Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 2)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142 which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 ( the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance- Expert Review of Ontario’s Construction Lien Act

The proposed changes to the Act are so numerous that they are being dealt with me in two articles. This article is the second article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Minor irregularities:

New subsection 6(2) expands the “minor irregularities” that are not to invalidate a certificate, declaration or claim for lien. They now include minor errors or irregularity in the name of the owner, or person from whom materials or services are provided, or the legal description of the premises, or owner’s name in the wrong portion of a claim for lien.

Comments and Questions

This is an important amendment. The power of the court to correct or allow irregularities in liens is substantially increased. There will likely be many applications to test the ambit of this wider corrective power.

Construction Trustee’s Records and Bank Accounts

New subsection 8.1(1) requires any trustee under the Act to deposit trust funds received by him or her into a bank account and to keep written records detailing the receipt, payments and transfers of each such funds for each project.

Under new subsection 8.1(2), if trust funds from separate trusts are deposited into a single bank account, the funds are deemed to be traceable, and such a deposit does not constitute a breach of trust.

Comments and Questions

This is an important amendment. The exact obligation of trustees regarding bank accounts and records will be explored in subsequent case law. The decisions from western Canadian provinces and the U.S.A. may be relevant since those jurisdictions have had more obligations and experience in this area than has Ontario.

It is to be noted that this amendment does not require the trustee to maintain a separate bank account for each project. But, as the Report notes, if the trustee does not then the trustee ’s books and records must “clearly show the allocation to each trust of the funds deposited in the general account” and the “trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and the books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.”

Interim Dispute Adjudication

New Part II.1 and Sections 13.1 to 13.24 introduce into the Act a new regime dealing with Construction Dispute Interim Adjudication.

This part will enable either party to a construction contract, during the performance of the contract, to have an interim resolution of a dispute between the parties conducted by an adjudicator. Under subsection 13.3(3), only if the parties both agree can this new adjudication regime apply to adjudications commenced after the contract or subcontract is performed.

The effect of the adjudication is interim since, under section 13.15, the determination is only binding on the parties “until a determination of the matter by a court or any determination of the matter by way of an arbitration conducted under the Arbitration Act, 1991.”

These sections provide in detail for: an Authorized Nominating Authority to be designated by regulation which will appoint the adjudicators (sections 13.1 to 13.3); the procedures relating to an interim adjudication (sections 13.6 to 13.14); the power of the court to set aside an adjudication (section 13.18); and the obligation of the court to enforce the adjudicator’s determination (sections 13.19 and 13.20).

The adjudication regime can extend the period to protect the lien. Under new subsection 34(10), if the matter that is the subject matter of a lien is also the subject matter of an adjudication, then the lien is deemed, for the purpose of section 34 only, to have expired “on the later of the date on which the lien would expire under section 31 and the conclusion of the 45-day period next following”

(a) the receipt by the adjudicator of the notice requesting adjudication and related documents referred to in section 13.11; or

(b) in the case of consecutive adjudications, the receipt by the adjudicator of the section 13.11 documents for the last of the adjudications.

Comments and Questions

Section 13.3(5) says that a matter can be sent to adjudication even though that matter is subject to court or arbitration proceedings. How will all these regimes work together? The addition of the adjudication regime means that there are now at least four regimes applicable to construction disputes: contract litigation, arbitration, lien litigation, and adjudication. Enough already?

What effect should be given to the adjudicator’s determination in subsequent court or arbitration proceedings? No effect, because the adjudication is, by section 13.15, no longer binding once an order is made by a court or arbitrator? Some proof of the facts decided by the adjudicator, but rebuttable? Respect for the findings, but not binding if unreasonable? Having introduced the adjudication process into the Act, should the legislature tell us what effect the adjudication has in subsequent proceedings, or did it intend to do so in section 13.15?

Are the adjudicative procedures subject to the Arbitration Act, 1991? Subsection 13.12(6) says that they are not subject to the Statutory Powers Procedure Act, but the same statement is not made in relation to the Arbitration Act, 1991?

