For many years, contractors facing long delays in receiving payment for work has been a significant problem in the construction industry across Canada. Currently in some provinces, the “pay when paid” clauses in contracts allow contractors to withhold payment to subcontractors until the contractor has received payment from the owner. Consequently, the Canadian construction industry has experienced a slippery slope of aged receivables edging into the 70 days or more territory, notwithstanding most of these construction contracts having 30-day payment terms (Leduc et al., 2019).
Conversely, other provinces are responding to this systemic problem in the construction industry by following the U.K. approach. These forward thinking provinces are legislating specific payment deadlines and a mechanism for rapidly resolving construction related payment disputes without resorting to lengthy and expensive court proceedings (Leduc et al., 2019). Ontario was the first Canadian province to legislate a “prompt payment regime”, and now Alberta is following suit (Ellergodt and Peretz, 2021).
Previous to the prompt payment regime, issues such as, payment, invoicing, and remedies for late payments, were left to the parties to negotiate terms into their construction contracts. Under the prompt payment legislation, these contract terms will be prohibited for construction contracts executed after the statutes come into force. The main changes under the prompt payment regimes in Ontario and Alberta are the inclusion of prescribed prompt payment timelines and the introduction of a formal adjudication process (Ellergodt and Peretz, 2021).
Prompt payment and adjudication measures have been brought to Ontario and Alberta to ensure the flow of funds from owner to general contractor to subcontractor and suppliers on a prescribed timeline. To implement their prompt payment regimes, both Ontario and Alberta made significant amendments to their respective construction legislation, resulting in substantial changes to the construction industry not seen for several decades (Ellergodt and Peretz, 2021).
Prompt Payment Legislation
On October 1, 2019, Ontario brought into force the prompt payment and adjudication regime under the Construction Act (“CA”) to replace and modernize the old Construction Lien Act. Subsequently, the Minister of Service Alberta tabled Bills 37 & 62 to replace the current Alberta Builders’ Lien Act with the Prompt Payment and Construction Lien Act (the “PPCLA”). While the PPCLA is not yet in force, if there are no further amendments, then the PPCLA is expected come into force in 2021.
The prompt payment regimes under the CA and the PPCLA have the following similar characteristics:
- imposes a schedule for progress payments under construction contracts and prohibits parties from contracting out of the statutory progress payments;
- mandatory payment within a specified number of days after delivery of an invoice in proper form, unless the invoice is disputed by the payor;
- the disputing party must deliver a notice of non-payment to the invoicing payment, unless only part of the invoice is in dispute, then the disputing party must pay the amount not in dispute; and
- an adjudication process for rapid dispute resolution (Bois et al., 2021).
Despite the similarity with above mentioned characteristics, the CA and PPCLA take different approaches to the prompt payment mechanisms contained within their respective regimes.
Proper Invoices
Krupat (2019) claims that the essence of the prompt payment legislation is the establishment of a set of statutory deadlines for payments of construction projects. Both the PPCLA and CA follow the “Rule of 7”, being that there must be a payment from the owner to the contractor within 28 days, and then to the subcontractor seven-days later, and subsequent payments to sub subcontractors and suppliers occurring on each subsequent seven-day interval down the contractual chain (Leduc et al., 2019). The initiating step that triggers the prompt payment deadlines is the giving a “Proper Invoice”.
Adjudication Process
If the essence of the prompt payment legislation is the statutorily prescribed payment deadlines for construction projects, then it may also be true that the heart of the legislation is the adjudication process. Adjudication is a rapid mechanism for resolving construction related payment disputes and avoiding lengthy and expensive court proceedings. In order to swiftly resolve disputes and minimize legal costs, the adjudication process is designed to be simple and flexible (Leduc et al., 2019).
Under the PPCLA and CA, the issuance of a notice will kickoff the adjudication process. While the PPCLA prescribes the kickoff notice as a ‘notice of dispute’, and the CA prescribes it as a ‘notice of non-payment’, the result is the same under both statutes, namely that the contractor may refer the matter to adjudication within 21 days of giving notice to the subcontractor, if the contractor does not refer the matter to adjudication, then the contractor must pay the amount payable to the subcontractor.
Once the matter has been referred to adjudication, both the PPCLA and CA prescribed that the adjudicator will resolve the dispute by issuing a determination. Despite this commonality, it is unknown at this point whether the PPCLA will follow the CA and prescribe a deadline for a determination. The CA provides for a rapid method a freeing up the flow of money along the construction chain by requiring the adjudicator to issue a determination within 30 days of receiving a copy of the notice of adjudication. As the PPCLA presently stands, the timelines for the adjudication process are not established. It is believed that these details will likely be clarified by the regulations, which are not presently available (Ellergodt and Peretz, 2021). Therefore, we will have to wait for the regulations associated with the PPCLA to draw any adjudication timeline distinctions between the PPCLA and CA.
