The Ontario Ministry of the Attorney General recently released a detailed report prepared by a panel of construction industry experts following their 14-month review of the Construction Lien Act.
The review contains numerous recommendations for changes to the act to modernize its rules and processes, which may be implemented by the end of 2017.
Construction subcontracts have grown in complexity over the past two decades, with more risk shifted onto subcontractors.
Subcontractors should take heed of some of the proposed changes to the act as they will face increased responsibilities in substantiating and expediting claims and in dealing with disputes.
Extended Lien Preservation and Perfection Time Periods
The review recommends increasing the time to preserve lien rights from the present 45 days to 60 days from the date of last supply, and extending the time to perfect the lien from 45 to 90 days. It further recommends that there should be increased sensitivity regarding quantum, allowing the court to consider if a claim is "willfully exaggerated," and if so giving the court more leeway to discharge the claim in whole or in part, and imposing particular types of damages upon a lien claimant.
The extension of the time periods for preservation and perfection will allow contractors and subcontractors more time to develop quantum but with these added sensitivities they will need to put effort into ensuring that the costs provided in their lien claim amount are substantiated and are defensible on the basis of "good faith" efforts to quantify.
Prompt Payment Provisions
The new "prompt payment" regime offers a defined process that would require payment to subcontractors within 35 days upon delivery of a "proper invoice." What constitutes a "proper invoice" is not however defined, so this is left to the discretion of the payer.
The payer would be permitted to withhold payment on written notice within seven days specifying what amounts are being held back and why.
These measures should assist subcontractors with understanding why payment of an invoice or portion thereof is not released and will help expedite payment to subcontractors of undisputed amounts, which would be required to be paid within the stipulated time frame. There is also concern, however, that "pay when paid" practices may result.
Mandatory Interim Binding Adjudication
The proposed requirements for mandatory adjudication will see significant shifts in how monetary disputes are dealt with during the project. The intention is to resolve disputes in a timely and cost-effective manner so that there is minimal disruption to the work.
The adjudicator’s decision would be binding on an interim basis only, compelling the parties to comply with the decision until such time as the parties either agree to keep the adjudicator’s decision, or pursue lien action, arbitration or litigation.
Mandatory adjudication would apply to any disputed costs that arise from a proper invoice under the contract or subcontract. Back-to-back adjudications will be permitted for those claims that flow from a subcontractor through the general contractor to the owner, which should help to expedite subcontract claims for which an owner is ultimately responsible.
Contractors and subcontractors will likely need to increase project control efforts to ensure that record-keeping is effective and maintained throughout the project so that they are ready to present a dispute to an adjudicator quickly and effectively. The services of a cost or claims professional may prove beneficial to assist with quantifying and preparing disputes for adjudication and at times an independent expert may be needed to support the claim. The potential associated costs should be considered when bidding a project.
The anticipation is that once changes to the act are implemented, contractors, subcontractors and project stakeholders will experience benefits similar to those occurring in other countries that have instituted these types of measures, with improvements to productivity, stronger incentives to complete, improvements in financial resources and the reduction of disputes requiring legal action.
Adele Wojtowicz, CET, FICCP, principal of ProEdge, is a construction claims consultant and has been active for over 32 years in the industry. She can be reached at 905-301-3025 or by visiting www.proedgecs.com. Send comments and Industry Perspectives column ideas to firstname.lastname@example.org.