Are the adjudicative procedures confidential? Must the adjudicator’s reason, which must be given in writing (section 13.13(4)), be kept confidential? If the proceedings or reasons must be kept confidential, or can be ordered to be kept confidential, between whom must they be kept confidential: the contractor, owner, subcontractor, and supplier? Is this matter simply left up to the adjudicator to decide, under his or her power in subsection 13.12(4) to determine the appropriate manner to conduct the adjudication?

As discussed below, does new subsection 71(5) prohibit appeals from orders reviewing or enforcing (or refusing to enforce) an interim adjudication? It appears that it does.

Under the new subsection 34(10), the extension of the lien-preservation period by reason of adjudication runs to the date of the receipt by the adjudicator (or the last adjudicator) of the adjudication claim and related documents referred to in section 13.11, not (as might be assumed) the date of the adjudication itself (or appeal decision). So a party wishing to make a lien claim and an adjudication claim must, in remembering to preserve its lien claim, pay attention to the date that the adjudicator receives the adjudication claim.

Landlords

Section 19 (1) of the Act is replaced with an entirely new regime relating to the liability of landlords. Gone is the regime whereby notice could be given to the landlord of the improvement being made, which required the landlord to disavow responsibility for the improvement. Now:

Subsection 19(1) says that “if payment for all or part of the improvement is accounted for under the terms of the lease or any renewal of it, or under any agreement to which the landlord is a party that is connected to the lease, the landlord’s interest is also subject to the lien, to the extent of 10 percent of the amount of such payment.”

In addition, new subsection 19(5) says that “Nothing in this section prevents a determination in respect of a premises that the landlord is instead its owner, if he or she meets the criteria set out in the definition of “owner” in subsection 1 (1). (underlining added)

Accordingly, the landlord may be liable for the 10 percent holdback if the “improvement is accounted for under the terms of the lease, renewal or other connected or agreement” (whatever those words may mean); or in the alternative may be liable as an owner.

Lien claimants are granted the right to obtain information from landlords under the amended subsection 39 (1), which requires landlords to provide information about the names of the parties to the lease, and the amount of the payment by the landlord under the lease for part or all of the improvements referred to in subsection 19 (1).

Comments and Questions

Issues may arise as to what words in a lease amount to “all or part of the improvement is accounted for under the lease” so as to trigger the 10 percent liability in subsection 19(1).

Also, the very same wording in the lease may be part of the surrounding circumstances which may arguably make the lessor an “owner” under subsection 19(5).

Set-Off

Section 12 and subsection 17(3) are amended to provide that, in determining the amount of the trust funds to be retained by a trustee and the amount of a lien claim, a set-off can only be asserted in relation to debts, claims and damages relating to the improvement.

Comments and Questions

This is a very substantial amendment. Formerly, set-offs applied “whether or not related to the improvement.” A substantial body of case law has been rendered irrelevant.

Holdback

Several amendments have been made to the retention and payment of the holdback.

Under new subsection 22(4), a holdback can be maintained in various prescribed forms including a letter of credit and a demand-worded holdback payment bond.

Under the amended section 26, the payer under a contract “shall” (and no longer “may”) pay the holdback once all liens have been satisfied, discharged or provided for, subject to a payer publishing a non-payment notice under new section 27.1.

Under new sections 26.1 and 26.2, a holdback may now be paid on an annual or phased basis if the contract provides for payment of the holdback on one of these bases and the other provisions of these sections are satisfied and the contract amount exceeds an amount to be prescribed under the Act.

Under section 27.1, a payer of a holdback may refuse to pay some or all of the holdback if it publishes a notice to that effect in the prescribed manner and form within 40 days of the applicable certificate or declaration of substantial performance.

Comments and Questions

Must the entitlement to withhold payment of the holdback be reconciled with the new prompt payment regime?

Presumably, the 40 day period for giving notice of non-payment of the holdback is intended to do so, but some of the periods are not intuitively consistent. Thus, under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. If the owner fails to give such a notice, can it still deliver a notice refusing to pay a holdback?

