Legal Blog

Construction Act – Part 1 – An Overview

We have been witness to, and of necessity students of, two major revamps of construction legislation in Ontario. We started our practice while the Mechanics’ Lien Act was in force, and had been in force for many years. In 1983, after a major study, the Construction Lien Act emerged. Many concepts were similar to those in the Mechanics’ Lien Act, but there were major differences. Since 1983, the Construction Lien Act has been tweaked many times, but with no major changes – until now. In December 2017, after another significant report and wide consultation, the Construction Lien Act was extensively amended. Most of the changes have been proclaimed into force as of July 1, 2018. These changes include a change to the name of the legislation; it will now be the Construction Act. Other changes, which introduce two innovative concepts, have been proclaimed into force as of October 1, 2019.

For the next issues of our newsletter, we will not report on current jurisprudence; rather, we will review the changes to the Construction Lien Act. To differentiate between the old and the new, we will refer to the existing legislation as the CLA and the new legislation as the Act.

Innovation

The two innovative concepts to which we have referred, are the requirements for prompt payment and the creation of an adjudication system. Prompt payment sounds simple, but is very complicated and will cause fits to general contractors and owners. Adjudication will allow disputes to be resolved quickly so that timely payment can be made and construction can continue unimpeded. An adjudication decision will not be a final determination of the issues; the adjudication decision can always be revisited later in arbitration or in the courts. In the meantime, however, the parties will be required to adhere to the adjudication decision. We will wait until these changes are closer to implementation to discuss them.

Name

You may ask yourself: why did they bother changing the name of the legislation? Simple answer; it did not aptly describe the purpose of the legislation. The CLA does not just apply to liens. The trust provisions are important, even crucial, portions of the legislation. Merely because lien rights have expired does not mean that a payor one rung up the payment ladder does not still have trust obligations to its payees one rung down the ladder.

Transition

You are now in the middle of a construction project. Which legislation governs, the CLA or the Act? The CLA applies if, before July 1, 2018, either (i) the owner and contractor entered into the prime contract, or (ii) the owner commenced the procurement process (e.g. request for pre-qualifications, call for tenders, issue of RFP). The creation date of subcontracts is irrelevant. Although the Act may apply to a construction project, the prompt payment and adjudication provisions apply only if the prime contract is entered into on or after Oct. 1, 2019.

Improvement

The CLA does not refer to a project; it refers to an improvement (i.e. the work has to improve land). The definition has now been amended slightly. Previously, it referenced “any alteration, addition or repair to the land.” Now, a repair in itself is not sufficient; it must be a capital repair, which has been newly defined as a repair intended to extend the normal economic life of the land or any structure on it, but excludes maintenance work to prevent the normal deterioration of the land or structure.

Accordingly, contractors who, for example, have a maintenance contract with an owner to service HVAC equipment of a commercial building may no longer be protected under the Act, either under the lien provisions or the trust provisions. Both of those provisions require an improvement to land.

Municipality

The CLA, which did not and still does not apply, to the federal Crown, had three categories (actually four, if you include railways), for liens: the Ontario Crown, a municipality owning a public street or highway, and everybody else. For the ordinary project, a claim for lien had to be registered against title to land. For a Crown project or municipal street work, a lien claimant was not to register a claim for lien; rather it was to serve the claim for lien on the Crown or the municipality. The CLA assumed that the Crown or municipality would maintain the correct holdbacks and ensure that a proper lien claimant was paid in accordance with the CLA; an unsatisfied lien claimant would never be allowed to sell Crown land or a municipal street to enforce its lien.

The Act did not make a major change to the definition of “municipality”; it is still very wide. It continues to include what we would normally think of as a municipality (e.g. Regional Municipality of Peel, City of Mississauga, etc.) and what we might not realise was included in the definition (e.g. a local board, such as the Police Services Board, library board, transit commission, etc.)

Under the CLA, the definition of municipality as it related to liens would have been unnecessarily wide. Local boards do not own streets. However, the definition was used as part of the trust provisions. A municipality was exempted, along with the Crown, from holding improvement financing in trust for the benefit of contractors.

Definition Effect

Under the Act, the definition now has wide application. For lien claims to be properly preserved (i.e. registered or served), municipalities are now dealt with in the same manner as the Crown. Claims for lien are not to be registered against land that a municipality owns for its own purposes (e.g. a fire station); rather, the claim for lien has to be produced on paper and served on the clerk of the municipality. Similarly, a certificate of action does not have to be registered to perfect a claim for lien; the statement of claim need only be issued.

Price

Contract price was referenced often in the CLA (e.g. substantial performance, trust obligations, holdback etc.). It is the price agreed upon by the parties or, if there is no agreement, the actual market value of the materials and services rendered. An argument then arose whether delay claims would be included in price. The jurisprudence dealt with that issue. The Act now incorporates that jurisprudence. It introduces the concept of “direct costs” and includes them in the definition of price.

Direct costs are the reasonable costs of performing a contract or subcontract during any extended construction period, including costs for the supply of services or materials, insurance and bond premiums, and costs resulting from seasonal conditions that would not have been incurred but for the delay. However, these costs do not include head office overhead costs or lost profit, productivity, or opportunity.

Accordingly, although, in a statement of claim, a claimant may claim in contract damages for lost profit and productivity, the claim for lien itself cannot include those claims and, more importantly, the amount of the security to vacate the claim for lien should not include the amount claimed for these indirect damages. Although the jurisprudence was relatively clear before the amendment that these claims for indirect damages could not be included in a claim for lien, many claimants did not care and added them anyway.

We note that section 22(1) of the CLA has not been amended. It refers to the basic holdback of 10% of the “price” of services or materials. Previously, that was an easy calculation for an owner or a general. Now, it seems, the payor under a contract may have to hold back 10% of a delay claim even if the payor disagrees with the delay claim. This could be a problem.

 

Image courtesy of Alvimann.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.