Availability of Adjudication
While the PPCLA follows the CA by prohibiting parties from contracting out of the adjudication regime, the PPCLA diverges from the CA in its approach to clarifying which matters are available for adjudication. The CA approach is to clarify which matters can be available for adjudication. Whereas, the PPCLA approach is to clarify which matters cannot be adjudicated, namely the PPCLA does not apply to public works, Crown projects, or other works prescribed by the Regulations. Arguably, the PPCLA approach, while appearing restrictive, was an attempt to assist parties in a construction dispute grappling with the immediate prompt payment legislation, by providing explicit clarity on the matters that cannot be adjudicated, rather than parties having to sift through the case law developed under its predecessor the Builder’s Lien Act, to determine the areas that do not apply (McCarthy, 2021).
Adding to the aforementioned statutory bars to adjudication under the PPCLA, adjudication is also not available where one party has commenced a court action or if the contract has been completed. The latter bar to adjudication is aligned with the CA, which suggests that the need for expedited dispute resolution when a contract is completed is arguably diminished (McCarthy, 2021). However, the former bar to adjudication is a diversion from the availability of adjudication under the CA. In Ontario, a party to a construction dispute could refer a prescribed matter to adjudication even if the matter is the subject of a court action or arbitration, unless the action or arbitration has been determined.
Arguably, this distinction sets the PPCLA apart from the CA, because the CA approach allows parties to seek out rapid dispute resolution of construction disputes despite a court action being initiated. Conversely, the PPCLA establishes a barrier to adjudication if there is a court action on foot. The troubling aspect of creating a bar to adjudication if there is a court action underway, is that in the race for parties to initiate proceedings in their venue of choice, the tie goes to the party with the court action (McCarthy, 2021). This circumvents the rapid dispute resolution mechanism afforded under prompt payment regimes and begs the question, ‘why would Alberta set out specific carve-outs to the binding nature of adjudication but also allow the process to be easily avoided’? When developing the regulations associated with the PPCLA, Alberta should look to this distinction for regulations that seek to modernize the construction legislation while streamlining the dispute resolution process (Leci and Radaj, 2021).
With respect to the completion of contracts restriction that’s common among the PPCLA and CA, it will be interesting to see how the courts determine whether a contract has been completed in light of aspects such as, deficiencies in the work or contractor obligations that exist under warranty claims (McCarthy, 2021).
Enforcement
Another distinction that can be drawn between the approaches to adjudication taken by Ontario and Alberta, is in how each jurisdiction sets out the enforceability of adjudicator decisions. While both jurisdictions set out that the adjudicator’s determination is binding on the parties unless altered by court order, arbitration or written agreement by parties, the PPCLA departs from the CA on the issue of judicial review. Under the CA, and adjudicator’s decision is binding on the parties until it is set aside under specific grounds for judicial review and with leave of the court. Conversely, the PPCLA provides that an adjudicator’s determination is final and binding on the parties, unless a party merely applies for judicial review.
McCarthy (2021) argues that the PPCLA appears to weaken the “pay now, argue later” attitude that characterizes most statutory adjudication regimes. The mere filing of a judicial review should not stay the effectiveness of the adjudicator’s determination. However, this is where the “made in Alberta” model of the PPCLA departs from the “pay now, argue later” model of the CA. At least with the CA model of interim binding adjudication, the adjudicator’s determination could be challenged in court but would remain binding on the parties until such court order or arbitration award.
Conclusion
Prompt payment regimes have operated successfully in the U.K. and the U.S.A. for several decades. The ability to resolve construction payment disputes rapidly has allowed many English and American construction projects to complete on schedule without being burdened by lengthy and costly litigation. Ontario was the first Canadian jurisdiction to try on the prompt payment regime and its success has shown the construction industry in other Canadian provinces the need to get on board. While the Alberta model of adjudication appears suspect as it stands, there remains the possibility that the associated regulations will align the PPCLA more closely with the CA.
Bibliography
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Ellergodt J., Hu S., Peretz L. (2021) Bill 37: New Legislation for Prompt Payment and Builders’ Liens. Available at: https://wt.ca/bill-37-new-legislation-for-prompt-payment-and-builders-liens/ [Accessed 10 September 2021].
Krupat (2019) Prompt payment and adjudication have arrived in Ontario. [pdf] DLA Piper. Available at: https://www.dlapiper.com/en/canada/insights/publications/2019/10/prompt-payment-and-adjudication-have-arrived-in-ontario/ [Accessed 10 September 2021].
Leci M., Radaj A. (2021) Key takeawys for the Alberta Construction Industry. Available at: https://www.on-sitemag.com/features/learning-from-the-construction-act-key-takeaways-for-albertas-construction-industry/ [Accessed 10 September 2021].
Leduc D., Gregoire L., Ferguson A. (2019) A Layperson’s Guide to the Construction Act. [pdf] Second edition. Ottawa Construction Association. Available at: https://petrelawinter.com/wp-content/uploads/sites/9/2019/09/A-Laypersons-Guide-to-the-Construction-Act.pdf [Accessed 10 September 2021].
McCarthy (2021) Bill 62: Welcome Guidance and Further Amendments to Alberta’s Prompt Payment and Construction Lien Act. Available at: https://www.mccarthy.ca/en/insights/blogs/lay-land/bill-62-welcome-guidance-and-further-amendments-albertas-prompt-payment-and-construction-lien-act [Accessed 10 September 2021].