Preservation, Protection And Expiry Of The Lien

Sections 31(2)(a), 31(2)(b) and 31(3)(a) are amended to increase the time to preserve the lien from 45 days to 60 days.

Subsections 31(2)(a)(ii), 32(2)(b)(ii), 31(3)(b) and section 72 are amended to include the termination of the contract, in addition to its completion or abandonment, as an event starting the period in which the lien must be preserved. Under new subsection 31(6), the terminating party is obliged to publish notice of the termination in the prescribed manner and form, but doing so does not preclude the other party from challenging validity of the termination.

New subsection 31(4) provides for the expiry of a workers’ trust fund lien in the same time period as other liens, including the period from the termination of the contract.

As already noted, the time for preserving a lien under section 34 may be extended by an adjudication as a result of the new subsection 34(10).

Subsection 36 (2) of the Act is amended to increase the time for perfecting the lien from 45 to 90 days.

Comments and Questions

How will the lien preservation and perfection regime intersect with the adjudication regime?

Can the adjudication process be abused for the purpose of extending lien preservation and perfection rights?

The accumulated times for preserving and perfecting a lien is now 150 days, or about five months, instead of 90 days, a substantial increase in the lien claim process.

Subsection 34(10) extends the time for preserving the lien, which effectively extends the time for perfecting the lien. But that subsection does not appear to directly, or otherwise, extend the time for perfecting the lien.

The word “termination” is not defined in the Act. Under contract law, a contract is not entirely terminated by an accepted repudiation or rescission or the like. Rather, the contract remains alive for dispute resolution purposes. It appears that the word “termination” has been used in these new provisions in the sense of termination of the performance of the contract.

Condominium Common Elements

Section 34 of the Act is amended to provide a regime for giving notice of the preservation of a lien affecting the common elements of a condominium.

Remedies For False Or Exaggerated Lien Claims

Subsection 35(1) is repealed and replaced with a new subsection (1) which states that a person who preserves a claim for lien or who gives written notice of a lien in the following circumstances is liable to any person who suffers damages as a result if:

  1. The person knows or ought to know that the amount of the lien has been wilfully exaggerated.
  2. The person knows or ought to know that he or she does not have a lien.

In addition, under the new subsection 35(2), in the circumstances described in subsection 35(1).1 the court may “order that the lien amount be reduced by the exaggerated portion…if it finds that the person has acted in good faith.” (underlining added)

Subsection 47(1) is repealed and replaced with a new subsection (1) which empowers the court to discharge a lien if the claim for lien is frivolous, vexatious or an abuse of process, or on “any other proper ground”. Under new subsection 47(1.1), the court may vacate the registration of a claim for lien or certificate of action or both, declare that a written notice of lien has expired or is no longer valid, or dismiss an action.

Comments and Questions

Section 47 refers to a lien which is “frivolous, vexatious or an abuse of process”. Do these words mean the same as “willfully exaggerated” in subsection 35(1)? Recommendation 15 of the Report called for Section 35 to be amended “to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level.” However, section 47 still refers to “frivolous, vexations or an abuse of process” which may or may not mean the same as “willfully exaggerated”.

It seems that subsection 35(2) is intended to be a sort of preservative exception to section 47; that is, if the person who registered the lien did so in good faith, the lien can be reduced in amount under subsection 35(2), but if the person who registered the lien did not act in good faith, then apparently the court has no power to reduce the lien amount by the exaggerated portion.

It is not clear how this provision will work. Recommendation 16 of the Report says:

“The provision [referring to section 35] should further be amended to allow the court to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant.”

However, the new subsection 35(2) is found in section 35, not section 47, and the relief in section 35 relates to “damages” for filing an “exaggerated” lien which may or may not be equivalent to the amount of a lien which is “frivolous, vexations or an abuse of process”.

