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Striking the Balance: Expert Review of Ontario's Construction Lien Act

Report prepared for the Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure

Delivered April 30, 2016

Bruce Reynolds, Sharon Vogel


Table of Contents

  1. Table of Legislation
  2. Chapter 1: Introduction
  3. Chapter 2: Conduct of Review
  4. Chapter 3: Lienability
    1. 1. Overview
    2. 2. Improvement
      1. 2.1 Context
        1. 2.1.1 Clarity of the Definition
        2. 2.1.2 Applicability to Information Technology (“IT”) Projects
      2. 2.2 Summary of Stakeholder Views
      3. 2.3 Analysis and Recommendations
    3. 3. Owner
      1. 3.1 Context
      2. 3.2 Summary of Stakeholder Views
      3. 3.3 Analysis and Recommendations
    4. 4. Price
      1. 4.1 Context
      2. 4.2 Summary of Stakeholder Views
      3. 4.3 Analysis and Recommendations
    5. 5. Supply of Services
      1. 5.1 Context
      2. 5.2 Summary of Stakeholder Views
      3. 5.3 Analysis and Recommendations
    6. 6. Municipal and Broader Public Sector Lands
      1. 6.1 Context
      2. 6.2 Summary of Stakeholder Views
      3. 6.3 Analysis and Recommendations
  5. Chapter 4: Preservation, Perfection and Expiry of Liens
    1. 1. Overview
    2. 2. Preservation
      1. 2.1 Lien Preservation Time Periods
        1. 2.1.1 Context
        2. 2.1.2 Summary of Stakeholder Views
        3. 2.1.3 Analysis and Recommendation
      2. 2.2 Termination as a Triggering Event
        1. 2.2.1 Context
        2. 2.2.2 Summary of Stakeholder Views
        3. 2.2.3 Analysis and Recommendations
      3. 2.3 Certificate of Completion of Subcontract
        1. 2.3.1 Context
        2. 2.3.2 Summary of Stakeholder Views
        3. 2.3.3 Analysis and Recommendations
    3. 3. Perfection
      1. 3.1 Context
      2. 3.2 Summary of Stakeholder Views
      3. 3.3 Analysis and Recommendations
    4. 4. Expiration
      1. 4.1 Context
      2. 4.2 Summary of Stakeholder Views
      3. 4.3 Analysis and Recommendations
    5. 5. The Abuse of Lien Rights
      1. 5.1 Context
      2. 5.2 Summary of Stakeholder Views
      3. 5.3 Analysis and Recommendations
    6. 6. Liens Against Specific Types of Property
      1. 6.1 Condominiums
        1. 6.1.1 Context
        2. 6.1.2 Summary of Stakeholder Views
        3. 6.1.3 Analysis and Recommendations
      2. 6.2 Residential Subdivisions
        1. 6.2.1 Context
        2. 6.2.2 Summary of Stakeholder Views
        3. 6.2.3 Analysis and Recommendations
      3. 6.3 Leaseholds
        1. 6.3.1 Context
        2. 6.3.2 Summary of Stakeholder Views
        3. 6.3.3 Analysis and Recommendations
  6. Chapter 5: Holdback and Substantial Performance
    1. 1. Overview
    2. 2. Amount of Holdback
      1. 2.1 Context
      2. 2.2 Summary of Stakeholder Views
      3. 2.3 Analysis and Recommendations
    3. 3. The Definitions of Substantial Performance and Completion
      1. 3.1 Context
      2. 3.2 Summary of Stakeholder Views
      3. 3.3 Analysis and Recommendations
    4. 4. Finishing Holdback
      1. 4.1 Context
      2. 4.2 Summary of Stakeholder Views
      3. 4.3 Analysis and Recommendations
    5. 5. Mandatory Release of Holdback
      1. 5.1 Context
      2. 5.2 Summary of Stakeholder Views
      3. 5.3 Analysis and Recommendations
    6. 6. Annual, Phased and Segmented Release of Holdback
      1. 6.1 Context
      2. 6.2 Summary of Stakeholder Views
        1. 6.2.1 Early Release Generally
        2. 6.2.2 Annual Release
        3. 6.2.3 Phased Release
        4. 6.2.4 Segmented Release
      3. 6.3 Analysis and Recommendations
    7. 7. Deferral Agreements
      1. 7.1 Context
      2. 7.2 Analysis and Recommendations
    8. 8. Deficiency Holdback
      1. 8.1 Context
      2. 8.2 Summary of Stakeholder Views
      3. 8.3 Analysis and Recommendations
    9. 9. Use of Financial Instruments for Holdback Purposes
      1. 9.1 Context
      2. 9.2 Summary of Stakeholder Views
      3. 9.3 Analysis and Recommendations
  7. Chapter 6: Summary Procedure
    1. 1. Overview
    2. 2. Changes to the Summary Nature of Proceedings Under the Act
      1. 2.1 Context
        1. 2.1.1 Leave to Bring Motions
        2. 2.1.2 Leave to Conduct Examinations for Discovery and Documentary Production
        3. 2.1.3 Leave to Bring Third Party Claims
        4. 2.1.4 Appeals From Interlocutory Orders
      2. 2.2 Summary of Stakeholder Views
      3. 2.3 Analysis and Recommendations
        1. 2.3.1 Leave to Bring Motions
        2. 2.3.2 Leave to Conduct Examinations for Discovery and Documentary Production
        3. 2.3.3 Leave to Bring Third Party Claims
        4. 2.3.4 Appeals From Interlocutory Orders
    3. 3. Joinder of Lien Claims and Trust Claims
      1. 3.1 Context
      2. 3.2 Summary of Stakeholder Views
      3. 3.3 Analysis and Recommendations
    4. 4. Case Management and References to Masters
      1. 4.1 Context
        1. 4.1.1 Case Management
        2. 4.1.2 References
      2. 4.2 Summary of Stakeholder Views
        1. 4.2.1 Case Management
        2. 4.2.2 References
      3. 4.3 Analysis and Recommendations
    5. 5. Monetary Thresholds and Special Considerations for Home Renovation Projects
      1. 5.1 Context
      2. 5.2 Summary of Stakeholder Views
      3. 5.3 Analysis and Recommendations
  8. Chapter 7: Construction Trusts
    1. 1. Overview
    2. 2. Context
      1. 2.1 Trust Provisions in Ontario and Other Jurisdictions
      2. 2.2 Trust Claims in Insolvency Proceedings
        1. 2.2.1 The Trust Regime in Ontario
          1. 2.2.1.1 The Trust Provisions of the Act
          2. 2.2.1.2 Ontario’s Rejection of Holdback Trust Accounts in 1983
        2. 2.2.2 Trust Regimes in Other Provinces
          1. 2.2.2.1 British Columbia
          2. 2.2.2.2 Saskatchewan
        3. 2.2.3 Trust Regimes in Other Countries.
          1. 2.2.3.1 The United States
          2. 2.2.3.2 The U.K.
          3. 2.2.3.3 Northern Ireland
          4. 2.2.3.4 Scotland
          5. 2.2.3.5 Australia
    3. 3. Summary of Stakeholder Views
      1. 3.1 Stakeholder views on the Effectiveness of Current Trust Provisions
      2. 3.2 Stakeholder Views on Mandatory Mechanisms for Sequestering Trust Funds
    4. 4. Analysis and Recommendations
      1. 4.1 Effectiveness of Current Trust Provisions
      2. 4.2 Mechanisms for Sequestering Trust Funds
      3. 4.3 Mandatory Surety Bonds
  9. Chapter 8: Promptness of Payment
    1. 1. Overview
    2. 2. Context
      1. 2.1 Bill 69 – Prompt Payment Act, 2013
      2. 2.2 Opposition to Bill 69
      3. 2.3 Support for Bill 69
      4. 2.4 The Prompt Payment Movement
        1. 2.4.1 American Prompt Payment Legislation
          1. 2.4.1.1 U.S. Federal Legislation
          2. 2.4.1.2 State Legislation
          3. 2.4.1.3 The Effectiveness of U.S. Prompt Payment Legislation
        2. 2.4.2 U.K.
        3. 2.4.3 Other International Jurisdictions
      5. 2.5 Lessons Learned from the Prompt Payment Movement
    3. 3. Summary of Stakeholder Views
      1. 3.1 Proponents of Prompt Payment
      2. 3.2 Stakeholder Concerns About Prompt Payment
    4. 4. Analysis and Recommendations
      1. 4.1 What Types of Contracts Should Prompt Payment Apply To?
      2. 4.2 In the Construction Pyramid, What Level of Contract Should Prompt Payment Apply To?
      3. 4.3 What Should the Trigger for Payment Be?
      4. 4.4 What Should the Payment Period Be?
      5. 4.5 When Is the Contractor Entitled to Render an Invoice?
      6. 4.6 On What Basis Should Payment Be Allowed to Be Withheld and When?
      7. 4.7 What Remedies Should Be Available in the Event of Non-Payment?
      8. 4.8 Should Financial Disclosure Be Included in a Prompt Payment Regime?
  10. Chapter 9: Adjudication
    1. 1. Overview
    2. 2. Context
      1. 2.1 The U.K. Adjudication Experience to Date
      2. 2.2 Adjudication Now Adopted in Many Jurisdictions
      3. 2.3 Comparative Review
        1. 2.3.1 Who Can Require Adjudication?
        2. 2.3.2 Who Can Adjudicate a Dispute and How is the Adjudicator Nominated?
          1. 2.3.2.1 Who Can Adjudicate a Dispute?
          2. 2.3.2.2 How is the Adjudicator Nominated?
        3. 2.3.3 What Types Of Disputes Can Be Adjudicated?
        4. 2.3.4 What Is The Adjudication Process and How Are Costs Dealt With?
          1. 2.3.4.1 What Is the Adjudication Process?
          2. 2.3.4.2 Timing of Statutory Adjudication
          3. 2.3.4.3 How Are Costs Dealt With?
        5. 2.3.5 How Are Adjudicated Decisions Enforced?
        6. 2.3.6 The Interface Between Adjudication and Lien Legislation
    3. 3. Summary of Stakeholder Views
    4. 4. Analysis and Recommendations
    5. 5. “Made-in-Ontario’ Adjudication
      1. 5.1 Who Can Require An Adjudication?
      2. 5.2 Who Can Adjudicate a Dispute and How is the Adjudicator Nominated?
        1. 5.2.1 Who Can Adjudicate a Dispute?
        2. 5.2.2 How is the Adjudicator Nominated?
      3. 5.3 What Disputes Get Adjudicated?
      4. 5.4 What Process and at What Cost?
        1. 5.4.1 Process
        2. 5.4.2 Costs
      5. 5.5 How Are Adjudicated Decisions Enforced?
      6. 5.6 How Would Adjudication Interface with the Act?
  11. Chapter 10: Surety Bonds
    1. 1. Overview
    2. 2. Context
      1. 2.1 Surety Bonds Generally
      2. 2.2 Mandatory Surety Bonds
        1. 2.2.1 United States
          1. 2.2.1.1 The Federal Regime
          2. 2.2.1.2 The State Regimes
      3. 2.3 The Electronic Delivery of Surety Bonds
      4. 2.4 Subcontractor Default Insurance
    3. 3. Summary of Stakeholder Views
    4. 4. Analysis and Recommendations
  12. Chapter 11: Technical Amendments
    1. 1. Overview
    2. 2. Irregularities That Can Be Cured Under the Act
    3. 3. Statutory Settlement Meetings
    4. 4. Harmonization of the Act with the Registry Act
    5. 5. Right to Seize Machinery and Equipment
    6. 6. Additional Information in the Certificate of Substantial Performance
    7. 7. Sheltering
    8. 8. Written Notices of Lien
    9. 9. Requests for Information
    10. 10. Vacating Liens Through the Posting of Security
      1. 10.1 Who is Permitted to Vacate a Lien
      2. 10.2 Amount of Security
      3. 10.3 Acceptable Types of Security
      4. 10.4 Procedure for Posting Security
    11. 11. Statement of Allocation of a Mortgagee
  13. Chapter 12: Industry Education and Periodic Review
    1. 1. Overview
    2. 2. Practice Guides and Interpretive Bulletins
    3. 3. Instituting a Periodic Review of the Act
  14. Chapter 13: Summary of Recommendations
  15. Chapter 14: Conclusion and Acknowledgments
  16. Appendix A: List of Participating Stakeholders
  17. Appendix B: Promptness of Payment Internationally
    1. 1. New Zealand
    2. 2. Ireland
    3. 3. Singapore
    4. 4. Malaysia
    5. 5. Hong Kong (Proposed)
    6. 6. Australian Prompt Payment Legislation
      1. 6.1 Australia (East Coast)
      2. 6.2 Australia (West Coast)
    7. Chart 1 - Comparison of Payment Periods in Prompt Payment Legislation in the United States
    8. Chart 2 - Comparison of Notice, Witholding and Other Provisions in Prompt Payment Legislation in the United States
  18. Appendix C: Adjudication Considerations and Mechanics
    1. 1. Who can require adjudication?
    2. 2. Who can adjudicate a dispute and how is the adjudicator nominated?
      1. 2.1 Who can adjudicate a dispute
      2. 2.2 How are they nominated?
    3. 3. What types of disputes can be adjudicated?
    4. 4. What is the adjudication process and how are costs dealt with?
      1. 4.1 Process Timeframes
      2. 4.2 Costs of Adjudication
      3. 4.3 Allocation of Costs
    5. 5. How is a decision of an adjudicator enforced?

Table of Legislation

Jurisdiction Legislation Title Short Form
Canadian Legislation
British Columbia Builders Lien Act[1] B.C. Act
Alberta Builders’ Lien Act[2] Alberta Act
Ontario Construction Lien Act[3] Ontario Act or the Act
Saskatchewan Builders’ Lien Act[4] Saskatchewan Act
Manitoba Builders’ Liens Act[5] Manitoba Act
New Brunswick Mechanics’ Lien Act[6] New Brunswick Act
Nova Scotia Builders’ Lien Act[7] Nova Scotia Act
Prince Edward Island Mechanics’ Lien Act[8] P.E.I. Act
Newfoundland and Labrador Mechanics’ Lien Act[9] Newfoundland Act
Yukon Builders Lien Act[10] Yukon Act
Northwest Territories Mechanics Lien Act[11] Northwest Territories Act
Nunavut Nunavut Act
International Legislation
United Kingdom Housing Grants, Construction and Regeneration Act 1996[12] U.K. Construction Act
New Zealand Construction Contracts Act 2002[13] New Zealand Act
Ireland Construction Contracts Act 2013[14] Ireland Act
Singapore Building and Construction Industry Security of Payment Act 2004[15] Singapore Act
Malaysia Construction Industry Payment and Adjudication Act 2012[16] Malaysia Act
New South Wales Building and Construction Industry Security of Payment Act 1999[17] New South Wales Act
Victoria Building and Construction Industry Security of Payment Act 2002[18] Victoria Act
Queensland Building and Construction Industry Payments Act 2004 Queensland Act
South Australia Building and Construction Industry Security of Payment Act 2009 South Australia Act
Tasmania Building and Construction Industry Security of Payment Act 2009 Tasmania Act
Australian Capital Territory Building and Construction Industry (Security of Payment) Act 2009 Australian Capital Territory Act
Western Australia Construction Contracts Act 2004 Western Australia Act
Northern Territory Construction Contracts (Security of Payments) Act 2004 Northern Territory Act

Chapter 1: Introduction

The document that follows this Introduction is the final Report (the “Report”) of the Expert Review of Ontario’s Construction Lien Act. The Report sets out certain of our research on the issues considered, and refers at many points to the submissions of the stakeholders that have been consulted through the approximately 14-month process that has culminated in the Report. While the conduct of the Review is dealt with in detail in Chapter 2 – Conduct of the Review, it is worth mentioning as an introductory point that the Report is not merely the result of legal research but is the product, as well, of extensive stakeholder submissions and consultations in 2015, and an Advisory Group process that took place in early 2016. In other words, when we sometimes refer to “the Review”, in a sense we include ourselves, our team here at Borden Ladner Gervais LLP, which has included the Honourable Dennis O’Connor, QC, Soizic Reynal de St. Michel, James Little (Secretary of the Review), Chuck Andary, and Imogen Bailey, as well as all of the stakeholders and subject matter experts that have participated in the process.

As we explained in each of the approximately 30 stakeholder consultation meetings, our retainer in respect of the Review is a solicitor-client relationship. Our clients are The Ministry of the Attorney General (“MAG”) and the Ministry of Economic Development, Employment and Infrastructure. Accordingly, the Review was not conducted as an independent public inquiry, like the Walkerton Inquiry, for example; rather, our instructions were to research and deliver an expert legal opinion – with a twist. The very significant twist was that our instructions also included the mandate to conduct a broad based consultation within the Ontario construction industry. Equally importantly, our clients committed to us from the outset that we would be allowed intellectual independence in our work.

In conducting the Review we have communicated with over 60 stakeholders, and have identified approximately 90 issues and sub-issues. In part, the number of stakeholders and issues resulted from our mandate to proceed in a manner that was inclusive, transparent and collaborative. In order for us to produce the Report, it was necessary to analyze the issues list with reference to our core mandate, which was described in MAG’s February 2015 Announcement. As discussed in the stakeholder consultation meetings, the core issues in respect of our mandate were, and are, the modernization of the Act; promptness of payment; and the effectiveness of dispute resolution. Our mandate did not include, for example, opining on procurement issues, which are not a subject encompassed by the Act, and did not extend to proposing the introduction of or major amendments to other provincial legislation. On this basis, we determined that a small number of issues, such as financial disclosure during the procurement of projects, bidder exclusion provisions, and the potential passage of false claims legislation, were beyond our remit. Having said this, however, the vast majority of the issues identified during the course of the Review to date have been researched and considered and are addressed in the Report that follows.

It is also important to note the breadth of the issues we have considered in respect of the Act. While certain areas were outside of our remit as noted above, everything within the context of the Act was open to consideration. In fact, we considered potential fundamental changes up to and including repealing the Act itself. However, it was apparent from the stakeholder consultation meetings, the written submissions received from the stakeholders, and the discussions of the Advisory Group, that there was virtually unanimous support for the continuation of the lien/holdback regime as a means for protecting the construction industry. Accordingly, the recommendations that flow from our report are aimed at allowing the Act to better achieve its policy objectives and at bolstering certain elements of the Act, such as expediting payment and improving the efficiency of dispute resolution, that have not evolved optimally over the years since 1983. In addition, we recommend some relatively new concepts which we believe will strengthen the Act while at the same time supporting the intent of the 1983 legislation.

A few words regarding the form of the Report. In July 2015 we issued the Information Package and launched the Review’s website, in order to make the Information Package easily accessible to the stakeholders and the public. The Information Package, which was broken down into fourteen categories of issues, was intended to provide the background context for the issues that had been identified up to that point in time. Of course, since the issuance of the Information Package we have conducted the stakeholder consultation meetings and the Advisory Group Meetings, and have received multiple written stakeholder submissions (all of which have been posted on the Review website), and this process has allowed us to draw a distinction between the core issues, a grouping of substantive issues, and a grouping of technical issues. Also, some issues that initially appeared to be distinct from one another have, as our research and analysis has developed, proven to be significantly related. As well, we have decided to recommend that no changes be made to the priorities provisions of the Act, and to recommend that alternative dispute resolution remain voluntary and outside the Act, such that our analysis in regards to these issues does not form part of the Report, but will be posted to the Review website as background papers. Thus, the breakdown of categories contained in the Information Package has changed, and the reader will readily see that the final Report follows its own organizational structure.

While over the course of five meetings the Advisory Group was not unanimous in respect of every issue discussed, a broad consensus was generally reached with relation to three core issues: maintaining and modernizing the lien/holdback remedy; introducing a made-in-Ontario promptness of payment regime; and introducing targeted adjudication to enhance the efficiency of dispute resolution throughout the Ontario construction industry.

Above all, we have in our recommendations attempted to achieve an appropriate balance between competing interests and tensions, hence the title of this Report, Striking The Balance. Among the linked principles we encountered perhaps the most fundamental was that of regulation versus freedom of contract, however the competing values of cash flow versus collateralization also featured prominently, as did efficiency versus thoroughness in regards to dispute resolution. Generally, there was a need to address a complex set of interacting mechanisms in as practical a manner as possible in the circumstances. In each case, we have attempted to develop a recommendation that is practical and efficient. Having said this, it must also be recognized, and the reader will appreciate, that we have reached the fundamental conclusion that promptness of payment, supported by the remarkable efficiency of adjudication, represents a policy objective that justifies the need to strike a balance that allows for blending these recommended features into the legislation.

As part of this introduction we would like to make one fundamental recommendation. That is, given the breadth and scope of the changes we recommend, a new Act will be created, an Act that will encompass rights and remedies that extend considerably beyond construction liens and trusts, and we suggest this new act be named the Construction Act: An Act respecting Security of Payment and Efficient Dispute Resolution in the Construction Industry. It is our view that such a change correlates with the changes we recommend, the changes in the industry that have taken place since 1983, and the collective desire to move forward with a modernized piece of legislation.

In conclusion, we consider ourselves fortunate to have been selected to conduct the Review, and, with the assistance of the persons mentioned above, we have made every effort to fulfill our mandate.

Bruce Reynolds, Counsel

Sharon Vogel, Co-Counsel

30 April 2016

Chapter 2: Conduct of Review

On February 11 2015, we were appointed to conduct an expert review of the Act (the “Review”). The appointment was announced to the public by the Ministry of the Attorney General. As noted above, our retainer is to advise MAG and the Ministry of Economic Development, Employment & Infrastructure (collectively, the “Ministries”).[19]

Over the course of the Review, our primary contact has been through MAG, and in particular Mr. Irwin Glasberg, Assistant Deputy Attorney General, Policy and Innovation Division.

Originally, a deadline of December 31, 2015 was established for the delivery of this expert report (the “Report”). The original deadline was ultimately extended to April 30, 2016.

Following the Announcement, we set out to design a process that would not only fit the needs of the industry but also would be flexible enough to ensure that the consultation would produce valuable submissions and meaningful dialogue. The goal was to create an open and transparent process. Ultimately, the process was organized in three distinct phases, as follows:

Phase 1:

Phase 2:

Phase 3:

1. Phase 1

Phase 1 commenced shortly after the Announcement, in February of 2015. Initially, MAG provided a list containing the contact information of various stakeholders that had been involved in the process surrounding Bill 69.[20] Once we had followed up with the representatives identified on the initial list, it was immediately apparent that there would be many other associations and groups that would want to participate.

We heard from many stakeholders in short order after the Announcement. Ultimately hundreds of people were heard from, representing over 60 stakeholders.[21]

Following the stakeholder identification process, the process of issue identification began. There were more issues than originally anticipated. We considered a significant amount of research material to assist in developing an information package of background material on the various issues which was distributed to the stakeholder community on July 15, 2015 (the “Information Package”).

2. Phase 2

The Information Package, when issued, contained over 60 issues and sub-issues to be considered by the stakeholder community. Its distribution marked the commencement of Phase 2 of the Review process.

Once the Information Package had been distributed to the stakeholder community, the Review’s website www.constructionlienactreview.com was launched in order to add a further level of transparency and an efficient mechanism through which to disseminate information.

At this time, the process of preparing a survey which was to be administered by a third party consultant also began. EKOS Research Associates Inc. (“EKOS”) was selected through a competitive process and EKOS began data collection (the “EKOS Survey”). The EKOS data collection process was ongoing throughout the entire Consultation Process and ultimately resulted in the EKOS Survey which is available online on the Review website. The results of this survey were used to confirm general submissions made by stakeholders and to analyze the views of the industry generally.

Concurrently with the EKOS process, we began the task of coordinating what would become approximately 30 stakeholder meetings that took place between September and December of 2015. The initial timeframes for the performance of these consultation meetings required significant adjustment as the Review did not have the power of subpoena and was required to accommodate the busy schedules of industry representatives in order to complete as many meetings as possible. As a result of the extended timeframe, a request was made to the Ministries to extend the deadline for the report (which request was subsequently granted such that an initial extension was given to March 31, 2016, followed by a further extension to April 30, 2016 as described below).

The stakeholders were grouped, where appropriate, in order to achieve a more efficient process. These meetings were held at our offices in order to present an accommodating neutral environment for stakeholders to share their views and discuss potential opportunities for modernizing the Act. A representative of MAG attended each of the meetings in order to prepare summaries of the discussion. Copies of the summaries of the Consultation Process are provided on the Review website.

Nearly every consultation meeting generated a new idea or new issue for the Review. As part of the Consultation Process, we invited each of the stakeholders (as well as members of the industry generally) to provide written submissions in relation to the issues identified in the Information Package. Over the course of the consultation process, upwards of 70 formal submissions were received from over 40 of the identified stakeholders in addition to many e-mail submissions from individual participants in Ontario’s construction industry. These submissions were extremely helpful and were reviewed as part of the ongoing process leading up to Phase 3. In January 2016, we posted the written submissions on the Review website.

Following the receipt of the written submissions and the conclusion of the Consultation Process, a supplemental issues list containing 27 new (or modified) issues was prepared. Shortly after, we wrote to stakeholders informing them that the new issues list was available and inviting stakeholders to provide discrete supplementary submissions on these issues.

A further tranche of written submissions was then received in relation to these new issues that were also considered in the writing of this Report. All submissions are on the Review website.

The final step of Phase 2 was the formation of the Advisory Group. We invited a group of eminently qualified subject matter experts to participate in 3 meetings to be held between January and March of 2016. The Advisory Group was comprised of the following individuals:

Importantly, while we selected the members of the Advisory Group in part due to their alignment with key stakeholder groups, the members of the Advisory Group were not representatives of their aligned interests and were not in a position to make binding commitments. Rather, they brought to the table an ability to provide the context of multiple stakeholder perspectives.

Phase 3

In Phase 3, the Advisory Group meetings were held for the purpose of obtaining input in respect of the issues, and determining whether it was possible to achieve consensus on certain issues, as well as to refine recommendations that were being developed following the Consultation Process. In order to promote discussion, the Advisory Group meetings were conducted on a confidential basis.

In March of 2016, certain members of the Advisory Group asked if it would be possible to add further Advisory Group meetings in order to continue the progress that had been made at the previous three meetings. In view of the potential opportunity to achieve further consensus, we gave careful consideration to the possibility of further meetings and ultimately requested a further extension from the Ministry to provide our Report. Shortly after, the Ministries granted the request for an extension so that this Report could be submitted by April 30, 2016. We then proceeded to conduct two further Advisory Group meetings in late March/early April of 2016.

As noted in Chapter 1 – Introduction, while over the course of five meetings the Advisory Group was not unanimous in respect of every issue discussed, a broad consensus was generally reached with relation to three core issues: maintaining and modernizing the lien/holdback remedy; introducing a made-in-Ontario promptness of payment regime; and introducing targeted adjudication to enhance the efficiency of dispute resolution throughout the Ontario construction industry.

During the entirety of Phase 3, our team has been was extensively engaged in researching certain of the issues under consideration in numerous jurisdictions in addition to our own. That said we could not have produced this Report without the important and significant contributions of the stakeholder community and the Advisory Group. We extend our thanks to each and every contributor for their hard work and collaborative spirit.

Chapter 3: Lienability

1. Overview

While in theory the Act contains all of the necessary procedures to pursue a claim for lien, some stakeholders report having experienced difficulties in applying certain definitions contained in the Act, including the definitions of: “improvement”, “owner”, “price”, and “supply of services”. Stakeholders have also expressed concerns with respect to the lienability of publicly owned lands and/or lands on which a public interest project is being constructed. It has been suggested that, because these lands are not likely to be subjected to a court-ordered sale, liens in respect of such lands be “given” and constitute a charge on the holdback, rather than being registered.

As a result, we have considered the following issues:

2. Improvement

2.1  Context

Stakeholders raised two concerns regarding the definition of “improvement”:

  1. Clarity of the definition and
  2. Applicability of the definition to Information Technology (“IT”) projects.
2.1.1  Clarity of the Definition

The definition of “improvement” is purposely broad to protect those who supply services and materials. In the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act in 1982, it was made clear that the lien created by the Act would apply “in the case of the construction and building repair industries”.[22] The broad definition replaced the old definition under the Mechanics’ Lien Act, which attempted to circumscribe the types of projects that would constitute an improvement.[23]

In 2010, the Act was amended to further broaden the applicability of the definition of “improvement”. The definition immediately prior to the amendment read:

  1. any alteration, addition or repair to, or
  2. any construction, erection or installation on,

any land, and includes the demolition or removal of any building, structure or works or part thereof, and “improved” has a corresponding meaning;

The 2010 amendment expanded the definition to include “the installation of industrial, mechanical, electrical or other equipment” that is “essential to the normal or intended use of the land, building, structure or works”. The definition now reads:

“improvement” means, in respect of any land,

  1. any alteration, addition or repair to the land,
  2. any construction, erection or installation on the land, including the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works, or
  3. the complete or partial demolition or removal of any building, structure or works on the land;

This amendment primarily affected electrical and mechanical contractors and suppliers of machinery in manufacturing facilities.[24] Commentators have noted that the 2010 amendment was preceded by the Ontario Court of Appeal Decision in Kennedy Electric Ltd. v Dana Canada Corporation.[25] In that case, the Court of Appeal upheld a decision of Killeen J. which had found that the work performed by two subcontractors, Kennedy Electric and its subcontractor Cassidy, who supplied services and materials to a project involving the addition to a manufacturing plant of an assembly line for the manufacture of Ford F150 trucks, was not lienable. Justice Killeen found that the supply and the installation of the assembly line “represented the installation of manufacturing equipment in a building but did not constitute an improvement or part of an improvement within the Act” [emphasis added].[26] The Divisional Court dismissed the appeals, finding that the trial judge had applied the correct law to his findings of fact. The Court of Appeal also dismissed the appeals, holding that each case would be decided on its facts, noting as follows:

In most cases, the installation or repair of machinery used in a business operated in a building, particularly where the machinery is portable, will not give rise to lien rights under the CLA. On the other hand, where machinery is installed in a building for the use of a business and is completely and permanently integrated into the building, a lien claim will arise.[27] [Emphasis added]

The legislature responded with the 2010 amendment which provided that the installation of industrial, mechanical, electrical, or other equipment that is “essential to the normal or intended use of the lands or building” constitutes an improvement. The issue of portability is now said to be largely irrelevant, at least by some commentators.[28]

The broad Ontario wording is atypical in Canada. British Columbia and Alberta both use definitions for “improvement” that are more restrictive. For example, British Columbia defines “improvement” as “anything made, constructed, erected, built, altered, repaired, or added to, in, on or under land, and attached to it or intended to become a part of it, and also includes any clearing, excavating, digging, drilling, tunnelling, filling, grading, or ditching”.[29] Alberta defines “improvement” as “anything constructed, erected, built, placed, dug or drilled, or intended to be constructed, erected, built, placed, dug or drilled, on or in land except a thing that is neither affixed to the land nor intended to be or become part of the land”.[30] Recognizing that the overarching purpose of the Act is to protect construction suppliers,[31] the Ontario legislature purposely adopted a broad definition of “improvement”.

A third definitional approach involves the use of non-exhaustive lists and exclusions to clear up ambiguities. An example of this appears in the Manitoba Act, where “contract” is defined as a contract for construction, for improving land, for doing any work or the providing any services in construction or in improving land, or for supplying any materials to be used in construction or in improving land.[32] Anyone that does work or provides services or materials in the performance of a contract or sub-contract has a lien for the value of the work.[33] “Construction” and “improving land” are both defined terms in the Manitoba Act. The definition of “improving land” incorporates a non-exhaustive list and exclusions:

…the doing of any work which improves the character of the land and without limiting the generality of the foregoing includes

  1. clearing the land of timber or scrub,
  2. landscaping the land,
  3. fencing the land, and
  4. demolishing structures on the land,

but does not include tilling, seeding, cultivating or mowing the land for agricultural or forest production or the harvesting of a crop from the land or the cutting of timber from the land for sale.[34]

Some stakeholders advocated for such lists to be incorporated into the Act; however, Ruth Sullivan, in her text on statutory interpretation and legislative drafting, cautions that non-exhaustive lists can lead to confusion, and should be used to deal with borderline applications of general terms to illustrate the range of application through the use of examples, to prevent the reading-down of legislation to exclude something that is meant to be included. The use of “does not include” is intended to carve out exceptions from the general application of a provision.[35]

Stakeholders particularly expressed concern with the distinction between “repairs” and “maintenance” under the current Act. Repairs to the land are specifically included within the definition of “improvement” under the Act while maintenance is not included. In 310 Waste Ltd. v Casboro Industries Ltd., the Divisional Court confirmed that maintenance is not included within the definition of “improvement”.[36] A concern was raised by a number of stakeholders, as outlined below, that the Act does not adequately distinguish between “repair” and “maintenance”. Infrastructure Ontario has noted this to be an issue of particular concern in regards to long-term agreements where repairs are part of regular maintenance over a long period of time, for example on an Alternative Financing and Procurement (“AFP”) project that includes an operations and maintenance phase of thirty years.[37]

The test employed by the courts to delineate between repair and maintenance examines whether or not the work improved the value of the land or constitutes part of a construction project (for example, snow removal that is part of regular maintenance would not give rise to lien rights, but snow removal directed by a contractor to clear the way for construction of an improvement to continue would) as opposed to typical periodic maintenance.[38] In some cases, the line between “repairs” and “maintenance” can be blurry. There is also commentary to suggest that some degree of permanence may be required;[39] a repair of some permanence could result in an increase in the value of the land, while work such as snow removal that is part of regular maintenance does not increase the value of the land, and should thus be excluded. This analysis is in line with a fundamental precept of the Act, that “[t]he lien is a right to hold the owner’s interest in the premises as security for the payment of all persons who have supplied services or materials to the making of the improvement”.[40] Thus, the lien should only attach where the work has contributed to an upgrade of some permanence to the land. In this regard, using the snow removal example, it would have to be determined whether the snow removal is part of an “improvement” (clearing the way for construction of the improvement) or is merely periodic maintenance associated with the normal use of the premises.

In our view, the Income Tax Act provides guidance on drawing the distinction between “repairs” and “maintenance” by analogizing to the distinction between “capital expenses” and “current expenses”. Landlords may deduct “current expenses” from rental income, which are “recurring expenses that provide a short-term benefit” that “keep a…property in the same condition”, but landlords cannot deduct “capital expenses”, which are “expenses that extend the useful life of … property or improve it beyond its original condition”.[41] The example of snow removal not associated with an improvement would be a “current expense” or “maintenance”, while snow removal directed by a contractor to clear the way for construction of an improvement to continue would be a “capital expense” or “repair”. Again, the element of permanence is important in this distinction. Several considerations are relevant to determining whether work is of a “capital” or a “current” nature. The following chart outlines some of the considerations in relation to the work, but the applicability and weight of each will depend on the circumstances:

Capital (Repair) Current (Maintenance)
Increase to the value of the land, building, structure or works No change or nominal increase to the value of the land, building, structure or works
Higher degree of permanence Temporary, low degree of permanence
Upgrade to the land, building, structure or works Replacement of similar quality or correction of a defect

In distinguishing between lienable repairs and non-lienable maintenance, the principal considerations therefore are the permanence of the work, the effect the supply has on the land, building, structure or works, and whether or not it is part of an improvement.

2.1.2  Applicability to Information Technology (“IT”) Projects

The definition of “improvement” under the Act relates solely to land. A concern raised by some stakeholders was that the definition of “improvement”, does not make clear whether or not the IT elements of a project fall within the scope of the Act.

IT projects may involve some construction work and may therefore be classified as an “improvement” under the Act. For some of these contracts, the physical installation of industrial, mechanical, or electrical equipment may be a relatively small element of the work to be performed under a contract, but the project generally may fall within the definition of improvement because of this work.

No other Canadian jurisdiction specifically mentions IT projects within the definition of “improvement”. However, New Zealand, which uses an exhaustive list of what is included in “construction work”, has addressed this issue. At section 6(1)(c) and (d) of the New Zealand Construction Contracts Act 2002, the installation and maintenance of communications systems is included. In the other jurisdictions reviewed, the inclusion or exclusion or IT projects is not clear.

2.2  Summary of Stakeholder Views

a) Clarity of the Definition

With respect to the definition of “improvement”, as noted, the two main stakeholder concerns related to the clarity of the definition and the application of the definition to IT projects.

With regards to the clarity of the definition, concerns were also raised regarding whether or not repairs should be included in the definition, and whether or not there needs to be a distinction drawn between “repairs” and “maintenance”:

  1. The Ontario Association of School Business Officials, the Ontario Public School Board Association,[42] and the Council of Ontario Universities[43]suggested that repairs be included in the definition of improvement such that the definition under paragraph (b) would read “any construction, erection, repair, or installation on the land…”.
  2. The Provincial Building and Construction Trades Council of Ontario and the International Union of Operating Engineers, Local 793 were in favour of making all of the definitions as inclusive as possible to protect workers, suppliers, and contractors.[44]
  3. The City of Toronto and the Association of Municipalities of Ontario submitted that there should be a clearer distinction between “repairs” and “maintenance”, with the City of Toronto suggesting a non-exhaustive list be adopted of what is considered an “improvement”.[45]
  4. As noted above, Infrastructure Ontario also commented on the distinction between “repairs” and “maintenance”, and suggested that “repairs that are part of regular maintenance over a long-term contract” be excluded “unless it is the intent such repairs be captured”.[46]

b) IT Projects

The treatment of IT projects under the Act was also commented on generally by municipal stakeholders during the stakeholder consultation meetings.

  1. Some municipalities indicated that, for IT contracts, payments are made on the basis of various testing phases rather than substantial performance. The municipalities indicated that, in this context, there are discrepancies in how the Act is applied; some municipalities apply the Act to IT projects while others do not. Further, many IT projects include long-term maintenance payments. The ongoing nature of these projects makes it unclear as to how the Act should apply.
  2. The City of Toronto commented that “it would be useful to have clarification for IT and service agreements particularly when a large part of the scope of work of a contract is a software solution or technical support”.[47]
  3. The City of Toronto also indicated that it “is open to considering carve-outs for certain work, such as the IT service/software components of a contract”; however, “the City does not support the waiver of lien rights that could result in a supplier not having access to holdback”.[48] The City also suggested that “there are issues that need to be addressed for specific forms of contract, such as [AFPs] and some other contract arrangements (for instance Waterfront Toronto doing a project for the City)” which “could possibly be addressed through definitions or new clauses for specific agreements rather than exempting certain projects from the Act”.[49] Specifically, the City noted that the definitions under the Act must be rewritten with AFP projects in mind, or new definitions be created that specifically address the parties, such as Project Co, involved in AFP projects.

2.3  Analysis and Recommendations

While the definition of “improvement” is, arguably, sufficiently broad to satisfy the objectives of the Act, stakeholders advocated for a clearer definition that would reduce litigation on the issue.[50] Accordingly, the suggestion by the City of Toronto of a non-exhaustive list of what should be considered to be an improvement is worth considering in order, for example, to distinguish between “repairs” and “maintenance”, and it is not without legislative precedent considering the Manitoba legislation cited above. In several U.S. states, specific lists of what is included as an “improvement” are provided, but these lists can become cumbersome and limiting; non-exhaustive general lists can be incorporated to satisfy the concerns that have been raised if needed. Importantly, though, such lists can create confusion as they generally cannot address every area of ambiguity, and should only be used where there is not a more practical alternative.

