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