Procedures: Directions, Summary Procedures And Appeals

Section 50 of the Existing Act is the section which sets forth the general procedures for lien actions. Among other things, the present subsection 50(2) prohibits a lien and trust claim being joined in the same action. The Report recommended that the prohibition on joinder of lien claims and trust claims under section 50(2) should be removed from the Act, subject to a motion by any party that opposes joinder on the grounds of undue prejudice to other parties.

Under the Proposed Act, Section 50 is repealed and replaced by subsections which states that, except to the extent that they are inconsistent with this Act and the procedures prescribed for the purposes of this Part, the Courts of Justice Act and the rules of court apply to actions under this Part; and that the procedure in an action shall be as far as possible of a summary character, having regard to the amount and nature of the liens in question.

Accordingly, the procedures in lien actions are now to be dealt with as generally provided in the Courts of Justice Act and the Rules of Civil Procedure, and there is no further prohibition of joining a trust claim with a lien claim.

Sections 53 to 57 are repealed. These sections instituted specific procedures in lien actions. In particular, section 56 prohibited third party clams in lien actions without court approval. The Report recommended that this prohibition be removed, and it has been.

Section 66 (dealing with applications to the court for directions) and section 67 (dealing with Summary procedures) are repealed.

Section 71(3) is amended to permit appeals from interlocutory orders of the court to the Divisional Court, with leave of that Court. Formerly, no appeals could be taken from interlocutory orders in lien actions.

Under new subsection 71(3), with respect to appealing the confirmation of a report made under the Act, if the amount in issue is $10,000 or less, there is no appeal: formerly, the amount was $1,000.

Under new subsection 71(5), there is no appeal from an order of the court under Part II.1, that is, interim adjudication.

Comments and Questions

The elimination of section 67 means that interlocutory motions may now be brought and oral and documentary discovery may be conducted in lien proceedings, as recommended by the Report. The Report also recommended, however, that all lien proceedings be case managed in all regions in Ontario.

Does subsection 71(5) mean that there is no appeal from an order under new section 13.18, namely, an order granting or dismissing an application to set aside the determination of an adjudicator? Presumably yes, because the adjudicator’s determination is only intended to be provisional, until an order of a court or arbitrator is made.

Does subsection 71(5) mean that there is no appeal from an order enforcing an adjudicator’s determination under new sections 13.19 or 13.20? Such a prohibition seems somewhat more radical that a prohibition against appealing an order under section 13.18 since enforcement of the adjudication regime seems to be matter of importance. Then again, the adjudication regime is only intended to be provisional, and the parties can still go to court or arbitration outside that regime.

Surety bonds

A new Part XI.1 entitled Surety Bonds is introduced into the Act. This new part may be summarized as follows.

If a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond, both to be in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price. The labour and material bond is required to provide coverage to the subcontractors and persons providing labour or materials to the improvement.

New subsection 86.3(1) provides that any person to whom payment is guaranteed under a labour and materials payment bond has a direct right of action against the surety. New subsection 86.3(2) provides that an owner has the right to enforce a payment bond against the surety and the contractor. New subsection 86.3(5) states that, on satisfaction of the obligations of a person under a bond, the surety is subrogated to the rights of that person.

Comments and Questions

For the most part, these amendments appear to be intended to allow third party beneficiaries to a bond to enforce it, overcoming the rule against the enforcement of a contract by a third party beneficiary of the contract. The case law has largely accomplished this result but these amendments may solidify the position of third party beneficiaries.

While subsection 86.3(5) appears to strengthen the subrogation principle in favour of sureties, the case law has protected other interests conflicting with those of the subrogating surety, including those of lien claimants, mortgagees and the Crown.

Thomas G. Heintzman O.C., Q.C., LL.D.(Hon.), FCIArb                     September 23, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

Amendments To The Ontario Construction Lien Act Have Been Given First Reading (Part 1)

On May 31, 2017, the Ontario Legislature gave first reading to Bill 142, which will enact the Construction Lien Amendment Act, 2017. By this legislation, substantial amendments are proposed to the Ontario Construction Lien Act, including the change of the name of the Act to the Construction Act.