An alternative is to utilize the approach of the Income Tax Act. “Repairs” of a “capital” nature should be included as “improvements” under the Act, while “maintenance” that is more “current” in nature should not be included as “improvements”. As noted above, in determining whether work is “capital” or “current”, there are several considerations, such as the value that the work brings to the land, building, structure or works, the degree of permanence intended by the work, and whether or not the work is an upgrade to the original condition of the land or structure. Capital repairs are intended to improve upon the land, building, structure or works and therefore should be captured by the Act while maintenance is intended to maintain the original condition of the land, building, structure or works, and are not part of an “improvement”, and therefore should not be captured by the Act.

With respect to IT projects, few stakeholders offered submissions. While a specific definition could be included in the Act, as is the case in New Zealand, this would move away from the broad scope of the provision unless incorporated as part of a non-exhaustive list. The broad wording used in the 2010 amendment to the definition of “improvement” will be interpreted to include IT projects, if they involve “the installation of industrial, mechanical, electrical or other equipment on the land or on any building, structure or works on the land that is essential to the normal or intended use of the land, building, structure or works”. Those IT projects that are essential to the intended use of the building, structure or works would thus fall within the existing definition. That said, it would not be advisable to expand the application of the Act to include software solution contracts that are not part of a construction project. Accordingly, the definition should not be revised to include such contracts and the dividing line between what is and is not lienable should be left to the courts.

Recommendations

  1. Part (a) of the definition of “improvement” should be amended to refer to “any alteration or addition to the land and any capital repair to the land”.
  2. Capital repair” should be added as a definition and defined to include all repairs intended to extend the normal economic life or to improve the value and productivity of the land, or building, structure or works on the land, but not including maintenance work performed in order to prevent the normal deterioration of the land or building, structure or works on the land and to maintain them in a normal functional state.
  3. The definition of “improvement” should not be amended to specifically include IT services, materials, equipment and software.

3. Owner

3.1  Context

The issue of who is an “owner” for the purposes of the Act has been the subject of considerable attention in case law and in academic commentary. In particular, the concept of ownership has become more complex due to an increase in the types of contractual arrangements in use, for example, in public-private partnership (AFP) projects multiple parties may be considered to be “owners”. To further complicate matters, construction is sometimes carried out under “licenses” that purport to grant access to land but not an interest in the land, with the “licensee” then contracting for the supply of services, materials and equipment.

In addition to the increased complexity of contractual arrangements, the complexity of projects themselves can further compound the issue of determining who the “owner” is for the purposes of the Act. Some stakeholders have noted that this issue compels subcontractors to, in effect, “lien everyone” to attempt to ensure compliance with the Act.[51] While this may be an effective way for a lien claimant to minimize its risk of failing to properly preserve its lien, it is inefficient and it can create an administrative burden that places strain and additional costs on the dispute resolution system. As a result, it has been suggested that the definition of “owner” should be clarified. The definition of “owner” currently reads:

“owner” means any person, including the Crown, having an interest in a premises at whose request and,

  1. upon whose credit, or
  2. on whose behalf, or
  3. with whose privity or consent, or
  4. for whose direct benefit,

an improvement is made to the premises but does not include a home buyer;

The definition of “owner” has not been amended since the Act came into force in 1983,[52] despite the increasing complexity of construction projects and the increased use of AFPs. AFP projects in Canada trace back to the mid-1980s,[53] after the Act came into force.

In AFP projects, the identity of the “owner” for the purposes of the Act can be difficult to ascertain. “Project Co”[54] acts as the manager of the project, entering into a contract with a public-sector counterparty and passing down the design, building, and commissioning of an asset to a contractor, but Project Co’s interest in the land is typically limited to its license to use the land to build, operate, and maintain the project.[55] Crown agencies, such as Infrastructure Ontario, manage the procurement process and are involved throughout the construction phase of the project, but also may not have an interest in the land.

The “owner” of the land will typically be listed in the AFP project agreement, but for sub-contractors lower in the contractual pyramid, these documents may not be readily accessible. This leads to the problem of “liening everyone”, cited by stakeholders. The owner(s) will vary depending on the project. For example, in the case of a highway, the owner may be the Crown (under the jurisdiction and control of the Ministry of Transportation),[56] along with any municipalities that the highway runs through. Or, in the case of a hospital, the Crown will only be involved to fund the project. The confusion in ascertaining the owner(s) in AFP projects stems in part from the presence of “Project Co” in the contractual pyramid, leading many claimants to believe that Infrastructure Ontario is an “owner”. According to some stakeholders, the resulting confusion has led to increased costs as a result of liens being improperly registered.

Significantly, Infrastructure Ontario has suggested that there be only one owner with respect to an improvement, and that the owner should be the entity that requests the improvement from the contractor. This could include, in respect of AFP projects, a “special purpose vehicle” that has taken responsibility for the improvement, typically known as “Project Co”.[57]

Other stakeholders have suggested the exclusion of AFP projects from the lien regime of the Act, with mandatory surety bonding of AFP projects.[58]

3.2  Summary of Stakeholder Views

With respect to the definition of “owner”, stakeholder submissions were varied.

  1. Infrastructure Ontario noted that the definitions of “owner” and “contract” under the Act are misaligned with the AFP model,[59] and suggested several possible solutions with respect to the definition of “owner”. These include:
    • Consider amending the definition of “owner” to allow the parties to deem an “owner” and ensure that there is one “owner” per improvement.
    • Consider allowing parties to designate the agent that is directly contracting with the contractor to be the “owner”.
    • “Consider limiting the definition of “Owner” to only one “Owner” that directly requests the improvement from the Contractor”.
    • Consider clarifying that “owner” in “AFP projects means the special purpose vehicle that has taken responsibility for the improvement”.
    • Consider allowing liens on the Authority property while allowing the Authority “to delegate “Owner” responsibilities to Project Co”.
    • Alternatively, consider “prohibiting liens against Authority property but ensure that funds withheld by [the] Authority for Project Co constitute trust funds with the beneficiary being contractors”.
    • Consider whether Project Co should be an “owner” under the Act as Project Co “is granted an interest in the premises by way of its license to the site”.[60]
  2. Prompt Payment Ontario submitted that a separate AFP scheme should be included in the Act with a definition of “owner” specific to AFP projects, and submitted that the definition of “owner” “should not be amended to accommodate the specific issues arising from” AFP projects.[61]
  3. Metrolinx submitted that the definition of “owner” requires clarification to address the issue of subcontractors “lien[ing] everyone”.[62]
  4. The Ontario Association of Landscape Architects suggested that “owner” should be redefined as “proponent”, such that in an AFP project “someone near the top” of the project “be held accountable as the proponent”.[63] Other stakeholders also noted issues with the definition as it applies to multiple “owners”.[64]
  5. The Toronto Transit Commission submitted that “owner”, as it is currently defined, can include a person “who does not actually pay any money in respect of a project,” but will not include a party that, for all intents and purposes, is the “owner” but does not have a legal interest in the land.[65]

3.3  Analysis and Recommendations

As noted above, stakeholders varied in their submissions on the definition of “owner”. Generally, it was agreed that the current definition does not suit the AFP model. Stakeholders recommended either amendments to the definition of “owner” to address AFP projects, or an entirely separate regime for AFP projects.

The Act was drafted prior to the introduction of AFPs in Ontario. As AFP projects have developed, gaining significant prominence in size and scope, problems have been encountered with applying the provisions of the Act. The definition of “owner” with respect to AFP projects should be amended to provide that Project Co is an “owner” and is the entity responsible for maintaining holdbacks.

Recommendation

  1. The definition of “owner” should be amended to provide for multiple owners on AFP projects such that Project Co is included as an owner (along with the Crown) and it is Project Co that should be responsible to maintain holdbacks.

4. Price

4.1  Context

A lien claimant can lien for “the price of those services or materials” supplied. The issue of what constitutes the “price” has been the subject of dispute, particularly in relation to the consequences of delay. The definition of “price” currently reads:

“price” means the contract or subcontract price,

  1. agreed upon between the parties, or
  2. where no specific price has been agreed upon between them, the actual value of the services or materials that have been supplied to the improvement under the contract or subcontract.

Generally speaking, time is money, and delayed projects give rise to extra costs for all parties. The parties typically look to their respective contractual rights for relief. Some commentators question whether or not there should be lien rights in relation to costs or damages arising from delays.[66]

To be the proper subject of a lien a claim must be reflective of the “price” of work done on the improvement. As well, it must come within the definition of “services or materials supplied to the improvement” and is limited to the “amount owing to the lien claimant in relation to the improvement”.[67] Some jurisdictions allow a lien claimant to include costs or damages for extended duration if such costs or damages represent part of the price of work done or provided or material supplied, or if damages for delay are closely connected to the work so as to be reasonable and proper within the claim for lien.[68]

Case law in Ontario is divided as to whether additional costs or damages incurred as a result of delay are lienable. Recent cases have suggested that additional costs incurred because a project takes longer than anticipated (such as labour costs, equipment rental and similar costs of remaining on the job) can be found to be the basis for a valid lien.[69] Conversely, one author notes that older cases state that such additional costs are not recoverable because they were not contemplated in the contract price, and are in the nature of damages.[70]

As well, some Ontario courts have found that damages at large, such as lost opportunity costs, loss of profits, or aggravated damages are not lienable. Additional costs incurred offsite such as administrative overhead or lost profit, and even onsite office overhead costs, have also been found not to be lienable on this basis. Some stakeholders have suggested that it would be useful to clarify what can be properly included within a lien claim.

Stakeholders have also expressed concern with the definition of “price” as it relates to the scope of what exactly can be included within a claim for lien. A strict reading of the Act suggests that “price” should be limited to the contracted price or the “actual value of the services or materials that have been supplied.” There is case law in Ontario that supports the principle that “price” includes “reasonable value of the additional work caused by the [delaying] owner’s conduct” so long as those costs are incurred by a person supplying services or materials to an improvement.[71] It includes, for example, labour costs, equipment rental and similar costs of remaining on the job that will readily be found to be the basis of a valid lien”.[72] However, it does not include damages at large, such as lost opportunity cost, loss of profits or aggravated damages.[73]

In British Columbia, “price”, although not separately defined, is restricted to the value of work or material and does not include damages for delay. However, courts in British Columbia have, in some circumstances, included damages for delay that are “so closely connected [to the work performed or material supplied] that it is reasonable and proper to include them in a claim of lien”.[74]

4.2  Summary of Stakeholder Views

The majority of responding stakeholders expressed the view that “price” ought not include damages for delay other than direct out of pocket expenses.

  1. The Association of Municipalities of Ontario, the Council of Ontario Construction Associations,[75] the Toronto Transit Commission,[76] the City of Toronto,[77] and Metrolinx[78] all opposed the inclusion of a definition of price which would include damages for delay.
  2. The Council of Ontario Construction Associations submitted that allowing these types of claims “would upset the balance achieved under the Act” and “would likely increase the potential for lien rights to be abused”.[79] The Ontario Association of Landscape Architects proposed that a contractor that is incurring costs beyond the construction schedule ought to have out of pocket expenses included in the lien amount.[80] They further suggested that “damages for delay” should be a defined term, listing costs that are associated with delays are lienable.
  3. The Ontario Public Works Association suggested that the Act should differentiate between “price” and “damages”.[81]

4.3  Analysis and Recommendations

The concern expressed by the stakeholders in respect of the lack of clarity as to what is included in “price”, combined with varying judicial decisions on what types of costs (or damages) are included, prompts the need for a clarified definition of what is included in the term “price.” The case law suggests that direct out of pocket costs incurred ought to be part of the lien but not other damages such as head office overhead. In order to bring clarity to the definition, consideration may be given to the Ontario Public Works Association’s suggestion to delineate between “price” and “damages” in the Act. The definition should be framed in such a way that makes it clear that the fair market value of direct out-of-pocket costs incurred due to extended duration are included in the definition of “price”.

Recommendation

  1. The definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay.

5. Supply of Services

5.1  Context

Some stakeholders raised a concern that the definition for “supply of services” is unclear with respect to consulting services. The current definition reads:

“supply of services” means any work done or service performed upon or in respect of an improvement, and includes,

  1. the rental of equipment with an operator, and
  2. where the making of the planned improvement is not commenced, the supply of a design, plan, drawing or specification that in itself enhances the value of the owner’s interest in the land,

and a corresponding expression has a corresponding meaning;

The current definition is broad enough to include consulting services as it applies to “any … service performed … in respect of an improvement”. Further, courts have consistently held that consultants are entitled to make lien claims where the value of the land is enhanced as a result of their services.[82]

5.2  Summary of Stakeholder Views

Few submissions were made in regard to the definition of “supply of services”.

  1. The City of Toronto suggested a non-exhaustive list of what should be included as a “supply of service” to bring a greater degree of certainty to the definition.
  2. Metrolinx submitted that “supply of services” requires clarification, particularly in the application of consulting services that are required over an extended time to support projects.[83]
  3. The Ontario Association of Landscape Architects also suggested clarification with regards to whether consultants can lien.[84]

5.3  Analysis and Recommendations

The definition of “supply of services” appears sufficiently broad so as to address the concerns raised by stakeholders, particularly given that courts have held that consultants can make lien claims where the value of the land is enhanced as a result of their services.

Recommendation

  1. The current definition of “supply of services” is sufficiently broad and need not be amended.

6. Municipal and Broader Public Sector Lands

6.1  Context

Stakeholders identified difficulties in registering liens in certain circumstances, including, inter alia, the following:

The difficulties associated with certain of these types of projects tend to derive from the nature of the projects themselves. For example, a light rail transit project may cause logistical problems as the project extends over and under a large number of properties, thereby affecting multiple “owners” for the purposes of the Act, both public and private. For many of these types of projects, liens do not attach to the premises in any event, as they fall into one of the categories listed in section 16 of the Act as follows:

Interest of Crown

16. (1) A lien does not attach to the interest of the Crown in a premises.

Interest of person other than Crown

2) Where an improvement is made to a premises in which the Crown has an interest, but the Crown is not an owner within the meaning of this Act, the lien may attach to the interest of any other person in that premises.

Where lien does not attach to premises

(3) Where the Crown is the owner of a premises within the meaning of this Act, or where the premises is,

  1. a public street or highway owned by a municipality; or
  2. a railway right-of-way,

the lien does not attach to the premises but constitutes a charge as provided in section 21, and the provisions of this Act shall have effect without requiring the registration of a claim for lien against the premises.

Section 16(1) of the Act was enacted because “the Crown is the source of property rights” and because it is unnecessary to have liens registered against Crown lands since the Crown is required to pay all final judgments against it.[85] Thus, the security that the lien provides when it attaches to land, that is, the power to order a sale of the land, is unnecessary because there is no risk of non-payment at the conclusion of proceedings. As well, liens cannot attach to federal Crown lands due to the doctrine of interjurisdictional immunity; the Act, being provincial legislation, cannot intrude on a federal undertaking.[86]

In applying section 16 of the Act, difficulties can arise for subcontractors liening facilities in terms of ascertaining the ownership and nature of the property in order to properly make a claim for lien. In addition, some types of projects involve interaction with different pieces of legislation specific to the project type. As well, projects may involve the construction of multiple structures on a single property or more than one property. The aggregate effect of all these factors can serve to ‘muddy’ the issue of lienability.

Pursuant to section 34(3) of the Act, where land is owned by the provincial Crown, a copy of the lien is “given” to the office prescribed by regulation. If an office has not been prescribed, the lien is given to the ministry or Crown agency for whom the improvement is made. The lien is not registered, but constitutes a charge against the holdback. In addition, liens also do not attach to public streets or highways owned by a municipality or a railway right-of-way pursuant to section 16(3) set out above. The attachment of liens to municipal roads or railways was cited as “impractical” in the 1982 Report of the Attorney General.[87] Again, the lien will constitute a charge against the holdback.[88]

Municipalities

Conversely, municipal lands outside of those prescribed under section 16(3) of the Act can be subjected to a claim for lien by registration against title. That said, there is case law from outside of Ontario (discussed below) to suggest that lien claimants who hold liens against municipalities cannot force a sale that is contrary to public interest, depending on the “uses and purposes for which [the municipal] property is held”.[89]

Some provinces treat municipal lands similar to Crown lands. For example, in British Columbia, although liens can be registered against municipal lands, lien claimants are prevented by the legislation from forcing a sale of the municipal property that is subject to the lien; instead, the court may give judgment for an amount equal to the maximum liability under the legislation.[90] In Manitoba, liens do not attach to the interests of municipalities; rather, the amount becomes a charge on the amounts retained in the holdback.[91]

Several stakeholders have commented that it is unnecessary to register liens against municipal lands. In this regard, municipalities are not authorized to become bankrupt under the Bankruptcy and Insolvency Act,[92] although they can and do take on debt. Under section 17 of the Municipal Act, municipalities are not authorized to incur debt unless it is for the purpose of long-term financing or capital projects. Debt levels for long-term financing and capital projects are closely monitored by the province as municipalities are “creatures of the province” and municipalities are ultimately accountable to the province due to the controls imposed under the Municipal Act[93] and the Municipal Affairs Act. The Municipal Affairs Act, for example, authorizes the Ontario Municipal Board to take several measures with respect to the finances of a municipality that is at risk of defaulting on debts, including the consolidation of the debenture debt and debentures of the municipality and the “custody, management, investment, and application of sinking funds, reserves, and surpluses”.[94] The Municipal Affairs Act also authorizes the Ministry of Municipal Affairs and Housing to take “full charge and control over all money belonging to the municipality”.[95] Given the prospect of provincial control in exigent circumstances, and the fiscal restrictions placed on municipalities, the current financial outlook of municipalities is considered generally positive, with net financial debt generally decreasing yearly.[96] In view of the foregoing, it is at a minimum extremely unlikely that an Ontario municipality would become insolvent or otherwise be in a position where it is unable to meet its financial obligations.

The Broader Public Sector

During the Consultation Process, some stakeholders expressed support for public entities other than municipalities to be included as part of the “broader public sector”, which is generally understood to include colleges, universities, school boards, and hospitals.

Colleges that are enumerated under the Colleges of Applied Arts and Technology Act, 2002 are agents of the Crown, thus liens do not attach to their lands under the current legislation.[97] Master Sandler noted in Dirm Inc. v Dalton Engineering & Construction Ltd. that, in addition to colleges, other institutions falling under this regime could include the “AGO, ROM, O.C.A.D. (Ontario College of Art and Design), the casinos in Windsor, Orillia, and Niagara Falls, other local museums and art galleries, Ontario universities, and other educational, cultural, health, or tourist institutions”.[98]

Universities, on the other hand, are largely autonomous, having “considerable flexibility in the management of their financial affairs and program offerings”.[99] However, universities rely on public grants for almost half of their total revenue, with the rest coming from tuition and other private sources,[100] which is comparable to the percentage of total revenue that is comprised of public funding in Ontario’s colleges.[101] Most Canadian universities are “private, non-for-profit corporations”,[102] and there is no prohibition in the Bankruptcy and Insolvency Act upon their becoming bankrupt. Universities are often described as “public” institutions, but this is because they receive public funding.[103] There are exceptions, for example, the Royal Military College of Canada is a federal institution established by an Act of Parliament in 1874.[104] The Royal Military College of Canada Degrees Act, 1959, granted the Royal Military College of Canada degree-granting authority. In order to have the ability to grant degrees, an institution must either be authorized to do so under the Post-Secondary Education Choice and Excellence Act.[105]

With regards to school boards, section 58.5(1) of the Education Act provides that every district school board is a corporation. Public school boards in Ontario are registered as not-for-profit corporations, and there is no prohibition in the Bankruptcy and Insolvency Act against their becoming bankrupt. School board trustees are elected during municipal elections under section 58 of the Education Act.[106] Similar to the case of municipalities, the Education Act imposes strict control over finances. Schools are largely publically financed,[107] and the Education Act prohibits school boards from having in-year deficits without the approval of the Minister of Education and Training and schools must comply with accounting standards set by the legislature.[108] School boards also require permission under section 242(2) to exceed the prescribed maximum amount of debt that a school board may incur under the Education Act. The Education Act also allows the Minister of Education and Training to take financial control of a school board where the school board has “failed to pay any of its…debts or liabilities when due”.[109]

Public hospitals are non-share capital corporations run by their own boards of directors;[110] hospitals are not agents of the Crown.[111] Under section 4 of the Public Hospitals Act, no application to incorporate a hospital can proceed until it has the approval of the Minister of Health and Long-Term Care. Despite their legal status, however, public hospitals are almost entirely publically funded, although may raise their own (nominal) funds through fundraising initiatives, food sales, and parking income.[112] Hospitals are not agents of the Crown and the Bankruptcy and Insolvency Act does not prohibit a hospital from declaring bankruptcy, although the Public Hospitals Act allows the Minister to provide financial assistance to a hospital if it is considered “in the public interest to do so”.[113] Further, the Public Hospitals Act allows the Lieutenant Governor to appoint an investigator to investigate and report on the management and administration of a hospital, and appoint, on the recommendation of the Minister, a hospital supervisor where it is in the public interest to do so.[114] Public interest is defined in the Public Hospitals Act, and includes “the availability of financial resources for the management of the health care system and for the delivery of health care services”.[115] For public policy reasons, it seems unlikely that a court would ever direct the sale of a hospital that is subject to a lien. In Westeel-Rosco Ltd. v Board of Governors of South Saskatchewan Hospital Centre, Justice Ritchie wrote in obiter that “any sale of the hospital property in the present case ‘would be clearly contrary to the public interest and should not be permitted’”.[116]

Several pieces of legislation define the “broader public sector” for other purposes. The Broader Public Sector Executive Compensation Act, 2014, for example, applies to hospitals, school boards, colleges, and other broader public sector entities for the purposes of managing executive compensation.[117] The Broader Public Sector Accountability Act, 2010, also defines “designated broader public sector organization” as follows:

“designated broader public sector organization” means,

  1. every hospital,
  2. every school board,
  3. every university in Ontario and every college of applied arts and technology and post-secondary institution in Ontario whether or not affiliated with a university, the enrolments of which are counted for purposes of calculating annual operating grants and entitlements,
  4. every community care access corporation,
  5. every corporation controlled by one or more designated broader public sector organizations that exists solely or primarily for the purpose of purchasing goods or services for the designated broader public sector organization or organizations,
  6. every publicly funded organization that received public funds of 10 million dollars or more in the previous fiscal year of the Government of Ontario, and
  7. every organization that is prescribed for the purposes of this definition;

As discussed below, there was some support among stakeholders for adopting a “broader public sector” definition and for precluding liens from attaching to the lands of “broader public sector” entities; however, this definition of “broader public sector” is quite significant in respect of the issue of lienability. Specifically, although subheadings (a) and (b) represent institutions that can be easily identified, and which clearly constitute public interest entities, subheadings (c) through (h) include entities that are not easily identifiable, some of which are not core public interest entities. Generally, the definition raises serious concerns regarding how one would identify such entities with certainty and, in some instances, justify their inclusion within a group of entities the lands of which should not be put at risk of a judicial sale.

Further, identifying which lands are hospital, university, or school board lands can be complex as these institutions typically own multiple buildings for research and services outside of their core mandates.

6.2  Summary of Stakeholder Views

The submissions from the municipal stakeholders were nearly unanimous in supporting not only the continued exemption of transportation and rail projects from the registration of liens, but also in supporting an extension of the exemption to municipal lands generally.

  1. The Toronto Transit Commission and other municipal stakeholders stated that there was a sound public policy basis against allowing a lien claimant to initiate a process that would allow for the sale of publicly held property, and that “giving” a lien in such circumstances would still provide security to lien claimants but reduce the overall costs associated with registration.[118]
  2. The City of Mississauga noted the importance of preserving public properties such as City Hall and parks with clear title.[119]
  3. The Council of Ontario Construction Associations submitted that, similar to the regime in British Columbia, liens should not attach to municipal lands, but municipalities should remain bound by the Act and that a lien should “be a charge on the holdbacks required to be maintained by the municipalities”.[120]
  4. The OBA CLA Reform Committee did not note any problems with respect to municipal lands; in the view of the OBA CLA Reform Committee, potential issues have been “well addressed in the case law”, thus, there is no need to reform the Act in this respect.[121]
  5. Prompt Payment Ontario opposed the proposition that municipalities be treated the same as Crown lands. They argued that allowing liens to be registered serves a municipality in that, without registration, the municipality would have to establish procedures to receive notices of lien, which would cause an administrative burden on municipal clerks. Currently, “the municipality can easily search title to ascertain if a lien has been registered”.[122] This may result in a situation where a municipality “inadvertently advance[s] funds when a notice of lien has been given, but this has not been brought to the attention of the payment issuing authority”.[123] The risk of this happening is heightened when there is no registration of the lien on title. Prompt Payment Ontario expressed the view that it was unaware of a municipality ever being ordered to sell lands due to a construction lien. Where municipalities maintain their holdback obligations, the risk is nominal at best.[124] The City of Toronto shared these concerns, citing the burden that the process of receiving and locating liens could cause on the city clerks.[125]
  6. During the Consultation Process, the municipalities further asserted that, since municipalities are creatures of the Crown governed by the Municipal Act, they cannot become bankrupt. Thus, there is minimal risk to people who provide materials or services towards the improvement of land with respect to municipalities such that the ability to sell land is not necessary. As noted above, it was also suggested that liens should not attach to lands in the broader public sector, including municipalities, colleges, school boards, and hospitals.
  7. Outside of municipal lands, Colleges Ontario submitted that colleges, as Crown agencies, are not subject to liens attaching to their lands and opposed any change in this regard.[126]
  8. The Ontario Association of School Business Officials suggested that schools also be treated similar to Crown lands as it would result in cost savings to manage disputes without a lien on title. The Ontario Association of School Business Officials further stated that, in any case, liens are typically vacated from title shortly after registration.[127]

6.3  Analysis and Recommendations

As noted above, most of the responding municipalities, with the exception of the City of Toronto, advocated for municipal lands to be afforded the same treatment as Crown lands in that a lien should not be registerable with respect to municipal lands. Municipalities in Ontario cannot become bankrupt, therefore it is unnecessary to have liens attach to municipal lands, with the ultimate remedy of a court-ordered sale. The Council of Ontario Construction Associates advocated for changes that closely resemble the regime used in Manitoba and British Columbia. In Manitoba, liens do not attach to the interests of municipalities in municipal lands but constitute a charge against the holdback.[128] In British Columbia, liens attach to municipal lands, but these lands cannot be sold to satisfy lien claims. Rather, the court may “give judgment for an amount equal to the maximum liability under [the] Act…and any money realized on the judgment must be dealt with as if it were the proceeds of a sale of the interest in land”.[129]

Other stakeholders, particularly Prompt Payment Ontario, suggested that this is not a practical issue as Ontario municipalities have not had to sell lands in the past to satisfy lien claims. The ability to register lien claims against municipalities benefits the municipalities in that administrative procedures need not be put into place to deal with liens that are given.

Given that municipalities cannot become bankrupt, and that a situation where the courts have ordered public lands to be sold to satisfy a lien has not arisen, the additional security provided by registering a lien is unnecessary. The Act can be amended to either allow liens to be “given” to municipalities in the same way that they are given to the provincial Crown, or to adopt a regime similar to that in British Columbia where the court cannot order a sale of public lands to satisfy a lien claim. Both of these solutions satisfy the concerns raised by stakeholders and maintain the security that the lien provides to claimants.

With respect to other “public” institutions, the question becomes much more difficult. The former Mechanics’ Lien Act stipulated that liens did not attach to the premises of “public work” projects, and these were treated in the same manner as Crown lands. This was removed from the Act as the term “public work” was found to be too ambiguous.[130] Considering the problems that this posed,[131] and the potential for introducing a potentially significant ambiguity in the AFP context, we do not recommend attempting to identify which specific public interest entities, or projects, should be excluded from being subject to having liens attach to their lands.

The purpose of the lien is to provide security for those who provide services, materials, or equipment. The ultimate remedy that the lien provides is to force a sale of the owner’s interest in the land for the benefit of the lien holder. For municipal lands, this remedy is unnecessary. In some other jurisdictions, liens either do not attach to municipal lands, or, when they do attach, the land cannot be sold in a judicial sale. Municipal owners cannot become bankrupt under the Bankruptcy and Insolvency Act, and are extremely unlikely to become insolvent, or to be allowed by the province to remain so. As well, the courts are highly unlikely to order the sale of such lands. As a result, the current procedure to register liens on municipal properties is largely unnecessary and unduly burdensome.

Recommendations

  1. Municipal lands should not be subject to a court-ordered sale, such that lien claims against municipalities should be “given” and not registered, provided that there should be clarity in respect of to whom the lien must be given.
  2. Liens should continue to attach to hospital, university, and school board lands due to the fact that they are private entities. As well, attempting to identify certain “broader public sector” owners would likely cause more confusion than clarity, such that the lands of these entities should continue to be liened by registration.

Chapter 4: Preservation, Perfection and Expiry of Liens

1. Overview

The legal concepts of “preservation”, “perfection” and “expiration” of liens are straightforward enough, although in practice they are prone to complexity and misunderstanding. The basic principles applicable to preservation, perfection, and expiry are as follows:

The stakeholders raised issues in relation to each of the above principles. As a result, we have considered the following issues:

2. Preservation

With certain fairly limited exceptions, lien claimants must strictly comply with the preservation and perfection requirements of the Act. This is important because it provides public notice to the owner of the improved land or premises, potential purchasers, lenders and any other interested parties that a lien claimant intends to enforce its lien against the premises.[132] In other words, “fair warning” is provided.

The Act prescribes the form and content of the documents that must be completed and either registered on title or, in respect of certain types of premises, “given”, in order to preserve subsisting lien rights.[133] Errors and omissions in these documents can be fatal to the lien.[134] Section 34 of the Act provides as follows:

34. (1)A lien may be preserved during the supplying of services or materials or at any time before it expires,

  1. where the lien attaches to the premises, by the registration in the proper land registry office of a claim for lien on the title of the premises in accordance with this Part; and
  2. where the lien does not attach to the premises, by giving to the owner a copy of the claim for lien.

As discussed in Chapter 3 - Lienability, subject to the exceptions set out in subsections 34(2) (Crown land), (3) (public highways) and (4) (railway right of ways), a lien that attaches to the premises is preserved by registration in the proper land registry office of a claim for lien against the title of the relevant premises. Where a lien fits within the express exceptions and does not attach to the premises, it is preserved merely by “giving” a copy of the claim for lien to the prescribed representative of the owner.[135]

Under section 31 of the Act contractors have 45 days within which to preserve their liens, counting from the earlier of:

Where there is no certification of substantial performance, or for services or materials supplied after the date of substantial performance, the preservation period for contractors is 45 days from the earlier of:

For subcontractors and suppliers, the preservation period is 45 days from the earlier of:

Where there is no certification of substantial performance, or for services or materials supplied after the date of substantial performance, the preservation period for subcontractors and suppliers is 45 days from the earlier of:

Stakeholders questioned certain of these time periods, suggested the inclusion of “termination” as an additional triggering circumstance for the commencement of the lien preservation period, questioned the fairness of the “date of last supply” concept in some circumstances, and questioned the permissive language of the Act with regards to certificates of completion of subcontracts.

2.1  Lien Preservation Time Periods

2.1.1  Context

Ontario’s lien preservation time period runs 45 days, which is consistent with other Canadian jurisdictions (the mean preservation period in Canada is 44 days) but is relatively short when compared to the United States where the mean preservation period is 120 days.[136]

The mean time for preservation across all states is 120 days.[137] Only Hawaii and Louisiana have preservation periods within the ranges prescribed in Canada, at 45 days and 60 days, respectively, and almost half of U.S. states prescribe 90 day time periods for preservation. Rhode Island has the longest amount of time at 200 days,[138] which was increased in 2006 from 120 days.[139]

The following is a summary of time periods for preservation in Canada:

Province/territory Preservation period
Newfoundland and Labrador
Quebec
Yukon Territory
30 days[140]
Manitoba
Saskatchewan
40 days[141]
Alberta
British Columbia
Northwest Territories
Nunavut
Ontario
45 days[142] (In Alberta, 90 days for oil and gas projects).
New Brunswick
Nova Scotia
Prince Edward Island
60 days[143] (New Brunswick applies varying time periods, depending on the claim. Generally, the time period is 60 days from completion or abandonment. With respect to materials, the time period is 60 days from the furnishing of the last material. For wages and services, the time period is 30 days).

In 2004, Nova Scotia amended its Mechanics’ Lien Act to increase the time for preservation of a lien from 45 days to 60 days.[144] The reasoning was explained during debate in the Legislative Assembly by the Honourable Michael Baker:

Again, I know I've dealt with clients who - routinely in the building trades, most people are on 30 days' credit, and that seems to be fairly standard these days in many organizations, whether it's the building trades or, in fact, the furnishing of materials for the building trades, people are on 30 days. Well, routinely what would happen is that people would get very close to or slightly over the 45 days before it became obvious that somebody was not going to pay their bill. By that time, it was too late, because after you're over the 45 days, your ability to file a lien disappears.[145]

The result in Nova Scotia was an amendment to 60 days, but there were calls to extend the time period even further.[146] The 60-day recommendation came from a report of the Law Reform Commission of Nova Scotia, which stated that “the 45-day time period was likely the product of an era when a 30-day payment period was the norm.”[147] The report, drafted in 2003, ultimately recommended a 60-day preservation period to “reflect more closely commercial practice.”[148]

2.1.2  Summary of Stakeholder Views

Many stakeholders expressed the view that the Ontario lien preservation period is too short.

The EKOS survey revealed stakeholder concern about the time period to preserve liens, but the results were mixed. Most of those who expressed concern with the 45-day time period suggested only a slightly longer lien preservation period.

There was a clear split between stakeholders in their submissions regarding the question of the adequacy of the 45-day time period to preserve liens. Those who expressed support for maintaining the status quo include the Canadian Bankers Association,[149] the City of Toronto,[150] the Consulting Engineers of Ontario,[151] Metrolinx,[152] and the Ontario Society of Professional Engineers.[153] Prompt Payment Ontario[154] and the Council of Ontario Construction Associates[155] both suggested that the 45-day time period be maintained provided that prompt payment provisions are enacted. Both expressed the concern that extending the time to preserve would extend the time to receive holdback monies.

Several stakeholders suggested modest increases to the 45-day time period, with most suggesting 60 days to align with modern billing practices:

Stakeholder Suggested time period
Council of Ontario Universities 60 days (to allow subcontractors sufficient time to preserve the lien).[156]
Greater Toronto Sewer & Watermain Contractors Association 60 days (payments now take longer to process).[157]
Infrastructure Ontario 60 days (to allow for negotiated invoice review).[158]
International Union of Operating Engineers, Local 793 75 days (to allow claimants with more time to assess, prepare, and register the lien).[159]
Labourers’ International Union of North America, Local 183 60 days (to allow for an assessment on whether the lien is necessary before registration).[160]
Ontario Association of School Business Officials and Ontario Public School Board Association 60 days (to allow payment to flow to subcontractors with modern billing practices).[161]
Ontario Electrical League Extension beyond 45 days (current time period does not align with modern business practices).[162]
Ontario Sewer & Watermain Contractors Association 30 days after the contractual payment date.[163]
Thunder Bay Law Association No less than 60 days.[164]
Ontario Road Builders’ Association Modest increase to give smaller operators more time to invoice; however, a longer time period may provide incentive for some companies to delay payments even further.[165]
2.1.3  Analysis and Recommendation

While the preservation period in Ontario is generally in line with the other Canadian jurisdictions, a number of significant stakeholders recommended an increase to 60 days.

We are of the view that 60 days is more consistent with prevailing commercial practice, even if prompt payment provisions are introduced into the Act.

Recommendation

  1. The time period for preservation of a lien under section 31 of the Act should be extended to 60 calendar days, commencing as currently stipulated by the Act.

2.2  Termination as a Triggering Event

2.2.1  Context

Termination occurs when a party repudiates a contract, either through its internal termination mechanism or due to a repudiatory breach. Where a contract contains a termination clause, the contract may only be terminated “in accordance with its provisions” unless there is a repudiatory breach.[166]Abandonment occurs when a party stops work on a project. Currently, only abandonment is listed as is a statutory trigger for the commencement of the lien preservation period under section 31 of the Act: termination is not.

In British Columbia, termination is included with completion and abandonment of the head contract as triggers for the commencement of the lien preservation period. For subcontracts, only completion or abandonment act as triggers.[167]

The “termination” issue was commented on briefly by the Alberta Court of Appeal of Alberta in Tervita Corporation v ConCreate USL (GP) Inc. Although not expressly stated, the Court of Appeal seemed to equate termination with abandonment, holding that “[t]he contract had been abandoned, at the very latest, by the time of [the plaintiff’s] acknowledgment…that its contract had been terminated”, and held this acknowledgment to be the preservation period trigger.[168] Therefore, the preservation period began when the plaintiff acknowledged that the subcontract had been terminated, not at the later date when the owner recommended that testing not be done. The claimant was thus unable to register its second lien.

2.2.2  Summary of Stakeholder Views

Termination was specifically addressed by the City of Toronto and Metrolinx. Both agreed that “termination” should be added to subsections 31(2)(a)(ii) and 31(2)(b)(ii) of the Act to trigger the expiry of lien rights.[169]

2.2.3  Analysis and Recommendations

The addition of “termination” as a triggering event helps to fill a possible gap in the Act. “Termination” has the same effect as “abandonment”: the work stops. For clarity, “termination” should be included as a triggering circumstance.

A prescribed Notice of Termination or Abandonment should be provided for, and publication should be required indicating the precise date it is claimed that a contract has been “terminated” or “abandoned”.

Recommendations

  1. Termination should be added to the list of events that triggers the commencement of the time limit for preservation of liens under subsections 31(2)(a)(ii), 31(2)(b), 31(3)(a), and 31(3)(b) of the Act.
  2. The Act should prescribe a mandatory form of Notice of Termination or Abandonment to be published specifying a date upon which a contract has been abandoned or terminated.

2.3  Certificate of Completion of Subcontract

2.3.1  Context

Section 33 of the Act allows the contractor to ask the payment certifier to certify a subcontract as completed. There is a prescribed form for this certificate.

Some stakeholders have proposed that the issuance of the certificate of completion of subcontract be made mandatory, or mandatory at the request of any lien holder, while the majority of stakeholders cited the administrative burden this would cause as a reason to maintain the current regime.

In 1982, the rationale behind the permissive rather than mandatory language in section 33 was described by the Attorney General’s Advisory Committee as follows:

The Committee is of the view that the mandatory certification of completed subcontracts would impose an intolerable administrative burden on the industry. […] The Committee is of the opinion that a mandatory scheme for the certification of the completion of subcontracts is not practical. In most cases, it is very difficult to determine the date of such completion with accuracy. Furthermore, a mandatory scheme of certification would be an extremely expensive burden for the industry to bear. To make the system work it would be necessary for the owner or payment certifier to be familiar with the terms of all subcontracts. […] While the system is not often used, it may be of some advantage in some cases.[170]

British Columbia, on the other hand, has adopted a “certificate of completion” provision that becomes operative upon the request of any lien holder. In British Columbia, the “certificate of completion” is a statutory form. The provision becomes operative on the request of the lien holder, at which point the payment certifier must determine within 10 days of the request whether the subcontract has been completed.[171]

This British Columbia regime is similar to that suggested by some stakeholders, where the certificate of completion becomes mandatory upon the request of any lien claimant.

2.3.2  Summary of Stakeholder Views

Many stakeholders who responded regarding the issue opposed making the certificate of subcontract completion mandatory. This group included:

  1. The City of Mississauga,[172]
  2. City of Toronto,[173]
  3. Council of Ontario Universities,[174]
  4. Infrastructure Ontario,[175]
  5. Metrolinx,[176]
  6. Ministry of Transportation,[177]
  7. York Region[178]

All expressed opposition to making the certificate of completion of subcontract mandatory on grounds of unnecessary administrative burden and delay disproportionate to any benefit.

