Legal Blog

Prompt Payment & Adjudication

The construction industry is about to experience a tectonic shift. On October 1, 2019, the prompt payment and adjudication sections of the newly named Construction Act will take effect. Regardless of what role you play in the industry, you must understand the new regime and have the appropriate systems and procedures in place to comply with it. The following sets out answers to 10 commonly-asked questions.

1. To whom does the new prompt payment and adjudication regime apply? It applies to private and public sector construction projects of all types and sizes located in Ontario and to every party in the construction pyramid (i.e. owner, developer, general contractor, subcontractor, lender, consultant, etc.). Said otherwise, it applies to almost everyone involved in the Ontario construction industry.

2. How does the payment regime work? The payment regime is like a quick flowing waterfall that begins when the general gives the owner an invoice (a “Proper Invoice“) in a prescribed format. From that point, each party in the construction pyramid effectively has two choices: pay or provide notice of non-payment (in the form and manner prescribed and within the requisite deadlines). The purpose of the payment regime is to ensure that funds continue to flow and projects continue to progress.

Owner: The owner must pay the general within 28 days after receiving a Proper Invoice. Alternatively, if the owner disputes all or a portion of the invoice, the owner may give the general notice of non-payment (in the prescribed form and manner) specifying the amount that is not being paid and the reasons for non-payment. This must be done within 14 days of receiving the Proper Invoice.

 General Contractor: A general who receives full payment from the owner within the prescribed time must pay each sub, whose work was included in a Proper Invoice, within 7 days of receiving payment from the owner. Of course, a sub has to deliver an invoice to its general before the general will include the sub’s work in a Proper Invoice. A general who has been paid by the owner, but disputes a sub’s invoice, may refuse to pay some or all of it by delivering to the sub an appropriate notice within 35 days of the date on which the general delivered the Proper Invoice to the owner.

What if the owner provides notice of non-payment and doesn’t pay the general? The general may withhold payment from a sub if the general (i) provides notice to the sub of non-payment within 7 days of receiving the owner’s notice of non-payment and (ii) refers the dispute to adjudication within 21 days after giving notice of non-payment to the sub. If, however, the owner does not provide notice of non-payment to the general, then the general may withhold payment from a sub, but only if the general provides notice of non-payment within 35 days of the date on which the general gave the owner a Proper Invoice. If the general fails to give timely notice, the general must pay its subs, regardless of receiving no payment from the owner.

 Subcontractor: The rules governing when a sub is required to either pay or give notice to a subsub is similar to the requirements governing when the general is required to pay or provide notice to its subs.

3. What is a Proper Invoice and when is it given? A general is required to give a Proper Invoice to an owner on a monthly basis unless the contract provides otherwise (e.g. milestone payments, payment schedule, etc.). A Proper Invoice must contain certain prescribed information (i.e. basic information concerning the parties, the date, the work, etc.) and comply with other requirements set out in the contract. The Act does not specify when or in what form subs are to provide invoices to the general. Subs and generals should consider whether they need to amend their subcontracts to address (i) the form and timing of the delivery of the sub’s invoice and (ii) whether the general is required to advise the sub about the payment provisions in the prime contract and the date when the general provides the owner with a Proper Invoice.

4. Can a Proper Invoice be conditional on prior certification? With a couple of exceptions, any contractual provision that makes the giving of a Proper Invoice conditional on prior certification by a payment certifier or on the owner’s approval are deemed invalid. However, these provisions are still effective to determine when payment on a Proper Invoice is to be made.

5. How do we deal with notices and payments? Monitoring the payment/notice calendar will likely involve significant time and work. Consider who within your organisation has the time and ability to perform this work.

6. What is adjudication? Adjudication is intended to be a quick way to obtain an interim decision when a construction dispute arises. It allows the parties to the dispute to present their side of the dispute to an impartial third party (not necessarily legally-trained) who is tasked with making a determination. As yet, the Authority (i.e. the organisation in charge of adjudications) has not even set up a roster of adjudicators.

7. What can be adjudicated? Most issues can be adjudicated (e.g. disputes involving the valuation of services, extras, holdbacks, setoff, and non-payment). An adjudication can only address a single issue unless the parties and adjudicator agree otherwise, but there are ways of consolidating different disputes into a single adjudication. Notably, parties cannot contract out of the adjudication procedure.

8. What are the timelines governing adjudication? The timelines governing adjudication are very tight; so tight that complicated adjudications cannot likely comply with the prescribed deadlines. For instance, although not explicitly stated, the Act seems to require parties to agree on an adjudicator (who also has to consent to conduct the adjudication) within 4 days of the date on which the initiating party provided written notice of the adjudication, failing which the initiating party must request the Authority to appoint an adjudicator. Imagine the difficulties of a large general complying with this deadline if the initiating party serves the notice of adjudication on December 23.

Further, an adjudicator is required to render a determination within 30 days of receiving the documents unless the parties and the adjudicator agree otherwise. If the disputed issue is complicated (e.g. an alleged delay) and one party refuses to consent to extend the deadline by which a determination must be made, how can the dispute be properly resolved in the prescribed time? The answer is unclear.

After the adjudicator renders a determination, any payments that are ordered to be paid must be paid within 10 days.

9. Is an adjudicator’s decision binding? The decision is binding and can be enforced by the court until the dispute is resolved either in a court action, through arbitration, or by the parties’ written agreement. Adjudication is, thus, an interim decision until the dispute is finally resolved.

10. What does this all mean? You should think about how your organisation is going to prepare for the new regime. Questions to consider include:

a) Do you need to update your standard contracts?

b) Who is going to be responsible for monitoring payments and providing notices?

c) Do you need any systems in place to comply with the new regime?

d) Is there anything you can do to be more prepared to respond quickly to a notice of adjudication (e.g. maintain documents in a more organised manner, have a process in place, and know who is responsible for responding, etc.)?

Welcome to the new wild west of construction disputes.

Image courtesy of qimono.

Written by Allison J. Speigel, a skilled advocate whose practice focuses on commercial litigation. She has broad industry experience and represents clients dealing with issues relating to complex commercial, intellectual property, securities, bankruptcy-related, construction, commercial real estate, and personal injury litigation. Allison deals effectively and efficiently in the resolution of all issues emanating from business disputes.