The “Real” Ontario Construction Lien Amendment Act

Ontario’s new construction lien reforms come with a new prompt payment regime.

In 2017, Ontario passed extensive amendments to its legislative regime for construction liens. The Construction Lien Amendment Act was enacted on December 12, 2017, and immediately changed the name of the underlying Construction Lien Act to the Construction Act. Readers of Building are probably already familiar with the changes to lien rights brought about the legislation that came into force on July 1, 2018, including:

  • special rules allowing condominium unit owners to delete construction liens against common elements from their individual units;
  • the extension of lien rights to including landlords’ freehold interests in many circumstances, even when the improvements were contracted for by tenants;
  • clarification that only “capital repairs” (and not routine minor maintenance) could be liened;
  • extension of the lien deadline from 45 to 60 days, and the litigation “perfection” deadline from 45 days to 90 days;
  • new rules for construction liens on municipal property; and
  • deeming of multiple projects under a single construction contract to be treated like individual sites with individual contracts; etc.

Notwithstanding these amendments, it is arguable that the real impetus of the Construction Lien Amendment Act had very little to do with construction lien mechanics. The legislation was enacted primarily to aid contractors, subcontractors, and suppliers in lessening the length of time that such parties have to wait to receive payment following the submission of an invoice, and the overwhelming bulk of the legislation is dedicated to the implementation of a detailed new “prompt payment” system for payments under construction contracts in Ontario. Greatly summarized, the prompt payment protocol specifies: (i) proper invoicing; (ii) strict payment timelines and prescribed notices for disputing invoices; and (iii) mandatory tribunal-like dispute adjudication in the event that parties cannot agree, including the formation of a brand-new dedicated authority tasked with overseeing such adjudications.

The construction lien reforms were introduced last year, but on October 1, 2019, the prompt payment provisions of the Construction Lien Amendment Act came into effect, represent the culmination of earlier (failed) attempts by the Ontario government in 2011 and 2013 to implement similar reforms for the construction industry. This makes Ontario a rather unique jurisdiction in that it has both advanced construction lien rights as well as a comprehensive prompt payment regime: most jurisdictions have one or the other strategies to help contractors and tradesmen get paid, Ontario has both.

Under the prompt payment regime, everything is triggered by the issuance of a “proper invoice” — an invoice issued at an agreed-upon time (or monthly, if not specified) — which then triggers a cascade of payments: in 28 days, the owner pays the general contractor; a week later, the general contractor pays the subcontractor; and a week after that, the subcontractor pays the sub-subcontractor, and so on: the so-called “28-7-7” timeline. This 28-7-7 timeline cannot be altered or eliminated in the contract.

If a party in the chain wants to dispute an invoice, then the party has to give a “Notice of Non-payment” setting forth the reasons the invoice is being disputed. The owner has 14 days from the receipt of the proper invoice to issue the dispute notice, and the general contractor has a week thereafter to notify its subcontractor that the payment is not coming, and so on down the line. If a contractor receives a Notice of Non-Payment but does not issue a downstream notice, then it must pay its subcontractors, even if the owner is disputing payment upstream. A contractor can also be paid in full but then dispute payments downstream.

The reforms that came into effect in October of this year also introduced a formal adjudication process intended to be a quick and efficient dispute resolution mechanism for payment-related construction contract disputes. Any party (owner, general contractor or subcontractor) can demand an adjudication by simply giving written notice requesting adjudication to the other party with an electronic copy of the notice sent to a new central dispute resolution authority referred to in the legislation as the “Authorized Nominating Authority” (the “Authority”). The inaugural Authority is, perhaps surprisingly, not a government entity at all. Instead, it is a division of ADR Chambers, a private entity with former judges and lawyers on its roster for hire as adjudicators.

If the parties cannot agree on their own adjudicator, the Authority will appoint an adjudicator from its roster of available adjudicators. The complaining party has to deliver documents to that adjudicator within five days of the adjudicator’s appointment, and the non-complaining party has to provide any responding documents on the same day. The adjudicator is to make his/her decision within 30 days of receiving the documents.

The lien preservation timelines are also extended if the parties are adjudicating. Accordingly, construction liens do not have to be preserved until 45 days after the adjudicator receives the documents for adjudication.

Ontario is not alone in this new prompt payment experiment. The Federal Prompt Payment for Construction Work Act recently passed as part of the larger federal budget and became law on June 21, 2019, implementing a similar prompt payment program for all federal construction projects. Furthermore, both Saskatchewan and Nova Scotia are considering similar legal reforms of their own.

By the time this article is in print, the first adjudications will have been conducted. Like all of these sorts of mandatory alternative dispute resolution protocols, the biggest concern is that these outsourced mini-courts, which are supposed to be faster, cheaper and more efficient than the regular courts, end up being just as slow, just as expensive, and just as bureaucratically cumbersome as going to court (notwithstanding legislation ostensibly forcing performance deadlines!). That said, it’s a brave new world — prompt payment, in some form or another, is probably here to stay.

Megan J. Lem is a corporate lawyer in the New York office of Kirkland & Ellis LLP.
Megan J. Lem is a corporate lawyer in the New York office of Kirkland & Ellis LLP. This article reflects the personal views of the authors alone.
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