Those stakeholders who recommended making certificates of completion of subcontract mandatory suggested that it become mandatory on request of the contractor or subcontractor. This group included:

  1. The Council of Ontario Construction Associations which suggested that “[m]ost subcontracts…delay payment of holdbacks to subcontractors until the prime contract is substantially complete”.[179]
  2. The Canadian Institute of Quantity Surveyors,[180]
  3. Ontario Public Works Association,[181]
  4. Ontario Road Builders Association (unless there is annual release of holdback),[182]
  5. Council of Ontario Construction Associations,[183]
  6. Greater Toronto Sewer and Watermain Contractors Association,[184] which proposed that the certificate of completion of subcontract be mandatory on request of the contractor or subcontractor,
  7. Ontario Sewer and Watermain Construction Association which proposed a scheme similar to that used in British Columbia.[185]
2.3.3  Analysis and Recommendations

Most stakeholders were of the view that the certificate of completion of subcontract should not be mandatory.

While the rationale for making the certificate of completion of subcontract mandatory at the request of any lien claimant is easily understood, the practical feasibility of such a measure, particularly for large projects, is questionable as it would cause owners to incur a not insignificant additional administrative burden. Furthermore, our recommendations to permit the early release of holdback (set out in Chapter 5 – Holdback and Substantial Performance) should at least partially relieve the financial burden of the early trades.

Overall, we are of the view that the collective recommendations made in this Report provide sufficient benefits to subcontractors such that making a certificate of completion of subcontract mandatory would provide only a limited incremental gain, with considerable negative administrative consequence.

Recommendation

  1. Certificates of completion of subcontract should not be made mandatory.

3. Perfection

3.1  Context

“Preserved” liens must be “perfected”, unless “sheltered” under the perfected lien of another lien claimant on the same premises.

“Perfection” of a lien requires commencement of an action to enforce the lien, and registration of a certificate of that action on title where the lien attaches to the premises, all within 45 days of the last day upon which that lien could have been preserved, failing which the lien expires.

Section 36 of the Act, provides as follows:

What Liens May be Perfected

  1. (1) A lien may not be perfected unless it is preserved.

    Expiry of preserved lien

    (2) A lien that has been preserved expires unless it is perfected prior to the end of the forty-five-day period next following the last day, under section 31, on which the lien could have been preserved.

    How lien perfected

    (3) A lien claimant perfects the lien claimant’s preserved lien,

    1. where the lien attaches to the premises, when the lien claimant commences an action to enforce the lien and, except where an order to vacate the registration of the lien is made, the lien claimant registers a certificate of action in the prescribed form on the title of the premises; or
    2. where the lien does not attach to the premises, when the lien claimant commences an action to enforce the lien.

As was the case with the lien preservation time period, the perfection time period was thought by some to be relatively short when compared to other North American jurisdictions.[186]

Concerns have been expressed that the limited time available to perfect a lien is a disincentive to early settlement discussions. Conversely, it has been suggested that extension of the time period would only extend the period of uncertainty.

The triggering date for perfecting a lien varies by province. Generally, it runs from either the last day of the preservation period, the date of preservation, or the date of substantial performance, completion, or abandonment of the contract.

Most provinces use the date of the registration of the claim for lien as the trigger date, while Ontario is the only province to use the last day of the preservation period.[187] From the date of publication of the certificate of substantial performance (or a declaration), completion, or abandonment of the contract, Ontario, along with Newfoundland and Labrador, has the shortest period to perfect among Canadian provinces, at 90 days. The following chart outlines the perfection periods across Canada, and when those perfection periods are triggered:[188]

Province/Territory

Perfection Period

Northwest Territories
Nunavut
Ontario

45 days from the last day of the preservation period[189]

Newfoundland and Labrador
Yukon Territory

90 days from the date of substantial performance, completion, or abandonment of the contract[190]

New Brunswick
Nova Scotia
Prince Edward Island

90 days from the date of registration of the lien[191]

Quebec

6 months days from the date of substantial performance, completion, or abandonment of the contract[192]

Alberta

180 days from the date of registration of the lien[193]

British Columbia

1 year from the date of registration of the lien[194]

Manitoba
Saskatchewan

2 years from the date of registration of the lien[195]

The mean time to perfect in Canada is 208 days.

Comparatively, the mean time for perfection in the United States is much higher than in Canada, at 412 days.

The maximum time to perfect from the time of completion of a contract varies greatly, from as few as 90 days in Alaska and Tennessee to over six years in Ohio.[196] The most common regime requires perfection within one year after filing or preserving the lien, which is the case in fifteen states.[197]

3.2  Summary of Stakeholder Views

York Region,[198] Metrolinx,[199] Infrastructure Ontario,[200] and the City of Toronto[201] suggested keeping the status quo.

However, the majority of responding stakeholders suggested extending the time period for various reasons, including the following:

Stakeholder

Suggested Time Period

Greater Toronto Sewer & Watermain Contractors Association

120 days (to allow more time for achieving a resolution before commencing an action and incurring the associated costs).[202]

International Union of Operating Engineers, Local 793

60 days (120 days total)[203]

LIUNA Local 183

90 days (to allow for settlement of the matter and to make the legislation more consistent with other provinces).[204]

Council for Ontario Construction Associates

90 days (to allow more time to settle before commencing an action).[205]

Canadian Bankers Association

90 days (to allow more time to settle and avoid additional legal fees).[206]

Ontario Association of Landscape Architects

Advocated extending the time period to allow for the parties to try to resolve the dispute.[207]

Ontario Road Builders’ Association

90 or 135 days (45 days is too short for many members, especially small contractors, to meet the requirements for issuing a statement of claim).[208]

3.3  Analysis and Recommendations

In theory, a short time period for perfection of a lien is supportive of more expeditious lien proceedings, but in practice, this is not the case. Perhaps this is simply a function of the increasingly complex nature of construction disputes.

Extending the perfection time period would bring Ontario in line with other jurisdictions and give parties an opportunity to resolve their disputes before commencing an action, particularly where a contract calls for stepped dispute resolution.

While the majority of stakeholders expressed support for extending the perfection time period to match those jurisdictions that utilize perfection periods of several months or years, in our view this would run the risk of diminishing the sense of urgency that should be associated with the process.

Most stakeholders agreed that an increase to 90 days would address the concerns that have been raised. Along with a “preservation” period of 60 days, we recommend that the total perfection period be increased to 150 days, i.e. 90 calendar days following the last date upon which the lien could have been “preserved”.

Recommendation

  1. The time period for perfection under section 36(2) of the Act should be increased to 90 days from the last day upon which that lien could have been preserved.

4. Expiration

4.1  Context

A perfected lien may expire under section 37 of the Act:

Expiry of Perfected Lien

  1. (1) A perfected lien expires immediately after the second anniversary of the commencement of the action that perfected the lien, unless one of the following occurs on or before that anniversary:
    1. An order is made for the trial of an action in which the lien may be enforced.
    2. An action in which the lien may be enforced is set down for trial.

A perfected lien expires immediately following the second anniversary of the commencement of the action that perfected that lien, unless prior to that time an order is made for the trial of an action in which the lien may be enforced, or an action in which the lien may be enforced is set down for trial.

Some consider this section of the Act necessary to clear title of abandoned liens. Others are not concerned about the concept, only the time periods. Concerns were also raised about lack of mandatory notice prior to the expiration of liens pursuant to section 37.

Ontario’s current two year limit is generally consistent with the other Canadian provinces where one and two year expiry periods are common.[209]

Alberta

2 years after registration

If no trial within 2 years of the date of registration, any interested party may apply to have the lis pendens vacated and the lien discharged.

New Brunswick

1 year after action commenced

Liens expire one year after an action is commenced if it is not set down for trial. This expiry period does not apply where an application is made to court for an order continuing the action.

Newfoundland and Labrador

1 year after certificate of action registered

Where certificates of action have been registered for 1 year or more, and no appointment has been taken out for the trial of the action, the judge may upon unilateral application made an order vacating the lien.

Saskatchewan

2 years

Where an action has been commenced, the lien expires where the action is not set down for trial within two years. The court may extend this time-limit.

4.2  Summary of Stakeholder Views

Most responding stakeholders suggested keeping the two-year limit.

  1. The Ontario Bankers Association suggested adding time at the perfection stage rather than the two-year expiry period.[210]
  2. The Toronto Transit Commission submitted that setting a matter down for trial is early enough in the litigation process, that no more latitude should be given.[211]
  3. York Region,[212] Metrolinx,[213] the Council of Ontario Universities,[214] and the Ontario Road Builders’ Association[215] expressed support for maintaining the current regime.

Two stakeholders suggested changes:

  1. The Canadian Institute of Quantity Surveyors suggested a one-year limitation period,[216] while the Council of Construction Associations suggested lengthening the period, arguing that the expectation of setting down for trial within two years is unrealistic in most cases. They suggested mandatory status hearings for actions not set down for trial within the two-year limitation period.[217]
  2. The Advocates’ Society suggested that the procedure should be uniform across Ontario. Currently, in regions outside of Toronto, the practice to set a matter down for trial involves serving a trial record, requisition, and affidavit of service. Some regions require a settlement conference, and if the settlement conference is unsuccessful, the matter is set down for trial. In Toronto, the lien claimant can elect to have the matter referred to a Construction Lien Master or proceed with a judge. The Advocates’ Society recommended that the Act be amended to bring uniformity to setting an action down for trial.[218]

4.3  Analysis and Recommendations

The two-year time limit for the expiry of liens has broad support among stakeholders. Parties are required to move the action along in a timely manner.

Recommendation

  1. The 2 year time period under section 37 of the Act should not be changed.

5. The Abuse of Lien Rights

5.1  Context

Pursuant to section 35 of the Act, a lien claimant who preserves or notifies a lien claim which the person knows or ought to know is grossly in excess of the amount which the person is owed, or is not lienable, “is liable to any person who suffers damages as a result”.

Pursuant to section 86 of the Act, costs may be ordered against a party, or the solicitor or agent of any party, on a substantial indemnity basis where such a person, “knowingly participated in the preservation or perfection of a lien, or represented a party at the trial of an action where it is clear that the claim for lien is without foundation or is for a grossly excessive amount, or that the lien has expired, or has prejudiced or delayed the conduct of the action”.

Several other provinces impose penalties for exaggerated claims or abuse of process.

5.2  Summary of Stakeholder Views

Many stakeholders suggested preserving the status quo.

  1. The Council of Ontario Construction Associations, for example, suggested that the Act already contains measures to prevent abuse of lien rights (for example, liability for exaggerated claims), and the abuse of lien rights is not a frequent occurrence.[225]
  2. The OBA CLA Reform Committee, however, suggested that the exaggerated lien claim provision provides little in the way of deterrence; rather, the OBA CLA Reform Committee submitted that the Act should specify a threshold for exaggerated claims whereby once that threshold is reached, statutory damages would automatically be triggered.[226]

There was also a suggestion that lawyers should be obliged to certify that the quantum of a lien is a reasonable and bona fide amount.

  1. The Ontario Road Builders’ Association expressed agreement with this suggestion, and also suggested a regime whereby mandatory costs awards be made against parties who register exaggerated liens, regardless of whether the lien action is successful.[227]
  2. Conversely, the City of Toronto expressed opposition to a requirement to have lawyers certify the lien amount, arguing that lawyers take instructions from clients and should not be involved in this type of “certification.”[228]

5.3  Analysis and Recommendations

Sections 35 and 86 of the Act were intended to create a significant disincentive in respect of the preservation and pursuit of grossly inflated liens; however, in practice, this objective has not been uniformly achieved.

Anecdotally, we have repeatedly heard that the exaggeration of the quantum of liens is becoming more and more common, and sections 35 and 86 have failed to effectively regulate this practice, and this is also consistent with our experience.

There are few reported cases where sanctions have been levied in respect of grossly inflated liens.

In our view, stronger sanctions are needed to dissuade lien claimants from exaggerating claims, and compensate parties who are forced to expend resources to defend these claims.

Other jurisdictions provide specific penalties that judges have the discretion to apply where a lien claim has been intentionally exaggerated.

Recommendations

  1. Section 35 of the Act, which imposes penalties for exaggerated claims, should be amended to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level. As well, the court should be given the discretion to discharge a claim for lien in whole or in part if on a balance of probabilities it is established that the claim is frivolous, vexatious, or an abuse of process.
  2. The provision should further be amended to allow the court to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant.

6. Liens Against Specific Types of Property

Stakeholders have noted that the process of preservation is increasingly difficult in certain circumstances including, among others, condominiums, residential subdivisions, and leasehold interests.

Aspects of this particular sub-issue are also relevant to the issue of lienability, as discussed in Chapter 3 - Lienability.

6.1  Condominiums

6.1.1  Context

With respect to condominiums, it has been suggested that the current preservation mechanism of the Act does not allow for the efficient registration of liens. In particular, it has been noted that condominium projects carry a disproportionate cost of registering and vacating liens.

The Act was amended in 2010 to require developers to publish a Notice of Intention to Register a Condominium allowing attentive lien claimants to register liens prior to condominium registration.[229]

Prior to the time that the Notice of Intention to Register a Condominium is published, the condominium is a single title, owned by the developer or builder and the lien process is simpler.

Once the condominium is registered, however, each unit becomes a separate parcel, and the common elements are collectively owned by all of the unit owners.[230] It is with respect to the latter case, post-registration, that stakeholders have expressed concern. In order to register a lien for work done to the common elements of a condominium after registration, the claimant must first search title for each unit to determine who is the owner and then register with the land registry office a claim for lien on the title of each of the units which includes listing the name and address of the owner of the premises and a description of the premises.[231] This is a time consuming and costly process that has prompted several stakeholders to suggest changes.

At the time the Act was introduced, roughly one in ten dwellings built in major metropolitan areas in Canada were condominium units. Between 2001 and 2011, roughly one third of the dwellings built were condominium units.[232] Liening condominiums is thus far more common today than at the time the Act came into force.

Other Canadian jurisdictions have regimes similar to that in Ontario in that liens must be registered against each unit in a condominium for improvements performed on the common elements. No jurisdiction treats the common elements in a standard condominium as a single entity (identifiable by a single PIN).

Slight differences exist between the jurisdictions in how the lien can be vacated:

  1. In British Columbia, an individual owner can apply to the court to have a lien discharged upon payment of their proportionate share of the lien.[233]
  2. In Alberta, the language is mandatory. An owner can pay into the court their proportionate share of the lien and the holder of the lien must provide a discharge.[234]
  3. The Act is silent on this point, but in Associated Mechanical Trades Inc. v Kurzbauer, Master Polika relied on section 14(1) of the Condominium Act, 1998 for the proposition that a unit owner may discharge the portion of the encumbrance that is applicable to the common interests. [235] It has, however, been noted that section 14 of the Condominium Act applies to encumbrances that are registered prior to the Declaration of a condominium corporation. Thus Master Polika cited section 14 for its policy rationale of allowing a unit owner to vacate a lien by posting security.[236]
6.1.2  Summary of Stakeholder Views

Most stakeholders who addressed the issue suggested that the process for liening condominium units needs to be simplified.

  1. The Labourers’ International Union of North America, Local 183 suggested that condominiums be subject to a general lien, similar to subdivisions, rather than liening unit-by-unit.[237]
  2. The OBA CLA Reform Committee[238] and the Council of Ontario Construction Associations[239] suggested that the Condominium Act should be amended to create a common elements PIN in the name of the condominium corporation to which a general lien would attach. As the Council of Ontario Construction Associations described it, “the interests of the condominium unit owners would be subject to the lien as if the lien had been registered against title to each individual unit”.[240] This would reduce the costs associated with registering liens against condominium corporations and be less of an administrative burden for both the lien claimant and the unit owners.
  3. In their joint submissions, the Association of Condominium Managers of Ontario and the Canadian Condominium Institute of Toronto noted several problems that arise from the current regime. An immediate and measurable cost is associated with the title searches for all condominium units, which is required to register the lien against each unit owner. The disbursements can total thousands of dollars, depending on the number of units. Costs will continue to accumulate in court filings given the number of owners involved. In cases where the cost of repairs is relatively low compared to the associated legal costs, proportionality becomes an issue. It was also noted that most unit owners are either not involved or unaware of the condominium corporation’s arrangements with contractors, making it unfair to unit owners to be involved in a court action.[241]
  4. The Association of Condominium Managers of Ontario and the Canadian Condominium Institute of Toronto suggested the removal of the ability to lien condominium corporations. They assert that security for payment in the form of a lien is generally not needed as problems rarely arise in the collection of debts from condominium corporations, given the ability of condominium corporations to collect each owner’s proportionate interest under the Condominium Act.[242]
  5. Prompt Payment Ontario disagreed with the Association of Condominium Managers of Ontario and the Canadian Condominium Institute of Toronto, noting that an exemption for condominiums from the Act would reduce payment security. The alternative solution of liening common elements, not individual units, is also not considered a complete solution because there would be no capacity to act on lien rights, that is, the lien holder would not be able to force a sale of common elements.[243]
  6. The OBA CLA Reform Committee further suggested that a statutory form be created with all the lots listed and each lot individually described with all of the information required under section 34(5) of the Act, rather than registering multiple unit-by-unit liens. It was also suggested that the Director of Titles for Ontario create an index of owners for each condominium, obviating the need to search title for each unit.[244]
6.1.3  Analysis and Recommendations

Liening the common elements of condominiums has been cited by many stakeholders as being an overly burdensome, administratively time consuming process. For lien claimants with small claims, the cost to lien is disproportionate to the amount claimed. There is unanimity among responding stakeholders that the process needs to be simplified.

Liening the common elements as a single PIN and subjecting the interests of all owners to that lien was suggested by multiple stakeholders. This solution would bring the cost of liening in line with the cost to lien other projects as a single lien would be registered. This process would benefit owners compared to the current regime provided that notice is given by way of a prescribed form to each owner.

Unit owners should be able to post security proportionate to their share of the lien to have the lien vacated as against their interest in the common elements. This would bring the legislation in line with other provinces and with the jurisprudence on the issue.

Recommendations

  1. After registration, the common elements in condominium buildings should have a single PIN that is subject to a lien, and the interests of all owners should be subject to this lien.
  2. Notice of lien should be given to the condominium corporation and the unit owners by way of a prescribed form.
  3. Condominium unit owners should be able to post security proportionate to their share of the lien to have the lien vacated.

6.2  Residential Subdivisions

6.2.1  Context

Section 20 of the Act provides for a “general lien” where lienable work, services or materials are supplied to more than one premises under a single contract:

20. (1) Where an owner enters into a single contract for improvements on more than one premises of the owner, any person supplying services or materials under that contract, or under a subcontract under that contract, may choose to have the person’s lien follow the form of the contract and be a general lien against each of those premises for the price of all services and materials the person supplied to all the premises. R.S.O. 1990, c. C.30, s 20 (1).

Where subs. (1) does not apply

20. (2) Subsection (1) does not apply and no general lien arises under or in respect of a contract that provides in writing that liens shall arise and expire on a lot-by-lot basis.

According to Glaholt’s 2016 text the Annotated Act, the general lien is designed to “assist suppliers of services or materials to subdivisions, or multiple location projects, and avoids the problem of allocating the total supply generally to each of the individual buildings in a subdivision at the time of preservation of a lien.”[245]

Under section 20 a general lien claim is available if the following conditions are met: (i) there is a single owner of all the premises; (ii) the services or materials to each of those premises is governed by a single contract, and (iii) the contract does stipulate that liens will arise and expire on a lot by lot basis.[246] It is this latter condition that poses difficulties for lien claimants, particularly on residential subdivisions.[247]

Section 20(2) of the Act is not replicated in other jurisdictions. British Columbia,[248] Saskatchewan,[249] Newfoundland & Labrador,[250] and Prince Edward Island[251] explicitly allow for a general lien and do not provide a similar exception as that found in section 20(2) of the Act.

Outside of Canada, general liens are often permitted with no exception for expiry on a lot-by-lot basis. By way of example, in the state of Florida under section 713.09 of the Florida Statutes a lienor is “required to record only one claim of lien covering his or her entire demand against the real property when the amount demanded is for labor or services or material furnished for more than one improvement under the same direct contract.” This claim for lien is sufficient even though the improvement is for one or more improvements located on separate lots, parcels, or tracts of land.[252]

6.2.2  Summary of Stakeholder Views

During the Consultation Process, many stakeholders stated that section 20 of the Act should be simplified[253] by removing the exception for lot-by-lot contracts.

  1. The OBA CLA Reform Committee submitted that section 20(2) “increase[s] the cost of a lien, and severely restricts its effectiveness”.[254]
  2. The International Union of Operating Engineers 793 and Provincial Building and Construction Trades Council of Ontario submitted that section 20(2) as drafted makes it “far too difficult and expensive for lien claimants to register liens especially when the amount in issue is less than $25,000”.[255] It is difficult for lien claimants to specifically isolate the homes worked on in a subdivision, for example, and if required to prove those liens at trial, it is a time-consuming process of calling witnesses who worked on the homes to advise what they worked on and when.
  3. The Residential Construction Council of Ontario and the Ontario Home Builders Association submitted that freedom of contract is paramount and should be preserved in the Act. They submitted that “the parties to building contracts are the ones best able to determine what works best for their particularly project”.[256] In this regard, they emphasized at their consultation meeting that no changes should be made in respect of the lot-by-lot provisions under the Act.
  4. At the consultation meeting of the Provincial Building and Construction Trades Council of Ontario it was explained that a contractor is “required to determine exactly how many hours [they] worked on each lot” and that this requirement is “punitive, onerous and not in line with the objectives of the Act”.[257]
  5. As a recommendation, the Ontario Road Builders’ Association noted that “one lien against the parcel of land should be sufficient”.[258]
  6. From a procedural perspective, the OBA CLA Reform Committee noted that there is “currently no form to allow for multiple liens to be registered as 1 document, increasing significantly the costs to register a Claim for Lien” and that a lawyer must “search every lot in a subdivision that will be liened to exclude a lien on a lot where title has been transferred to a ‘home buyer’” which can ultimately be quite expensive.[259]
  7. Goldman Sloan Nash & Haber LLP filed a submission that noted “[w]here the contracts or subcontracts call for the liening on a lot-by-lot basis, often the subcontractors and / or suppliers farther down the chain are not aware of this requirement and it adversely impacts their ability to properly protect their lien rights for materials and services supplied to a project.”[260] In such circumstances, some lawyers recommend that a prudent subcontractor on a subdivision project should “find out before the first supply if the contract between the owner and contractor provides that liens expire on a lot by lot basis” and if that is the case, the subcontractor must consider its lien rights for each individual lot as the lien rights will expire 45 days after the last supply to each individual lot.[261] This practice is difficult and cumbersome.
6.2.3  Analysis and Recommendations

The central concern with the current process of liening residential subdivision lands is the exception to the general lien under section 20(2) of the Act, which in essence allows owners to require liens to be registered on a lot-by-lot basis.

This has been cited as overly cumbersome and costly, particularly for liens for amounts that are less than $25,000.

A central objective of the Act is to protect those who provide services and materials to an improvement, and those who provide services at the lower end of the construction pyramid are more likely to be negatively affected by this section due to lower claim amounts, and, in some cases, less sophistication with regards to how section 20(2) affects their rights.

Recommendation

  1. Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.

6.3  Leaseholds

6.3.1  Context

Some commentators have raised issues with respect to the enforcement of liens against leasehold interests.

Theoretically, liens can attach to leases, and leases can be sold to satisfy liens.[262] In Ontario, where the owner is a leaseholder, the landlord’s interest will also be subject to a lien if the contractor gives the landlord written notice of the improvement to be made; however, the landlord then has fifteen days to give the contractor notice that the landlord assumes no responsibility for the improvement.[263] Termination or forfeiture of the lease will not affect the lien, except when there is termination for non-payment of rent, in which case the lien holder can pay the rent to the landlord and add that amount to the lien.[264] However, experience shows that this right is rarely exercised by the lien claimant.

In practice, however, it is often difficult to enforce such rights. There are five principal problems:

Given these issues, contracting parties may seek recourse to the Personal Property Security Act,[266] or attempt to have a landlord declared an “owner” under the Act.[267]

Most provinces use a similar regime, with different mechanics:

British Columbia’s Builders’ Lien Act does not contain a corresponding provision. In British Columbia, if a landlord has prior knowledge of an improvement, the landlord will be deemed to have requested the improvement (even if, factually, that was not the case). Landlords can prevent this automatic lien only by filing a statutory Notice of Interest in the land title office.[269] The Notice of Interest contains the owner’s name, the nature of the owner’s interest, and a statement that the owner is not bound by a lien claim unless the improvement was made at the owner’s express request.[270] The Notice of Interest does not expire and will cover all improvements by all tenants, present and future.[271] Thus, contractors are able to determine whether a landlord’s interest is lienable prior to commencing with the improvement.

In the U.S., there are four main approaches to the issue of liening a landlord’s interest.[272]

6.3.2  Summary of Stakeholder Views

Stakeholder views were generally as follows:

  1. The OBA CLA Reform Committee reviewed the issue of lienability with respect to leasehold interests and provided an alternative to the present-section 19 of the Act. A practical problem that was cited was that “some landlords are preoccupied with creative attempts to make the freehold owner not an “owner” of the leasehold, depending on how much control the landlord exerts over the approval process for leasehold improvements”.[278] The OBA CLA Reform Committee proposed a system whereby a leasehold claim for lien should be limited to the parties who actually fund improvements to the leasehold premises – the tenant, a secured lender of the tenant, or the landlord who pays a cash allowance to the tenant. The payer would be required to maintain a holdback without any right to set off against sums to be advanced to the tenant. The lien would only be against a fund and not land, so it would not be necessary to register a claim for lien on title to the property. Section 39 of the Act would have to “be amended to allow lien claimants to obtain from landlords, tenants, and secured lenders all relevant information about the lease, a lender’s security, the funding available from the landlord and lender, and the state of accounts”.[279]
  2. The OBA CLA Reform Committee was critical of the system used in British Columbia, where improvements to leasehold interests are deemed to be at the owner’s request unless the owner files a prescribed form with the Land Registry Office that they will not be bound by a lien. The OBA CLA Reform Committee asserted that the system under the B.C. Act “only benefits sophisticated landlords and leaves lien claimants without any recourse to any third party fund that the tenant would use to pay for the leasehold improvements”.[280]
  3. Prompt Payment Ontario highlighted further problems with the lienability of leasehold interests. The first is simply that “leases are seldom registered on title, leaving the claimant with an undefined asset against which to engage the charge of a lien.” The second is that tenants who default on payments are also likely to default on rent payments, which could terminate a lease and extinguish the security interest in the leasehold, although sections 19(3) and (4) allow a lien claimant to pay the landlord the amount of rent owing and add it to the lien claim.[281]
  4. Prompt Payment Ontario suggested that a lien registered against a party holding itself out as the holder of a leasehold interest “should be deemed to apply equally to any other party who may have the actual leasehold interest or a superior leasehold interest.”[282]
  5. The Council of Ontario Construction Associations suggested amendments to section 19(1) that would allow any party to serve a Notice to Landlord, or Form 2, and allow for the Form 2 to be served at any time until the completion of the contract.[283] Form 2 subjects the interests of the landlord to the lien unless the landlord provides written notice, within 15 days of receiving the notice, that the landlord assumes no responsibility for the improvement to be made.[284]
6.3.3  Analysis and Recommendations

In general, we suggest that the Act should be amended to include the interests of the party that funded the improvement as an “owner”.

Several U.S. jurisdictions have grappled with this issue, resulting in varying tests on the lienability of a landlord’s interests. The common suggestion among stakeholders was that the lien should attach to the interests of the entity that funds the improvement.

The approach in Tennessee attempts to strike a proper balance between the rights of lien claimants and the interests of landlords by measuring the level of involvement of the landlord in the improvement; such that a landlord’s interests can be measured in substance and not be shielded by a declaration.

The suggestions of the stakeholders seem to strike a balance between the uncertainty that can arise from the approach in Tennessee and the current system that allows landlords to avoid having their interests liened despite consenting to and indirectly funding an improvement. Landlords that provide a cash allowance to tenants to fund improvements to tenants or otherwise require the improvement to be performed should have their interests lienable, and lien claimants should be able to obtain this information through a section 39 request.

Recommendations

  1. For improvements to leasehold properties, claims for lien should attach to the interests of the tenant named in the lease and to the interest of the landlord if the landlord funded the improvement through a cash allowance or otherwise required the improvement; provided that the landlord’s liability should be limited to an amount equal to any deficiency in the holdback.
  2. Section 39 of the Act should be amended to allow lien claimants to obtain from landlords, tenants, and secured lenders all relevant information about the lease, the lender’s security, the funding available from the landlord and lender, and the state of accounts.

Chapter 5: Holdback and Substantial Performance

1. Overview

The purpose of the holdback provisions – the maintenance of a fund to satisfy liens that may be claimed – must be balanced with the necessity to keep funds flowing down the construction pyramid to avoid affecting subcontractors’ cash flow and ability to carry on with the work.[285]

Part IV of the Act provides that each payer on a contract (the owner) or subcontract (the contractor or subcontractor) is required to retain a basic holdback of 10% of the price of services and materials supplied.

In reality, the money accumulates throughout the performance of the contract in the hands of the owner, or the owner’s lender(s). The holdback must be retained until all liens that may be claimed have expired or have otherwise been satisfied, discharged or provided for under section 44 (payment into court). Part IV also provides for a “finishing holdback” of 10% for work supplied after the date of substantial performance of the contract.[286]

The holdback obligation is intended to create a fund to which lien claimants may look if they cannot recover from the contractor or subcontractor with whom they have a direct contract.

In 1980, the Ministry of the Attorney General’s Discussion Paper stated as follows in respect of the holdback regime in the Mechanics’ Lien Act then in force:

The holdback represents money already earned by those who have supplied services or materials to a construction project. Despite this fact, very often those persons find that the owner has not set aside this money and that their claim to a lien against the premises is lower in priority to those of other secured creditors of the owner. […]The Act requires the owner to withhold money which has already been earned from those who are entitled to it. […] The present notional holdback permits owners to retain money belonging to those who have worked on an improvement long after it would be payable if there was no legislation. Thus, the holdback operates as an interest-free loan, used to help finance the owner’s project. This was not the intention of those who created the holdback system, but it has become one of the effects.[287]

During the Consultation Process, some stakeholders expressed concerns about the timing of the release of holdback on large projects, the assertion by owners of set-offs against the holdback funds after the expiry of the lien period, and the inability of some to recover holdback funds at all.

In this regard, the following issues were considered:

2. Amount of Holdback

2.1  Context

The statutory minimum holdback is defined under subsection 1(1) of the Act as “10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV”. The reasons for setting the holdback at 10 percent were explained by the Ministry of the Attorney General in 1980 as follows:

Traditionally, the holdback rate has been set at the prevailing margin of profit within the construction industry. Where the holdback relates to the profit, the contractor and subcontractor receive enough payment to satisfy their obligations to those who supply services or materials under agreement with them. The current rate of profit in the construction industry is no longer near 15%. It now runs closer to 5%. […] Reduction of the holdback to the actual levels of profit, approximately 5%, would mean its virtual elimination. This would not be acceptable to most segments of the industry. […] The 10% figure seems to be a more reasonable rate of holdback […].[288]

The statutory holdback is also set at 10% of the contract price under the Alberta Act [289] (although it is called the “lien fund” under that statute), the B.C. Act,[290] the Newfoundland and Labrador Act, [291] the Nova Scotia Act,[292] the Saskatchewan Act,[293] the Northwest Territories Act[294] and the Yukon Act.[295]

Under the New Brunswick Act[296] and under the P.E.I. Act[297] the holdback is set at 20% where the value of the work and materials supplied does not exceed $15,000. Where the value of the work is less than $15,000, the holdback is set at 15%.

Under the Manitoba Act the holdback is set at 7.5%.[298]

2.2  Summary of Stakeholder Views

The vast majority of stakeholders support maintaining the holdback at the current rate of 10%.[299]

Many commented that the holdback should neither be reduced nor increased and that, should the amount of holdback be increased, contractors would carry higher costs translating to higher costs for owners.[300]

  1. For example, Metrolinx submitted that the 10% holdback ties up a significant but reasonable portion of capital and it should not be changed. [301]
  2. The Ontario Road Builders’ Association took a similar position, explaining that a change in the holdback amount (either an increase or a decrease) will create an industry wide financing and cash flow change. In addition the Ontario Road Builders’ Association noted that for a large section of its members, “changes in the holdback are a double-edged sword because many members operate between large contractors and smaller sub-contractors, which mean they alternate between wanting the benefits and / or bearing the burdens of holdback issues”.[302]
  3. Union stakeholders firmly oppose any reduction in the statutory holdback requirements as they advise generally that it is an amount necessary for the protection of lower tiers of the contractual pyramid.[303]
  4. A limited number of stakeholders however, suggested that a reduction of the holdback percentage could reduce costs and improve cash-flow for contractors and subcontractors.[304] For example, the Canadian Bankers Association recommended a reduction in the holdback to 5%.[305]
  5. The Surety Association of Canada submitted that it would support a recommendation for “a reduction in the amount of the holdback on contracts where payment bonds are provided, while holdback would remain at 10% where payment bonds are not provided”.[306]

2.3  Analysis and Recommendations

The quantum of holdback currently provided for under the Act is widely accepted among the stakeholders. The stakeholders’ submissions and the EKOS Survey indicate that the majority of stakeholders find the current amount of holdback appropriate. It is high enough to set aside a significant amount of money for the protection of sub-trades and yet low enough to keep funds flowing down the payment chain. In addition, the existing amount of holdback is generally in line with most other Canadian jurisdictions.

Despite the submission of the Surety Association of Canada we did not receive other submissions in relation to a reduction of holdback for bonded projects. Accordingly, we do not propose to make a recommendation to reduce (or increase) the quantum of the holdback.

Recommendation

  1. The amount of holdback should remain at the current amount of 10% of the value of the services, materials and equipment actually supplied to the improvement.

3. The Definitions of Substantial Performance and Completion

3.1  Context

Substantial performance of a contract may be determined by a certification or a declaration to that effect. Section 2 of the Act sets out the mechanism for substantial performance as follows:

Contracts, substantial performance and completion

When contract substantially performed

    2. (1) For the purposes of this Act, a contract is substantially performed,

    1. when the improvement to be made under that contract or a substantial part thereof is ready for use or is being used for the purposes intended; and
    2. when the improvement to be made under that contract is capable of completion or, where there is a known defect, correction, at a cost of not more than,
      1. 3 per cent of the first $500,000 of the contract price,
      2. 2 per cent of the next $500,000 of the contract price, and
      3. 1 per cent of the balance of the contract price.

    Idem

    (2) For the purposes of this Act, where the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and the remainder of the improvement cannot be completed expeditiously for reasons beyond the control of the contractor or, where the owner and the contractor agree not to complete the improvement expeditiously, the price of the services or materials remaining to be supplied and required to complete the improvement shall be deducted from the contract price in determining substantial performance.

    When contract deemed completed

    (3) For the purposes of this Act, a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of,

    1. 1 per cent of the contract price; and
    2. $1,000.

Accordingly, statutory substantial performance occurs when the improvement or a substantial part of it is ready for use or is being used for the intended purpose, and when the improvement can be completed (or a defect corrected) at a cost of not more than three percent of the first $500,000, two percent of the next $500,000 and one percent of the balance, of the contract price.[307] These amounts and percentages have not been modified since 1983.

The concept of substantial performance does not apply to subcontracts; however section 33 of the Act provides for a voluntary system for the certification of “completion” of subcontracts which also establishes the time within which the completed subcontractor’s lien expires.[308] This voluntary system may give a subcontractor expedited access to holdback funds,[309] but it is not mandatory.[310]

3.2  Summary of Stakeholder Views

A number of stakeholders submitted that it would be appropriate to update or review the minimum requirements for substantial performance under section 2(1) of the Act, to take into account a number of factors.[311] In summary:

  1. The Council of Ontario Construction Associations, suggested that the Act should be amended to modernize the criteria for substantial performance and update the definition to reflect inflation since 1983. Further, the Council of Ontario Construction Associations suggested the definition should be shifted to the regulations under the Act so that it may be updated more often in the future.[312]
  2. In relation to the traditional delivery model (i.e. as opposed to the AFP model) Infrastructure Ontario submitted that the Act should be revised to incorporate specific criteria for determining the achievement of substantial performance and suggested that reductions in the minimum requirements might result in the release of funds while there are still substantial defects and deficiencies outstanding.[313]
  3. The Ontario Sewer and Watermain Construction Association submitted that when changes are made to the rules for substantial performance, they should be the same for all contracts, including sub-contracts.[314]
  4. The Toronto Transit Commission agreed in part with revisions, submitting that section 2(1) should remain the same, while section 2(2) should be clarified to show that the amount being “deducted from the contract price” should also be deducted from the “cost to complete or correct” to be mathematically consistent.[315]
  5. The Ontario Association of Architects submitted that the concept of substantial performance should be independently applied at the design phase and the contract administration phase as architects are often involved at each of these distinct project phases. The Ontario Association of Architects submitted that such a multiple substantial performance would negate the current situation where the statutory holdback is released after total completion of the architect’s services being the end of the twelve-month warranty review of the work.[316]

In addition, certain stakeholders recommended that consideration should be given to the provision governing the deemed completion value under section 2(3) and that this provision should be updated to reflect inflation from 1983.[317]

A number of stakeholders submitted that the status quo should remain in effect with respect to the requirements for a certificate of substantial performance.[318]

3.3  Analysis and Recommendations

According to the Bank of Canada, the applicable rate of inflation accounts for the consumer price index over the 33 years (i.e. 1983 to 2016) would be an approximate increase of 120%.[319] In this regard, if you assume generally that this inflation rate is applicable for the $500,000 stipulated in section 2(1)(b)(i) and (ii) of the Act, then the 2016 amount would be approximately $1,110,000.

The OBA CLA Reform Committee recommended that we consider increasing the amount to an even $1,000,000 for the purposes of section 2(1).[320] We see no reason to disagree with this figure as it largely accounts for inflation from 1983 to the present.

Similarly, the $1,000 deemed completion value under section 2(3) of the Act could also be updated to reflect inflation. In this case, we are of the view that an appropriate value for the deemed completion is $5,000.

Recommendations

  1. Section 2(1) of the Act should be amended to provide that a contract is substantially performed when the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and if it is capable of completion at a cost of no more than 3 percent of the first $1,000,000.00 of the contract price, 2 percent of the next $1,000,000.00 of the contract price, and 1 percent of the balance.
  2. Section 2(3) of the Act should be amended to provide that “a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of (a) 1 percent of the contract price; and (b) $5,000.”