The text of Bill 142 may be found by googling Bill 142, Construction Lien Amendment Act, 2017.

This proposed legislation (the Proposed Act) follows a lengthy Report: Striking the Balance: Expert Review of Ontario’s Construction Lien Act, delivered April 30, 2016 (the Report). The Report recommended the changes to Ontario’s Construction Lien Act (the Existing Act) that are now contained in the Proposed Act, so the contents of the Report should be consulted in interpreting and understanding the Proposed Act. The Report is reviewed in my article dated May 1, 2017. The text of the Report may be found by googling Amendments to the Construction Lien Act/Striking the Balance-Expert Review of Ontario’s Construction Lien Act.

The proposed changes to the Existing Act are so numerous that they will be dealt with me in two articles. This is the first article. These articles do not address all the proposed changes to the Existing Act, only those that I consider to be interesting or important.

The changes will be dealt with largely in the order in which they appear in the Proposed Act. I will offer my Comments and Questions about the various sections in the Proposed Act.

Joint Ventures 

The definition of “contractor” in subsection 2(1) is amended to include a “joint venture entered into for the purpose of an improvement or improvements”.

Written Notice of Lien

The definition of “written notice of lien” in subsection 2(1) is changed to read “a claim for lien or a written notice of a lien in the prescribed form, given by a person having a lien.”

New subsection 87(1.1) provides that “a written notice of lien shall be served in a manner permitted under the rules of court for service of an originating process.”

Comments and Questions

These amendments are important. They do away with the prior informality of the form and the manner of service of a notice of lien. Now, the notice of lien must be in a prescribed form and must be served in the same manner as an originating proceeding in court.

Improvements involving “repairs” limited to capital repairs

The definition of “improvement” in subsection 1(1) is amended to include the word “capital” before the word “repairs”. In the result, only capital, and not operating, repairs are included within the word “improvement”.

This point is emphasized in new subsection 1(1.1), which further defines the word “improvement” as follows:

            “Capital repair”

(1.1) For the purposes of clause (a) of the definition of “improvement” in subsection (1), a capital repair to land is any repair intended to extend the normal economic life of the land or of any building, structure or works on the land, or to improve the value or productivity of the land, building, structure or works, but does not include maintenance work performed in order to prevent the normal deterioration of the land, building, structure or works or to maintain the land, building, structure or works in a normal, functional state.” (underlining added)

Comments and Questions

The new legislation clearly re-draws the line around “repairs” to only include “capital” repairs. The debate will continue, however, but it will now be a debate about what is included in the definition of “capital repairs”, and whether the material or services fall within the words “extend the normal economic life” or “improve the value or productivity” on the one hand, or the words “prevent normal deterioration” or to “maintain” the building etc. in a “normal, functional state”, on the other hand.

The Report states that its approach to “capital” repairs and “maintenance” reflects the approach taken in the Income Tax Act. Accordingly, income tax cases may be of some assistance in interpreting this portion of the Proposed Act.

Price, Delay, Direct and Indirect Costs

In the definitions in subsection 1(1), the definition of the word “price” is amended in two respects:

First, if the parties have not agreed upon the price, then the price is to be set by the “market value” of the services and materials. Formerly, the price in this circumstance was to be set by the “value”, rendering it uncertain what scale or system of value was to be used.

Second, a new sub-paragraph (b) is added to state that if the contract is extended (that is, if there are delays) then only direct costs qualify as being part of the “price”. The amended definition reads as follows:

“ “price” means,

(a)  the contract or subcontract price,

(i)  agreed on between the parties, or

(ii)  if no specific price has been agreed on between them, the actual market value of the services or materials that have been supplied to the improvement under the contract or subcontract, and

(b)  any direct costs incurred as a result of an extension of the duration of the supply of services or materials to the improvement for which the contractor or subcontractor, as the case may be, is not responsible;” (underlining added)

The latter point about direct costs is further dealt with in subsection 1(1.2) to define what direct costs means, to define some of the possible ingredients of direct costs, and to specifically remove indirect damages from “price”. Subsection 1(1.2) reads as follows:

