Legal Blog

Construction Act #6

We previously notified our readers that major changes to the Construction Act were coming (see January 2025 newsletter), The first amendments were enacted November 24, 2024; the second amendments were enacted November 27, 2025, but the changes for each were only proclaimed in force on January 1, 2026. There are many changes, but we will only discuss the most important of them.

Annual Holdback Release

This is the big one. Previously, holdback would be released 45 days after substantial performance of the prime contract. This was not great for subs working at the beginning of a four-year prime contract (e.g. excavators, piling subs, etc.). Indeed, it was not great for subs working throughout the contract; 10% of their contract money for work they performed was held up for years. Cash flow was severely affected.

The legislature heard their cries of anguish and provided for a mandatory release of holdback annually (s. 26(1)) – assuming the prime contract extends for at least one year.

Specifics:

• The owner publishes notice within 14 days after each anniversary date of the prime contract in the prescribed form setting out the amount of holdback the owner intends to pay to the general.
• The owner pays the holdback between 60 and 74 days after publishing the notice – assuming there are no current liens.
• The general pays the subs within 14 days of receipt of the holdback from the owner – assuming no current liens.
• Subs pay to subsubs in the same manner.
• These payments reduce the respective holdback amounts of the payers.
• Whatever holdback that remains, after payment of the annual payments, is paid in accordance with the usual rules (e.g. those relating to substantial performance, etc.)
• The rules apply to post-2025 contracts; for pre-2026 contracts, the first payout time is the second anniversary of the prime contract that falls after Jan. 1, 2026. (s. 87.4)

Set-Off

In the previous version of the Act, s. 27.1 allowed a payer to notify a payee that it was not paying all the holdback otherwise due – presumably because of some claim for set-off. That section has now been repealed. Accordingly, with one exception, holdback must be paid – even if the payer has claims against the payee under the contract.

This amendment can cause major problem for a general with a non-performing sub. On occasion, perhaps to keep the sub working, a general would pay to a sub more than the value of the work that the sub had actually performed. If the general did this, it would assume that the overpayment would be taken out of the holdback, and, as long as the sub paid all subsubs and its employees so that there were no liens attributable to the sub, the general could get away with this. No longer.

We mentioned one exception. Under s. 30, a payer may set-off a claim against a payee if the applicable contract was abandoned or terminated and the payer expended money to complete the work.

Joinder of Claims

In our May 2024 newsletter, we reported on the Devlan case in which the Divisional Court interpreted the 2018 changes to the Construction Act. The Court decided that the changes that had been made dealing with trust actions and lien actions still did not allow the two types of actions to be joined in one statement of claim. It was an interpretation that the Court certainly could have made; it gave effect to the argument that a lien claim, which was supposed to be quick and simple, should not get bogged down by a trust claim. The Court noted that the government of the day could change its regulations to specifically allow the joinder, but the Court was not going to do it for the government.

It seems that the government listened. It added a section to the Act (s. 50(4)) authorising the regulations to provide for the joinder of a lien claim with another claim in an action; it stipulated that the procedures under the Act would apply to the trust claim. The applicable regulation was then amended (O. Reg. 265/25) to specifically allow for the joining of a trust claim to a lien claim in one action.

Trust Rights

Just in case there was any confusion, sections 7 and 8, dealing with trust obligations of an owner and of a general or subsub, were amended to provide that all amounts that a payer receives, including any holdback amount, constitute a trust fund. Accordingly, although a right to lien may have lapsed because the lien was not preserved or perfected in time, the rights of a payee to claim a breach of trust remain.

Proper Invoice

We understand that, previously, some owners recognised that an invoice may not have met all the requirements of a “proper invoice”, but instead of immediately notifying the general, the owner waited. Then, just before the general expected to be paid, the owner notified the general that the invoice, which the general thought was a proper invoice, was deficient and therefore was not a proper invoice. Give us a new and better one. This was a gotcha. The amendments get rid of the gotcha. If an owner receives an invoice and does not notify the general of any technical deficiencies within 7 days, that invoice is deemed a “proper invoice”. The owner cannot later refuse payment based on administrative errors. (s. 6.1(2))

Owners, acting reasonably, may now require specific information necessary for their accounts payable systems to be included in a proper invoice. (s. 6.1.(1) 6.1 – this looks silly, but it is not a typo).

Adjudication

After, say, four years of experience, some changes needed to be made to the adjudication process. These changes were made both in the Act and in the regulation (264/25) that deals with adjudication.

Under the changes to the Act:

• The parties to a prime contract or subcontract can agree to refer a dispute to adjudication. (s. 13.5(1 and 2))
• Adjudication is available up to 90 days after the date on which a prime contract is completed, abandoned, or terminated unless the parties to the adjudication agree otherwise. (s. 13.5(3)).
• Adjudication for a subcontract is available up to 90 days from the earlier of the date on which the prime contract is completed, abandoned, or terminated and the date on which the subcontractor last supplies services or materials to the improvement. (s. 13.5(3.1))
• ODACC (i.e. Ontario Dispute Adjudication for Construction Contracts) is the authority responsible for administering adjudications and for training and qualifying adjudicators. Previously, all adjudicators had to register with ODACC to be able to conduct an adjudication. We now have the concept of a private adjudicator. Private adjudicators must still be involved in ODACC training programs and meet prescribed requirements as adjudicators in the same manner as registry adjudicators (s. 13.9(2.1)). The only difference that we can see between private adjudicators and registry adjudicators is that ODACC can set the fees that registry adjudicators may charge, but cannot do so for private adjudicators. The parties must agree on a private adjudicator’s fees. (s. 13.10 (2.1))

Upshot

These amendments are welcome. Payment stalling will decrease. Cash flow will increase. Low-cost adjudication will become easier.

 

Image courtesy of tayebmezahdia.

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