper invoice and the period during which the services or materials were supplied.
- Information identifying the authority, whether in the contract or otherwise, under which the services or materials were supplied.
- A description, including quantity where appropriate, of the services or materials that were supplied.
- The amount payable for the services or materials that were supplied, and the payment terms.
- The name, title, telephone number and mailing address of the person to whom payment is to be sent.
- Any other information that may be prescribed.
The legislation specifies that unless another timeframe for invoicing is specified, the invoices should be monthly, but the lawyers noted that it is okay to contractually revise the invoicing/payment rules to other schedules, such as project milestones or perhaps a more frequent weekly cycle.
Ferguson said the law’s mandatory notice and payment terms are confusing – and it is important that everyone understand the rules because of the serious consequences if you miss key deadlines. He suggested that a “Rule of seven” may be helpful, in that various deadlines operate under a seven day timeline or a multiple of a seven day timeline.
For example, the owner has 14 days to dispute the general contractor’s invoice. The owner must provide the notice on a specific form outlined by the Construction Act’s regulations. The owner can for example, provide a “notice of non-payment”, “disputing all or part of (the invoice) and giving reasons for the dispute.”
General contractors receiving the non-payment notice, can send a similar notice to affected sub-trades, but they only has seven days for this notice – meaning it would take 21 days from the original “proper invoice” date (and still before the invoice would be due) for first-line sub-trades to know there was a payment problem/issue.
“This is a statutory ‘pay-when-paid’ clause, Ferguson said. “But don’t be too concerned about this – there are going to be provisions to speed things up.” Allowing for a further seven days for each level down the chain, “within 35 days of a proper invoice (everyone) will know if the invoice is paid or being disputed,” he said. “It’s a lot quicker than dealing with things the way they are now.”
And missing the filing deadline could be costly. Say owners or general contractors fail to provide the prescribed notice – the payments will still be due, regardless of whether they have received their money or are dissatisfied with the work that has been done.
L. P. Gregoire of Gowling WLG explained that these notice provisions also tie into the adjudication process, which is intended as a rapid resolution of any contract disputes.
Under the legislation, most payment disputes should be resolved between 39 and 46 days, unless the parties agree to an extension, he said.
The adjudication starts with a “notice of adjudication” form, where the general contractor or subtrade selects an adjudicator, from a roster to be overseen by the government (the Authorized Nominating Authority).
The selected adjudicator “has four days to accept or reject” the assignment, and then claimants have five days to provide documentation to back up their claim.
“The adjudicator has 30 days to come up with a written decision” meaning all disputes should be resolved one way or another within 39 days.”
If the adjudicator initially selected cannot take on the assignment, “the claimant can then deliver a notice of adjudication to the Authorized Nominating Authority, which will have seven days to appoint an adjudicator that can take on the matter, he said. Note that the respondent has no say in the selection of the adjudicator.
Once the adjudicator makes a decision, payments must be made within 10 days – and the decision is fully enforceable, including bank account garnishments.
The lawyers also outlined other provisions in the Act:
- If the payment dispute only relates to part of the payment request, then the balance must still be paid within the 28/7/7 day cycle;
- Interest is payable on overdue accounts; but unless you specify the interest int the contract, a very low statutory rate of simple interest will apply;
- If an arbitrator’s decision to pay is not obeyed, the party to which the sum would be paid can “walk off” the job – obliged to return only after the amount due are paid, plus interest and reasonable remobilization fees;
- Owners, contractors and sub-trades cannot opt out of the law’s core provisions;
- The rules apply to every type of Ontario construction project, from the smallest residential renovation to massive multi-billion P3 projects;
- While these provisions relate to Ontario projects, other provinces and the federal government are preparing their own laws similar to Ontario’s Construction Act, so variations of the new rules will soon apply in several other jurisdictions.
The adjudication and prompt payment rules are parallel and dovetail with the other Construction Act provisions already in effect, including revised notice periods and holdback provisions for construction liens, and the mandatory segregation of trust accounts to ensure that funds remain available for subtrades and suppliers, even if an owner or general contractor’s business fails.