4. Finishing Holdback

4.1  Context

Under the Act, when a project has been certified substantially performed, the payer upon the contract must retain a separate holdback, called “finishing holdback” equal to 10% of the price of the remaining services to be supplied after the date certified to be the date of substantial performance.[321] The finishing holdback period expires 45 days after the earliest of the date of last supply or the date of total completion of the project.[322] The intent of this provision is to provide the same protection to persons who supply materials and services to the project during its final stages as those who supply materials and services in earlier stages, with separate but similar statutory rules.[323] In 1982, the Attorney General’s Advisory Committee explained the reason for the introduction of the holdback for finishing work, as follows:

Because the early release of holdback would jeopardize the finishing trades, subsection 2 creates a second holdback, requiring the retention of 10 per cent of the price of all services and materials supplied from the day certified as the day the contract was substantially performed to the day it was completed.[324]

Under the Act, where a contractor (or a supplier) supplies services and materials both before and after certification of substantial performance, subsection 31(4) applies and, in effect, splits the contractor’s lien into two separate liens.[325]

Regarding the manner in which other provinces treat the issue of finishing holdback:

  1. After the issuance of a certificate of substantial performance in Alberta, the owner must retain 10% of the price of the remaining work (called the Minor Lien Fund) for a period of 45 days from the date of completion of the contract.[326]
  2. After the issuance of a certificate of substantial performance in Saskatchewan, the payer on the contract must maintain a separate holdback for the remaining work to be completed,[327] which it must then release 40 days after the contract is completed.[328]
  3. After the issuance of a certificate of substantial performance in Manitoba, the Manitoba Act, like Ontario, Alberta and Saskatchewan, provides for situations where a contract or subcontract has been substantially performed and where services and materials are provided after substantial performance.[329] Upon substantial performance of the contract, the person primarily liable for payment under the contract shall deduct 7.5% of each payment for the remaining work to be done and retain that amount for at least 40 days after the work has been completed.[330]
  4. The concept of “substantial performance” does not exist under the B.C. Act. In British Columbia, contracts and subcontracts alike can only be certified complete and there is no separate holdback for finishing work.
  5. Nova Scotia, Northwest Territories and the Yukon do not provide for a separate holdback for finishing work. Nova Scotia, however, is considering formally adopting a separate holdback for finishing work. Currently the Nova Scotia Act provides for a general holdback which is applicable to finishing work. Sixty days after substantial performance of the contract, the amount of the general holdback may be reduced to 2.5% of the value of the work completed under the contract.[331] This is not a separate holdback, but a continuation of the basic holdback which must be maintained until the project is completed.
  6. The Law Reform Commission of Nova Scotia issued a final report in March 2013 suggesting various amendments to the Nova Scotia Act which ultimately recommended that a separate holdback for finishing work (i.e. 10% of the work remaining to be done following substantial performance) be implemented.[332]

4.2  Summary of Stakeholder Views

Most of the stakeholders who made submissions on the issue of finishing holdback were opposed to the elimination of the finishing holdback.[333] For example, the Council of Ontario Construction Associations submitted that “the finishing trades need the protection of the [Act]” and that, should the definition of substantial performance is modernized as the Council of Ontario Construction Associations has recommended, “the value and importance of the finishing holdback will increase accordingly”.[334] In considering the impact of removing finishing liens, LIUNA Local 183 submitted that as “the amount of finishing work is typically a fraction of the work already performed, it would be impractical to oppose such a finite holdback and burden the system with civil claims over relatively small amounts”.[335]

Some stakeholders, however, submitted that finishing holdback is a duplication of the basic holdback and that it is often irrelevant and does not seem to advance an important policy goal.[336] Specifically, the Canadian Institute of Quantity Surveyors stated, “the holdback for finishing work acts as a crutch and excuse for not being diligent in determining substantial performance”.[337]

4.3  Analysis and Recommendations

Most participating stakeholders agreed that the elimination of holdback for finishing work would be unfair to contractors who supply services and materials after substantial performance (and for certain types of subcontractors, such as landscapers, most or all of their services and materials are often supplied after that time). The current provisions align with the legislation in the other Canadian jurisdictions where the concept of substantial performance was adopted, and is applied, to permit an earlier release of holdback than would otherwise occur after completion.[338] (In Nova Scotia, where there is no separate holdback requirement for finishing work, the legislature is considering introducing it.[339])

Given the support for maintaining the current finishing holdback provisions, and the corresponding limited support for removing the provision, we see no credible reason to jeopardize the rights of the subcontractors that rely on a finishing holdback at the end of a project.

Recommendation

  1. The finishing holdback provisions of the Act should remain unchanged.

5. Mandatory Release of Holdback

5.1  Context

Currently, sections 26 of the Act permits, rather than requires, the release of basic holdback as follows:

Payment of basic holdback

26. Each payer upon the contract or a subcontract may, without jeopardy, make payment of the holdback the payer is required to retain by subsection 22 (1) (basic holdback), so as to discharge all claims in respect of that holdback, where all liens that may be claimed against that holdback have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44. [Emphasis added]

Section 25 of the Act provides for the release of holdback in respect of completed subcontractors and is also permissive rather than mandatory. Section 25 provides as follows:

Payment where subcontract certified complete

25. Where a subcontract has been certified complete under section 33, each payer upon the contract and any subcontract may, without jeopardy, make payment reducing the holdbacks required by this Part to the extent of the amount of holdback the payer has retained in respect of the completed subcontract, where all liens in respect of the completed subcontract have expired as provided in Part V, or have been satisfied, discharged or provided for under section 44 (payment into court). [Emphasis added]

Under section 32 of the Act, the date of substantial performance is determined by the payment certifier, and must be set out in a certificate of substantial performance, or if there is no payment certifier by the owner and the contractor jointly, at the request of the contractor.

Not only is the certification of substantial performance mandatory upon application (ss. 32(1)), if achieved, but any person who fails to make a determination within a reasonable amount of time after receipt of an application may be found liable for damages “to anyone who suffers damages as a result” (ss. 32(3)). Publication of the certificate triggers the commencement of the preservation period.

Significantly, the concept of “substantial performance” does not exist in all Canadian provinces. It was introduced in Ontario to address the issue of delay in holdback release. Prior to the introduction of this concept, the holdback could not be released until the contract work was certified complete, no matter how small the outstanding amount of work, and this caused cash flow issues in the industry.[340] The policy for the introduction of the doctrine in the Mechanics’ Lien Act in the late 1960s was as follows:

The burden which the holdback imposes increases in direct proportion to the length of time that the holdback is retained. However, the benefit of the holdback decreases as the project nears completion, because the chances of either the contractor or a principal subcontractor becoming insolvent at this stage of the project are low. The purpose of the inclusion of the substantial performance concept was to speed the release of the holdback, particularly in the case of major building projects.[341]

Once all liens that may be claimed against the holdback have expired, the funds lose their status as holdback and become merely funds owing to the contractor pursuant to the contract.[342] When this occurs, the owner may set-off any debts or claims it has against the contractor, whether related to the project or not.[343] While section 30 of the Act prohibits set-off against the holdback, it does not otherwise prohibit the deduction of costs to rectify deficiencies and to complete work. The ability to set-off in such a manner accords with a basic principle underlying the Act being that, apart from the holdback, in protecting those who supply work and materials, the owner is not to be prejudiced.[344]

However, a number of stakeholders have proposed that the release of holdback should not be permissive, but mandatory.

  1. Subsection 41(1) of the Saskatchewan Act[345] allows subcontracts to be certified as substantially performed. Specifically, section 41(1) states that “at the request of the subcontractor, the payment certifier … shall, within seven days after the day of the request … determine whether a subcontract has been substantially performed” and, where he or she determines that it has been substantially performed, “certify the substantially performance by signing a certificate in the prescribed form and delivering it to the subcontractor”.[346] The Saskatchewan Act also imposes liability for refusal to certify under section 41(2) pursuant to section 42.[347]

    Under subsection 43(1) of the Saskatchewan Act, where a contract has been certified as being substantially performed, each payer on the contract and any subcontract shall (if money is due and payable under the contract or subcontract) make payment of the holdback amount calculated as of the day of the certification of substantial completion forty days after the certificate is given. The payer must also make payment of the holdback retained after the day of substantial performance, 40 clear days after the contract is complete (or abandoned).[348]

  2. Where a subcontract has been substantially performed, section 45 of the Saskatchewan Act requires that each payer on the contract (or subcontract) shall (if money is due and payable) make payment reducing the holdback by the amount of the holdback retained in respect of the substantially performed subcontract 40 clear days following the date on which a copy of the certificate of substantial completion being given pursuant to section 41 as described above.[349]

5.2  Summary of Stakeholder Views

A number of stakeholders recommended the mandatory release of holdback, as the current uncertainty adversely affects a contractor’s ability to plan and to accept contracts for new work.[350]

  1. The OBA CLA Reform Committee and the Ontario General Contractor’s Association submitted that changing the release of holdback to be mandatory upon expiry of the lien period (provided no liens have been registered) would remedy the unfairness of set-off claims that are brought without notice and only after the expiration of liens.[351]
  2. Prompt Payment Ontario submitted that, “holdback monies should be solely for the purpose of providing security to suppliers and sub-contractors who have not been paid by a contractor. Holdback monies should not be treated as security for performance of the contract”.[352]

    Prompt Payment Ontario also submitted that mandatory rather than optional early release of holdback upon the certification of completion of subcontracts would be preferable and would better balance the interests of improved cash flow with the need to protect trades.[353]

  3. The Ontario Association of Architects submitted that, “regardless of which triggering mechanism is incorporated in the [Act] it should be mandatory and not left to the discretion of the ‘payer’ (owner) as this may not improve the cash flow under a contract”.[354] The Council of Ontario Construction Associations proposed that the release of holdback could become mandatory if a subcontractor requests such release, stating this would achieve the goal of making owners bear the burden of financing a project without putting owners in the jeopardy of paying the holdback twice.[355]
  4. The Ontario Sewer and Watermain Construction Association submitted that holdback should be mandatory for work performed and materials supplied on projects lasting more than one year.[356]

Some stakeholders submitted that they do not support the mandatory/automatic holdback release[357] or, alternatively, that the timing of release of the holdback should be negotiated in the terms of the contract.[358] Others oppose the mandatory release of holdback after the expiration of lien rights because it is not flexible and may not be well suited for all projects.[359]

  1. While the Surety Association of Canada asserted that contractual payment terms should be freely agreed to by parties, it also stated that it would be in favour of a recommendation that required parties to resume payment under agreed contractual terms “when the requirements under the Act to withhold holdback and other funds is satisfied or expires”.[360]
  2. The Ministry of Transportation submitted that, “adding mandatory provisions for early release of holdback will create multiple administrative processes, increase inefficiencies and timelines to confirm quality of work, invoicing, lien status and to process payments”.[361]

A significant concern raised by owner stakeholders, with respect to the mandatory release of holdback relates to an owner’s right to set-off legitimate claims against any amount owing to a contractor, which includes the amount of the holdback once it loses its character as such, in accordance with the Act.[362]

  1. The Toronto Community Housing Corporation submitted that the mechanism by which owners are able to withhold funds for set-off is often negotiated by contracting parties.[363] Any statutory requirement for automatic holdback release would undermine this current structure, which Toronto Community Housing Corporation submitted allows for balance and would only create an incentive for additional, contractual retainage funds to address deficiencies and other project completion issues.[364] Finally, Toronto Community Housing Corporation submitted that a significant additional administrative burden would result for owners from the imposition of a mandatory holdback release regime.[365]
  2. Although opposed to the mandatory release of holdback, in its submissions the Ontario Road Builders’ Association made some suggestions for the Review’s consideration, in the event that the mandatory release of holdback is recommended. The Ontario Road Builders’ Association submitted that if mandatory release of holdback was to be implemented, it should be subject to (a) a right of payers to continue to withhold amounts necessary to cure defects and complete work and (b) the right of parties to contract out of the provision in order to efficiently arrange performance security.[366]

5.3  Analysis and Recommendations

The issue of mandatory release of holdback polarized reactions among stakeholders, with general contractor and subcontractor groups generally advocating for change and owner groups opposed to change.

Section 26 of the Act was drafted using permissive language (i.e. “may”) rather than mandatory language (“shall”) to address the end of the owner’s obligation to retain basic holdback (set out under section 22(1)) and to give the owner some certainty with respect to potential liability for making payments. This intention is reflected in the comments found in the Ministry of the Attorney General Discussion Paper from 1980, which states as follows:

The Draft Act contains provisions designed to provide for the conclusive determination of the date of substantial performance of a contract or the completion of a subcontract. The expiration of lien rights under this Act is directly related to these dates. It is hoped that these modifications to the law will enable the speedy release of holdback funds, without jeopardy to owners or disregard for the rights of any person who has worked on the improvement.[367]

At the time of the 1983 modifications, the effect of section 26 on an owner’s right to set-off was not directly noted as a primary concern. However, as noted by some of the stakeholders in the Consultation Process, contractors and subcontractors are not opposed to the application of the owner’s right of set-off where appropriate and necessary, but they take issue with the potential for abuse of the permissive language. This concern relates to exaggerated amounts being retained, without prior notice, for extended periods of time. In fact, concern was expressed that some owners intentionally wait until after the substantial performance liens expire before announcing their intention to set off, such that the subcontractors are “ambushed” and their withheld funds go to satisfy the general contractor’s contractual obligations to the owner.

Recognizing the necessity of a balance between the (sub)contractors’ right to be paid in full and the owner’s right to set-off in the event of a legitimate claim, the Ontario Road Builders’ Association suggested that mandatory release of holdback language in the Act should be aligned with the language in the Saskatchewan Act. In doing so, the Ontario Road Builders’ Association suggested that the application of such a provision should be subject to a payer’s right of set off.[368]

As noted above, the Saskatchewan Act provides that “each payer on the contract and any subcontract shall, if the money is otherwise due and payable under the contract or subcontract … make payment”.[369] If the Act is to be amended to provide some certainty to contractors and subcontractors regarding payment of the holdback, in order to be effective and balanced, it could be amended to include language similar to the language adopted in the Saskatchewan Act.

From a contractor/subcontractor perspective, the Saskatchewan Act language may discourage the potential abuse of payer set-offs as it would place an onus on a withholding owner to show that the set-off and the amount set-off are legitimate, so long as liability for interest and costs were to apply for failure to show that the set-off was warranted and in the appropriate amount, interest and cost consequences could be imposed. However, this approach would not address the concern regarding the potential exposure to “ambush” set-off.

Recommendation

  1. The Act should be amended to provide for the mandatory release of holdback, but not the mandatory early release of holdback; that is to say, “may” should be revised to “shall” in sections 26 and 27 of the Act. The owner should be required to publish a notice of non-payment/set-off to interdict the obligation to pay where the owner, in good faith, intends to assert a set-off in relation to the contract (as further provided for in Chapter 8 – Promptness of Payment).

6. Annual, Phased and Segmented Release of Holdback

6.1  Context

The phasing of construction projects is an increasingly common practice within the construction industry, particularly with respect to larger-scale projects which span over a number of years, including public-private partnership / AFP projects. Phasing may involve multiple prime contracts for each phase of the construction process.

Other Canadian jurisdictions allow for phased partial release of holdback on larger construction projects. For example, Manitoba, Saskatchewan and Newfoundland and Labrador allow for early or progressive release of holdback to take place on larger projects, with Saskatchewan allowing for either progressive release or annual release of holdback for phased construction projects.[370]

Some commentators have suggested that the consistent adoption of phased substantial completion or phased release of holdback across the provinces would be beneficial, particularly to those who perform early work packages. However, other considerations must also be taken into consideration including the relevance of the minimum standards set out in section 2 of the Act, the implications of phased holdback release on milestone payments, and how the practice would affect trades that carry on work through various phases of a project.

  1. In Manitoba, the holdback may be reduced when an individual subcontract is substantially performed in accordance with the requirements of subsection 25(2).[371] Subsection 25(5), also drafted to be permissive, allows for a reduction in the holdback once a subcontract has been certified substantially performed. Therefore, subsections 25(5) through 25(8) govern the mandatory issuance of certificates of substantial performance of subcontracts, as between the contractor and a subcontractor[372] or as between a subcontractor and a sub-subcontractor.[373] A subcontractor who has applied for, but has not received, a certificate of substantial performance, may apply to a judge for an order declaring that the subcontract has been substantially performed.[374]
  2. The P.E.I. Act creates a statutory scheme akin to a phased or annual release of holdback scheme.[375] This scheme, however, only applies to government contracts for highway construction, where the contract provides that the completion of the work is scheduled for the calendar year following the calendar year in which the contract is signed. The consultant may certify that the work scheduled for completion in the first year has been completed to the consultant’s satisfaction. The work so certified is then deemed to have been completed on December 1 of the first calendar year and the owner shall reduce the amount to be retained as holdback by the corresponding portion of the holdback (i.e. depending on the type of project under section 14 the holdback will be 15% of 20%).[376]
  3. Both the Saskatchewan Act and the Newfoundland and Labrador Act expressly authorize the phased/annual release of holdback on a broader range of projects then the P.E.I. Act does. The Saskatchewan Act allows for annual holdback payments on large contracts with a completion schedule longer than a year and for a price (at the time the contract is entered into) in excess of $25,000,000.
  4. Like the Saskatchewan Act, the Newfoundland and Labrador Act allows for partial annual release of holdback on larger multi-year construction projects. In 1991, section 12.1 was added to address the release of holdback for contracts with a completion schedule intended to last more than one year for a price in excess of $20,000,000. In relation to such projects, section 12.1 of the Newfoundland and Labrador Act provides that where the contract provides for a schedule longer than 1 year, no proceedings have been commenced to enforce a lien/charge against the holdback and notice of early release has been given and posted, then the holdback can be paid out 30 days after the day notice of early release is completed pursuant to section 12.2.[377]

    Practitioners in Newfoundland and Labrador however have noted that the above provisions are not often applied in practice.

6.2  Summary of Stakeholder Views

6.2.1  Early Release Generally

A number of stakeholders submitted that they would support a statutory regime that would allow the release of holdback in tranches upon completion of certain portions of the work, for instance for projects where payment is based on milestones.[378]

Other stakeholders, however, expressed some concern about releasing holdback in tranches.

  1. The Ontario Association of School Business Officials submitted that, while partial releases of holdback could be considered, this would impose an additional administrative burden on all parties.[379] In addition, the holdback would be of a lower value at substantial performance, thereby limiting the amount of funds available for set-offs, which may cause owners to retain deficiency holdbacks.[380]
  2. Toronto Transit Commission submitted that a permissive, flexible approach to holdback release based on the particularities of each contract, rather than mandatory or prescribed tranches, would be easier to administer and would have a logical connection to the contract work.[381]
  3. Enbridge submitted that if there were changes to phasing-in or phased-released of holdbacks, “this should not affect Enbridge’s ability to use these holdbacks to ensure these above items are completed for critical safety issues, maintenance and operational purposes. Without these holdbacks there may be unintended consequences”.[382]
  4. Prompt Payment Ontario explained in its submissions that the release of holdback in tranches would favour early-completing trades (who would presumably receive 100% of their holdback) unlike those trades who supply the bulk of their labour, services and materials near the end of the project and whose holdback recovery would be limited to the amount of holdback left for distribution.[383] Prompt Payment Ontario also submitted that there are ambiguities that are created by the phasing of large projects and recommended that each contracted segment of work should be subject to certification of substantial performance which should be published.[384] Prompt Payment Ontario further suggested that the certification of substantial performance should trigger lien rights applicable to that section of work, allowing a portion of holdbacks to be released.[385]
  5. Toronto Transit Commission submitted that, with respect to design services contracts, both annual releases and percentage completion releases may artificially separate work for a particular drawing or RFI response into different parts.[386] Contract driven milestones could be crafted to ensure the release of holdback for all design work up to the award of the construction contract, provided a certificate of substantial performance is published for that milestone.

Generally, all stakeholders who made submissions with respect to the early release of holdback for services rendered prior to the commencement of construction, agreed that a distinction should be drawn[387] between the design service phase and the construction phase[388] but opinions varied with respect to its practical application.

  1. The City of Toronto submitted that the distinction should not necessarily be tied to arbitrary time intervals that have no relationship to the project or significant milestones that are being met, as this would make it harder to distinguish work that is being certified from continuing work.[389]
  2. Taking a different approach, the Consulting Engineers of Ontario submitted that work undertaken by engineers that is not “construction related” should be excluded from the application of the Act, while work involving construction-related work, should be subject to it.[390]
  3. The Ontario Association of Architects submitted that formalizing two phases for substantial performance of the architect’s services should negate the current situation where the statutory holdback is released after total completion of the architect’s services.[391] The Ontario Association of Architects also submitted that substantial performance should apply to architectural services, in the same manner as it currently applies to contractors,[392] and that the concept of substantial performance should apply to both the design phase and the contract administration phase.[393]

    The Ontario Association of Architects further submitted that the triggering mechanism for the completion of the design portion should be the start of construction.[394] In the construction phase, substantial performance of the architect's services should coincide with substantial performance of the contractor’s work.[395] It was also suggested that, in the context of design build contracts, “commencement of the Work” should be redefined to mean the earlier of the date the construction contract is signed or the date of the start of construction.[396]

  4. Infrastructure Ontario submitted that the Act should be revised to incorporate specific criteria for determining the substantial performance of consulting agreements, master services agreements and design and professional services agreements.[397]
6.2.2  Annual Release

The concept of the annual release of holdback received mixed reactions from stakeholders.

  1. Generally, municipalities and the Ontario Sewer and Watermain Construction Association submitted that they support the annual release of holdback on multi-year contracts.[398]
  2. The Provincial Building and Construction Trades Council of Ontario stated that any amendments to holdback provisions needs to weight the competing rights of parties who preform work at different stages of a project.[399]
  3. The Toronto Transit Commission cautioned that, “the proposed solutions of annual or percentage completion releases may work in certain scenarios, however, they may also create artificial distinctions that in practice are difficult to administer but which permissive milestones defined in the contract may avoid”.[400]
  4. On the other hand, the Canadian Bankers Association and York Region opposed the concept of annual release of holdback in their respective submissions, for different reasons.[401]
  5. The Canadian Bankers Association and York Region submitted that the conditions or triggering events for the release of holdback should be stated clearly and tied to the work or project completion rather than arbitrary release dates such as calendar dates (e.g. annually).[402]
6.2.3  Phased Release

Many stakeholders supported the idea of phased release of holdback in general terms.

For example, the Canadian Bankers Association submitted that a reduction in the holdback amount combined with earlier and more frequent releases of holdback would be in the best interests of all stakeholders, as these changes would result in more funds flowing down the construction pyramid and less funds tied up with owners, leading to earlier and/or more frequent payments to contractors, more timely resolution of disputes between owners and contractors, lower risk of holdback deficiencies, and lower claims for deficiencies when they do occur.[403]

Other stakeholders also submitted that they would support the release of holdback upon the completion of project phases, as this would accelerate payment for work done in the early stages of a project, without compromising the protection available to trades working later on the project.[404]

Several stakeholders agreed, however, that a “one-size-fits-all” approach to the release of holdback no longer aligns with the realities of the industry and instead a project-specific approach should be adopted.[405]

Some stakeholders made suggestions regarding the practical application of phased release of holdback.

  1. For example, the Consulting Engineers of Ontario submitted that “any revised or new payment statute governing Ontario’s construction and design industry should require the provision for the release of holdback on design services, or other services if they continue to be covered under the Act to realistically reflect the nature and completion of the services provided”.[406]
  2. The City of Toronto suggested that holdback of large amounts of project funds over very long periods of time could be addressed through phased certification but that the Act would have to offer some flexibility with respect to the length and the definition of phases, it would have to be permissive rather than mandatory about the application of any phased release provisions.[407]
  3. In the same vein, the Ministry of Transportation submitted that it would support permissive provisions allowing the early release of holdback, at the owner's discretion or in accordance with negotiated contract terms, but that mandatory early release provisions would create multiple administrative processes, increase inefficiencies and timelines to confirm quality of work, invoicing, and lien status, and to process payments.[408]
  4. Ontario Road Builders’ Association members are generally supportive of increasing the number of dates for the release and early release of holdbacks and submitted that a staged release of holdback similar to the one employed in Saskatchewan would be useful.[409]

    The Ontario Road Builders’ Association noted that subcontractors who finish their work early in the project schedule may have to increase their subcontractor price significantly in order to be able to manage their cash flow.[410] Some Ontario Road Builders’ Association members did caution that administering partial releases of holdbacks might be administratively burdensome and would recommend that early release be implemented as an optional rather than a mandatory change.[411]

  5. The OBA CLA Reform Committee made some practical suggestions with respect to necessary amendments to the Act in order to implement a phased release of holdback regime. The express recognition in the Act of holdback release bonds or other forms of holdback security provided by payees would likely alleviate concerns regarding compliance with the Act.[412] Further, the Act could stipulate that a payer who relies upon such security, or upon the issuance of a Certificate of Completion by a payment certifier and releases holdback funds would not be liable for any deficiency in the holdback fund.[413]

Other stakeholders, however, raised concerns about the potential effects of phased release of holdback.

  1. The Canadian Institute of Quantity Surveyors submitted that early release is normally based on substantial performance of a subcontract or prime contract and that the danger of a where land is under one title is the lack of protection once the holdback on earlier phases is released.[414] The Canadian Institute of Quantity Surveyors also submitted that this issue could likely be overcome by requiring signed lien releases on the early phases of the work.[415]
6.2.4  Segmented Release

Specifically with respect to AFP agreements, it has been drawn to our attention that certain AFP projects are conducted such that multiple improvements are built under a single Project Agreement. For example, two hospitals, geographically separate, may be contracted for under a single Project Agreement by a single Project Co. Under the Act as it currently stands, a unitary holdback is required, yet the construction of the two buildings may proceed on different schedule, and one could achieve substantial performance before the other. The potential problem would only be exacerbated in the event that the contract called for the construction of a dozen schools, for example. It has been proposed that, in such circumstances, there is no policy reason not to allow the two improvements to be treated separately for the purposes of calculating and releasing holdback, so long as payment certification is applicable and accounting is properly conducted in respect of each improvement.

6.3  Analysis and Recommendations

Numerous stakeholders, including engineers and consultants made submissions to the effect that the current “one-size-fits-all” statutory scheme of the Act does not accord with the realities of the construction industry in Ontario today. This issue arises in particular with certain types of AFP projects (roadworks, seasonal work such as landscaping) and with large or “mega-projects”, such as multi-year infrastructure projects.

Arguably, a mechanism for the phased release of holdback based on the completion (or substantial performance) of certain portions, tranches or milestones is already contemplated under subsection 2(2) of the Act. This subsection, however, and in particular the words “where the improvement or a substantial part thereof is ready for use or is being used for the purpose intended and […] where the owner and the contractor agree not to complete the improvement expeditiously”, has not been interpreted by the courts as allowing parties to pre-emptively agree to release the holdback in phases or according to milestones. Instead, in the name of preserving certainty for the benefit of all parties involved in the project, the courts have limited the use of subsection 2(2) by parties.

Part of the difficulty in interpreting section 2 of the Act stems from the fact that subsection 2(1) refers to the substantial performance of “a contract” while subsection 2(2) refers to “the improvement”, which is consistent with section 14(1), pursuant to which a lien attaches to “an improvement”. The difficulty that arises, when a single improvement is to be completed under several contracts is that under section 14(1) lien rights still attach to the entire improvement.

Another proposed statutory mechanism for the early release of holdback is the annual release of holdback for projects over a threshold dollar value.

Further, in our view, there is no policy impediment to allowing for the segmentation of holdback where a contract has payment certifier and separate accounts are maintained for each improvement.

Recommendation

  1. We recommend that the Act should be amended to permit partial release of holdback on either a phased or annual basis, if provided for in the construction contract entered into by the parties, subject to a significant monetary and time-based threshold in the case of annual release.
  2. We also recommend that the Act should be amended to allow for the segmentation of holdback for projects involving clearly separable improvements, particularly for AFPs.
  3. We recommend that there be no provision for mandatory early release of holdback for design consultants in respect of services supplied up to the commencement of construction; but the Act permit the designation of a design phase for the purposes of phased release of holdback.

7. Deferral Agreements

7.1  Context

Currently, subsection 2(2) of the Act provides for limited exceptions to the basic principle of substantial performance (and corresponding release of holdback) as follows:

(2) For the purposes of this Act, where the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and the remainder of the improvement cannot be completed expeditiously for reasons beyond the control of the contractor or, where the owner and the contractor agree not to complete the improvement expeditiously, the price of the services and materials remaining to be supplied and required to complete the improvement shall be deducted from the contract price in determining substantial performance.

The circumstances in which this section applies and its purpose, were intended as follows:

The purpose of this provision is to provide for the possibility of severing a completed part of an improvement from the improvement as a whole where the completed part is of use to the owner and the remainder of the improvement cannot be completed expeditiously. This may be advantageous to all parties involved in the project, since it will prevent a prolonged and unexpected delay in the release of the holdback.[416]

Ontario courts have generally resisted finding that separate contracts for one project involve separate holdbacks that could be released upon the substantial performance of each contract. Rather, the courts have demonstrated a tendency to find that multiple contracts for the same project each form part of one general contract requiring only one holdback.[417]

Commentators have considered the application of subsection 2(2) as a potential mechanism for the release of holdback on staged or phased projects, referring to a 1992 case, Bob Dionisi & Sons Ltd. v F.J. Davey Home for the Aged (Algoma), where the early release of holdback issue was addressed. The Court considered whether section 2 of the Act “contemplated a second or indeed a greater number of uses of the section to provide succeeding releases from the holdback amount, and more generally, whether there was one improvement or three improvements”.[418] The Court held that the release of holdback, after the completion of a phase of the Project, did not comply with section 2 of the Act.

Consequently, a contractual term permitting the early release of holdback for a portion of the work is of little use to a contractor “as the release of holdback in respect of a designated portion of the work may leave an owner liable for that holdback”.[419] In a subsequent decision of the Divisional Court, Soo Mill & Lumber Company Limited v J.J.’s Hospitality Limited (1996), the Court found that a contract can relate to more than one improvement.[420] Although this decision may be relied upon by contractors seeking release of holdback before overall substantial completion, “it leaves subcontractors in a precarious situation because they may not know at the time of contract when the holdback will be paid out nor the extent of the owner’s holdback liability”.[421]

In a more recent case, also decided under section 2 of the Act, Echafauds Plus (Laval) Inc. v RBG Environmental Inc.,[422] Master Wiebe held that an agreement between an owner and contractor to terminate one construction contract, issue a certificate of substantial performance, release holdback and enter a new contract was not consistent with subsection 2(2) of the Act, for two reasons. First, there was no evidence that the work was being used or was ready for use for the purpose intended, and second there was no evidence that the purpose of the second agreement was to delay the completion of the first agreement; instead it was intended to serve the commercial convenience of the owner and the contractor. Master Wiebe noted that the intention of s.2 is to create certainty for all parties affected by the CLA system, namely the owners, payment certifiers, contractors, subcontractors and suppliers. Therefore, the definition of substantial performance should not be open-ended.

In our view, these three cases are indicative of the market reality that owners and contractors, when faced with a commercial incentive to do so, will enter into agreements that defer or “carve-out” the completion of part of the originally contracted work, and, in doing so, will provide for the release of substantial performance holdback whether the improvement is ready for it intended use or not. Some parties call these deferral agreements and some call them “carve-out” agreements. In fact, such agreements are becoming more and more common. The lengths to which parties are prepared to go is perhaps exemplified by the Echafauds case, where the owner and contractor actually terminated and then reconstituted their contract in order to allow for a deferral of a portion of the work and the release of holdback. While the issue of deferral agreements was not isolated as an item on the Review’s issues list, the concept of deferral agreements came up in discussion with a number of stakeholders. In these discussions, the support for allowing deferral agreements was strong.

7.2  Analysis and Recommendations

We have been unable to isolate any policy reason that such agreements should not be allowed, so long as they are optional to both the contractor and the owner, provide for certification of the substantial performance of the reduced scope of the contract (without the requirement that the improvement be ready for its intended use), and publication of the certificate of substantial performance. Where a deferral agreement is entered into, the deferred work should then be added to the “finishing” work.

Recommendation

  1. We recommend that the Act should be amended to allow for deferral agreements to be entered into between owners and contractors provided that such agreements are for the purpose of allowing certification and publication of substantial performance, subject to an appropriate threshhold.

8. Deficiency Holdback

8.1  Context

While the 10% basic holdback may not have been intended for use by owners in relation to deficiencies, in Ontario and other provinces, such as B.C., some contracts provide for a contractual deficiency holdback in addition to the holdback provided for under the relevant lien legislation.[423]

By way of example, contracting parties in the United States make use of the concept of retainage as a form of deficiency holdback. There, the related state legislation merely aims at regulating retainage practices in the industry.[424] Commentators have described retainage as “[a] common contract approach to reducing a contractee’s risk that its contractor will fail to perform its contractual obligation” by “withhold[ing] a percentage of the sums due until the work is substantially complete”.[425]

In that regard, it has been said that “retainage is often a subject of bitter dispute between parties to a construction contract”.[426] In order to ameliorate the issue in the US, some states have implemented limitations on the amount that can be subject to retainage on construction contracts. For example, under New York law, retainage is permitted by an owner but only so long as the amount retained is a “reasonable amount”. The contractor may then withhold a reasonable amount and so on down the chain. Further, in New York, the owner must release the retainage no later than 30 days after final approval of the work under a construction contract. If such retainage is not released on time, by statute it will accrue interest.[427]

8.2  Summary of Stakeholder Views

Some stakeholders submitted that they were in support of the use of contractual deficiency holdbacks,[428] although others suggested that such a holdback does not need to be legislated as it can be described in the construction contract.[429]

The Ontario Association of School Business Officials submitted that it strongly supports “the continued use of deficiency holdbacks, separate from the lien holdbacks” as they allow “the general contractor to be aware of and make the necessary financial allowances for each of the sub-trades as a contract progresses rather than being advised of the issues towards the end of the project when project funds may have already been released to the subcontractors”.[430]

On the other hand, other stakeholders strongly oppose the introduction of a statutory deficiency holdback.[431]

  1. The Surety Association of Canada submitted that imposing an additional holdback against the correction of deficiencies would be punitive, unnecessary and counterproductive to the objective of bringing about more timeliness and certainty of payment within the Ontario construction industry.[432]
  2. Prompt Payment Ontario submitted that the practice of withholding exaggerated amounts relative to the cost of correction or completion, and/or the practice of withholding arbitrary amounts or percentages of construction contract prices, is both unwarranted and antithetical to the objectives of improving cash flow to trades.[433]
  3. Instead, Prompt Payment Ontario further submits, any amount for which certification is withheld (where the project involves an independent payment certifier) or for which any payment may otherwise be withheld by the owner (for projects where there is no independent payment certifier) must be limited to a reasonable valuation of the cost of correction or completion.[434]

No stakeholders specifically recommended that the use of contractual deficiency holdbacks be capped or otherwise limited.

8.3  Analysis and Recommendations

As noted above, no other jurisdiction considered has enacted a statutory deficiency holdback. Instead, in every one of these jurisdictions, deficiency and warranty holdbacks are negotiated contractual terms. While some stakeholders generally supported the concept of deficiency holdback, no stakeholder advocated for the implementation of such a holdback by means of legislation. Rather, there was significant opposition to any such recommendation by a variety of other stakeholders noted above.

Accordingly, we see no reason why the concept of a deficiency holdback should be the subject of a legislative prohibition or statutory regulation.

Recommendation

  1. The Act should not be amended to provide for a statutory deficiency holdback; nor should it be amended to restrict the deficiency holdback provisions that parties may negotiate between themselves in their contracts.

9. Use of Financial Instruments for Holdback Purposes

9.1  Context

The definition of holdback under section 1(1) of the Act does not specify the form in which holdback should be maintained, rather only that it should be 10 per cent of the value of services or materials supplied under a contract or subcontract.[435] Further, the specific form is not provided under section 22(1) which provides details on how holdback is to be retained as further discussed above. That said, the predominant industry practice is that holdback is maintained in cash.

Interestingly, what can and can’t constitute holdback in Ontario is somewhat vague. Canadian Author Duncan Glaholt points out that the most prevalent misconception is “that cash is actually held back at each level”. Generally, one would assume based on the requirements of section 22(1) that cash would have to be maintained in order to satisfy the holdback, however, Glaholt points out that “[i]n effect, the holdback is more often merely a stacked series of claims upon a final draw by the contractor on the owner’s funds”.[436] For this reason, among others, certain stakeholders and commentators have posited that another form of financial instrument should satisfy the otherwise broad definition of holdback in lieu of cash.

Looking abroad, the United States, 21 states explicitly permit contractors to substitute or request permission to substitute some type of security (with 5 states explicitly allowing letters of credit) in lieu of cash for retainage.[437]

9.2  Summary of Stakeholder Views

Almost all stakeholders who made submissions on this issue indicated that they would or would be willing to support the use of certain financial instruments in lieu of cash.[438]

  1. The City of Toronto for example submitted that “any financial instrument that takes the place of cash holdback must be easily accessible”.[439] In this regard the City noted that it would consider “an irrevocable and unconditional letter of credit in certain circumstances” so long as any letter of credit in lieu of cash holdback provision was “permissive, not mandatory” and it does not interfere with section 12 of the Act (i.e. set off by a trustee).[440] In relation to use of bonds, the City of Toronto was not supportive as they noted that such bonds were “difficult to realize on”.[441]
  2. The Surety Association of Canada submitted that it was in favour of a recommendation for security “holdback with a form of bond or other security that would enable all (or more) funds to flow through the payment chain while ensuring holdback is funded”. The Surety Association of Canada also supported the concept of allowing the posting of an instrument to replace holdback at the outset of projects.[442]

Certain stakeholders expressed concerns about the use of bonds for this purpose, which they asserted can be expensive, difficult to realize on and administratively burdensome.[443]

9.3  Analysis and Recommendations

It is our view that there are certain circumstances where requiring holdback, whether legislatively or by industry practice, to be in the form of cash only simply does not accord with the notion of a modernized Act. In that regard, and given the submissions of the stakeholders, we recommend allowing (permissively) alternative forms of holdback (i.e. surety bonds or recognized letters of credit) in order for parties to take fuller advantage of available financial products and loosen the restrictions on projects. This also avoids the obligation of certain owners to maintain cash in circumstances where that may otherwise be administratively cumbersome.

Recommendation

  1. We recommend that the current scheme should be supplemented by allowing the replacement of cash holdback with a Letter of Credit or a demand-worded Holdback Repayment Bond.

Chapter 6: Summary Procedure

1. Overview

The Act states that the procedure in a lien action is, as far as possible, to be summary in nature. In order to facilitate this objective, section 67 of the Act expressly requires leave of the court for parties to take interlocutory steps other than those specifically provided for under the Act. As well, section 50(2) of the Act prohibits the joinder of trust claims with a lien claim. Stakeholders have raised concerns that, as things have evolved since 1983, the summary procedure provisions actually cause unnecessary steps in proceedings, extend timelines, and result in increased costs. In that regard, stakeholders expressed concern that proceedings under the Act are no longer summary in practice. Specifically, concerns were raised about the requirement to seek leave of the court to take certain interim interlocutory steps[444] in proceedings because these requirements were seen to be complicating proceedings. Concerns were also raised regarding smaller claims, particularly home renovation projects, which are subject to the same procedure as larger claims, notwithstanding the principle of proportionality set out in section 67 of the Act.

The Act was intended to provide an expeditious forum for the summary resolution of disputes involving suppliers of services and materials against the owner of the improved property, with whom they have no privity of contract.[445] Section 67 of the Act provides as follows:

Procedure Generally Summary Procedure

67. (1) The procedure in an action shall be as far as possible of a summary character, having regard to the amount and nature of the liens in question.

To that end, Part VIII of the Act provides a set of procedures unique to construction lien actions. The Rules of Civil Procedure and the Courts of Justice Act are applied except where they are inconsistent with the provisions of the Act.[446]

Commentators have noted the discord between the legislative intent and the nature of lien actions in practice, in that the steps often overlap between lien actions and other actions and the summary nature of lien actions has seemed to disappear.[447]

In assessing the summary procedure provisions of the Act, we have considered the suggestions proposed by stakeholders and the use of summary procedure provisions under the Rules of Civil Procedure (the “Rules”) and in the lien legislation of other provinces.