“Direct costs”

(1.2) For the purposes of clause (b) of the definition of “price” in subsection (1), the direct costs incurred are the reasonable costs of performing the contract or subcontract during the extended period of time, including costs related to the additional supply of services or materials (including equipment rentals), insurance and surety bond premiums, and costs resulting from seasonal conditions, that, but for the extension, would not have been incurred, but do not include indirect damages suffered as a result, such as loss of profit, productivity or opportunity, or any head office overhead costs.” (underlining added)

Comments and Questions

Although “indirect damages” do not now qualify as part of the price for lien purposes, indirect damages may qualify as recoverable damages, if they otherwise so qualify under the general law of contract and damages.

Do these new definitions mean that there can no longer be a debate about whether some of these items are direct or indirect costs for lien purposes?

Thus, in the first group – which is prefaced by the word “including” – is the additional supply of services or materials deemed to be a direct cost, even if the particular supply might, under contract law or accounting, be considered to be indirect? Does the word “including” have that effect?

So far as the second group – prefaced by the words “such as”, are loss of productivity or head office overhead now deemed to be indirect costs, or can it be shown that they are, in fact, law or accounting, direct costs in the particular circumstance? Does the word “such as” mean “for example”, and is that the same as “including”?

In sorting out what is included within or excluded from “direct costs”, the recommendation of the Report may be relevant. In its 5th recommendation, the Report stated that the “definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay.” (underlining added).

Crown and Municipal Ownership

Alternative Financing and Procurement arrangements

New subsection 1.1 may be summarized as follows:

When, as owner, the Crown, municipality or a “broader sector organization” [which is defined in the Proposed Act to have the same meaning as in the Broader Public Sector Accountability Act, 2010] enters into an agreement to undertake an improvement on behalf of the Crown, municipality or broader sector organization” with a “special purposes entity” then that entity is deemed to be the owner of the premises in place of the Crown, municipality or broader sector organization, and the contract between the entity and the contractor is deemed to be the contract, for the purposes of Part I.1 (prompt payment), Part II.1 (interim dispute resolution), Section 32 (certification and substantial performance), Section 39 (right to information) and any other portion or provision that may be prescribed. (underlining added)

With these exceptions, “the Crown, municipality or broader public sector organization continues to be the owner of the premises for the purposes of this Act,” and:

  “For the purposes of section 22, holdbacks shall be determined in reference to the agreement between the contractor and the special purpose entity.”

  For the purposes of section 85.1 (surety bonds), “the agreement between the contractor and the special purpose entity is deemed to be a public contract.” (underlining added)

Comments and Questions

These provisions relating to special purposes entities are somewhat duplicative, complicated and inter-dependent. The summary above is what I understand the provisions to mean. Exactly how they will work out will depend upon the final wording of the Proposed Act, and future experience and case law.

Definition of municipality

The definition of “municipality” in subsection 2(1) now includes a municipality or local board within the meaning of the Municipal Act, 2001, or a conservation authority established by or under the Conservation Authorities Act or a predecessor of that Act.

Crown and Municipal Land

Section 16 is amended to state that the land of the Crown or a municipality cannot be the subject of a lien. However, a lien may attach to the interest of any other person in the premises.

Under new subsection 16(3), the lien is a charge upon the holdback under section 21 even if the owner of the land is the Crown, a municipality or the land is a railway right-of-way.

Under new subsection 34(3.1), if the land is owned by a municipality, the claim for lien may be served by being given to its clerk.

            Comments and Questions

These amendments contain important clarifications or amendments of the existing law. Now, the prohibition against liening municipal land applies to all municipal land, not just a public street or highway owned by a municipality – as provided for in the Existing Act, subsection 16(3)(c). Now, it is clear that the lien may be a charge upon the holdback even if it is not a lien against Crown or municipal land or a railway right-of-way.

