It’s been a few months since the report Striking the Balance: Expert Review of Ontario’s Construction Lien Act was released and while its authors Bruce Reynolds and Sharon Vogel have been working on the report since 2015, they recognize there is a lot more work ahead.
Reynolds likened the review process to climbing a mountain.
"Now that the report’s been delivered and we’re moving onto the next phase, it turns out that was the foothill but there is a mountain still to climb, which is trying to take the holistic and integrated recommendations of the report and develop that into legislation," said Reynolds.
"We have to work very hard to try and make sure that the legislation that emerges out of the process that’s coming will capture the recommendations in a way that is workable in the industry, in the businesses on a day-to-day basis."
An informal discussion with Reynolds and Vogel was the highlight of the CEO Breakfast, which was hosted by the Toronto Consrtuction Association (TCA) and ConstructConnect, as part of Construct Canada, held Nov. 30 to Dec. 2 at the Metro Toronto Convention Centre. The discussion was led by John Mollenhauer, president and CEO of the TCA, and Glenn Ackerley, a TCA board member and WeirFoulds construction lawyer.
Many items were addressed during the hour-long discussion on proposed changes to the lien act including modernizing Ontario’s construction lien and holdback rules, introducing rules on prompt payment and creating a new process to resolve disputes.
A key theme, Vogel said, was to attempt to strike a balance between freedom of contract on one hand and regulation on the other.
"It was probably the most significant tension that we dealt with over the course of the review," said Vogel. "People want the ability to enter into bargains that suit their needs, but at the same time you have legislation that’s intended to protect people.
"As it exists now, the Construction Lien Act does impinge on a parties’ ability to contract freely in certain respects. It’s how far do you move along that dial, how much do you impair people’s freedom of contract and that’s really where the balancing was and that’s why it was so useful to research what else has been done in other jurisdictions around the world."
Prompt payment and addressing the payment period was at the top of their priority list.
"What we’re saying is in regards to payment, move that dial a bit more on the regulatory side and impose a time limit subsequent to the receipt of a proper invoice within which the owner must pay and that time limit we’re recommending is 28 days," explained Reynolds. "If that is enacted and complied with, it will cut the elongation effect in half.
"Processes will have to be reengineered because the processes that exist are calibrated to produce payment within 60 days and from a policy perspective, we conclude that that is not acceptable."
Anti-corruption concerns has contributed to the elongation of the payment period, Reynolds noted. In the ’80s, he was working on 10- and 12-page contracts that needed two or three signatures. Nowadays, depending on the entity, a contract could have hundreds of pages and require the signatures of six or more senior individuals.
"The more complex a contract becomes, the more complex the administrative process has become to manage the contract and, in particular, payment mechanisms have become more complex," said Reynolds.
"The more complicated, the longer the cycle of review."
One of the concerns that was brought to their attention from public authorities since the publication of the report is the time constraint of reviewing the documents within 28 days. Often times, the sector is under resourced, he added.
"Having looked at the payment cycle that’s in use in other jurisdictions around the world, we are quite confident that if those authorities reengineered their processes, 28 days is quite achievable," Reynolds stated.
Subcontractors are often the hardest hit by the elongation of the payment cycle, he noted.
"The financial burden in terms of the cost of not having the money in a timely way, sits at the bottom of the construction pyramid and particularly the subcontractors are the meat in the financial sandwich," Reynolds stated.
"So the more the elongation effect becomes multiplied, the harder it is at the subcontractual level."
Adhering to the 28-day limit could result in a better working relationship between the owner and contractors and subcontractors. Reynolds added the sanction for not adhering to the 28 day limit is payment of non-waivable interest at a rate that would be established in the contract.
"The world does not come to an end if the 28 days is not adhered to," explained Reynolds.
"Stakeholders said to us that the imposition of statutory, non-waivable interest would one, provide a strong incentive for that reengineering to take place, and two, as long as the interest is paid and flows down appropriately, then it would address the cost of money issue. It’s an incentive to reengineer the process to make it work properly… and get your processes in order so you don’t have to keep paying this interest."