In this regard, the following issues were raised with stakeholders through both the Information Package and Consultation Process and have been considered by the Review:

2. Changes to the Summary Nature of Proceedings Under the Act

2.1  Context

As noted above, a party is not permitted to take certain steps in a lien action without leave of the court. This includes bringing any motion for interlocutory relief, conducting oral examinations for discovery and obtaining discovery of documents, and issuing third party claims.

Stakeholders expressed concern that, in reality, these provisions complicate the very issues they attempt to simplify, not because they were improperly drafted, but because the legal landscape has changed considerably since 1983. Presently, motions, oral discoveries, and documentary disclosure are considered necessary and appropriate steps and are granted almost as of course, making the requirement to seek leave of the court an unnecessary, almost administrative step in many cases.

2.1.1  Leave to Bring Motions

A party in a construction lien action cannot bring motions, or take any other interlocutory steps, without leave of the court. Section 67(2) provides:

Interlocutory Steps

67. (2) Interlocutory steps, other than those provided for in this Act, shall not be taken without the consent of the court obtained upon proof that the steps are necessary or would expedite the resolution of the issues in dispute.

This provision requires the party bringing the motion to demonstrate that the remedy sought is “necessary” to permit the issues between the parties to be decided or would expedite the resolution of the issues. In some cases, the courts have strictly enforced these provisions. For example, in 1188710 Ontario Limited v Gartner,[448] the Superior Court of Justice refused to grant an adjournment of a construction lien trial to consolidate it with an action in relation to a subrogated insurance claim related to damage to the same property. The Court found that the issues were distinct enough to be tried separately, and even though there might have been overlap, section 67 of the Act required that the lien action be tried expeditiously; trying both actions together would require additional witnesses and additional issues to be argued, thereby lengthening the resolution of the lien matter. Leave to bring the interlocutory motion to adjourn was therefore refused.[449] In many cases, however, stakeholders have expressed a concern that the requirement to obtain leave to bring motions adds costs and results in delays.

With regard to other provinces, only Saskatchewan and Newfoundland and Labrador require leave of the court to proceed with certain interlocutory steps.[450] In Manitoba and Nova Scotia, the process is slightly different. Lien actions for any amount are governed by the ordinary procedure of the court, except where varied by their respective lien legislation[451] and in Manitoba, interlocutory steps are governed by the normal court processes, but any party may apply to a judge for directions on any of these interlocutory steps.[452] The legislation in the remainder of the common law provinces does not contain summary procedure provisions and does not require leave to conduct interlocutory steps; rather, actions are governed by the regular rules of court.[453]

2.1.2  Leave to Conduct Examinations for Discovery and Documentary Production

The requirement to obtain leave of the court to conduct oral examinations for discovery and discovery of documents is also tied to the summary procedure provision in the Act. Unlike civil proceedings governed by the Rules of Civil Procedure, the Act does not provide for oral examinations for discovery or discovery of documents. Instead, leave must be obtained under section 67(2) to proceed with discoveries. To obtain leave to conduct discoveries, the party seeking leave must be prepared to demonstrate that discoveries are necessary or would expedite the resolution of the matters in dispute.[454]

In this regard, since 1983, the construction lien litigation landscape has significantly changed. For example, the emergence of larger and larger projects, along with the use of new project delivery models, has affected the complexity and the scale of construction disputes today, as has the use of new methods of communication, such as email and texting. These developments have necessitated the adoption of eDiscovery guidelines, to address the exponentially expanded number of documents to be produced and analyzed during discoveries and at the trial of a construction lien matter.

Due to the summary nature of the lien action, the Court may impose time limits on examinations for discovery or limit the nature of documentary disclosure.[455] Master MacLeod has described this requirement as having “the effect of making all lien actions potentially case managed”.[456] Such restrictions can have a beneficial effect in terms of streamlining the discovery process, thereby saving costs and time. Often, parties conduct discoveries on consent and without leave, but issues may later arise as to the scope of the discovery. The benefit of seeking leave of the court is that the court can give direction as to the real issues that should be the focus of discovery, and order customized plans for examinations for discovery, discovery of documents, and Scott Schedules.[457] Concern was raised during the Consultation Process that examinations for discovery are often difficult and unnecessarily time consuming due to the lack of preparation of witnesses being examined and the lack of adequate documentary disclosure in advance of the discovery. Guidance on the scope of discoveries as well as sanctions for unduly delaying the process were suggested as methods to bring increased efficiency to the process.

Where the parties agree to conduct documentary discovery, or the court orders documentary discovery, the Rules of Civil Procedure require that the parties have a discovery plan.[458] The tension between the Act’s summary procedure and mandatory discovery planning in all actions under the Rules of Civil Procedure has attracted discussion among commentators. In particular, reference has been made to Master MacLeod’s decision in Lecompte Electric Inc. v Doran (Residential) Contractors Ltd. in relation to the principle that “counsel acting in lien actions are well advised to take the obligation to consider proportionality seriously when creating a discovery plan”.[459] Considering section 67 and the principle of proportionality, counsel should collaborate with each other to develop a discovery plan that is “focused, streamlined and … cost effective and efficient”.[460] As noted by the Council of Ontario Construction Associations below, however, discovery plans may complicate proceedings, particularly in those cases where counsel are uncooperative, and this may detract from the summary nature of lien proceedings under the Act.

2.1.3  Leave to Bring Third Party Claims

Section 56 of the Act provides that third parties may only be joined with leave of the court and “for the purpose of claiming contribution or indemnity from the third party in respect of that claim”.[461] The motion is made on notice, and the party bringing the motion must demonstrate that the trial of the third party claim will not:

  1. unduly prejudice the ability of the third party or of any lien claimant or defendant to prosecute a claim or conduct a defence, or
  2. unduly delay or complicate the resolution of the lien action.[462]

This provision aims to make the resolution of lien claims the “primary purpose of the procedures” under the Act.[463] The provision does not address the issue of consolidation of claims or trial one after the other. Only three other provinces refer to third party claims in their respective lien legislation; Saskatchewan, Manitoba, and Nova Scotia all expressly allow for third party claims without leave of the court.[464]

2.1.4  Appeals From Interlocutory Orders

Section 71(3) of the Act prohibits appeals from interlocutory orders.[465] In contrast, the Courts of Justice Act allows appeals of interlocutory orders in civil actions in section 19(1)(b). The Ontario Court of Appeal has held that section 71 of the Act takes priority over the Courts of Justice Act.[466] While this provision was introduced in 1983, Glaholt and Keeshan suggest that it “merely codified established principles of common law”.[467] This proposition stems from in Macon Drywall Systems Ltd. v H.P. Hyatt Construction Ltd., (Macon)[468] where, after a review of the Mechanics’ Lien Act in force at the time and the case law up until that point, Justice Lerner wrote:

The Mechanics' Lien Act, R.S.O. 1970, c. 267, s. 43, contains the only reference to appeals and provides no appeal from an interlocutory order...

The Mechanics' Lien Act is a creature of statute and designed to prevent owners obtaining the benefit of buildings erected and worked on at their insistence without paying for them. The Act is devised to enforce claims for liens expeditiously, informally and as cheaply as possible. To that end, multiplicity of proceedings such as third party proceedings, mortgagee remedies by way of judgment under this Act, claims by one defendant against another that are completely independent of the plaintiff's claim are avoided. The object of the Act is to enforce liens at the least possible expense, and, in order to do this, the procedure should be as far as possible of a summary character.

Therefore, it seems that the common law impetus for the prohibition of appeals from interlocutory orders is rooted in part in the notion of ensuring the summary nature of legal proceedings under the Act. The Courts of Justice Act balances the need for finality and the policy consideration of preventing protracted litigation with a litigant’s right of appeal by requiring leave of another judge to appeal interlocutory orders.[469]

2.2  Summary of Stakeholder Views

Some stakeholders were satisfied with the current regime, while others advocated for change. Stakeholders who supported the current regime commented as follows:

  1. Infrastructure Ontario suggested that the status quo be maintained.[470]
  2. The Toronto Transit Commission noted that, in Toronto, the Masters’ review of issues is an “effective process,” where the Masters determine which interlocutory steps are required and to what extent they should be carried out.[471]
  3. Prompt Payment Ontario suggested that alternative dispute resolution mechanisms, such as adjudication, would obviate the need for summary procedures.[472]

Other stakeholders favoured changes, including the following:

  1. The Ontario Public Works Association expressed support for a general review of the summary procedure provisions in light of the complexity of projects today in the hopes of making procedures more efficient.[473]
  2. The Council of Ontario Construction Associations submitted that the requirement for leave is a waste of time and resources. In lien references before a master, “obtaining leave of the Court is routine and easy... Furthermore, in jurisdictions without masters, most counsel are co-operative in facilitating oral and documentary discovery”.[474] They went on to state that “some counsel and parties use the prohibition on discovery as a technique to delay and obstruct lien actions, [and] in such cases it is necessary to bring a motion”.[475] As a recommendation, it was suggested that “Section 67 of the Act should be amended to make oral examinations for discovery and documentary disclosure mandatory subject to the discretion of the Court to modify the scope and duration of discovery”.[476]

    Regarding discovery plans, the Council of Ontario Construction Associations commented that “Discovery Plans are a failed experiment”.[477] In cases where counsel and parties are co-operative, “Discovery Plans contribute little or nothing to the process of the litigation”.[478] In cases where a party or their counsel is being uncooperative, “requiring the parties to agree on a Discovery Plan creates another opportunity for delay and obstruction”.[479] The Council of Ontario Construction Associations suggested that “the ideal reform would be to have Rule 29.1 of the Rules of Civil Procedure revoked. At a minimum…the Discovery Plans [should] be made optional in lien and trust actions”.[480]

  3. The OBA CLA Reform Committee suggested allowing interlocutory steps “such as affidavits of documents and discoveries to be permitted in larger cases” and further suggested limiting the duration of cross-examinations.[481]
  4. The City of Toronto suggested amendments to make the summary procedure more efficient by dispensing with the requirement to seek leave to bring a motion, and allowing document production and examinations for discovery to be performed on agreement of the parties, failing which the party seeking discovery could ask the court for directions. Overall, the City of Toronto suggested that interlocutory steps could be agreed to by the parties, thus creating “a more efficient and economical summary procedure”.[482]
  5. Few stakeholders made submissions on appealing interlocutory orders. Metrolinx expressed support for discussion around the ability to appeal an interlocutory order.[483] The City of Toronto commented on the appropriateness of appeals from interlocutory orders, suggesting that it would depend on whether, after the completion of the Review, lien actions are treated as complex litigation shaped like civil actions or if the Act contains a more summary procedure.[484]
  6. The Advocates’ Society suggested that, for actions that exceed $250,000, production and discovery should be mandatory; leave of the court would not be required. The Advocates’ Society also suggested that, above a monetary threshold ($100,000 was suggested), mandatory mediation should be required for lien actions.[485] Finally, the Advocates’ Society suggested allowing third party claims under section 56 to proceed without leave of the court, with the caveat that the Act provide for case management of all lien claims to prevent multiple-party claims from becoming unwieldy.[486]

2.3  Analysis and Recommendations

Generally, in circumstances in which the failure of the summary procedure provisions of the Act are widely acknowledged, we are of the view that a greater conformity to the Rules of Civil Procedure will save intermediates steps that have become largely unnecessary, and the attendant expense, and simplify proceedings for the broader bar and bench.

2.3.1  Leave to Bring Motions

The requirement to obtain leave for interlocutory proceedings is not widespread in Canada, with only the legislation in Saskatchewan and Newfoundland and Labrador containing similar provisions requiring leave. This requirement has been cited as unnecessary in many cases, adding costs that would otherwise not be incurred. An alternative that would maintain the purpose of the provision would be to require that proceedings under the Act be summary in nature and be case managed so as to attempt to ensure efficient progress of actions, but remove the requirement for leave to bring motions. The summary nature of the Act would still be a consideration for the court in assessing whether to grant the remedy sought in the motion.

Recommendation

  1. The requirement to seek leave of the court to bring motions under section 67(2) should be removed from the Act, but, as noted below, construction lien actions should be case managed.
2.3.2  Leave to Conduct Examinations for Discovery and Documentary Production

Stakeholders expressed concern with the requirement to seek leave to conduct oral examinations for discovery and examinations of documents, particularly because such motions are usually granted on consent. In these cases, the lawyer is still required to go to the jurisdiction where the land is situated as that is where the motion is heard. This requirement may result in costs and delays. When oral examinations for discovery are conducted, the preparedness of the witness being examined may affect the overall summary nature of the proceedings. The importance of discoveries has increased with the increased complexity of construction lien actions. Parties typically require examinations for discovery and documentary production, and the requirement to obtain leave is an additional cost and administrative burden that is unnecessary.

Stakeholders expressed frustration with discovery plans as unnecessarily complication lien proceedings and distracting from the summary nature of such proceedings.

Recommendations

  1. The requirement to seek leave of the court to conduct oral examinations for discovery and examination of documents under section 67(2) should be removed from the Act, but, as noted, lien actions should be case managed so that production of documents and examinations for discovery can be appropriately streamlined, applying the principle of proportionality.
  2. The use of discovery plans should be at the discretion of the case management judge.
2.3.3  Leave to Bring Third Party Claims

Ontario is the only province to expressly require leave of the court to bring third party claims. The purpose of this leave requirement is to ensure that the resolution of the lien claim is the primary purpose of the proceedings. The risk with this approach is that the issues and evidence in the third party claim will typically overlap with the issues and evidence in the lien claim, thereby creating inefficiencies when re-litigating issues. We recommend that a more efficient approach would be to allow third party claims that relate to the lien action to be commenced as of right.

Recommendation

  1. The requirement to seek leave of the court to bring third party claims under section 56.2 should be removed from the Act.
2.3.4  Appeals From Interlocutory Orders

As construction lien matters have grown more complex since 1983, the ability to appeal interlocutory orders would allow for procedural precedents to be promulgated from the senior echelons of the court, and would allow parties in complex litigation to exercise rights that are otherwise available in civil actions. Extending the right to appeal from interlocutory orders must be balanced with the objective of summary procedure under the Act. Therefore, leave of a judge of the Superior Court of Justice should be required to avoid unnecessary protracted litigation and ensure that only meritorious appeals are heard.

Recommendation

  1. The prohibition of appeals from interlocutory orders under section 71(3) should be amended to allow appeals from interlocutory orders with leave of a judge of the Divisional Court.

3. Joinder of Lien Claims and Trust Claims

3.1  Context

The Act’s procedural regime does not apply to breach of trust actions which must proceed in accordance with the Rules of Civil Procedure and the Courts of Justice Act. This is, in part, why a trust claim cannot be included with a lien claim, despite the fact that trust claims and lien claims share in a commonality of parties and factual circumstances.[487] Section 50(2) of the Act provides:

50(2) A trust claim shall not be joined with a lien claim but may be brought in any court of competent jurisdiction.

The prohibition against the joinder of lien and trust claims stems from the Report of the Attorney General’s Advisory Committee on the Draft Construction Lien Act in 1982. At that time, it was decided that the issues in relation to lien claims and trust claims may be very different, and the resolution of lien claims should be the primary concern under the Act.[488]

Ontario is the only common law province that prohibits the joinder of lien and trust claims. Manitoba allows for the joinder of other claims related to the construction or improvement of land without leave of the court, but if a joined issue cannot be conveniently tried with the other issues in that action, or cause undue prejudice to other lien claimants or parties, a separate trial on that issue may be ordered on application from any party.[489]

3.2  Summary of Stakeholder Views

The Advocates’ Society submitted that, while section 50(2) prohibits trust claims from being joined to lien claims, in practice courts have been willing to join these types of proceedings. The Advocates’ Society submitted that the Act should allow these types of claims to be joined without requiring leave of the court for greater efficiency. The OBA CLA Reform Committee,[490] the Thunder Bay Law Association,[491] the Council of Ontario Construction Associates,[492] the Provincial Building and Construction Trades Council of Ontario, the International Union of Operating Engineers (Local 793)[493] and the Toronto Transit Commission were also of the view that lien claims and trust claims ought to be joined, although the Toronto Transit Commission suggested leave of the court be required, and only “if the matters concern largely the same issues”.[494]

The Advocates’ Society further suggested that counterclaims under section 55 should be restricted to claims related to the improvement, as plaintiffs’ claims are currently restricted in this manner.

3.3  Analysis and Recommendations

The removal of the prohibition against joinder of lien and trust claims would make the Act consistent with legislation from the other provinces, where such a prohibition does not exist. It is particularly concerning because the prohibition of joinder can be circumvented by a court order for a trial together or one after another, resulting in unnecessary costs and delays. The very problem this provision seeks to address is exacerbated by the duplication of proceedings it can cause, contributing to the courts’ backlog and costs to the parties. The provision has been heavily criticized by stakeholders, most of whom have suggested its removal, and none of whom proposed its retention. In keeping with the summary procedure provisions of the Act, parties should be able to join lien and trust claims without leave of the court, subject to a motion by any party that opposes the joinder on grounds that the joinder would cause undue prejudice to other lien claimants or parties.

Recommendation

  1. The prohibition on joinder of lien claims and trust claims under section 50(2) should be removed from the Act, subject to a motion by any party that opposes joinder on the grounds of undue prejudice to other parties.

4. Case Management and References to Masters

4.1  Context

4.1.1  Case Management

It was suggested during the Consultation Process that case management be made mandatory for construction lien matters. Case management has its origins in the work of the Joint Committee on Court Reform (the “JCCR”). In 1988, the JCCR introduced case management as a pilot project to address delays in the court system. Actions commenced under the Act were excluded from the case management pilot project. In 1994, when case management became permanently implemented under Rule 77, construction lien cases continued to be excluded.

In 1995, the Civil Justice Review (the “CJR”), a joint initiative of the Chief Justice of the Ontario Court of Justice and the Attorney General of Ontario, consulted with various stakeholders in the construction industry to develop alternative methods of dispute resolution for actions commenced under the Act. These consultations resulted in a series of recommendations incorporated into the Supplemental Report released by CJR in 1996. One of the recommendations made in the Supplemental Report was that construction lien cases should be case managed. Notably, this same report also recommended that construction lien cases be subject to mandatory mediation even before the introduction of Rule 24.1.[495] Despite this report, construction lien actions remained excluded from Rule 77.

In 2001, the Report of the Evaluation Committee for the Mandatory Mediation Rule Pilot Project again recommended that construction lien matters be subject to Rule 77 case management for the timely resolution of disputes, but construction lien matters again remained excluded.[496]

The CJR outlined the benefits of case management as follows:

4.1.2  References

Often, and particularly in Toronto and Ottawa, Construction Lien Masters manage construction lien disputes. Section 58 of the Act empowers Masters to conduct construction lien actions by means of a reference of the entire action or any part of it on motion to a judge by any party at the close of pleadings.[498] This procedure is important as it “empowers Masters, who have a recognized expertise in complex construction lien matters, to conduct these actions”[499] and reduces the resourcing strain on the Superior Court in Toronto and Ottawa (the only two regions that currently have Masters).

Pursuant to the Act, a motion for a reference is made to a judge with notice at the close of pleadings. In addition, a judge at trial may direct a reference to the appropriate Master (section 58(3)). Sections 58(4) and (4.1) set out the broad powers of a Master (or consensual third party) on a reference and essentially, this person exercises the powers of court.[500] Further, in the jurisdictions of Toronto and Ottawa, Construction Lien Masters preside over an expedited reference procedure, when available.

According to Master Albert, one of Toronto’s current Construction Lien Masters, in the recent decision of 4361814 Canada Inc. v Dalcor Inc.,[501]:

Case management was practiced in Toronto construction lien references long before the case management reforms introduced into civil actions in Toronto, Ottawa and Windsor in the 1990's by Civil Justice Review. In construction lien references case management is grounded in section 67 of [the Act] and rules 54 and 55.

[…]

The construction lien reference procedures in place in Toronto seize the reference master of all steps in the reference, including the trial. As such the reference master becomes familiar with the facts of the case, the issues, and the dynamics between the parties and their lawyers. This level of familiarity is considered beneficial because it leads to the efficiencies demanded by the Act and the reference rule. This legislative scheme is presumed to be fair and just. It permits the reference master to take into account, in each attendance, his or her accumulated knowledge of the case, gained from previous contact with the reference.[502]

Section 58 resulted from the 1960 decision of the Supreme Court of Canada in Ontario (Attorney General) and Display Services Co. Ltd. v Victoria Medical Building Ltd., which had held that the power conferred on the provincial master under the then Ontario Mechanics' Lien Act could only be derived from a judgment of a federally appointed Superior, County, or District Court judge.[503] Specifically, the court in Display Services ruled that “this assignment of the power of final adjudication on mechanics' lien matters went beyond the assignment of mere matters of procedure and amounted to an unconstitutional appointment of a judge under section 96 of the British North America Act”.[504] As noted in the text Construction, Builders' and Mechanics' Liens in Canada, the

“[the] Ontario Legislature, following the decision in Display Services, amended the relevant section of the Mechanics' Lien Act to provide that in the Judicial District of York the action was to be tried by a judge of the Supreme Court, but, on motion, a judge of the Supreme Court might refer the whole action to the master for trial pursuant to section 71 of the Judicature Act, or, at the trial, the judge might direct a reference to the master pursuant to section 70 or 71 of the Judicature Act. The Ontario Construction Lien Act contains a similar provision in section 58”.[505]

As it stands, and to oversimplify, “under section 58(1) of the Construction Lien Act and Rule 54.02(1) of the Rules of Civil Procedure, only judges can make [the required] reference orders”[506] for case management under section 58 of the Act. Section 58 “specifically prohibits a master from doing so and reserves the power to a judge. That is necessary for constitutional reasons since the authority of the master to try the case is delegated authority (Ontario (Attorney General) v Victoria Medical Building Ltd. (1959), [1960] S.C.R. 32)”.[507]

Accordingly, support for increasing the jurisdiction of Masters must be tempered by the restrictions under section 96 of the Constitution Act and by the availability of Masters in the various regions. Currently, Masters sit in only Toronto and Ottawa. In Attorney General for Ontario and Display Services Co. Ltd. v Victoria Medical, the court was particularly concerned with Masters having the power of final adjudication.[508] The response of the legislature was to maintain the Superior Court judge’s jurisdiction over the matter by directing a reference, and ultimately either approving, rejecting, or varying the report of the Master. The practice in Toronto is to have lien actions conducted by reference to Masters,[509] thus consideration should be given to the suggestion that matters be deemed to be referred to Masters at the close of pleadings as a matter of course.

4.2  Summary of Stakeholder Views

4.2.1  Case Management

Stakeholders were generally supportive of mandatory case management. The Advocates Society submitted that case management powers “ought to be extended to every lien action once an order for trial has been obtained or an action set down for trial. This would ensure that lien actions do not become unwieldy or unduly delayed, as is all too often the case in civil litigation”.[510]

LIUNA Local 183 suggested that more difficult cases should be case managed in a manner similar to Rule 77 of the Rules of Civil Procedure, with construction lien masters having the same powers as judges under that rule.[511]

Prompt Payment Ontario noted that the expedited reference procedure employed under the Act is similar to a case management process used in non-lien actions and that the case management procedure utilized by construction lien masters has not been extended to regions outside Toronto and Ottawa. Prompt Payment Ontario submitted that this beneficial process should be extended on a province‐wide basis.[512]

4.2.2  References

The OBA CLA Reform Committee made two suggestions regarding references. First, they suggested that consideration should be given to “allowing a Reference to be permitted to be obtained on a without notice basis, subject to the right to set it aside by an affected person”.[513] Second, they suggested that “consideration should be given to whether parties can obtain a Judgment [or] Reference ex parte (similar to the order fixing day, time and place for trial under s. 60) and requiring that the order be served on all persons who would be entitled to notice under s. 60(2)”.[514]

When the Review met with the Construction Lien Masters as part of the Consultation Process, the Masters discussed procedural concerns. Specifically, the Masters asked us to consider whether there is a more expeditious way to get to a reference (specifically, whether the judgment has to be a judgment of the judge or the court). The Masters suggested that it could be a judgment of the court, thus allowing the master to refer the matter. In addition, the Masters suggested that we consider whether it is possible to obtain an order for a reference and a trial at the same time.[515] We discussed with the Masters the constitutional concerns raised if a trial is referred to someone who is not a section 96 judge.

4.3  Analysis and Recommendations

As lien actions have grown in size and complexity, the Construction Lien Masters have played an invaluable role in resolving disputes. In Toronto and Ottawa, they have specialized expertise in lien matters and help to reduce the stress on Superior Court judges. Stakeholders expressed support for mandatory case management, and mandatory case management for construction lien matters has been recommended in numerous reports. A mandatory regime could provide immediate support for a backlogged system. Case management is a useful tool in and should be mandatory.

Recommendations

  1. Lien actions should become subject to case management in all regions.

5. Monetary Thresholds and Special Considerations for Home Renovation Projects

All lien actions under the Act are heard in the Superior Court of Justice under the same procedure. While the Court has discretion regarding interlocutory steps, the process may be overly cumbersome for lien claimants where smaller amounts are at issue.

5.1  Context

Many stakeholders expressed concern with the costs associated with pursuing small lien claims in the Superior Court of Justice and being subject to the same procedure as high claims. The purpose of summary procedure under the Act is to keep actions as “summary”, that is, as simple, quick, and cost-effective, as possible. The Rules of Civil Procedure have undergone several changes as a result of studies and proposals by the Civil Rules Committee to streamline the process as much as possible, with proportionality being a significant consideration, and the Act should incorporate the changes that have worked thus far.

Attempts at cost- and time-savings have been implemented in the Rules of Civil Procedure through monetary thresholds by which certain actions will be governed by more “summary” rules. Actions for less than $25,000 are governed by the Rules of the Small Claims Court,[516] and actions for $25,000 to $100,000 are governed by the Rule 76 “simplified procedure” rules. In both of these instances, certain monetary thresholds apply to determine the forum and rules governing the action. There are limits on interlocutory steps, such as time limits on examinations for discovery. The purpose of the simplified rules is to promote the expeditious resolution of disputes and reduce the strain on the judicial system, and the process has been well-received.[517] The effect of establishing monetary thresholds to govern the specific procedure in civil actions has largely been positive, resulting in cost savings and a reduced burden on the courts. At present, these monetary thresholds do not apply to construction lien actions.

a) Small Claims

The Small Claims Court hears civil claims that are under $25,000. The process under the Rules of the Small Claims Court is summary in comparison to the Rules of Civil Procedure, with an aim to keep fees and the allocation of court resources proportionate to the amount of the claim. Several stakeholders expressed support for a procedure where lien claims of under $25,000 would be referred to the Small Claims Court. Stakeholders expressed concern that the cost to pursue small lien claims in the Superior Court is disproportionate to the amount of the claims and takes up valuable court time.

The proposition to refer lien matters to the Small Claims Court is constitutionally challenging as the Small Claims Court is not a “section 96” court under the Constitution Act, 1867. The Law Reform Commission of Nova Scotia (“Commission”) recently considered an identical proposal as part of a review of specific sections of the Builders’ Lien Act.[518]

The Commission noted that provincial legislatures cannot grant authority over lien trials to an inferior tribunal.[519] This proposition stems from the Supreme Court of Canada decision in Attorney General for Ontario and Display Services Co. Ltd. v Victoria Medical, where as noted above, the Court held that only a Superior Court judge has ultimate jurisdiction over a lien matter when considering the jurisdiction of Masters as Masters are not federally appointed.[520] The Commission also noted that the Small Claims Court does not have the capacity to make declaratory orders (this is also the case in Ontario under section 97 of the Courts of Justice Act).

Ultimately, however, the Commission recommended that, similar to the process under section 58 of the Act, Superior Court judges can act as “gatekeepers” and refer lien matters under $25,000 to the Small Claims Court for a determination of issues that are within its jurisdiction, such as issues of liability in contract and tort, determinations of amounts owing, and the allocation of holdback funds.[521] The reference would be made upon an election by any party to the action, subject to an objection by any other party.[522] The Small Claims Court would issue a report for a Superior Court judge to review and either accept, reject, or vary upon an objection by any party.[523]

In Ontario, referring matters involving amounts of under $25,000 to the Small Claims Court could have additional benefits for lien claimants in terms of cost savings. Under section 67(5) of the Act, lien claimants with claims of under $25,000 can be represented by a person authorized by the Law Society Act,[524] that is, a non-lawyer.[525] However, we note that Master Albert held in Hayes v Silva that this does not authorize paralegals to represent lien claimants.[526] This is because under the Law Society Act, Bylaw 4, paralegals do not have standing to appear at the Superior Court of Justice outside of the Small Claims Court. It is unclear whether this is an oversight or an intention to preclude paralegals from providing legal services in small lien claims. If lien claims are heard in the Small Claims Court paralegals would be able to act for lien claimants.

b) Simplified Procedure

The simplified rules were instituted in 1996. In 2007, Justice Osborne led the Civil Justice Reform Project (“Osborne Report”), which made a series of recommendations regarding the Rules of Civil Procedure. Finding that the simplified procedure was working well, the Osborne Report recommended expanding the scope of the simplified procedure. This included increasing the monetary threshold for when claims would fall within the simplified procedure, allowing for limited discovery, and limiting interlocutory appeals.[527]

Under the simplified procedure, claims that fall between $25,000 and $100,000 follow a distinct procedure carved out of the Rules of Civil Procedure. This includes limited discovery, where parties can conduct up to two hours of oral discovery. Examination for discovery by written questions and answers, cross-examinations of affiants, and examinations of witnesses on motions are prohibited.[528] Further, on motions, supporting materials and motion records are not required,[529] obviating the need for voluminous motion materials.

Trials under the simplified procedure are also summary in nature, where evidence is given by affidavit, and the affiant can be examined for no more than ten minutes and cross-examined for no more than 50 minutes. Each party only has 45 minutes to give their oral arguments.[530]

Appeals from interlocutory orders to the Divisional Court require leave to appeal from a Superior Court judge, and the motion for leave is to be made in writing.[531] This follows Justice Osborne’s recommendation that some restriction on appeal rights from interlocutory orders would promote cost-effective litigation.[532] Under the Rules of Civil Procedure, a balance was struck where leave is required to appeal interlocutory orders (as opposed to final orders) but the leave application is to be submitted in writing.

c) Special Considerations for Home Renovation Projects

Stakeholders also expressed concern specifically with home renovation projects, particularly where the amounts in question are less than $25,000. Frequently, the cost of litigation is disproportionate to the amount of the dispute, and many parties in these situations do not understand or apply the Act. These concerns were expressed in Lore v Tortola, where a judge curiously penalized a lien claimant for pursuing the lien in Superior Court despite the lien being worth less than $25,000, preferring the lien claimant to withdraw the lien and commence the action in Small Claims Court.[533]

Construction lien legislation across Canada applies uniformly to all construction projects without exceptions for home renovations and without monetary thresholds. Several U.S. jurisdictions offer additional protections for home owners. While lien rights still attach, separate schemes exist within the lien legislation. In Texas, for example, in a contract between a homeowner and contractor, the courts are not required to order homeowners to pay costs and attorney fees in lien actions.[534] Contractors are also required to deliver a statutory disclosure statement outlining the homeowner’s rights and responsibilities in plain language as well as a list of all subcontractors with their names, addresses, and telephone numbers.[535] Further, before final payment is made to the contractor, the contractor must provide the homeowner with an affidavit stating that all of the subcontractors have been paid in full, or who is still owed money.[536]

In New Jersey, a lien cannot be registered against an owner’s interests in relation to a residential improvement until two conditions are satisfied: (1) Notice of Unpaid Balance must first be delivered within 60 days of the completion of the project; and (2) within ten days of serving the Notice of Unpaid Balance, a Demand for Arbitration must be served. An arbitrator will determine the validity of the lien or any rights to setoff. If the lien is determined to be valid, the claimant then has 10 days to preserve the lien, but this cannot be later than 120 days after completion of the contract.[537]

5.2  Summary of Stakeholder Views

Generally, stakeholders supported implementing changes that would adopt some of the procedures adopted for smaller dollar value matters in the Rules of Civil Procedure, including the following:

  • During the Consultation Meetings, the Advocates’ Society noted that small projects, particularly home renovation projects, take up significant court time. In practice, Masters sometimes move the case to small claims court, on consent of the parties, and bring it back to enforce the judgment. The steps required for these actions can be altered to make the proceedings more summary in nature. To varying degrees, a tiered system for dispute resolution based on monetary thresholds was suggested.[538]
  • The OBA CLA Reform Committee suggested that matters below $25,000 that cannot be resolved automatically should go to the Small Claims Court or alternatively, be exempt from the Act.[539]
  • The Toronto Transit Commission submitted that there should be a streamlined process for small lien claims under $50,000 and subject to a simplified procedure model rather than the small claims model.[540]
  • The Provincial Building and Construction Trades Council of Ontario and the Ontario Association of Architects commented that small claims court would be preferable below a threshold as “a lien under $25,000 is not cost effective”.[541]
  • The Labourers’ International Union of North America, Local 183 suggested that a small claims court procedure could be created in order to resolve construction lien claims under $50,000 with a set of procedures similar to that used in small claims court.[542]
  • On the other end of the threshold discussion, the Thunder Bay Law Association suggested that the Act should adopt the normal litigation process set out in the Rules of Civil Procedure for any claims in excess of $100,000. This submission noted that adopting such a process would avoid the necessity of having to set up a Settlement Meeting to discuss and resolve such issues.[543]
  • We also received a submission from a paralegal who suggested that the Act, or perhaps Bylaw 4 of the Law Society Act, be amended to allow paralegals to represent litigants in lien actions worth under $25,000 as this would be more cost effective for those claimants.
  • With regards to home renovation projects, similar proportionality concerns were raised by the OBA CLA Reform Committee:

    The OBA CLA Reform Committee noted two central concerns with home renovation projects: (1) the failure to maintain holdback and (2) the cost of litigation. With respect to the holdback, it was suggested that it does not make sense to retain holdback due to the relatively lower values of the contracts, and the lack of understanding of the holdback in the sector. The OBA CLA Reform Committee suggested that a radical proposal would be to exempt home renovation projects from the Act. Alternatively, the OBA CLA Reform Committee suggested that a penalty could be imposed on contractors and subcontractors who register liens but fail to maintain holdback from their own subcontractors and suppliers.[544]

    The OBA CLA Reform Committee also noted the disproportionate costs associated with registering and preserving liens in home renovation projects. The OBA CLA Reform Committee suggested that a radical proposal would be to have lien matters below $25,000 to go to the Small Claims Court. While this would cause contractors and subcontractors to lose the security of the lien, this would be tempered by the fact that there would no longer be a holdback requirement. Alternatively, the OBA CLA Reform Committee suggested that matters below $25,000 could be exempt from the Act altogether.[545]

    5.3  Analysis and Recommendations

    Some form of tiered system based on monetary thresholds was suggested by stakeholders, who pointed to the $25,000 threshold as a figure where the cost of the litigation process outweighs the benefits of liening. Stakeholders also suggested a simplified process for smaller claims, but varied as to the threshold from $50,000 to $250,000. If modelled after the Rules of Civil Procedure, three tiers would be established: claims under $25,000, claims between $25,000 and $100,000, and claims over $100,000.

    Considering the concerns raised by stakeholders, the lowest tier would be the most “summary” in nature. Leave of the court would be required for interlocutory steps, and, where granted, production and discovery would be limited in time and scope or such actions could be addressed through the Small Claims Court. Summary trials could also reduce costs and the burden on the courts by reducing the amount of time parties have to examine and cross-examine witnesses and tender oral arguments.

    The Small Claims Court is not a “section 96” court, thus lien actions would have to be referred to the Small Claims Court by a Superior Court of Justice judge. Lien claims of under $25,000 should therefore be deemed at the close of pleadings to be referred to the Small Claims Court for liability issues, amounts owing, and the allocation of holdback to be reported on by a Deputy Judge, with a Superior Court judge having jurisdiction over the matter.

    The next tier would see limited discoveries, while for lien actions worth over $100,000, given the potential complexity of the claim(s) and the inevitable requirement to exchange documents, production and discovery may be required without leave of the court.

    The adopting of “tiers” of claims will resolve the issue of proportionality in home renovation projects without sacrificing the security that the lien provides to those persons who have supplied services or materials to home renovation improvements. In this regard, we adopt the reasoning in the 1983 Report of the Attorney General on the Draft Construction Lien Act to maintain the application of the Act to home renovation projects:

    If one agrees with the view that an owner should be liable to persons who have supplied services or materials to the improvement of his premises, and that the premises should stand as security for their payment, then it is difficult to justify the exemption of a class of owners from such liability. While consumer home improvements variably involve low-dollar amounts when compared to other forms of construction activity, such as major heavy construction projects, they may nevertheless involve substantial amounts of money. The suppliers of services and materials to the home improvement market are particularly vulnerable, because they are often small businesses which lack financial services. Furthermore, the effort to exempt such improvements from the scope of the Act would inevitably result in the drawing of arbitrary distinctions between apparently identical supplies of the same types of services and materials.[546]

    We are of the view that this reasoning still applies today, and the other recommendations made which address proportionality satisfy the concerns raised by stakeholders.

    Recommendations

    1. Regarding small lien claims, including most home renovation claims, of an amount less than $25,000, the Act should be revised to require such lien claims to be referred to the Small Claims Court for a report on liability, amounts owing, and the allocation of holdback by a Deputy Judge, with a Superior Court judge retaining ultimate jurisdiction.[547]
    2. Regarding claims between $25,000 and $100,000, the Act should be revised to provide for a simplified procedure with limited examinations for discovery and a summary trial procedure.

    Chapter 7: Construction Trusts

    1. Overview

    A set of statutory trusts are contained in Part II of the Act. The trust provisions are a separate set of rights, in addition to the lien rights provided in the Act.[548] The trust provisions are essentially designed to keep all funding within the “construction pyramid” until all accounts for work and services are paid in full.[549]

    The trust provisions provide remedies to unpaid contractors, subcontractors and suppliers not only against the corporate owner, contractor or subcontractor but also personally against their directors, officers and any employees or agents who have “effective control” of the corporation or its relevant activities. “Effective control” is a question of fact in every case, and courts are not bound by the form of any transaction. Personal liability for breach of the Part II trust may survive personal bankruptcy, and in extreme cases may give rise to criminal liability for breach of trust under section 336 of the Canadian Criminal Code.[550] Clearly, in cases of defalcation, Part II provides powerful remedies.

    However, as was noted by the Ministry of the Attorney General in 1980, when the Act was last reviewed “[t]he trust rights give some protection to suppliers of services and materials primarily in cases where an owner, contractor or subcontractor becomes bankrupt”.[551] Our review of the trust provisions of the Act focusses on their utility in the context of an insolvency or bankruptcy.

    In particular, where there is an insolvency or bankruptcy, and federal legislation in the form of either the Bankruptcy and Insolvency Act (“BIA”) or the Companies’ Creditors Arrangements Act (“CCAA”) becomes operative, there is a significant risk that trust claims will be treated just like any other unsecured claim such that opportunities for recovery are limited, particularly given the following:

    We note that these issues affect lien claimants as well trust claimants, but for the purpose of this Chapter, given that the main purpose of the trust provisions is to address insolvency and bankruptcy situations, our primary focus is on trust claims and we will discuss the following issues:

    2. Context

    2.1  Trust Provisions in Ontario and Other Jurisdictions

    There are two kinds of trusts, common law trusts and statutory trusts such as those contained in Part II. In order for a common law trust to come into existence, three certainties must exist, namely:

    1. certainty of intention;
    2. certainty of objects; and
    3. certainty of subject matter.[555]

    Statutory construction trusts are distinguished from common law trusts by “the degree of knowledge required to find liability”.[556] In order for a stranger to the trust to be liable for a breach of common law trust it must have knowingly received trust funds or knowingly assisted in a breach of trust.[557] The statutory construction trust, on the other hand, expressly “traces funds into the hands of strangers to the trust”[558] and is not dependent on the application of common law principles.