Sureties For Public Contracts

As will be noted in further detail in the second part of this article, if a public contract (defined to be a contract between a contractor and the Crown, a municipality or broader public sector organization) exceeds the prescribed amount, then new section 85.1 requires the contractor to provide the owner with a labour and materials payment bond and a performance bond in the prescribed forms and written by a licensed insurer and in each case providing coverage of at least 50 percent of the contract price.

Holdback, Substantial Performance and General Liens

Section 2 of the Existing Act defines when a contract is substantially performed for the purpose of the Act. It does so by stipulating that, when the cost of completion or correction are not more than certain amounts or percentages, then the contract is substantially performed.

Section 2 is amended by the Proposed Act to change the cost of completion or correction amounts in subsection 2(1) from $500,000 to $1 million, and the deemed completion amount in subsection 2(3) from $1,000 to $5,000 (or 1 percent of the contract price, whichever is the lesser).

In section 2(2), the non-completion of the improvement due to factors beyond the control of the contractor is removed as a reason for deducting the cost of completion from the contract price to determine substantial performance.

Subsection 2(4) of the Act is added to provide that separate improvements on separate lands may, if the contract so provides, be deemed to be made under separate contracts.

Comments and Questions

Does the new subsection 2(4) have any impact on the general lien, which is provided for in section 20? It seems to mean that, if the contract provides as now stated in subsection 2(4), then a general lien cannot arise on both or all improvements on “separate” lands.

Subsection 20(2) of the Present Act states that a general lien does not arise “under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.” Recommendation 20 of the Report was that “Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.” Apparently, this recommendation will not be implemented as there is nothing in the Proposed Act deleting subsection 20(2).

Indeed, reading the new subsection 2(4) with the existing and remaining subsection 20(2), it seems that the present general lien regime continues to apply but with expanded rights to contract out of that regime, both under the existing right to contract out of it through a contract complying with subsection 20(2), and also under the new subsection 2(4) allowing for the contract to provide that there are separate contracts for “separate improvements” on “separate lands”.

Prompt Payment

New Part I.1 and sections 6.1 to 6.8 implement a “prompt payment” regime. The regime is detailed, so a careful review of it must be undertaken by all construction law practitioners. The following is a basic outline of the regime as I understand it:

  • Section 6.1 mandates the form of a “proper invoice”. Under subsection 6.2(1), unless the contract otherwise provides, a proper invoice must be given by the contractor to the owner each month. Under subsections 6.2(2) and (3), the contract cannot provide that the giving of a proper invoice is conditional on a prior certification of a payment certifier or the owner’s prior approval, but such a certification or approval after the proper invoice is delivered is not affected.
  • Under section 6.3, the owner must pay the proper invoice within 28 days, unless it disputes that invoice and gives a notice of non-payment within 14 days after receiving the invoice. The notice of non-payment must specify the amount of the proper invoice that is not being paid and must detail “all of the reasons for non-payment.” The owner must pay within the 28 days any amount not so disputed.
  • Under section 6.4, subject to giving a notice of non-payment to a subcontractor, the contractor must, within 7 days of receiving the amounts from the owner, pay the subcontractors whose materials or services were included in the contractor’s proper invoice to the owner. If the contractor has received partial payment from the owner, the contractor must pay any subcontractors for whose work the owner has paid the contractor. Otherwise the subcontractors are to be paid on a rateable basis.
  • If the contractor does not give notice of non-payment to a subcontract, then even if it has not been paid by the owner, it must pay any remaining amounts due to the subcontractors within 35 day of sending its proper invoice to the owner.

Under subsections 6.4(5) and (6), the contractor can give a notice of non-payment to a subcontractor:

  1. either due to the fact that it has not been paid by the owner, in which case the notice of non-payment must be made within 7 days of the notice of non-payment by the owner, and the contractor must agree to have the “matter” adjudicated; or
  2. due to the fact that it disputes the subcontractor’s claim in which case the notice must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.
  • Under section 6.5, similar cascading regimes of payment, non-payment notices, etc. apply to subcontractors with slightly different time periods for notices and payment.
  • This prompt payment regime does not apply to wages.
  • Interest is payable on amounts due under these provisions at the greater of the prejudgment interest rate under the Courts of Justice Act, or the interest rate specified in the contract.