    2.2  Trust Claims in Insolvency Proceedings

    Before considering the solutions utilized in other jurisdictions to address the problems encountered in respect of statutory trusts, it is necessary to review the relevant case law.[559]

    The main concern expressed by stakeholders about the current trust provisions in Part II of the Act is with respect to their enforceability in the event of the insolvency and/or bankruptcy of a payer (an owner, contractor or subcontractor).[560]

    As noted by Justice Morawetz in the Comstock case (a CCAA proceeding):

    This motion underscores the inherent difficulty which surrounds the attempted reorganization of certain entities, in particular, real estate companies and construction companies. By definition real estate companies and construction companies operate on a project-by-project basis. In many cases, each project is the subject of specific- purpose financing. In the case of real estate companies, secured creditors vary on a project-by-project basis. With respect to construction companies, creditors, including construction lien trust claimants, vary on a project-by-project basis and the assets or trust funds also vary on a project-by-project basis. The legal rights of these creditors vary to such a degree that quite often they cannot be grouped in one class. The community of interest is often lacking, resulting in fragmented interests.[561]

    The Act is provincial legislation which falls under the Province’s jurisdiction over property and civil rights. Given the doctrine of constitutional paramountcy, in the case of an operational conflict between provincial legislation, i.e. the Act, and federal legislation, including the BIA, the federal legislation will prevail. As long as all the parties involved in a construction project remain solvent, there is no issue about the enforceability of the trust provisions of the Act. But when there is an insolvency and the scheme of the priorities set out in the BIA is applied, operational conflicts may be found to arise.

    The BIA governs the distribution of the estates of bankrupt entities. The scheme imposed under the BIA can be generally summarized as follows:

    The Bankruptcy and Insolvency Act incorporates numerous provisions that determine the priority of payments to claimants in a bankruptcy. In the most general terms, the scheme is:

    1. Under s. 67(1), only “property of the bankrupt” is available for distribution to any class of claimants. Under s. 67(1)(a) property “held by the bankrupt in trust for any other person” is not considered to be property of the bankrupt, and so is not available to the creditors of the bankrupt.
    2. Under s. 136(1), the scheme of distribution is made “subject to the rights of secured parties”. Secured parties are thus entitled to enforce their security in accordance with provincial law, without regard to the scheme in the Bankruptcy and Insolvency Act.
    3. Section 136 next lists, in order of priority between themselves, a dozen categories of claims that have priority over general unsecured claims…
    4. Finally, s. 141 provides that all other claims will be payable rateably, subject to a few specific statutory exceptions.[562] [Emphasis added]

    As noted recently by the Alberta Court of Appeal in Iona Contractors Ltd v Guarantee Company of North America:

    The categorization of a claim for the purposes of relative priority is a matter of federal law. Thus, the provinces cannot define what is a ‘trust’ or a ‘secured party’ for the purposes of bankruptcy law; which claims are included in these various categories is a matter of federal law. This ensures the uniformity of bankruptcy law across Canada.[563]

    In 1995, in Husky Oil Operations Ltd. v Minister of National Revenue[564], the Supreme Court of Canada rejected a broad “bottom line” approach pursuant to which any provincial law that affected a final result in bankruptcy would create an operational conflict and also rejected a narrow “jump the queue” approach pursuant to which an operational conflict could only be said to arise if there was a “manifest intent” to change priorities in bankruptcy. Instead, the Court set out the following propositions to be applied:

    1. provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s. 136(1) of the Bankruptcy Act;
    2. while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred section 136(1) of the Bankruptcy Act determines the status and priority of the claims specifically dealt with in that section;
    3. if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, an unacceptable situation; […]
    4. the definition of terms such as "secured creditor", if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for purposes of the Bankruptcy Act.
    5. in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; [and]
    6. there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.[565] [Emphasis Added]

    These principles definitively establish when provincial legislation will be found to be inoperative, therefore “[w]hether any provincial scheme is in operational conflict with the bankruptcy regime must be determined by examining the purposes and effects of the provincial legislation within its statutory context.”[566] In considering changes to the existing trust provisions of the Act, it is therefore important to understand how the courts have applied these propositions.

    Regarding provincial statutory trusts, in British Columbia v Henfrey Samson Belair Ltd.[567] the Supreme Court of Canada considered the exclusion of trust funds from the bankrupt’s property under section 47(a) of the Bankruptcy Act (now section 67(1) of the BIA, referred to above in bold). This section exempts trust property in the hands of the bankrupt from distribution to creditors “giving trust claimants absolute priority”[568] The question before the court was whether or not a statutory trust established by provincial legislation should be considered to be a trust within the meaning of what is now section 67(1) of the BIA. The Court noted that the intention of parliament in enacting this provision was “to permit removal of property which can be specifically identified as not belonging to the bankrupt under general principles of trust law from the distribution scheme established by the Bankruptcy Act”[569][emphasis added]. Therefore, the exception set out in section 67(1) applies to statutory trusts established by provincial legislation only if such trusts bear the attributes of a common law trust.[570] The attributes of a common law trust include establishing the three certainties being:

    1. certainty of intention,
    2. certainty of subject matter (identification of the property subject to the trust), and
    3. certainty of object.[571]

    The Court also held that funds that are deemed to be trust funds by statute may lose their character as trust funds if they become untraceable and may become part of the estate to be distributed to creditors, in accordance with the priority regime under the BIA.[572]

    In the 2005 decision of GMAC Commercial Credit Corp. – Canada v TCT Logistics Inc.[573], the Ontario Court of Appeal addressed whether or not provincial statutory trust funds were trust funds within the meaning of section 67(1)(a) of the BIA and whether or not these statutory trust funds constituted property available for distribution to creditors in the bankruptcy. The Court invoked the principle of paramountcy and relied on the Henfrey Samson and Husky Oil cases to find that even if the provincial legislation created a deemed trust in favour of the carriers, provincial legislation “cannot operate to reorder the priorities in bankruptcy” and to find that section 67(1)(a) of the BIA did not exclude “funds that are subject to a deemed trust but are not held in accordance with general trust principles”.[574] In determining that the funds at issue did not satisfy the common law test for trusts, the Court found that “once the purported trust funds are co-mingled with other funds, they can no longer be said to be effectively segregated for the purpose of constituting a trust at common law”.[575]

    In another 2005 Ontario Court of Appeal decision, Graphicshoppe Ltd., Re,[576] the issue under consideration was whether or not the bankrupt’s employees could recover their pension contributions which Graphicshoppe had co-mingled in its single general bank account. The Court of Appeal, relying on Henfrey Samson, held that, once the funds had been co-mingled in Graphicshoppe’s general account and converted into other property by the company, they were no longer traceable and had lost their character as trust funds and therefore could not be excluded from the property of the bankrupt under s.67(1)(a) of the BIA. The Court stated as follows:

    For present purposes, I am prepared to accept that Henfrey Samson falls short of holding that co-mingling of trust and other funds is, by itself, fatal to the application of s. 67(1)(a) of the BIA. Once however, the trust funds have been converted into property that cannot be traced, that is fatal. And that is what occurred here.[577]

    In the 2014 Ontario Superior Court case of Royal Bank of Canada v Atlas Block Co.,[578] the Court considered the issue of whether or not Part II trust funds lose their character as trust funds when they are not segregated but are co-mingled, in the context of BIA proceedings. A court appointed receiver in a bankruptcy sought directions on whether or not a supplier of materials had a trust claim under the Act. The court noted that section 67(1)(a) does not “extend to assets subject to a deemed trust created by provincial statute where such deemed trust does not otherwise have all the attributes of a valid trust at common law”.[579] The court examined the three certainties described above (i.e. certainty of intention, certainty of subject matter and certainty of object). Given that funds from construction projects were co-mingled with funds from other sources, there was no certainty of subject matter and “the mere fact that it might be possible to trace the funds for products incorporating Holcim materials [a supplier of cement powder to Atlas Block] to particular construction projects does not change this. Once co-mingling has occurred, that is the end of the matter.”[580] Accordingly, the priorities under the BIA governed the disposition of the funds.[581]

    Recently, the Supreme Court of Nova Scotia considered the trust provisions of the Nova Scotia Builders’ Lien Act in the context of a general contractor’s bankruptcy in Kel-Greg Homes Inc (Re)[582] and reached a different conclusion from that reached in Atlas Block. In Kel-Greg, the Court held that, despite the fact that the trust funds were co-mingled with other monies; the funds had nevertheless remained traceable and had not lost the required certainty of subject matter. As the Court was able to trace some of the funds to deposits made by one residential housing unit owner, it found the amount of those deposits to be excluded from the property of the estate in bankruptcy.[583] Moreover, relying on the principles enunciated in Re Hallett’s Estate[584] namely, that a trustee may be presumed to have spent all its own money first before spending any trust monies in its possession, and that the onus is on the trustee to rebut such presumption by identifying its own funds, the court concluded that the entire sum in the bank account of the general contractor retained their trust character and were excluded from property of the trustee in bankruptcy.[585]

    The Alberta Court of Appeal also recently considered the interaction between the Alberta trust provisions and federal bankruptcy legislation in its decision in Iona Contractors Ltd. (Receiver of) v Guarantee Co. of North America.[586] Notably, the Supreme Court of Canada dismissed leave to appeal in this case on April 14, 2016. Under section 22 of the Alberta Act, once a certificate of substantial completion is issued, any “payment by the owner” is subject to the trust. The owner’s primary obligation at that stage was noted to be a chose in action which was stated to be the subject matter of the trust. It was further found that there was no deliberate attempt to reorder priorities in bankruptcy, that the province was not trying to do indirectly what it could not do directly, and that the trust provisions were “merely a collateral part of a complex regime designed to create security for unpaid contractors.”[587] Therefore, the court concluded that there was no operational conflict.

    In Iona, the Alberta Court of Appeal commented on the Atlas Block decision and similar decisions[588] noting that in such decisions, the courts have essentially read the Supreme Court of Canada authorities as “essentially holding that no statutory trust will be effective after bankruptcy”.[589] As noted by the Alberta Court of Appeal, in Husky Oil and Henfrey Samson Belair, this in fact was not the approach taken by the Supreme Court of Canada. To the contrary, the Supreme Court “essentially recognized that some provincial statutory trusts could be effective.”[590]

    On the facts of Iona, because the trust clearly existed before the bankruptcy of the contractor and the trust funds were quantified and traceable in the hands of the owner (the owner had segregated the trust funds into a separate account), the trust was not defeated by the bankruptcy and the funds were not available to the trustee in bankruptcy for distribution to secured creditors under the BIA. In the circumstances trust provisions of the Alberta Act were found to meet the requirements of a common law trust, including the requirement of certainty of subject matter.

    In summary, the difficulty in reconciling cases like Iona and Kel-Greg on the one hand, and as Atlas Block, on the other, creates uncertainty. The uncertainty has been alleviated somewhat given that leave to appeal to the Supreme Court of Canada was denied in Iona such that it has arguably been established that a provincial statutory trust can be effective in the face of a bankruptcy proceeding, if there is no operational conflict with insolvency legislation. However, there still remains a significant practical concern as to whether or not a provincial statutory trust will satisfy the three certainties necessary to establish a common law trust, particularly the certainty of subject matter requirement. A possible solution to address this concern about certainty of subject matter, which would have to be adopted by the legislature, was indirectly suggested by the Court in the Atlas Block decision as follows:

    In Ivaco Inc., Re […] the Court of Appeal for Ontario dealt with a deemed trust under the provincial pension benefits legislation. The Court held that a deemed trust “is, in a sense a legal fiction”. Only a trust at common law is exempt from the bankrupt’s estate. The designation “deemed trust” does not “by itself create a true trust. If the province wants to require an employer to keep its unpaid contributions to a pension plan in a separate account it must legislate that separation. It has not done so”.[591] [Emphasis added]

    Clearly, this is a reference to the possible implementation of legislation that requires parties to open project trust accounts or project bank accounts, a potential solution that will be considered below and has been implemented in other jurisdictions.

    A different possible solution would be to accept that the risk of operational conflicts will inevitably call into question any attempt to enforce a provincial statutory trust regime, given the paramountcy doctrine. If an alternative mechanism of protection is required for subcontractors and suppliers in an insolvency situation, mandatory surety bond protection for subcontractors and suppliers is a potential solution.

    The insolvency issue affects lien claimants, as well as trust claimants, given the potential for operational conflicts between insolvency legislation and lien legislation. Lien claimants, like trust claimants are subject to stay provisions that preclude lien claimants from commencing actions absent court approval and must also cope with the Canada Revenue Agency’s super-priority and with the super-priority of post-filing debtor-in-possession financing or receiver’s interim financing.

    The Comstock case addressed a situation where the court adopted a unique mechanism to address the rights of lien claimants in the context of a CCAA proceeding. When Comstock applied for protection under the CCAA, it was crucial that at no time the flow of funds be stopped on Comstock’s ongoing key projects, otherwise any hope of realizing amounts due to Comstock and, by extension, the creditors’ recovery prospects, would have been jeopardized.[592] To that end, the Court granted an Initial Order which did not exclude the preservation and perfection of construction liens from the application of the CCAA automatic stay of proceedings. Soon after the Initial Order was issued, liens were preserved on one of Comstock’s projects and the lien claimants were required to attend at court to explain why they had preserved liens in contravention of the Initial Order. The problem was that the rights of lien claimants could not be ignored, but at the same time, liens could not be registered because if they were registered funds would have stopped flowing and Comstock’s projects would have come to a halt. The monitor’s solution, as ordered by the Court, first consisted of an Amended and Restated Initial Order which expressly excluded the registration of liens under the Act, the Manitoba Act, the Alberta Act or the B.C. Act.[593] Then, on August 7, 2013, the court issued a Lien Regularization Order, which, in effect, entirely circumvented the application of the Act and created an alternative to the statutory lien remedy by giving lien claimants a court ordered charge in lieu of their liens. [594] This solution was unique and risky for the lien claimants but commentators have taken the position that it was an “elegant solution”, and the best chance the lien claimants had of making any recovery.[595] Although criticized by some, the monitor’s solution in Comstock was a practical one which provided for the orderly administration of Comstock’s estate and permitted Comstock to continue its operations long enough to complete its projects.[596]

    In any event, it is clear that there is a need for a solution to the insolvency issue. In considering potential solutions below, we have evaluated whether these solutions are designed to fit within the context of the Act (and are not a one-off solution as was adopted in Comstock), do not create an operational conflict with federal insolvency legislation, and are not unduly onerous for the construction industry.

    2.2.1  The Trust Regime in Ontario
    2.2.1.1  The Trust Provisions of the Act

    As noted above, the trust obligations of the Act are set out in Part II of the Act and provide remedies that are in addition to the lien rights provided in the Act, as noted above.[597] There are three statutory trusts created in Part II as follows:

    (a) The Owners Trust

    Section 7(1) states as follows:

    Amounts received for financing a trust

    7. (1) All amounts received by an owner, other than the Crown or a municipality, that are to be used in the financing of the improvement, including any amount that is to be used in the payment of the purchase price of the land and the payment of prior encumbrances, constitute, subject to the payment of the purchase price of the land and prior encumbrances, a trust fund for the benefit of the contractor. R.S.O. 1990, c. C.30, s. 7 (1). [Emphasis added]

    According to section 7(2) of the Act, the owner has a trust obligation in respect of amounts payable on a certificate of payment “that applies even when the money is not borrowed or acquired for the purposes of financing the improvement.” This section is “aimed at those situations where the owner is financing the improvement out of general revenues” and the trust arises where “a payment certifier certifies an amount payable under the construction contract, and attaches to an amount in the owner’s hands or which the owner receives subsequently that is equal to the amount so certified”.[598]

    Section 7(3) creates a similar trust over monies in the owner’s hands “after a certificate of substantial performance has been issued or a declaration of substantial performance has been made by the courts.”[599]

    Section 7(4) provides that an owner in possession of trust funds shall “not appropriate or convert any part of a fund to the owner’s own use or to any use inconsistent with the trust until the contractor is paid all amounts related to the improvement owed to the contractor by the owner”.[600]

    (b) The Contractor’s and Subcontractor’s Trusts

    In relation to the contractor’s and subcontractor’s trust, section 8(1) provides as follows:

    8. (1) All amounts,

    1. owing to a contractor or subcontractor, whether or not due or payable; or
    2. received by a contractor or subcontractor,

    on account of the contract or subcontract price of an improvement constitute a trust fund for the benefit of the subcontractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor or subcontractor. R.S.O. 1990, c. C.30, s. 8 (1).[601]

    Section 8(2) provides as follows:

    (2) The contractor or subcontractor is the trustee of the trust fund created by subsection (1) and the contractor or subcontractor shall not appropriate or convert any part of the fund to the contractor’s or subcontractor’s own use or to any use inconsistent with the trust until all subcontractors and other persons who supply services or materials to the improvement are paid all amounts related to the improvement owed to them by the contractor or subcontractor.

    (c) The Vendor’s Trust

    Section 9(1) creates a trust for the benefit of the contractor where an owner’s interest in a premises is sold by the owner, subject to the deduction of the reasonable expenses arising in respect of the sale and the amount paid by the vendor to discharge any existing mortgage indebtedness.[602]

    There are only three ways to properly manage statutory trust funds:

    1. Discharge: section 10 allows a statutory trustee to “discharge” the trust obligation. In particular, section 10 “allows a trustee to discharge, on a dollar for dollar basis, its obligations to ‘all beneficiaries of the trust by paying ‘a person’ who the trustee is liable to pay for services or materials supplied to the improvement”.[603] This section is to be read in conjunction with section 85 which “requires a rateable distribution in the case of an insolvent payer”. The sections, read together, make it clear that “a trustee’s obligation is, in its simplest terms, to pay to the person it owes the amount owing on the improvement, and that if that is done without any actual notice of a possible breach of trust by the payee, the trustee will have discharged its duties”.[604]
    2. Reduction by substitution: Section 11 allows a statutory trustee to “reduce” the trust fund. Specifically, subsection 11(1) allows a trustee to “‘retain’ out of trust funds an amount equal to any non-trust monies that the trustee has borrowed or otherwise used to pay for services or materials supplied to the improvement.” Further, subsection 11(2) allows a trustee “not only to ‘retain’ but also to ‘apply’ trust funds to repay borrowed money otherwise used to pay beneficiaries”.[605] Such loans must be specific to the project and must be repaid by the statutory trustee not the creditor.[606]
    3. Retainage for set off: section 12 allows a statutory trustee to “retain” trust monies. Set-off by a trustee is provided for under section 12, which states as follows:
      Subject to Part IV, a trustee may, without being in breach of trust, retain from trust funds an amount that, as between the trustee and the person the trustee is liable to pay under a contract or subcontract related to the improvement, is equal to the balance in the trustee’s favour of all outstanding debts, claims or damages, whether or not related to the improvement. R.S.O. 1990, c. C.30, s. 12.

    The effect of this section is that “the value of any trust claim by a payee will be limited to the net amount owing by the payer after all set-offs have been exercised”.[607]

    The court considered the right of set-off in the decision of Datasphere Sales Ltd. v Universal Light & Power Corp (1991)[608] and held that there is “no right in [a trustee] put some or all of the [trust] funds to general use because in its view, in the light of claims it has or proposes to assert against the beneficiary-contractor, the ultimate arithmetical calculations will demonstrate that the trust moneys owing net out at a balance less than the gross total of the funds retained. The word used in section 12 is ‘retain’ not ‘spend’”.[609] Therefore, a trustee is obligated to retain the funds in relation to which a right of set-off is claimed.

    Similarly, in Arborform Countertops Inc. v Stellato (1996)[610] the Court held that that the intent of section 12 is to “is to allow the trustee to retain moneys alleged to be for set-off, but not to expend them”.[611] On the facts of the case, the defendants had spent the trust funds, the Court held that they were precluded from advancing the defence of set off given that the Act “prohibit[ed] them from doing so”.[612]

    As noted above, there is a remarkably powerful statutory remedy for breach of trust found in section 13(1) which states as follows:

    13. (1) In addition to the persons who are otherwise liable in an action for breach of trust under this Part,

    1. every director or officer of a corporation; and
    2. any person, including an employee or agent of the corporation, who has effective control of a corporation or its relevant activities,

      who assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust by the corporation is liable for the breach of trust. R.S.O. 1990, c. C.30, s. 13 (1).[613]

    Section 13(2) allows the court to pierce the corporate veil in that it permits the court to “disregard the form of any transaction and the separate corporate existence of any participant”.[614] Section 13(3) and 13(4) provide for “mandatory joint and severable liability, and for equal contribution between liable parties, unless the court considers equal contribution to be unfair.”[615]

    Duncan Glaholt in The 2016 Annotated Construction Lien Act notes that several basic principles have been established in relation to breach of trust under section 13 of the Act. Specifically, no mens rea (i.e. proof of intent) is required to establish personal liability under this section. The standard is simply one of reasonableness and whether the defendant knew or ought to have reasonably known of a breach of trust.[616]

    Opec Acoustics & Drywall Ltd v Kascop Corp (1997)[617] is instructive in this regard:

    An allegation of malfeasance such as fraud, misrepresentation, malice or malicious intent is not a prerequisite to establishing a “breach of trust” under the Construction Lien Act. A mere failure to account for funds to all subcontractors and other persons who supplies services or materials to the improvement for funds received prior to any appropriation or conversion of any part of the funds to the contractor's or subcontractor's own use or to any use inconsistent with that trust, is in itself a “breach of trust”. The allegation of such failure to account is sufficient to validate pleadings in relation to a “breach of trust” created by the Construction Lien Act without anything else. [Emphasis added]

    Therefore, while the current provisions of the Act do not explicitly require the creation of a separate bank account for trust funds, a failure to “account for” such funds will be found to be a breach of trust.

    2.2.1.2  Ontario’s Rejection of Holdback Trust Accounts in 1983

    The creation of separate holdback trust accounts was explicitly considered by the Ministry of the Attorney General in 1980 and, in fact, was recommended in the Discussion Paper on the Draft Construction Lien Act prepared by the Ministry of the Attorney General in November 1980.[618] The proposed provision provided that the owner was to pay the holdback into a joint trust account on projects where the contract price was $150,000 or more. The draft provision stated that this proposed joint trust account:

    1. shall be opened and held in the joint names of the owner and the contractor as trustees;
    2. may be maintained at any chartered bank, rust company or other financial institution;
    3. shall be an interest bearing account;
    4. shall be held in trust for those who have a charge upon the holdback;
    5. shall require the signatures of both trustees for payment out of the account unless otherwise ordered by the court.[619]

    The Ministry of the Attorney General identified the policy considerations behind the proposed holdback trust account provisions as follows:

    Since before the turn of the century, owners have been required to maintain a holdback. However, the experience of the construction industry has been that the holdback is usually more notional than real. Only rarely is an actual holdback fund set aside by the owner. In most cases, the owner will deduct the holdback percentage from his payment, but he will not put this money aside to satisfy any lien claims. When such claims are made, it is often discovered that there is no money available to satisfy the claims. Although the property can be sold, this process is lengthy and cumbersome. The interest on prior mortgages will usually eat away any extra value in the project, depriving the suppliers of services and materials of the amount that should have been set aside to satisfy their claims.

    (…)

    The holdback does not belong to the owner, but rather, belongs to those who have contributed services and materials to the improvement. Its purpose is to provide security to subcontractors and labourers, not to assist the owner in the financing of his endeavours. It has become clear that for the holdback to provide the protection which it was intended to achieve in large projects, provision must be made for the security of these funds.[620]

    Subsequently, the Attorney General’s Advisory Committee on the Draft Construction Lien Act “strongly recommend[ed] the rejection” of the proposal to mandate holdback trust accounts which it had identified, at the time, as “the most controversial proposal contained in the Discussion Draft”[621] [emphasis added]:

    In the opinion of the Committee, the costs of the joint trust account proposal would far exceed its benefits. The scheme would have provided no practical protection on contracts for less than $150,000, yet it is often on these contracts that the holdback is least secure. The scheme would have imposed a very high cost on the industry. The owner would often have to borrow the money to put into the joint trust account and in many cases, this money would have been borrowed from the same bank or trust company in which it was deposited. (…) In addition, the scheme would have imposed significant administrative costs. A separate joint trust account would have been required for each contract. In the case of many large owners they would have been required to open hundreds of such accounts every year. The cost of opening, controlling and closing these accounts would have been very high. But ironically, these are precisely the same owners who are the least likely to default in maintaining the holdback. As a result, the total cost of this proposal would have greatly exceeded the cost which the risk of default on the holdback forces on the industry. Finally, the scheme was incompatible with some common forms of project organization, such as construction and project management. Thus it would have severely restricted the ability to use these systems of organization.[622] [Emphasis added]

    As can be seen from the above bolded references, it was primarily the costs and administrative burden that motivated the recommendation to reject the joint trust account.

    Although the Advisory Committee did not recommend the introduction of mandatory holdback trust accounts, it recognized the importance of somehow protecting the holdback. To protect the holdback, changes were made to the statutory scheme regarding relative priorities between the interests of mortgagees and lien claimants.

    2.2.2  Trust Regimes in Other Provinces

    There are no trust provisions in Quebec, Newfoundland and Labrador, the Northwest Territories and Nunavut, P.E.I. and the Yukon. Below, we address specifically those provinces where separate holdback trust accounts have been put in place.

    2.2.2.1  British Columbia

    The B.C. Act requires that the owner establish a separate holdback account.[623] The features of the British Columbia holdback account regime are as follows:

    1. The regime applies to private owners (not public owners) and to construction contracts where the value of the work and materials is more than $100,000.[624]
    2. The owner must open a separate account at a savings institution for each contract under which a lien may arise and deposit in that account all holdback amounts retained by the owner pursuant to section 4(1) of the B.C. Act.[625] It has been noted that the adoption of multiple accounts regime was intended to facilitate the owner’s administrative obligations.[626]
    3. The amounts to be deposited into the holdback account are held in trust for the contractor from whom the holdback was retained and cannot be paid out without the agreement of all of the persons who administer the account (i.e. the owner and the contractor).[627]
    4. Unless the parties otherwise agree, the interest on the holdback account accrues to the owner during the holdback period, and after the expiration of lien rights it accrues to the credit of the contractor from whom the holdback was retained.[628]
    5. An owner’s failure to pay the holdback into the account as required constitutes an act of default, and the contractor, upon 10 days written notice, is entitled to suspend the work for the duration of the default.[629]
    6. The administrator of a holdback account can apply to the court for directions on the administration of the account, and the court is empowered to make orders including those for payment into court for the removal of claims of lien, or those for payment to a lien holder.[630]

    Construction law practitioners in British Columbia have noted that section 5 of the B.C. Act was enacted as a result of a large number of owner foreclosures in insolvency proceedings, which left contractors and trades with no chance of recovery. Section 5 was therefore intended to provide the additional protection and better opportunities for recovery afforded by a holdback fund as opposed to a notional fund. Some commentators have noted, however, that in practice holdback accounts are, in some cases, not being established.[631] These commentators have noted that in order to “avoid administrative complications and sometimes simply because of a reluctance to advance and relinquish sole control over holdback funds, some owners decline to establish holdback accounts.”[632]

    One of the reasons for such non-compliance is that the only remedy available to a contractor in the event that an owner fails to open the required holdback account is the suspension of the work, after providing notice. Generally, contractors are adverse to suspending their work even when they are not being paid, and are even more reluctant to do so if they are being paid and the only remedy being sought is to enforce the owner’s obligation to pay funds into a holdback account.

    2.2.2.2  Saskatchewan

    The Saskatchewan Act provides that every owner shall establish a holdback trust account to be administered jointly with the contractor, as trustees in relation to which:

    1. All amounts deposited into the holdback trust account must be held in trust for all those persons who have a lien.[633]
    2. Where there is more than one contract for the same improvement, the owner has to maintain a single holdback trust account administered jointly by the owner and one other trustee.
    3. The other trustee must be one of the contractor, a lawyer, an architect or engineer (who is not the payment certifier), a member of the accounting profession, a person with experience in the construction industry, or a trust or loan corporation.[634]
    4. All payments out of the holdback trust account require the signatures of both trustees.[635]
    5. A trustee may apply to the court for directions respecting the administration of the trust.[636]
    6. Interest on holdback trust accounts accrues in accordance with the agreement between the owner and contractor, and in the absence of an agreement, to the owner.[637]

    The provisions in relation to holdback trust accounts do not apply to the Crown where the Crown is an owner; to a contract for services or materials provided to a house, to repairs or renovations to a four-plex or condominium unit; or to a contract with an architect or engineer.[638]

    We have been advised by practitioners in Saskatchewan that, as is the case in British Columbia, in practice the requirement to maintain joint holdback accounts is sometimes not observed. Reasons cited for the failure to comply with this requirement were the limited mechanisms for enforcement under the legislation and the cumbersome administrative burden associated with operating such accounts.

    2.2.3  Trust Regimes in Other Countries.
    2.2.3.1  The United States

    A number of U.S. states have enacted statutory construction trust regimes.[639] The scope of these statutes varies broadly. In some states, trust fund legislation only applies to private projects,[640] some exclude residential projects,[641] some only apply to public works[642], and some apply to both public and private projects[643] (or separate statutory regimes are created for public and private projects)[644].

    In some states, violation of the statutory trust requirements amounts to theft and/or may give rise to civil and criminal liability with criminal penalties ranging from fines to imprisonment.[645] By way of example, in Michigan any contractor or subcontractor engaged in the building construction business, who, with an intent to defraud, retains or uses the proceeds of any payment made to him, for any other purpose than to first pay laborers, subcontractors and materialmen, engaged by him to perform labor or furnish material for the specific improvement, is guilty of a felony.[646]

    In New York, the legislative trust regime is particularly interesting and merits more detailed examination.

    (a) The New York Model

    The New York Lien Law[647] applies to all projects for improvements to real property and to the construction of public improvements. It applies to owners, contractors, and subcontractors as trustees of funds received and, as well, to contractors, subcontractors and vendors as beneficiaries of trust funds.[648] Article 3-A of the New York Lien Law creates a statutory trust over certain funds (i.e. funds that have been received for or in connection with an improvement to real property). If the trustee (i.e. an owner, contractor or subcontractor, depending on the circumstances) diverts assets from a trust, then that trustee incurs liability to any parties that hold liens or had contracted directly with that trustee.[649] In extreme cases, diversion of trust assets can constitute larceny under § 79-a(1).[650]

    The trust regime under the New York Lien Law includes the following:

    1. Funds received by an owner (and associated rights of action) in connection with each improvement are each a separate trust with the owner as trustee. The same applies to funds received by a contractor or subcontractor in connection with each contract or subcontract;
    2. Funds received by a trustee (for or in connection with an improvement of real property or in relation to a public improvement) constitute the assets of the trust;
    3. The trust arises whether or not a covenant declaring or acknowledging the trust has been executed;[651]
    4. Persons having claims for payment of amounts held in trust are beneficiaries to the trust whether or not they have filed or had the right to file a lien;[652] and
    5. Any transaction by which a trust asset is paid, transferred or applied for any other purpose other than a purpose of the trust is a diversion of trust assets regardless of the existence of trust claims. If the diversion occurs by a voluntary act of the trustee or by his consent, then such act or consent constitutes a breach of trust.[653]

    The statute also provides for standard bookkeeping practices that, if followed, are a prima facie defence to the breach of trust action that may result from a diversion of trust assets.[654] The key elements of these standard bookkeeping practices are as follows:

    1. All trust funds are deposited in the trustee’s name (i.e. as trustee);
    2. The trustee is not required to keep the funds in separate bank accounts for each trust provided that the trustee’s books and records of account clearly allocate the funds deposited in the general account to each individual trust;
    3. The trustee is required to keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and
    4. The books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.[655]

    Case law has established that a trustee under the New York Lien Law Article 3-A has the same basic fiduciary duties and loyalties as a trustee of any trust, including:

    A duty of loyalty to the beneficiaries, a duty to keep and render accounts for the beneficiaries, and keep trust funds separate from his own; a duty to furnish beneficiaries information[656] and to permit them to examine the trust accounts; a duty to take proof of the trust assets and to enforce claims on behalf of the trust.[657]

    It has been recommended by some stakeholders that Ontario adopt a regime similar to that in place in New York, as will be discussed in the analysis and recommendations section below.

    2.2.3.2  The U.K.

    In the U.K., a concept currently being explored is that of “project bank accounts”. These accounts are either in place or being tested as part of pilot projects throughout the U.K. They are currently only applicable to public construction contracts.

    Because there has not yet been any judicial consideration of the relationship between project bank accounts and bankruptcy proceedings, Richard Davis has outlined how existing bankruptcy and trust concepts might apply to a project bank account, stating as follows:[658]

    If the trust account has not been funded at the date of the contractor’s administration or liquidation, then the certified sum will remain due to the contractor […]. It would be payable in full to the relevant insolvency practitioner for distribution to creditors subject to the employer’s contractual set-off rights on termination and any conditions imposed by the court.

    If the account has been funded at that time and proportions in the fund have been identified by the authorization [i.e. the agreement between the Owner and the general contractor for the disbursement of funds from the account] but the process of paying out has not yet started or is not yet completed, then the amount standing to the credit of the account is held in trust and is not included in the contractor’s property. The trustees can administer the trust without reference to the insolvency practitioner. […]

    If the contractor’s insolvency intervenes after the payment in, but before the authorization has finally identified the proportions owned by the beneficiaries, there are various possibilities. The first is that the trust fails and the money standing to the credit of the account is returnable to the employer […] by resulting trust. Second, the fund would be distributed equally, but this seems inequitable as the trust was intended as the means of payment for work done, and equality would give some beneficiaries a windfall at the expense of others. Third, the court could order a distribution on the basis of the breakdown attached to the certificate or an authorization prepared in draft […]. Of these options, the third is most likely. The trustees would be under a duty to do the best they could to identify the beneficiaries’ respective interests.

    Should the trust fail, the named suppliers might argue that the PBA ought to continue as an escrow agreement on the same terms.[659]

    The U.K. Government Construction Board decided that central government departments, their agencies, and non-departmental public bodies would adopt project bank accounts unless there were compelling reasons not to do so.[660] In July 2012, the Cabinet Office published a PBA Briefing Note[661] and a PBA Guide.[662]

    According to the PBA Briefing Note, by utilizing project bank accounts payments to small and medium sized enterprises working on government projects were to be paid within five days or less from the due date of payment (from the delivery of a payment claim under the applicable prompt payment legislation).[663]

    Project Bank Accounts were intended to “revolutionize the way the construction supply chain gets paid, in an industry where around 99 per cent of businesses are SMEs (small and medium sized enterprises)”. It was suggested that “[s]upply chain members in PBA projects [would] no longer have to wait for higher tier contractors to process their payment; instead they [would] receive it directly through a bank account specific to the project they are working on.”[664]

    The PBA Guide explains that there are two approaches to the implementation of project bank accounts - the “dual authority” approach and the “single authority” approach. Respectively, these approaches refer to whether or not both the owner and the general contractor, or only the general contractor, can instruct the bank to distribute the authorized amounts to the supply chain from the project bank account.[665]

    The PBA Guide also explains that the Government Construction Board’s Fair Payment User Group has agreed to minimum PBA requirements, which include linking the trust account to a Trust Deed, a dual agreement between the parties before a payment can be made out of the account, informing the bank of the existence of the Trust Deed, making transactions easily available to the client for review no more than one day after a payment is made, having no overdraft facility on the account, only making payments to the contractor and other named beneficiaries, and informing all trust beneficiaries and trustees by the contractor of any changes to the PBA terms and/or payment authorisations.[666]

    The use of project bank accounts for construction projects has increased since their introduction in 2007. By way of example, Highways England has used the PBAs model and delivered over £4.5 billion of government contracts through PBAs in 2013-14. As of April 2015 there are some 35+ Project Bank Accounts in operation across a suite of Highways England major schemes and maintenance contracts.[667]

    2.2.3.3  Northern Ireland

    In Northern Ireland, project bank account trials are underway for selected public projects. A Procurement Guidance Note[668] published by the Department of Finance and Personnel in 2014 (and reissued in 2016) explains that project bank accounts are to be implemented in government construction contracts that have an estimated value in excess of £2 million, and contain a significant contracting element.[669]

    The Procurement Guidance Note explains that there are three key decisions that have to be made with respect to the operation of the PBA:

    5.2 Who will be the trustees of the PBA?

    The trustees control the money within the PBA and may direct its use as they wish. To protect the funds in the PBA from inappropriate use, there will be a trustee from the Contracting Authority and a trustee from the Main Contractor.

    5.3 Who will authorize payments?

    To protect the funds in the PBA, payments made from the PBA will require authorisation from both the Contracting Authority’s representatives and the Main Contractor’s representatives.

    5.4 Who will set up the PBA?

    Opening a PBA can require additional time if the agreement for a facility has not already been arranged. To avoid delays, the PBA facility provision should be agreed by the Contracting Authority prior to completion of the tender process.[670]

    The Procurement Guidance Note explains that project bank accounts only apply to first tier subcontracts. However, the head contractor and first tier subcontractors may agree to the voluntary use of project bank accounts for subsequent tiers of subcontractors if they wish.[671]

    The Procurement Guidance Note provides a list of what the PBA does and does not do. In citing what a PBA can do, it was noted as follows:

    A PBA:

    The Trust Deed that aids in insolvency protection noted above is a document that a contractor is required to fill out in setting up a PBA. In essence, the Trust Deed is an agreement between owner and contractor (and potentially suppliers) that the sums held in the PBA are held “in trust” for the contractor and the named suppliers.[673]

    Notably under the Procurement Guidance Note, a PBA does not:

    1. involve Contracting Authority prefunding;
    2. cut across contractual provisions governing the preparation and submission of interim applications or the valuation, authorization or certification of interim payments;
    3. take away the Main Contractor’s responsibility for managing and selecting the supply chain so that the work is performed in accordance with the contract. The Contracting Authority’s role, as a trustee of the PBA, is merely to authorize payment transfers from the account;
    4. remove statutory obligations for VAT, taxation accounting liabilities, etc. from the Main Contractor, Subcontractors or Contracting authority; or
    5. add significant cost to the project, as interest can be used to offset banking fees where such fees are charged.

    The Procurement Guidance Note further explains that, in the event of the insolvency of the head contractor, an administrator, receiver or liquidator of a head contractor may be able to delay payment of monies within the project bank account to subcontractors, but will not be able to remove such monies.[674]

    2.2.3.4  Scotland

    In Scotland, trials of project bank accounts have also been underway for public sector projects since 2013.[675] These trials arose out of the recommendations of the Scottish Government in their Review of Scottish Public Sector Procurement in Construction, published in October 2013.[676]

    The Scottish Review noted that PBAs remove the “incentive for main contractors to withhold or delay payment, and thus there is potential to unlock the flow of cash throughout the supply chain and assist the solvency of sub-contractors and suppliers”.[677]

    Accordingly, the Scottish Review recommended a trial of PBAs to be monitored and assessed for suitability and future wider application.

    2.2.3.5  Australia

    An inquiry into construction insolvency in Australia was conducted by the Australian Senate. In December 2015, The Economics Reference Committee (the “Senate Committee”) published a report entitled Insolvency in the Australian Construction Industry[678] noting strong support for a statutory construction trust[679] and that such a model was explicitly recommended by the Collins Inquiry, described below.[680]

    The Senate Committee explained that a “retention trust would operate over only the small amount of money held back at each progress payment and the money held until the end of the defects liability period” whereas “a trust applying to the entire contract would include the entirety of each progress payment within its ambit.”[681]

    Construction trust fund statutes have been implemented in Western Australia and the Northern Territory, New South Wales, and are being contemplated in Queensland.

    (a) Western Australia and the Northern Territory

    Both Western Australia and the Northern Territory have construction trust fund statutes.[682] These statutes provide that where a contract does not have a written provision concerning the status of money retained by the principal (the owner) for the performance by the contractor of his or her obligations, the principal is to hold these monies in trust for the contractor until the monies are paid to the contractor, the contractor gives up any claim to the monies, the monies ceases to be payable to the contractor by operation of the contract, or a court determines that the monies cease to be payable to the contractor.[683]

    In Western Australia, project bank account trials are underway for 7 public projects. In an overview presentation of the trials, the Department of Building Management and Works explains that the following parties are paid through the project bank account:

    The payment process is described as follows:

    Some of the benefits of project bank accounts, according to the Department of Building Management and Works, include:

    1. the fact that they afford better protection to subcontractors against the insolvency of a prime contractor;
    2. they speed up the payment process for parties lower down the supply chain; and
    3. they increase transparency and accountability.[686]

    Responding to some of the concerns raised by contractors, the Department of Building Management and Works noted that project bank accounts do not prevent general contractors from monitoring the performance of subcontractors, withholding payments, or seeking adjudication when a dispute arises.[687]

    (b) New South Wales

    In 2012 and 2013, the government of New South Wales (“NSW”) conducted an Inquiry into Construction Insolvency in NSW, or as it is more commonly known, the Collins Inquiry. The Inquiry’s final report was published on January 28, 2013, and it made two major recommendations:

    1. the introduction of construction trusts; and
    2. the use of project bank accounts.[688]

    In response to the Collins Report, the NSW Government committed to establishing a statutory retention trust under the New South Wales Act. [689]

    Three potential methods of creating a trust were examined: (1) a deemed trust, (2) a statutory construction trust, and (3) a statutory trustee.

    After stakeholder consultations, amendments were made to the regulations under the New South Wales Act, and the statutory construction trust model was adopted.

    The Building and Construction Industry Security of Payment Regulation 2008, as revised in 2015, only applies to retention money held by the head contractor when the construction project has a value of at least $20 million.[690] The regulation requires that retention amounts be held in separate trust accounts with an approved deposit-taking institution. Details of the account must be given to the chief executive of the Office of Finance and Services.[691]

    With respect to bankruptcy, the regulation states that retention money is “not available to pay [the] head contractor’s debts,”[692] and requires the head contractor to keep records in relation to the trust account showing deposits and withdrawals from the account.[693] Accounts must also be audited annually, with the audit reports forwarded to the government.[694]

    Project bank account trials are underway in New South Wales for select government projects. The purpose of project bank accounts is to “protect, as far as possible, the money paid by the principal to the head contractor for the payment of subcontractors, from being used for other purposes by the head contractor or from any claims made by a voluntary administrator or liquidator in the event of the insolvency of the head contractor”.[695]

    (c) Queensland

    In December 2015, the Queensland Government published a paper entitled Security of Payment: Discussion Paper,[696] which sets out five potential options to address key problems in the security of payment system of the Queensland construction industry including: insolvency in the contractual chain (that leave subcontractors unpaid for work already completed), the use of retention money as cash flow by contractors and head contractors (instead of being kept aside for defects), a lack of financial management skill in the industry, and the protracted/unjustified delays in payment for work done.[697]

    Project bank accounts were considered as an option to address these issues. It was noted that the project bank account model would involve everyone getting paid from the project bank account at the same time rather than a chain of payments vulnerable to insolvency.[698] It was proposed that project bank account trials would initially be conducted for government projects, and, pending the outcome of the trials, project bank accounts could become applicable to private sector projects. Subcontractors would submit payment claims for work done to the head contractor, who would then submit a progress payment claim to the principal. After the principal verified the work for which payment is claimed, both the principal and the contractor would agree to payment into the project bank account. The signatures of the principal and the head contractor would give the bank authority to disperse the funds. A key feature of the project bank account was noted to be its trust character, so that in the event of insolvency, the money is held safely for the subcontractor as a secured creditor.[699]

    The Discussion Paper also notes the disadvantages of project bank accounts, including the following:

    All of the above considerations apply in the Canadian context, as will be explained further below following a discussion of relevant legal principles.

    3. Summary of Stakeholder Views

    3.1  Stakeholder views on the Effectiveness of Current Trust Provisions

    Many responding stakeholders expressed concern about the clarity of the trust provisions in the Act.[700]

    1. The Surety Association of Canada submitted that it supported amendments to clarify the priority of contractors to construction funds over other creditors whose claims are not directly related to construction work and services performed. It was submitted that such amendments should be directed at ensuring that “construction funds constitute a common law trust” by promoting certainty and predictability for everyone in the construction payment chain as well as reducing credit risk and strengthening the industry.[701]
    2. The Metropolitan Plumbing & Heating Contractors Association suggested strengthening the trust provisions of the Act.[702]
    3. Similarly, the Ontario Public Works Association and the Ontario Road Builders Association supported strengthening the trust provisions and bringing clarity to how trust funds can be used.[703]
    4. Prompt Payment Ontario suggested that, in a prompt payment regime, “the obligations of trustees should include a duty of prompt remittance…with failure to remit promptly being deemed a breach of trust and liability for the trustee and those identified in the current section 13” of the Act. Prompt Payment Ontario also suggested that “prospective purchasers of newly constructed low-rise housing units should be entitled” to have their money to be held in trust.[704]
    5. The Council of Ontario Construction Associations submitted that section 12 of the Act should be amended to require anyone exercising a claim of set-off for deficiencies or delay in a trust action “to provide full particulars in their Statement of Defence” to “discourage the practice of raising a vague set-off defence” to delay the proceedings.[705] The Council of Ontario Construction Associations further submitted that section 13 of the Act be amended to “put the onus upon an officer or director to prove that they are not liable for a breach of trust by the corporation” as they are in a better position than trust beneficiaries to assess the finances of the corporation.[706]
    6. The OBA CLA Reform Committee provided detailed submissions on trust provisions that canvassed the relevant cases. The OBA CLA Reform Committee suggested that the decisions in Atlas Block and Iona raise an issue of great importance to construction law, namely, the “enforceability of the trusteeship provisions of the provincial lien legislation in the face of federal bankruptcy legislation”.[707] In this regard, the OBA CLA Reform Committee suggested that the Review consider the requirements imposed on trustees in New York, discussed above, where trustees are “required to act as ‘fiduciary managers of the fixed amounts provided for the operation’” as described in Glaholt and Rotterdam’s paper Managing Trust Funds: The New York Model.[708]

    3.2  Stakeholder Views on Mandatory Mechanisms for Sequestering Trust Funds

    Several stakeholders opposed the concept of a mandatory holdback trust account or project bank account.

    1. The City of Toronto, the Council of Ontario Universities, Metrolinx, York Region, the Toronto Community Housing Corporation, and the Ministry of Transportation as they noted it would be administratively burdensome and cause increased costs.[709]
    2. The Toronto Transit Commission was also strongly opposed to the mandatory holdback trust account and project bank account as it advised that such accounts would “impede the management of municipal and Crown funds”.[710]
    3. During the Consultation Process, it was clear that many municipal and public entities were largely opposed to the mandatory holdback trust account and mandatory project bank account. In addition to their concerns about the increased administrative costs,[711] they pointed out that, in a contentious situation, getting money out of a trust account for set-off would be difficult.
    4. Infrastructure Ontario was opposed to mandatory holdback trust accounts for the Project Agreement “as the Authority should not be construed as the “owner””, but as an alternative, suggested that “Project Co be subject to a mandatory holdback trust account”.[712]

    The following stakeholders favoured some mechanism for sequestering funds:

    1. The Council of Ontario Construction Associations suggested that the Act require trust funds to be deposited into a bank account; acknowledging that while this can be administratively burdensome, trusts can be breached when commingled with other funds.
    2. The Council of Ontario Construction Associations suggested a balance be struck by requiring mixed trust accounts for contracts under $5,000,000 and separate trust accounts for contracts over $5 million.[713]
    3. The Metropolitan Plumbing & Heating Contractors Association was also in favour of separate trust accounts (i.e. not mixed with other projects, non-trust monies, etc) and of a provision that stipulates that “trust funds should be held by a bank or lending institution” so that a third neutral party is the holder of the trust in order to ensure its integrity.[714] As part of the submission, it was suggested that to enforce this provision, “owners, as part of the normal course of business, would be required to provide to general contractors, subcontractors or suppliers an official ‘proof of trust’ document from the bank or lending institution.”[715]
    4. The Ontario Road Builders Association expressed support for a mandatory holdback trust account or a mandatory project bank account, but was “cautious about the financing burden and cost of this initiative if applied to contractors and subcontractors” because “the Act is not clear which uses can be made of trust funds” and they depend on trust funds to pay certain “project-specific and general office overhead expenses”.[716]
    5. The International Union of Operating Engineers, Local 793, expressed support for mandatory project trust accounts at the builder, owner, and general contractor level, but expressed concern with regards to the regime actually being followed by contractors lower in the contractual chain.[717]
    6. Prompt Payment Ontario expressed support for the proposition that trust funds should not be commingled with other funds. Prompt Payment Ontario suggested that 90% of the invoiced amount should be paid “within the time period specified by the new statute” and “the remaining 10% should be remitted at the same time to a segregated holdback trust account”, with the sole beneficiary being the contractor who is owed the 10%.[718] Prompt Payment Ontario also expressed support for a separate project trust account for projects “with a permit or tender value” of over $250,000.[719]
    7. The Surety Association of Canada expressed general support for strengthening the Act’s trust provisions, specifically to “clarify the priority of construction trust funds over other creditors whose claims are not directly related to the construction work and services performed”. The Surety Association of Canada suggested strengthening the trust to meet the requirements of a common law trust while considering the administrative costs on contractors, owners, and lenders to maintain segregated funds.[720]
    8. The Greater Toronto Sewer & Watermain Contractors Association suggested that the benefits of a mandatory project holdback account would outweigh administrative costs.[721] The Canadian Institute of Quantity Surveyors expressed support for a mandatory joint bank account to secure funds, with an additional benefit being that lenders would advance 100% of the progress payment.[722]
    9. The OBA CLA Reform Committee also expressed support for the mandatory project bank account and mandatory holdback trust account to strengthen the trust provisions “so as to protect the holdback fund from other creditors”.[723]
    10. General support for a mandatory project trust account or mandatory holdback account was also expressed by the Labourers’ International Union of North America, Local 183, the Ontario Association of Architects (where “substantial fees are involved”), the Ontario General Contractors Association, and the Thunder Bay Law Association.[724]

    4. Analysis and Recommendations

    4.1  Effectiveness of Current Trust Provisions

    Duncan Glaholt has described the key legal problems with statutory trusts as follows:

    It must be conceded that the idea of statutory construction trusts is brilliant. It is almost perfect in its simplicity of expression. If statutory construction trusts were actually carried into effect uniformly, we would not need liens, trusts would be enough. The legal problems have come in trying to overlay this otherwise simple statutory trust scheme over existing commercial relationships such as those between bank and customer, landlord and tenant, and over the business practices of the construction industry itself.[725]

    He further notes that “[a]s it is now, our trust legislation is unbalanced and can lead to what appears to be unfair outcomes”.[726] Given the state of jurisprudence as of the date of this Report (e.g. Iona, Kel-Greg, and Atlas Block), this observation remains as true as it was when this article was published over a decade ago. Glaholt New York Model states that we have lost sight of business practice while “single mindedly pursuing the enforcement of the remedial trust provisions” and suggests that, in addition to enforcement, prevention should also be addressed.[727] In this regard, Mr. Glaholt recommends, as did several stakeholders in the Consultation Process, that we consider the laws of other jurisdictions and specifically those of New York.

    As discussed above in section 2.2.3.1, the New York Lien Law provides a clear set of rules as to how a trust is formed and methods of bookkeeping to avoid unintended breaches of trust.

    The most noteworthy distinguishing feature of the New York model (i.e. as compared to the Act) is the bookkeeping mechanisms described in section 2.2.3.1. According to Glaholt, this mechanism “arms a defendant with at least a prima facie defence to a breach of trust action” and it is observed that if these bookkeeping practices are followed, “summary judgment … would be impossible”.[728]

    A further benefit of the New York model is that proof of diversion of trust funds is not a condition precedent to an action for an accounting and other relief under the New York Lien Law.[729] Therefore, a presumption of diversion does not place the burden of proof on the debtor but rather, raises it as a permissible inference (i.e. that failing to keep the statutorily prescribed records, the trustee used the funds in breach of trust).[730] The intent of the record keeping requirements in New York is that they are in place to ensure that the trustee uses the trust only to fund a particular project.[731]

    Through the course of the Consultation Process and the Advisory Group meetings, consideration has been given to multiple avenues aimed at resolving priority issues between the Act and bankruptcy/insolvency legislation. In this regard, the New York model described above has achieved the best traction as it does not impose the same administrative burdens as would be required to maintain separate trust accounts, nor does it ignore the issue by maintaining the status quo; however, it maintains traceability.

    In our view, prescribing record keeping requirements similar to those adopted under the New York Lien Law would not only assist in clarifying matters where defalcation is alleged, but would assist in addressing concerns that trust funds in Ontario fail to meet the three certainties required of a common law trust as discussed above. Having said this, however, the New York accounting requirements alone will not guarantee the existence of a trust under Ontario law.[732]

    Recommendation

    1. We recommend that the Act should be amended to require that a trustee must follow specific statutory requirements in relation to trust fund bookkeeping similar to that applied in the New York Lien Law, including the following:
      • If a trustee deposits trust funds they are to be deposited in the trustee’s name;
      • The trustee is not required to keep the funds of separate trusts in separate bank accounts or deposits provided that his books and records of account clearly show the allocation to each trust of the funds deposited in the general account;
      • The trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and
      • The books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.[733]

    4.2  Mechanisms for Sequestering Trust Funds

    As discussed above, some jurisdictions have implemented statutory obligations to segregate holdback funds for each project in a separate bank accounts called “project trust accounts” or “project bank accounts”.

    The criticisms of the holdback trust account and the project bank account that were articulated in 1980 to the Attorney General’s Advisory Committee on the Draft Construction Lien Act remain a concern. Implementing such mechanisms could be administratively burdensome and costly. As well, the experience in other jurisdictions demonstrates that because of the practical difficulties of implementing such accounts, they may be largely ignored by the industry. If a solution is implemented which is impractical and ignored as a result, we will not have solved the problem of how to deal with trust funds in Ontario. Furthermore, and as noted above, the creation of such accounts would not guarantee the end of the paramountcy debate.

    A third type of trust account approach was suggested by some stakeholders as a potential new solution, which is to require contractors and subcontractors to operate a single mixed trust account, similar to a lawyer’s trust account, into which all trust funds from all projects would be required to be deposited. Importantly however, co-mingled trust accounts can present some issues as described in our summary of the relevant case law above and given the case law addressing lawyer’s trust accounts. For example, in the decision of The Law Society of Upper Canada v The Toronto Dominion Bank,[734] the Ontario Court of Appeal held that co-mingled trust funds in a mixed trust account (i.e. a law firm trust account) lose their earmarked identity with respect to a particular client.[735]

    If a single trust account were to be utilized, it would save on administrative costs as it would not require opening separate bank accounts for each project. In such accounts, trust funds would not be co-mingled with the trustee’s own funds, e.g. those used to operate the company, and traceability could be maintained. As held by the Ontario Court of Appeal in Graphicshoppe (discussed above) a shortfall in such a mixed trust account can be addressed without defeating the trusts involved. However, this solution would still involve an increased administrative burden and mechanisms for enforcement would have to be adopted to motivate participants in the construction industry to use these accounts.

    Recommendation

    1. We recommend the initiation of a pilot project for project trust accounts utilizing a representative number of projects in the public sector. Over a period of two years, the selected pilot projects should be evaluated based on appropriate metrics in relation to their effectiveness and cost. After two years, the performance of project trust accounts on the pilot projects should be published and industry consultation conducted regarding their general adoption in the private and public sectors.

    4.3  Mandatory Surety Bonds

    Currently, as discussed in Chapter 10 – Surety Bonds, statutory mandatory bond regimes for public projects only exist in the U.S. but the use of payment bonds for the protection of subcontractors and suppliers is common in Canada. Payment bonds are currently a North American phenomenon and are mandatory in the U.S. on government projects, as described below.

    As discussed in Chapter 10, mandatory surety bonding has been in place in the U.S. in one form or another since 1894. In 1935, the Miller Act was enacted to “provide a statutory mechanism to protect persons supplying materials and labor to contractors or subcontractors working on federal projects.” [736] The purpose of the payment bond required under the Miller Act has been noted to be “to shift the ultimate risk of nonpayment from workers and suppliers to the surety”.[737]

    The Miller Act, by imposing payment bonds, provides claimants with a different form of recourse if they have not been paid for labour and materials supplied to a federal project. Imposing mandatory payment bonds has meant that there is no right to lien a federal project.[738]. All federal public construction projects valued over $100,000, with few exceptions, are subject to the provisions of the Miller Act[739] which requires that “a payment bond must be provided by the principal or general contractor on every federal contract to protect the right of payment for those supplying materials or services to the federal project”.[740]

    Commentators explain that after the “success” of the Miller Act on federal projects, each one of the 50 states enacted a “Little Miller Act”,[741] each modeled after the federal Miller Act.[742] The Little Miller Acts fulfill the same purpose as the Miller Act and provide security to trade contractors on state, county, municipal and other local projects, [743] as they require a contractor to post a payment bond as a pre-condition to contract award.[744]

    When a Labour and Material Payment Bond is in place, claimants that supply labour and/or material to an insolvent contractor are protected for the total debt owing by the contractor, subject to the penal limit of the bond.

    One certain way to provide protection to subcontractors and suppliers involved in all forms of construction projects for the public sector, regardless of the project delivery model that is adopted on each project, is to adopt a statutory regime similar to the Miller Act, and the “Little Miller Acts”, in the U.S. Given the current uncertain economy, including recent indications from the Federal Reserve Bank that interest rates will gradually increase, and given the major infrastructure initiatives underway in Ontario, we are of the view that the fundamental objective of the Act, to protect subcontractors and suppliers, are best served by making surety bonds mandatory for public projects. Regarding the implementation of our recommendation, we propose that the Province enter into a dialogue with the Surety Association of Canada to agree on standard form surety bonds to be incorporated into the Act by regulation.

    Recommendations

    1. We recommend that, in order to adequately protect suppliers of labour and materials from the risk of contractor insolvency on public projects, all public sector projects be required by the Act to be surety bonded, adopting the Miller Act and Little Miller Act approach to the protection of subcontractors and suppliers from the risk of contractor insolvency on public projects.
    2. Accordingly, the Province should enter into a dialogue with the Surety Association of Canada to agree on standard form surety bonds to be incorporated into the Act by regulation. As well, such regulations should include a protocol for investigation and payment, as discussed in Chapter 10 – Surety Bonds.

    Chapter 8: Promptness of Payment

    1. Overview

    As discussed with the stakeholders during the Consultation Process, two aspects of promptness of payment require consideration in relation to payment issues encountered on both public and private sector projects, namely:

    In considering the promptness of payment issue, we have considered existing prompt payment legislation in the U.S., the U.K. and Ireland, Australia, New Zealand, Singapore, and Malaysia, to determine how these jurisdictions have addressed timeliness of payment in the construction industry. In the course of developing prompt payment legislation, each of these jurisdictions has wrestled with the need to balance conflicting interests, most significantly the balance between statutory intervention and freedom of contract. There are significant lessons to be learned from the experiences of these other jurisdictions.

    In the Information Package distributed to the stakeholders and over the course of the Consultation Process, we have carefully considered the private members Bill 69 – Prompt Payment Act, 2013 (“Bill 69”) and the global prompt payment movement. The global prompt payment movement originated in the U.S. Based on its structure and content, the U.S. example inspired the Ontario initiative that resulted in Bill 69. Generally, prompt payment legislation in the U.S. (which at the state level operates alongside established lien legislation[745]) addresses what we have characterized above as the “ordinary course” issue by imposing time limits and deadlines for processing payment applications and by imposing mandatory interest for breach of the statutorily-imposed payment periods. U.S. prompt payment legislation does not address the gridlock scenario and does not provide for a bespoke dispute resolution process. Instead, unresolved disputes are litigated.[746]

    This Chapter considers the context of promptness of payment, including Bill 69, as well as relevant legislation from other jurisdictions, followed by a summary of stakeholders’ submissions, and concludes with our analysis and recommendations.

    2. Context

    Two important and related concerns that were identified by a number of stakeholder groups are: (1) timeliness of payment, and (2) the efficiency of the mechanisms for the enforcement of payment for work performed. Some commentators are of the view that the Act does not sufficiently protect contractors, subcontractors or suppliers from payment delays, and that proceeding to litigation to secure payment is too protracted and too costly. As a result, many have indicated that there is a need for a more practical solution.[747] Importantly, over the course of the Review, there has been virtually unanimous support for the general principle that participants on a construction project should be paid promptly for work performed. Differing points of view became apparent, however, in respect of the extent of late payment, the causes of late payment, and the appropriate methodology to ameliorate the lack of prompt payment.

    While late payment is not unique to the construction industry, it has also been argued that the nature of the construction industry requires greater protection of vulnerable parties. Commentators point out that late payment practices affect employment, cause the reduction of investment in apprenticeships, and force contractors and subcontractors to bid strategically so as to limit the number of projects they take on, resulting in reduced bidding pools. In addition, the direct costs of late payment and associated risks are said to be incorporated into contract and subcontract prices.[748]

    Proponents of prompt payment legislation point out that the purpose of such legislation is to level the playing field in the industry, increase investment in the industry and its future, reduce construction costs, and limit conflict and litigation within the construction pyramid.[749]

    Based on the Consultation Process, and the written submissions of stakeholders, it is clear that, for a number of reasons, the payment cycle has become elongated (as discussed at section 3.1 below) and that whereas general contractors are able to manage the repercussions of elongation through the use of pay-when-paid provisions the financing cost of the elongation of the payment cycle is borne at the subcontractor level, in that subcontractors must pay for labour and supplies on much shorter payment cycles and without holdback.

    2.1  Bill 69 – Prompt Payment Act, 2013

    In Ontario, the prompt payment initiative gained significant public attention following the introduction of Bill 69 in 2013. Bill 69 was introduced to the legislature as a private member’s bill and sought to address perceived payment delays within the construction industry.[750] The Bill was referred to the Standing Committee on Regulations and Private Bills which heard submissions from a number of stakeholders in public hearings on March 19 and 26, 2014. On April 2, 2014, the Standing Committee on Regulations and Private Bills voted to set aside Bill 69 to permit a broader review of the Act and to consider a potential new statutory regime addressing payment issues.[751] As explained in Chapter 2 – Conduct of the Review, this Review was constituted in February 2015. It was commissioned “in response to stakeholder concerns related to prompt payment and effective dispute resolution in Ontario’s construction industry, such as encouraging timely payment for services and materials, and making sure payment risk is distributed fairly”.[752] At the outset of the Review, the Ministry of the Attorney General provided us with materials gathered in relation to stakeholder comments on Bill 69. We have reviewed and considered these materials.

    Two of the most significant aspects of the proposed prompt payment regime described in Bill 69 were: (1) the mandatory minimum time periods within which payment was required to be made; and (2) the right to suspend or terminate the work if progress payments were not made on time. According to some stakeholders, Bill 69, if enacted, would have had the effect of eliminating owners’ and contractors’ freedom to negotiate contract terms, such as milestone based payment mechanisms, as well as certain payment mechanisms used in conjunction with the private sector financing necessary for AFP projects.

    The key elements of Bill 69 included the following:

    2.2  Opposition to Bill 69

    Stakeholders who made submissions to the Standing Committee on Regulations and Private Bills in March 2014 generally expressed support for fair and prompt payment for work performed by contractors and subcontractors, but many expressed serious concerns about the proposed legislation, which was characterized by some stakeholders as “poorly conceived and drafted” and “unacceptable”.[762] It was seen by some as too blunt a tool to achieve its policy objective of motivating payers to make payments promptly on construction projects. Concerns over the risks associated with the enactment of the Prompt Payment Act, 2013 were identified to the Standing Committee on Regulations and Private Bills and included the following[763]:

    (a) The inability to conduct proper due diligence before making payments

    A concern about the ability to have the time necessary to conduct the necessary due diligence arose, in part, from the provisions in the Bill in relation to the payment schedule. In this regard, sections 5 and 6 of Bill 69 provided as follows:

    Right to receive progress payments

    5. Every contractor and subcontractor is entitled to be paid progress payments in accordance with the following:

    1. If a contract or subcontract provides for progress payments that become payable at least every 31 days after the first day that services or materials are supplied to the improvement under the contract or subcontract, the payments shall be made in accordance with the contract or subcontract.
    2. If a contract or subcontract does not provide for progress payments as described in paragraph 1, the payments shall be made in accordance with section 6.

    Progress payments, default rules

    Application

    6. (1) This section applies where a contract or subcontract does not provide for progress payments that become payable at least every 31 days after the first day that services or materials are supplied to the improvement under the contract or subcontract.

    Payment period

    (2) A payment period referred to in this section means the period of time that begins on the first day of every month and ends on the last day of that month.

    Progress payment application

    (3) A contractor or subcontractor shall prepare, in respect of every payment period, a progress payment application that sets out the value of the services and materials that have been or will be supplied to the improvement under the contract or subcontract during the payment period.

    Estimates

    (4) A progress payment application may rely on reasonable estimates.

    Submission of application

    (5) Progress payment applications shall be submitted in accordance with the following schedule:

    1. A contractor shall submit a progress payment application to an owner on or after the last day of the payment period.
    2. A subcontractor shall submit a progress payment application to a contractor before the last day of the payment period.
    3. A subcontractor shall submit a progress payment application to another subcontractor within the time period prescribed by the regulations or, if no such time period is prescribed, within a reasonable period of time that would enable the other subcontractor to comply with this subsection.

    Payments, timing

    (6) A payer shall make a progress payment in accordance with the following schedule:

    1. In the case of a payment to a contractor, within 20 days after the day the payee submits the progress payment application.
    2. In the case of a payment to a subcontractor, by the day that is the later of,
      1. 10 days after the day a certificate is issued by a payment certifier in respect of the payment, if applicable, and
      2. 30 days after the day the payee submits the progress payment application.

    [Emphasis added]

    Many stakeholders objected to the payment schedule elements of Bill 69 and much criticism was focused on the fact that under section 6(4) a progress payment application could rely on “reasonable estimates”. Concern was expressed that this provision could result in payment being made for work not yet performed.[764]

    One stakeholder distinguished Bill 69 from other existing prompt payment legislation, noting as follows:

    One important feature that is unique to Bill 69 is that it mandates monthly payments based on an undefined notion of value. Under Bill 69, parties are not free to agree on the criteria for determining when work is complete, whether in part or in whole, and they’re not even allowed to agree on what documentation needs to be provided with an invoice, such as monthly work reports, which owners and general contractors need to manage the project. Quite simply, no other country prevents parties from mutually agreeing on the timing, value and conditions for payment.[765]

    Many commentators expressed the view that the schedule described in section 6 of Bill 69 would not provide sufficient time for those reviewing the payment application to conduct necessary due diligence.

    (b) Administrative burden imposed on owners and contractors

    Some commentators viewed the payment schedule of Bill 69, set out in section 6 above, as impractical. Others suggested that a prompt payment regime would impose an overly cumbersome administrative burden on an already strained industry.

    The “notice of payment” requirements of section 14(5) of the Bill also raised a concern about additional administrative costs to implement these requirements.[766]

    (c) Requirements to release sensitive financial information.

    As noted above, Bill 69 also obligated owners and contractors release to financial information prior to entering into a contract.[767] Section 14 of Bill 69 provided inter alia as follows:

    Right to financial information

    14. (1) Before entering into a contract related to an improvement, an owner shall provide the contractor with the financial information prescribed by the regulations for the purpose of demonstrating the financial ability of the owner to make the payments provided for under the contract.

    Same

    (2) For the purpose described in subsection (1), a contractor may at any time request in writing that the owner provide updated financial information, and the owner shall promptly provide the information.

    Right of subcontractor

    (3) If a subcontractor who supplies services or materials to the improvement requests in writing that the contractor provide a copy of the information provided under subsection (1) or (2), the contractor shall promptly provide the information. …

    Owners and contractors expressed concern about such disclosure obligations, considering the potential commercial sensitivity of such information. Some argued that requiring such disclosure was outside the ambit of a prompt payment statute as it related to the procurement phase of a project.

    (d) Additional construction risk

    Stakeholders also expressed concern about additional construction risk associated with the rigidity of the payment mechanisms of Bill 69. Many pointed out that Bill 69 did not accommodate certain types of contracts such as large infrastructure projects and AFP projects where payment is tied to the completion of milestones or the completion of the entire project. In this regard, one stakeholder submitted as follows:

    Milestone payments allow the owner to mitigate risk by tying payment to completion of a measurable part of the work, such as the power plant turning on when the switch is flipped or a road opening to traffic. Prohibiting the freedom of sophisticated parties to enter into payment arrangements that are tailored to the risk profile of the project will make projects riskier and therefore more expensive, reduce the abilities of governments to revitalize their infrastructure, squeeze small businesses out of the market and costs jobs.[768]

    (e) Additional construction costs

    A concern about additional construction costs was raised in the context of the perceived risk of increased financing costs for funds to be paid to subcontractors when the corresponding funds had not yet been paid by the owner.

    (f) Risk of an increase in litigation

    A concern about litigation risk was raised by some given that “the act is vague on many points and is not aligned with existing legislation like the Construction Lien Act”, which would give rise to disputes, an increase in litigation and the associated costs.[769]

    2.3  Support for Bill 69

    On the other hand, proponents of prompt payment legislation who, although they may have raised concerns about the drafting of Bill 69 as it was introduced in the Legislature, pointed out that this type of legislation is needed to ensure the ongoing health of Ontario’s construction industry because:

    a) Late Payments are Endemic

    Proponents of Bill 69 noted that the construction industry is structured like a pyramid, where the owner, at the very top of the pyramid, holds the funds that are vital to the project and the trade contractors and their labourers form the base, and asserted that there is a documented culture of late payments in the industry.[770]

    b) Inequality of Bargaining Power

    It was emphasized by some stakeholders that, within the confines of the construction pyramid, the entities at the bottom of the pyramid do not have the bargaining strength to negotiate for better payment terms, enforceable interest payments on late payments, or access to financial information that would allow them to evaluate the financial viability of the entities undertaking a project.

    c) Financial Burden on Subcontractors

    According to proponents of Bill 69, the structure of the industry and its culture of late payment frequently lead to financial difficulties for numerous Ontario workers who earn their living from construction. Some stakeholders pointed out that projects were being financed on the backs of the subcontractors and trades. Insolvency risk was also identified as a concern for subcontractors.

    d) Effect on Pension and Benefit Schemes

    It was submitted that late payment to trade contractors leads to late payment of contributions to the workers benefits and pension plans, which has a direct effect on the lives of Ontario workers and their families.[771]

    Importantly, Bill 69 was identified to be the local manifestation of a global prompt payment movement. Stakeholders referenced the existence of prompt payment legislation in other jurisdictions.[772] As will be discussed in the next section, there are valuable lessons to be learned from these other jurisdictions in considering whether or not some form of prompt payment regime makes sense for Ontario’s construction industry.

    2.4  The Prompt Payment Movement

    Security of payment legislation has been introduced in various jurisdictions world-wide.[773] A common objective of this type of legislation is to increase cash-flow down the tiered contractual structure in a fair and reasonable manner.[774] Such legislation often includes provisions that establish a right to progress payments, whether or not this right is included in a construction contract.[775] In some jurisdictions, legislation addressing promptness of payment also establishes a right to refer a dispute arising under the contract to adjudication. The topic of adjudication is addressed separately in this report in Chapter 9 - Adjudication. Adjudication can expedite the resolution of payment disputes.

    In every jurisdiction where prompt payment has been enacted (or where it is being considered), concern had been raised about the financial health of businesses in the construction industry, particularly trade contractors (i.e. subcontractors). Stakeholders lobbied their governments to take legislative action to protect subcontractors from cash-flow difficulties.

    Those who have studied the reasons behind the global prompt payment initiative refer to an industry-wide culture of late payment. By their nature, construction contracts require that contractors supply materials and services for a given period of time (generally stipulated in the contract) before they are entitled to make a claim for payment. In order to apply for payment, contractors must often include many documents to support their progress payment applications, as stipulated in the contract (e.g. invoices, monthly schedule update, schedule of values, proof of payment to subcontractors and suppliers, WSIB certificate and statutory declarations). Once an application for payment is submitted to the owner, the process of certification and approval begins, which often involves a consultant’s review, followed by the owner’s review and approval (sometimes by more than one department within an owner organization), and then the “cheque run” process. This application, certification, approval and payment process frequently contributes to payment delays. Such systemic delays occur in the ordinary course. Meanwhile, in order to manage its own cash flow, the general contractor operates on a pay-when-paid basis and does not release payments to subcontractors until after receipt of a progress payment from the owner. Yet, subcontractors depend on timely and full payment of their invoices to operate their businesses, meet their payroll obligations and purchase materials for the project on a continuous basis.

    On the other hand, in some instances, delays in payment may be attributable to flawed applications for payment which may not accurately reflect the work performed during the payment period, missing information and supporting documents, etc.[776] In addition, it is pointed out by public owners that multiple reasons are necessary to satisfy auditability and anti-corruption concerns. Also, the argument in favor of the introduction of prompt payment legislation is met by some with the argument that contractors and subcontractors should simply refuse to enter into contracts that contain onerous payment provisions. However, in Ontario, tender documents generally include the General Conditions of “Contract B”, the construction contract, including the payment provisions, such that some stakeholders take the position that, except for those construction contracts that are negotiated one-on-one between the owner and the contactor, in reality there is little freedom of contract in the marketplace, as owners unilaterally impose their chosen payment conditions through the tendering process, and general contractors impose their standard form subcontracts on subcontractors.

    2.4.1  American Prompt Payment Legislation

    U.S. commentators have described the practice of late payment down the construction pyramid as follows:

    The speed of the flow of money from lender to owner to contractor becomes slower as the ability to borrow tightens. Profit margins shrink as contractors and subcontractors cut their bids in order to compete for what work is available. Everyone in the payment chain wants to hold on to cash for as long as possible, with the result that many smaller contractors and subcontractors complain that they are being forced to wait longer and longer for payments that should have been made more promptly.[777]

    One commentator has summarized the common reasons for failure to pay promptly or at all in the United States as follows:

    Obviously, various reasons exist (…), including, among others, that (1) a prime contractor has not received payment from the owner for the work completed by a subcontractor, (2) the prime contractor perceives deficiencies in the subcontractor’s work for which he anticipates a future claim from the owner, (3) the owner disputes that certain work has been completed or that the work meets contract specifications; or (4) the prime contractor (or the owner) is a “bad actor” who knows that he ought to pay, but refuses.[778]

    There are numerous state forms of prompt payment regimes in the U.S. For example, some states may have separate prompt payment statutory schemes applicable to public and private sector contracts. Even within the category of public sector contracts, there may be separate regimes. In some instances, one statutory scheme will apply to state contracts; another one will apply to local government contracts (i.e. counties, municipalities, school boards); and a separate scheme may be applied to state Department of Transportation contracts. In respect of private sector contracts, prompt payment legislation may “limit certain industry procedures and practices [and] place parameters on parties’ actions, from invoicing and notice procedures [to] parties’ ability to override PPA [Prompt Payment Act] legislation provisions by contract”.[779] We examine below the key characteristics of the various regimes adopted in the United States.

    2.4.1.1  U.S. Federal Legislation

    In 1982, Congress enacted U.S. Code Chapter 39 or the Prompt Payment Act[780] to attempt to ensure that federal agencies would pay their suppliers and service providers on time, failing which they would be liable for interest on the overdue balance.[781]

    (a) What Types of Contracts does it apply to?

    The federal Prompt Payment Act is not limited to construction contracts but applies to all suppliers and service providers to federal agencies. The original statute was amended in 1988 to include provisions specifically applicable to construction contracts.[782]

    (b) In the Construction Pyramid, what Level of Contract does it apply to?

    The Federal Acquisition Regulation also imposes obligations on contractors with respect to their subcontractors. For example, the contractor’s subcontracts must include a prompt payment provision, stipulating that the contractor is to pay the subcontractor within 7 days from the contractor’s receipt of payment for work performed by the subcontractor and that interest will apply to late payments.[783]

    (c) What is the Trigger for Payment?

    The trigger for payment is the delivery of a proper invoice.

    (d) What is the Payment Period?

    Interest penalties accrue starting 14 days after receipt of an invoice for a progress payment or 30 days after receipt of an invoice for final payment, unless otherwise agreed.[784]

    (e) When is a contractor entitled to render an invoice?

    A contractor is entitled to issue an invoice when all relevant contractual requirements have been met.

    (f) On What Basis Can a Payment be Withheld and When?

    The Prompt Payment Act provides that (except in the case of certain specified types of contracts, for which a different maximum period is set) ‘‘each invoice be reviewed as soon as practicable after receipt’’ and ‘‘any invoice determined not to be such a proper invoice suitable for payment shall be returned as soon as practicable, but not later than 7 days after receipt, specifying the reasons that the invoice is not a proper invoice.’’[785]

    (g) What remedies are available in the event of non-payment?

    The federal statute entitles contractors to interest penalties for late payment of progress payments, retainage and final payment.

    2.4.1.2  State Legislation

    By the early 2000s, 49 of the 50 states had enacted prompt payment legislation for public sector projects, generally with the specific purpose of providing protection to subcontractors.[786] Since the early 2000s, prompt payment legislation applicable to private sector projects has been progressively adopted by individual states as a result of active lobbying by subcontractor groups.[787]

    (a) What Types of Contracts does it apply to?

    To date, 34 states have enacted statutes applicable to both private and public projects (in the same statute[788] or in separate statutes[789]), which generally apply to contractors and, in most instances, also apply to subcontractors.[790] Another 15 states have enacted statutes applicable to public sector projects but have not enacted corresponding statutes for private sector projects.[791] Of all the states in the United States, only the state of New Hampshire has still not enacted any prompt payment legislation.

    The individual state statutes were enacted with the common objective of improving cash-flow given the “basic and popular notion that someone who provides goods and services is entitled to be paid for those goods and services promptly”.[792] Commentators have noted that, although the state statutes have similar objectives, they are often inconsistent from state to state and even within the same state (when comparing public and private contract regimes).[793]

    Often, there is much greater freedom of contract in the private sector regime than in the public sector.

    A review of the prompt payment legislation in the U.S. on a state by state basis is summarized at Appendix B. Most states have enacted separate legislation for public and private projects, but fifteen of them have no prompt payment legislation with respect to private projects, seven states have prompt payment legislation but it does not apply to either owners (with respect to general contractors) or to general contractors (with respect to subcontractors)[794], and eight have enacted a single regime applicable to both public and private projects.

    (b) In the Construction Pyramid, what Level of Contract does it apply to?

    State legislation may involve different regimes for payments from owners to contractors as opposed to payments from contractors to subcontractors. In effect, such regimes can be said to function as a statutory pay-when-paid clause because the obligation to pay a lower tier payee only arises within in a prescribed number of days (anywhere between 7 to 30 days depending on the legislation) following the contractor’s receipt of funds from the owner or upper tier payer.