Comments and Questions

Contracting out/Pay-when Paid regimes. The first issue relating to this new prompt payment regime is whether the parties can contract out of it. In particular, does the new prompt payment regime replace and nullify, or enforce by statute, a “pay-when-paid” clause in a subcontract?

As to the first question, subsection 6.2(1) of the new statutory “prompt payment” regime states that proper invoices shall be given to the owner on a monthly basis “unless the contract otherwise provides otherwise.” Do those words apply to the whole regime? Or does that reference in this subsection to the parties’ entitlement to contract out mean that the parties cannot contract out of the other parts of these sections?

And does the “no waiver of rights” provision in section 4 of the Act nullify other conflicting contractual regimes?

As to the second question relating to pay-when paid clauses, two issues arise.

First, does the new prompt payment regime allow pay-when-paid clauses in subcontracts? There is nothing in the prompt payment regime that expressly mentions or nullifies pay-when-paid clauses.

In addition, the further question may be whether the new regime mandates a pay-when-paid regime whether or not the subcontract provides for such a regime. Thus, subsection 6.4(5)(a)(ii) states that the contractor is not obliged to pay the subcontractor under subsection 6.4(4) if it delivers a notice of non-payment to the subcontractor stating that the amount payable to the subcontractor is not being paid due to non-payment by the owner to the contractor. Does this subsection create a right to not pay the subcontractor if the owner has not paid the contractor, even if there is no pay-when-paid clause in the subcontract? Contractors may argue that it does, and that the statute has created a regime which must be followed.

In the United Kingdom under section 113(1) of the Housing Grants, Construction and Regeneration Act 1996 (U.K.), pay-when paid clauses are rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent.  This statute is the same one in which, in section 108, the adjudication regime is established. The two subjects – prompt payment and adjudication – are dealt with in the same payment regime, a regime in which pay-when paid clauses are banned except in the case of insolvency.

In the absence of such a prohibition of pay-when-paid clauses in the Ontario statute, does the proposed Ontario prompt payment regime effectively create a pay-when-paid regime which statutes in the U.K. (and in some states in the U.S.A.) have abolished? Where does the Ontario prompt payment regime provide a basis for the adjudicator (or arbitrator or judge) to require payment, either contrary to a pay-when-paid clause or contrary to a notice of non-payment under section 6.4 of the Proposed Act?

Second, if there are reasons why the pay-when-paid or other similar contractual regime could not presently be enforced by the contractor (for instance, if the contractor was the cause of the owner’s non-payment) can those reasons still be advanced by the subcontractor? While there is no provision in the Proposed Act to this effect, subcontractors will likely expect that they can do so. They may utilize the adjudication regime to require payment even though the contractor has served a non-payment notice on the subcontractor, alleging that the owner’s non-payment is due, among other reasons, to the fault of the contractor.

Is the non-payment regime arising from a disputed invoice or subcontractor’s invoice subject to the arbitration or other dispute resolution provisions of the respective contract?   Presumably yes, but there does not appear to be any link between the prompt payment regime and the either the court or arbitral dispute resolution systems. As noted below, this may mean that there are at least four dispute resolution regimes applicable to construction lien disputes.

Similarly, the link to, or impact of the prompt payment regime on, the certification or approval regimes is not entirely clear. Subsections 6.2(3) and (4) provide that a prior certification or approval regime cannot nullify a proper invoice, but it is unclear what the effect is of a certification or approval process after a proper invoice is delivered. Could such a process interrupt the contractor’s entitlement? What is the relationship between an owner’s notice of non-payment and a subsequent certificate denying payment or an owner’s non-approval? Could such a certificate or non-approval be the basis, by itself, of an owner’s notice of non-payment?

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.)                               September 10, 2017

www.heintzmanadr.com

www.constructionlawcanada.com