    (c) What is the Trigger for Payment?

    In analyzing the regimes in place in the various states in relation to the triggering event for payment, they can be categorized into the seven models described in the chart below. The applicable model may vary depending upon whether it is a public or private project.

    Model Public Projects Only Public and Private Projects Private Projects Only
    1. Receipt of invoice Under this model, the triggering event is the owner’s receipt of the contractor’s invoice. The statutes generally provide that “receipt of invoice” means receipt of a proper invoice. Alabama, Alaska, Arkansas, California, Hawaii, Indiana, New York, Nevada, Oklahoma, Virginia, Washington, West Virginia, Wyoming Florida, Georgia, Illinois, Kentucky, Nebraska, New Jersey, New Mexico, Pennsylvania, Tennessee, Texas, Vermont Delaware, Kansas
    2. Contract terms Under this model, the contract terms agreed to by the parties govern as the statute does not specify the triggering event. Louisiana, Ohio Mississippi, Missouri, Utah
    3. Approval Under this model, the triggering event is the approval or certification of a payment claim. Arizona Montana
    4. Contract terms and/or approval The parties may negotiate the triggering event in the contract, failing which the statute provides that the triggering event is the approval or certification of the payment claim. North Carolina ( where the regime for progress payments is based on the contract terms but the triggering event for final payment is the approval of the final invoice or the final acceptance of the work), South Dakota
    5. Receipt of invoice and/or approval Under this model, the triggering event for progress payment is the receipt of the contractor’s invoice and the triggering event for final payment is the earlier of completion and receipt of final invoice or certification. Missouri, Wisconsin
    6. Contract terms and/or monthly payments Colorado, Delaware, Michigan, Iowa, Maine Oregon, Minnesota Massachusetts, New York
    As this chart reveals, almost half of the states have adopted the receipt of “a proper invoice” approach for both public and private sector contracts. The invoice must generally be a proper invoice in order to start the clock ticking, as noted in the above chart.

    (d) What is the Payment Period?

    The length of the period allowed before payment must be made varies from state to state, depending on a number of factors such as whether the project is a public or a private project, whether the applicable payment is a progress payment or a final payment and, on public projects, whether the project is funded in whole or in part by grant or federal funds. With respect to final payments, the length of the pay period is not always tied to the same triggering event as progress payments and instead, the triggering event may become any of the following: possession, occupancy permit, substantial completion, certification by contracting authority or inspection for final payment. The range of pay periods (in number of days) can therefore be summarized as follows:
    Triggering event Progress payments : range in number of days Progress payments outliers Final payment: range in number of days Final payment outliers
    Receipt of invoice 14 - 30 (with 30 days being by far the most common pay period) 5 (Arkansas – public) 40 (Illinois – private) 45 (Connecticut, Nebraska, Pennsylvania, Tennessee, Wyoming – public) 60 (Idaho, Illinois, Utah, West Virginia – public) 75 (New York – highway only) Up to 90 (Arkansas – highway only) 10-30 (with 30 days being by far the most common pay period) 45 (Connecticut, North Dakota, Tennessee, Wyoming – public) Up to 60 days (Texas – private) 60 days (Colorado, Idaho, New York, Utah, West Virginia – public) 61 days from substantial completion: (Indiana – public) 65 days from substantial completion (Massachusetts – public)
    Approval 7 - 45 30-60
    Contract 30 days maximum or earlier under the Contract (Connecticut – private)

    (e) When is the contractor entitled to render an invoice?

    When a contractor is entitled to render an invoice will be determined by the contract.

    (f) On What Basis Can a Payment be Withheld and When?

    Owners’ and contractors’ rights to withhold payment are subject to a variety of restrictions depending upon the state. For example, some statutes impose a limit on the amount of payment that may be withheld.[795] In respect of set-offs/withheld payments, there is a lack of clarity about the nature of the notice to be provided in some states. One Illinois commentator raised the following questions: “[m]ust it identify work that does not comply with the plans or specifications? Or must it identify work that violates code? Can it withhold payment based on a suspicion that work is non-compliant (…)?”[796]

    (g) What remedies are available in the event of non-payment?

    Often, the state legislation provides for recovery of costs/legal fees to the prevailing party in a civil action (given that, under the U.S. model, the “English rule” of costs does not exist.)

    Interest penalties are frequently applied in relation to late payments and the state legislation will often contain specific rules on the calculation of interest.

    In respect of the right of suspension, generally, if a subcontractor wants to exercise a right to suspend work because of delays in payment, it must comply with specified notice requirements and cannot suspend in the event the payment in question is legitimately disputed.

    In the U.S. the impetus for prompt payment may be somewhat different than in Ontario, given that some states permit waivers of lien rights whereas in Ontario such waivers are not possible given section 4 of the Act.

    2.4.1.3  The Effectiveness of U.S. Prompt Payment Legislation

    The efficacy of prompt payment legislation has been questioned in the U.S. Among other criticisms, American prompt payment legislation has been criticized for its failure to include provisions that provide an environment for the expeditious resolution of disputes during the life of the project. There is no dispute resolution mechanism provided for in the U.S. prompt payment legislation, therefore payment disputes are resolved through litigation, which is costly and time consuming.

    In the context of such litigated disputes, some courts have found that the breach of prompt payment legislation does not form the basis of a private right of action. In the D.C. federal district court case of U.S. ex rel. IES Commercial, Inc. v Continental Ins. Co., Inc.[797], the court addressed the issue of whether or not a subcontractor can enforce a prompt payment statute by means of a private right of action against the prime contractor. The prime contractor had moved for summary dismissal, noting, among other arguments, that the statute made no provision for a private right of action. The court agreed, stating that no other jurisdiction had adopted the view that such private right existed under the state statutes. The motion to dismiss was therefore granted.

    Commentators have also noted that disputes arising under prompt payment statutes “have been fruitful sources of litigation” in relation to the issue of whether or not the work claimed was performed or whether it was performed satisfactorily.[798] For example, Thomas Marcey, in an article entitled “Show Me the Money, Now – Disputes under the Prompt Payment Act” discusses the Vermont case of Trombley Plumbing & Heating v Quinn.[799] The case dealt with certain heating and hot water services to be completed at a vacation home. The homeowner alleged that it had not paid the unpaid balance owing to the contractor because the work had not been performed in accordance with the contract, causing pipes to freeze and the furnace to shut down and leak. The trial court denied the contractor’s claim for payment noting that “the work was not well done”.[800] On appeal, the court rejected the contractor’s argument that it had made a prima facie case on its claim for payment. The court noted that the prompt payment legislation provided the homeowner with a defence because, under the statute, an owner is entitled to withhold payment in an amount “equaling the value of any good faith claims against an invoicing contractor…including claims arising from unsatisfactory job progress, defective construction, [or] disputed work…”[801]

    Similarly, in the California case of FEI Enterprises, Inc. v Kee Man Yoon[802], the court concluded that if, after applying an objective test, it was determined that there was a “good faith dispute” over the degree of completion of the work, that a general contractor could withhold 150 per cent of the disputed amount, in accordance with the applicable prompt payment legislation.

    The case of White Buffalo Construction, Inc. v U.S.[803]addressed the right to recover interest under the federal Prompt Payment Act. In this case, the contractor, White Buffalo, sought recovery for unpaid invoices and interest on those invoices in relation to a contract for the repair of damaged roads. The court found that White Buffalo was not entitled to interest given that there was a “disagreement over quantity, quality, Contractor compliance with [a] contract term or condition, or requested payment amount”. In other words, given that there was a good faith dispute, no interest was payable.

    Similarly, in the Texas case of City of San Antonio v KGME[804] the court stated that interest is unavailable in circumstances where there is a bona fide dispute as to whether or not the underlying principal amount is due and owing.

    In California, commentators have noted that courts have rendered decisions which have “restrict[ed] the applicability” of the provisions of the prompt payment legislation under consideration, contrary to the original objectives of the legislation.[805] For example, in Martin Brothers Construction, Inc. v Thompson Pacific Construction, Inc. the Third District Court of Appeal held that a contractor was entitled to withhold payment given a bona fide dispute regarding change orders under the subcontract, in circumstances where there was no dispute regarding the work performed by the subcontractor under the subcontract.[806]

    One solution proposed by a commentator in relation to the potential erosion of the protections and remedies intended by prompt payment legislation in California, was the creation of a uniform statutory scheme rather than “the current disparate and inconsistent statutes which would also directly address the issues presented by the recent appellate opinions”.[807]

    Generally, the case law in the United States indicates that prompt payment legislation is of limited utility where there is a bona fide disagreement about whether or not funds are owing to a contractor or subcontractor. The lack of an effective dispute resolution mechanism within these statutes means that such disputes are litigated and the remedies afforded by the legislation, including payment of interest, are not enforceable if there is a dispute over whether or not funds are owing.

    Finally, there is limited information about the cost savings to the industry since the introduction of prompt payment legislation in the United States. One commentator refers to a study performed by the United States Department of Transportation that shows that “the provisions [of Prompt Payment legislation] reduced a contractor’s profits by 4.35% and increased project costs by 0.14%”.[808]

    2.4.2  U.K.

    As noted by one commentator in the U.K., the purpose of prompt payment legislation is not to compel owners and general contractors to pay all certified amounts “uncritically” but to avoid payment delays and to resolve disputes in a timely manner while the project is ongoing.[809]

    The Housing Grants, Construction and Regeneration Act 1996 (the “U.K. Construction Act”), came into force in May 1998. It was intended to strike a balance between the principle of freedom of contract and statutory intervention by allowing parties to a construction contract a certain amount of flexibility with respect to the negotiation of payment terms, “provided that certain minimum standards set out in that Act are observed, failing which, terms contained in secondary legislation, known as schemes for construction contracts, would be implied by law into the contract of the parties”.[810]

    In 1993, Sir Michael Latham was commissioned to prepare a joint government/industry report on aspects of the construction industry in the U.K. This resulted in two reports: Trust and Money (December 1993) and Constructing the Team (July 1994).[811]

    Following Sir Michael’s reports, the U.K. Construction Act came into force in May 1998. It was intended to strike a balance between the principle of freedom of contract and statutory intervention by allowing parties to a construction contract a certain amount of flexibility with respect to the negotiation of payment terms, “provided that certain minimum standards set out in that Act are observed, failing which, terms contained in secondary legislation, known as schemes for construction contracts, would be implied by law into the contract of the parties”.[812]

    Previously, in Constructing the Team, Sir Michael had considered the use of pay-when-paid provisions and recommended that such clauses be rendered unenforceable by statute. Pay-when-paid clauses were perceived to be a potential cause of bankruptcy among small and medium-sized businesses.[813] As a result, section 113 of the U.K. Construction Act prohibited “conditional payment provisions” such as clauses where payment is conditional on the payer receiving payment from a third party, except in cases of insolvency. Section 113 provides as follows:

    113 Prohibition of conditional payment provisions.

    (1) A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent. [Emphasis added]

    In 2007, after further consultations with the industry, the U.K. Government determined that, although the U.K. Construction Act had successfully improved cash-flow, it was still ineffective in certain key regards”.[814] Specifically, the Government’s policies and objectives were to:

    1. Increase transparency and clarity in the exchange of information relating to payment to enable the better management of cash flow;
    2. Encourage the parties to resolve disputes by adjudication (…); and
    3. Improve the right to suspend performance under the contract.[815]

    In 2009, the U.K. Construction Act was amended by the Local Democracy, Economic Development and Construction Act 2009 (the “2009 U.K. Act”), which came into force in 2011 and introduced the following changes to the U.K. Construction Act prompt payment provisions:

    The above modifications to the U.K. Construction Act are reflected in our discussion below.

    (a) What Types of Contracts does it apply to?

    The U.K. Construction Act broadly applies to every “construction contract” for carrying out “construction operations” (or arranging for the carrying out of construction operations / providing labour for the carrying out of construction operations), including for example, architectural or engineering work, surveying work, design, landscaping or decoration work, whether written, oral, or partly written and partly oral, with limited exceptions for both construction contracts and construction operations.[820] The U.K. Construction Act Part II only applies to the carrying out of construction operations in England, Wales and Scotland.[821]

    The U.K. Construction Act does not apply to contracts for drilling for oil/natural gas; extraction; assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery on certain sites; manufacture or delivery to certain sites; or the making, installation and repair of artistic works.[822] Nor does it apply in relation to contracts of employment and contracts with residential occupiers.[823] Private finance initiatives (i.e. AFP projects) and certain insurance contracts related to construction projects are also excluded, albeit by specific order.[824]

    (b) In the Construction Pyramid, what Level of Contract does it apply to?

    As the U.K. Construction Act applies to all parties to a construction contract (as broadly defined), the legislation applies to all levels of the construction pyramid.

    (c) What is the Trigger for Payment?

    Payees under a construction contract subject to the U.K. Construction Act are entitled to payment by way of instalment, stage payments or other periodic payment for work under the contract unless such work is: a) specified to occur over less than 45 days; or b) agreed between the parties that the work is estimated to be less than 45 days.[825]

    The parties are otherwise free to agree on amounts of payments and intervals at which they become due.[826] Should the parties fail to agree, the default provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the “Scheme”) will apply.[827]

    Every construction contract is required to stipulate a notice requirement in relation to payment such that a party is required to give notice no later than 5 days from the date on which a payment becomes due or would have become due if: a) the other party carried out contractual obligations; and b) there is no set-off or abatement permitted by reference to a sum claimed under one or more other contracts.[828] Again, if such provision is not provided in the contract the parties will default to the provisions of the Scheme.[829]

    As noted above, the 2009 U.K. Act provided that a contract may specify who gives the first notice (i.e. the payer, or the payee, or a contract administrator) within a defined number of days after the payment due date has expired. In the event the payee is to deliver the first notice and the payer determines that it will withhold all or a portion of the amount set out in the notice, the payer may deliver a second notice or “pay less notice”. In the event that a payer does not challenge the payee’s notice but still fails to make full payment, the contractor may suspend (but not terminate) the work.[830]

    If the Scheme applies, the payment will become due on the later of two dates being: a) 7 days following the end of the payment period; or b) the date of a claim made by a payee.

    (d) What is the Payment Period?

    As noted above, the parties to a construction contract in the U.K. are free to agree on their own terms for payment and related payment periods.[831] Failure to agree results in the application of the Scheme default provisions. Under the Scheme, the following payment periods are applicable:

    (e) When is the contractor entitled to render an invoice?

    Subject to an agreement that provides otherwise, the Scheme entitles a payee to submit a payment claim

    (f) On What Basis Can a Payment be Withheld and When?

    Parties to construction contracts in the U.K. may not withhold payment after the final date for payment of a sum due unless effective notice has been given in the form of a notice of intention to withhold payment. To be effective, this notice must specify: the amount proposed to be withheld, the ground for withholding (and if there is more than one ground, each ground and the amount attributable to it).[833]

    Importantly, the U.K. Construction Act prohibits the use of pay-when-paid, and more recently paid-when-certified, clauses that could potentially inhibit cash flow.[834]

    (g) What remedies are available in the event of non-payment?

    When a sum under a construction contract is not paid in full by the final date for payment and no notice to withhold has been given, the person owed the sum is entitled to suspend performance of his obligations under the contract.[835] The right to suspend must not be exercised without first giving the party in default 7 days of notice of intention to suspend and the right to suspend ceases when the defaulting party makes payment in full.[836]

    The 2009 U.K. Act added a new section 112(3A) that provides that the defaulting payer will be “liable to pay to the party exercising the right a reasonable amount in respect of costs and expenses reasonably incurred”.[837]

    In addition, any party to a construction contract has the right to refer a dispute (i.e. in relation to a payment) to adjudication.[838]

    2.4.3  Other International Jurisdictions

    The U.S. and U.K. provide the origins for prompt payment legislation, however we also considered numerous other jurisdictions including: Ireland, Australia, New Zealand, Singapore, Malaysia and Hong Kong. Our research for each of these jurisdictions allowed us to gain insight into how prompt payment has been internationally and enabled us to answer each of the questions posed above in relation to the U.S. and U.K. For a detailed analysis of these jurisdictions please see Appendix B.

    2.5  Lessons Learned from the Prompt Payment Movement

    To some extent, every existing prompt payment statute necessarily affects the parties’ freedom of contract. Freedom of contract is, of course, a foundational principle of contract law in common law jurisdictions, sometimes described as the “sanctity of contracts”.[839]

    However, in attempting to develop legislation that effectively encourages prompt payment, it is necessary to attempt to find the right balance between the legitimate interests of the stakeholders, being the payers and the payees, which is essential to the practical success of legislation and necessary to justify the infringement on freedom of contract that it will represent.

    A review of the prompt payment or security for payment legislation enacted in the U.S, the U.K. and Ireland, and Australia, New Zealand, Singapore, and Malaysia,[840] reveals recurring features, which may be present to varying degrees, depending on the jurisdiction. The features include the following:

    These elements of prompt payment regimes have been considered by stakeholders in their submissions to the Review and widely divergent views have been expressed as to which, if any, of the above concepts should be adopted for a made-in-Ontario solution.

    3. Summary of Stakeholder Views

    3.1  Proponents of Prompt Payment

    A number of stakeholders galvanized around the issue of prompt payment around the time that Bill 69 was introduced have maintained their focus on advocating for the adoption of a prompt payment regime in Ontario. Perhaps most prominent among these organizations is Prompt Payment Ontario, a sole-purpose alliance or coalition of contractor associations, unions, suppliers, general contractors, and pension trust funds created for the purpose of persuading the Ontario government that prompt payment legislation is required in Ontario.[841]

    In preparation for its stakeholder consultation meeting with the Review, Prompt Payment Ontario commissioned Ipsos Reid to conduct a survey of Ontario trade contractors on payment security and late payment in the industry, which survey was conducted between August and October 2015 and elicited 535 responses.

    Among the participants, the average age of current receivables was 61.3 days.[842] About 84.7% of the participants reported that the average age of their current receivables was more than 30 days while one participant in five (18%) was carrying current receivables of an average age of 90 days or more. Prompt Payment Ontario noted that receivables over 90 days are not eligible for receivable bank financing (also called “tail risk” due to the high degree of uncertainty they represent).[843]

    Participants in the survey indicated that over the previous three years, 67.6% or two thirds of their overdue invoices that were outstanding for 30 days were outstanding for over 45 days. Unless these participants had preserved their lien rights prior to the expiry of the 45 day period, such rights had expired.[844]

    Late payment was revealed to be a common occurrence in all sectors of the construction industry. For the purpose of the survey, the industry was divided into a number of sectors including residential builders or developers, private individuals in residential, commercial owners, industrial owners, AFPs, public owners (federal, provincial, municipal), boards of education, colleges and universities, hospitals and not-for profits. The data gathered by Ipsos Reid in relation to these sectors indicates that late payment is a common problem in various sectors of the industry, given the high percentage reported in relation to payments being delayed more than 30 days.[845]

    Based on national data from Statistics Canada, Prompt Payment Ontario compared the average age of receivables in the construction industry with all other industries (excluding financial businesses) and found that between 2002 and 2013, the average collection period in construction increased from 57.3 days to 71.1 days. By contrast, the collection period in the other industries considered remained stable at about 47 days.[846]

    The Ipsos Reid survey also highlighted the fact that the economic damage resulting from late payments affects trade contractors on many levels, both directly and indirectly. Participants indicated that they were forced to lay off workers (23.9%), decline to take on additional work they cannot finance (39.1%), avoid or delay investing in machinery and equipment (57.4%) and sometimes adopt the practice of accounting for a contingency in their bids submitted to a payer’s reputation for making late payments (61.1%).[847]

    The Ipsos Reid survey results also indicated that late payment practices have cascading consequences, such as forcing contractors to delay their hourly (5.0%) and salaried (11.6%) payroll, forcing contractors to delay employee benefit funds remittances (13.5%), CRA source deductions remittances (17.8%) and HST remittances (20.0%), forcing contractors to delay payments to their bank (19.1%) and for leases on equipment (27.9%).[848]

    Finally, the Ipsos Reid survey results revealed that, from the perspective of payees, the perceived causes of payment delays on public sector projects ranged from bureaucratic delays in approving payments to the general contractor’s unexplained delays, disputes over alleged deficiencies, payment certifier delays, and insolvency of the general contractor.[849] On private sector projects, the perceived causes of payment delays were, similar: the general contractor’s unexplained delays, the owner’s financing problems, the insolvency of the owner, disputes over alleged deficiencies, and payment certifier delays.[850]

    Prompt Payment Ontario’s core position is that a legislative framework for the promptness of payment must be established in Ontario. Prompt Payment Ontario and the National Trade Contractors Coalition of Canada (NTCCC) negotiated a Consensus Draft for a Prompt Payment Act in Ontario, which, according to Prompt Payment Ontario, reflects “an industry consensus among the general and trade contracting communities”.[851] This draft was prepared prior to the introduction of Bill 69 and attached as part of the PRISM Economics and Analysis April 2013 report on the Need for Prompt Payment Legislation in the Construction Industry.[852] Prompt Payment Ontario summarized the essential elements of its Consensus Draft for a Prompt Payment Act in Ontario as including the following:

    1. a monthly payment cycle which would apply to all contracts, except those that provide for payment based on milestones,
    2. regulation of milestone contracts consistent with the principles of prompt payment,
    3. limiting the right to withhold payment to the portion of the work that is in dispute,
    4. disclosure obligations on the part of payers,
    5. mandatory interest on delayed payments,
    6. the right of a contractor to stop work or terminate the contract if payment is delayed beyond a stipulated time period,
    7. an obligation on the part of a payer to pursue collection […],
    8. voiding of pay-when-paid clauses and explicit specification of the circumstances in which pay-when-paid clauses can apply.[853]

    Prompt Payment Ontario submitted that a payment cycle must be stipulated by the statutory scheme (30 days) and cannot be left to be negotiated between the owner and the contractor, when the outcome of such negotiations, to which the subcontractors were not privy, will affect them directly throughout the life of the project.[854] Prompt Payment Ontario submitted as follows:

    The absence of a statutory standard for payment terms has led to conditions where there are serious and socially unacceptable third party effects, where there is intrinsic unfairness in the distribution of risk as a result of unequal bargaining power […].[855]

    The monthly payment cycle proposed by Prompt Payment Ontario provides that a payer may object to an invoice within a stipulated period, and in the absence of an objection, the invoice is deemed accepted by the payer and becomes payable. Prompt Payment Ontario states that a regime providing that the statutory payment period begins on the day the work for which payment is claimed has been certified by the payment certifier would “create a legal sanction for payment delay” and ultimately would “exacerbate the existing problem rather than contribute to its rectification”.[856] Prompt Payment Ontario expressed a concern that payment certifiers are not neutral as they depend on the owner for payment, which in practice may affect the length of the certification process to the detriment of prompt payment.[857] Prompt Payment Ontario supports its position by reference to the provisions of prompt payment legislation in other jurisdictions, which stipulate that the pay period begins on the date of submission of the invoice or application for payment.[858]

    Unlike Bill 69, the regime proposed by Prompt Payment Ontario recognizes milestone contracts, but it provides for defined conditions and permissible thresholds. For example, a project must be clearly identified as a milestone project during the tendering process and cannot be subsequently subject to amendments without the consent of the payee; the milestones between payer and payee should be based solely on work that is within the control of the payee; a subcontractor can only be subjected to milestones if the general contractor itself is subjected to milestones under the prime contract; no milestone under any contract may be expected to last more than three months; a maximum number of days for verification of the achievement of milestones should be stipulated and payment should be due within 30 days following verification.[859]

    In the event that the payer disputes an invoice, a specific procedure applies, according to which the payer must give the payee notice of the objection, with full particulars including the amount to be withheld, which cannot exceed the portion in dispute.[860] Payees should be entitled to object and refer the dispute to the statute’s dispute resolution process. Payers should be prohibited from withholding the entire amount that is due when only a portion of it is in dispute.[861]

    With respect to the payer’s disclosure obligations, Prompt Payment Ontario submitted that a payer should be required to disclose to its payees the payment schedule it negotiated with its own payer, it should be required to notify payees upon receipt of project funds intended to be paid to the payees, and owners should be required to demonstrate that they have the appropriate financing or financial capabilities to meet their payment obligations throughout the life of the project.[862]

    With respect to mandatory interest payments on late payments, Prompt Payment Ontario submitted that the rate of interest should be publicly posted. Prompt Payment Ontario also submitted, however, that prescribing penalty interest in lieu of suspension of performance or contract termination would be ineffective, because entitlement to interest already exists in Ontario under the Courts of Justice Act but has not prevented payment delays.[863]

    Finally, with respect to conditional payment clauses, Prompt Payment Ontario draws a distinction between pay-when-paid and pay-if-paid clauses. Pay-when-paid clauses only speak to the timing of payment, not to entitlement to payment as pay-if-paid clauses do. In that respect, Prompt Payment Ontario recognizes the value of pay-when-paid clauses for payers who expect delays in payments they are due to receive. The right to rely on such a clause should be subject to the payer’s obligation to “take commercially reasonable actions to pursue collection and/or prevent further harm to those supplying labour, services and materials”.[864] Pay-if-paid provisions, however, should be prohibited.[865]

    Generally, with respect to prompt payment legislation, Prompt Payment Ontario submitted as follows:

    PPO has advocated that Ontario apply the same broad framework that has been successfully introduced in most other jurisdictions in the OECD, including virtually all common law jurisdictions. The essence of that framework is a legislated payment cycle, interest payments on overdue accounts, requirements for reasonable financial disclosure, a right to suspend work when payment is not received, and a mandated process for expeditious resolution of disputes over payments. Ontario’s construction industry badly needs such a framework. […] A new ‘Construction Act’ would also add the essential elements of a more complete framework, namely a legislated payment cycle […].[866]

    A number of stakeholders either expressed their support for prompt payment legislation generally and/or expressly endorsed Prompt Payment Ontario’s position and proposed framework.

    The Council of Ontario Construction Associations remarked in their submission that prompt payment was its “overwhelming priority for reform”.[867] The Council of Ontario Construction Associations advised that it deferred to Prompt Payment Ontario as the “primary advocate for prompt payment”[868] but made its own submissions as well in relation to suggestions about the regulation of pay-when-paid clauses and compulsory financial disclosure.[869] In a supplemental submission, the Council of Ontario Construction Associations noted that the Act should be amended to compel the payment of interest when payments are delayed and that the rate of interest “should be sufficiently high to meaningfully deter the now prevailing incidence of late payment”.[870]

    The Ontario Architect’s Association advised that it supported the principle of prompt payment but proposed that it be addressed through stand-alone legislation.[871] The Ontario Association of Landscape Architects noted that “prompt payment provisions would allow contractors to have continuous and seamless money flow to allow payments to suppliers, subcontractors, and financial stability to bid on other projects and not be spread thin with monies held up in litigation and payment delays”.[872]

    The Ontario Electrical League did not respond directly to prompt payment proposals, but did note that they favoured mandatory owner and general contractor financial disclosure requirements.[873]

    The International Brotherhood of Electrical Workers Local 353 submitted that the Act is costly, cumbersome and inaccessible to 80% of the construction industry (i.e. small and medium-sized companies consisting of 20 or fewer employees). It noted that non-payment was a significant concern (as opposed to delinquent payment). The IBEW Local 353 stated that lien rights often expire long before the trade contractors realize they will not get paid. Accordingly, IBEW Local 353 supported Prompt Payment Ontario's recommendations for a new “Construction Act” to govern payments in the construction industry, comprised of four key features: security for payment; obligations for prompt payment and fair dealing; expeditious dispute resolution; and special provisions for AFP projects.[874] The IBEW Local 353 noted that delinquent payment in the construction industry is “rampant” and referred to the detrimental effects including:

    The detrimental effects of delinquent payment are many and include driving up the cost of construction as contractors factor the risk of delinquent payment into their bids; strains on cash flow, especially for small businesses that have to meet payroll, pay bills, taxes, WSIB premiums and other costs, forcing some into insolvency; lower employment figures as contractors must limit their payroll commitments to meet cash flow expectations; less investment in apprenticeships; less investment in new machinery, equipment and technology; and construction costs are driven up by a shrinking pool of qualified, reputable contractors who are able to bid on projects. On an industry wide basis, delinquent payment practices erode the level playing field as those who maintain honourable practices are put at a disadvantage.[875]

    The Labourers International Union of North America, Local 183, included in its submission some comments on prompt payment noting that it generally supported prompt payment but did not want any reduction in holdback. Local 183 also noted that it was opposed to the implementation of any pay-when-paid and/or pay-if-paid clauses and submitted that such clauses should be unenforceable because they force tradespeople to bear the burden of payment defaults higher up in the construction pyramid.[876]

    The Provincial Building and Construction Trades Council of Ontario and I.U.O.E. Local 793 (“Local 793”) also indicated its strong support for a legislative scheme which would prevent parties from delaying payments that are due and owing and added that such a legislative scheme should include “language which will allow parties to aggressively enforce any breaches of such prompt payment provisions and to provide severe penalties for such breaches”.[877]

    Other stakeholders, such as the Ontario General Contractors, supported certain types of penalties, such as accruing interest at a given rate.[878] Some of the proposals made included payment of interest in accordance with the contract, at a rate set out in a new provision in the Act, or at the rate set out in the Courts of Justice Act.[879]

    Stakeholders commented on the need to distribute the financial risks of construction fairly among participants based on their ability to know, control, and absorb these risks. Stakeholders expressed concern about exempting certain types of contracts or categories of owners from prompt payment regimes as a fairness concern.[880] The Ontario Society of Professional Engineers submitted that prompt payment legislation should create several mandatory and enforceable payment terms, applicable to all projects.[881]

    Some stakeholders commented on the mandatory interest requirements that could form a part of a prompt payment regime. For example, the Ontario Road Builders’ Association, in a supplemental submission, noted that “the requirement of a project owner to pay mandatory interest would encourage timely process in a contractor payments” and noted that it could serve as a remedy to address the shifting of the financing costs down the chain by stretching payments.[882]

    The Ontario Association of Architects noted that it is prepared to accept the continued use of pay-when-paid provisions, as long as prompt payment can be guaranteed.[883] The Ontario Association of Landscape Architects suggested that pay-when-paid and pay-if-paid clauses could be defined by way of legislation and restricted.[884]

    The Association of Registered Interior Designers of Ontario advised that they “supported the principles of Bill 69 and prompt payment where it is a solution that is encompassing of all applicable professions and stakeholders”.[885]

    3.2  Stakeholder Concerns About Prompt Payment

    As noted above, stakeholders agreed with the general principle that contractors and subcontractors should be paid in a timely way for work performed. Not surprisingly, no stakeholder identified itself as a payer who pays late. However, a number of stakeholders expressed concern about the imposition of prompt payment legislation because they advised that it would place an unacceptable restraint on their freedom of contract.[886]

    For example, the City of Toronto advised that it is not opposed to promptness of payment, but suggested that any prompt payment legislation should maintain the parties’ freedom to agree on payment terms rather than impose statutory pay periods.[887] The City of Toronto noted that any legislation should take into consideration existing legislation and policies such as the City of Toronto’s Fair Wage Policy and that the right of set-off should not be restricted.[888]

    The Ontario Road Builders’ Association recommended that in any legislation it should be clear that the parties “maintain the ability to retain or set-off amounts where permitted under the contract, such as for incomplete or defective work, indemnified claims, liquidated damages, etc. provided that written notice for the reason for the retention or set-off is given in a timely manner and before the payment would otherwise become due”.[889]

    The Association of Municipalities Ontario also emphasised the primacy of contracts entered into between the parties.[890]

    The Residential Construction Council of Ontario and the Ontario Home Builder’s Association noted that freedom of contract is “paramount” and should be preserved in the Act. They submitted that “the parties to building contracts are the ones best able to determine what works best for their particular project, from payment terms, to how best to settle a dispute, to fundamental project delivery models”.[891] The Residential Construction Council of Ontario and the Ontario Home Builder’s Association noted that the Act already provides significant protections specific to the construction industry (i.e. construction liens) and that, in light of these protections, specific provisions regarding payment, settlement, bonding, and other matters are “better left to the parties themselves” as “to do otherwise may restrict the industry from evolving and create complicated questions when the industry inevitably does grow”.[892] The Residential Construction Council of Ontario and Ontario Home Builder’s Association reiterated their criticisms of Bill 69, noting that Bill 69 would have established an “arbitrary payment structure with onerous timetables and significant administrative and reporting requirements”.[893] The Residential Construction Council of Ontario also opposed the financial disclosure requirements of Bill 69 as representing “an intrusive level of disclosure that [they] are not aware exists in North America”. The concern expressed was that this information could be abused considering the number of subcontractors on a project that would have access to the information.[894] The Residential Construction Council of Ontario and Ontario Home Builder’s Association further noted that Tarion requires a builder to post security and a risk assessment to demonstrate that the builder has the financial capability to complete the project.[895] They strongly emphasized the important role that Tarion plays in the residential construction sector in protecting purchasers of homes.

    A number of stakeholders reiterated the concerns that they had expressed at the time Bill 69 was introduced.[896] These stakeholders had opposed the specific legislative framework set-out in Bill 69.[897]

    For example, the Council of Canadian Universities provided us with a copy of the letter they had written to Premier Wynne on March 3, 2014. In that letter, they noted that their primary concern with Bill 69 was that it would restrict their freedom of contract “in ways that would have a significant impact on the ability of universities to negotiate payment terms and conditions with contractors”.[898] They noted that Bill 69 mandated that payments be made according to a schedule of dates as opposed to project milestones which they asserted could lead to overpayments.[899] Further, they expressed concern about the fact that, under Bill 69, contractors could demand payment on the basis of “reasonable” estimates by the contractor including “services and materials yet to be supplied”.[900] Further, the Council of Canadian Universities referred to “certain levers” that they would not be able to utilize such as the right to hold back payment in relation to identified deficiencies.[901]

    Colleges Ontario advised that it agreed with the submissions of the Ontario Association of School Board Officials and recommended that the parties be free to agree to their own contract terms.[902]

    The Canadian Institute of Quantity Surveyors submitted that prompt payment provisions may impair a contractor’s ability to properly manage the trades and noted that most contracts require payment within a certain number of days after certification.[903]

    The Ontario Association of School Board Officials had also prepared submissions at the time Bill 69 was introduced and created a further submission to the Review.[904] In its submission to the Review, the Ontario Association of School Board Officials expressed the view that legislated terms for construction contract payments should be dealt with in one piece of legislation[905]. In respect of its assessment of prompt payment issues, the Ontario Association of School Board Officials asserted that “the core non-payment problems in the industry are within the construction groups in the pyramid below project owners and general contractors”.[906] Ontario Association of School Board Officials, in its submission analyzed various causes of payment delays including the nature of the payment terms agreed to by the parties given the need for “extensive reviews by the several architectural and engineering consultants, by the owner’s project team followed by senior level approvals and then payment processing by accounting staff”.[907] The Ontario Association of School Board Officials also analyzed the issues of deficient work improperly categorized as complete, incomplete progress draws, and unfair payment practices and explored various potential solutions to these problems in its submission including self-policing, introduction of a prompt payment code (on a voluntary basis), and allowing parties to prescribe payment terms in their contracts.[908]

    The Ministry of Transportation advised that it had “concerns with legislation that either dictates or attempts to manage commercial payment transactions so as to override the financial controls the Ministry uses to manage and supervise its payment process”.[909] The Ministry of Transportation noted that such mandatory provisions would very likely increase the administration processes of filing claims by the Ministry of Transportation for work that could not be confirmed as acceptable, which would create new risks for the Ministry of Transportation and likely other owners. The Ministry of Transportation noted that payment flexibility was very important as it developed and expanded the use of different contracting models.[910]

    In a follow-up submission, the Ministry of Transportation advised that it had examined the last three years of data related to its major capital program and determined that “contractors have been paid within 30 days, approximately 86% of the time. The payment average increases to 97% for a timeline between 31 and 60 days”.[911]

    In relation to AFP projects, Infrastructure Ontario indicated that mandating prompt payment in the AFP context, the circumstances where the authority would not have properly assessed the services and work provided by the contractor would “run counter to the objectives of the AFP model in ensuring adequate risk transfer”.[912] However, Infrastructure Ontario noted that the AFP model “takes no issue with paying promptly upon certification according to the payment schedule to which the sophisticated parties have agreed”. Infrastructure Ontario noted that the principle of freedom of contract should be preserved with respect to AFP projects and the “public interest should be considered paramount given the demonstrable value for money”. Infrastructure Ontario suggested that if the AFP structure is altered based on prompt payment provisions, then such provisions should not be applicable to AFP projects.[913]

    The OBA CLA Reform Committee provided us with a copy of its submission related to Bill 69 but also provided a separate submission which highlighted the need to properly identify affected parties and the timing of review of the work. The OBA CLA Reform Committee also provided examples of exceptions to prompt payment, including in relation to set-offs and exclusions from prompt payment regimes for certain types of projects. Finally, the OBA CLA Reform Committee referred to consideration of the appropriate consequences of default in payment, notices of disputed payment requests, the possibility of waiver provisions, the timing of final payment, and overall legislative protections provided in other jurisdictions.[914]

    One concern raised by a number of stakeholders was with respect to maintaining the freedom to agree on payment terms adapted to the project at hand, as opposed to a “one-size-fits-all” payment statutory scheme.[915] The City of Mississauga, the Toronto Transit Commission and a number of other stakeholders submitted that any prompt payment scheme would have to be flexible enough to allow parties to negotiate the right payment terms for different types of projects.[916] The Regional Municipality of York advised that it would not support prompt payment provisions “without a careful review of their applicability and/or adaptability to different types of contracts”.[917] The Ontario Road Builders’ Association submitted that, while it is not opposed to prompt payment legislation, such legislation should leave the parties free to negotiate or model payment terms to fit each project, both in respect of the timing and the determination of entitlement. [918] The City of Toronto and other stakeholders submitted that complex and/or time sensitive projects may be better suited for payment terms tied to project milestones or set payment schedules.[919]

    The Surety Association of Canada submitted as follows:

    Prompt payment provisions should accommodate the market realities of reasonable alternative payment processes and provisions (milestone payments, advance and mobilization payments, for example), and not unduly restrict the ability of stakeholders at all levels to pursue innovation in the procurement of construction and related services (for example public-private partnerships and integrated project delivery).[920]

    The Surety Association of Canada also noted that where the terms of the contract conflict with any prompt payment provisions and the contract is deemed amended to comply, the provisions should acknowledge that the surety under a performance and payment bond must have no greater liability under the bond than does its principal under the contract.

    The Toronto Transit Commission noted that the goal of prompt payment is to ensure “when in time” amounts owing should be paid, but should not determine “what amounts are payable”. The Toronto Transit Commission emphasized the importance of ensuring the timely completion of public projects and the use of tax payer funds.[921]

    Many stakeholders raised concerns about the need to have sufficient time to review progress payment applications and invoices when they are received. For example, the City of Toronto stated that an owner should have no obligation to pay until the payment certifier has had a reasonable amount of time to review and certify the work and that there can be no deemed approval of payment applications.[922] The City of Toronto noted that “many payment delays are caused by incomplete or improper payment applications” and stated that “the onus of insuring correct payment applications should remain with the payee”.[923] In this regard, some pointed to the need to protect the interests of owners and payers, especially public sector owners who have obligations to taxpayers such that sufficient protections need to be in place to ensure that monies are paid for work properly performed.[924] The Consulting Engineers of Ontario noted that, though they strongly support the premise of timely payment for certified completed work, but that any legislative change must not create an environment that picks “winners and losers”.[925] The Consulting Engineers of Ontario note that Bill 69 had provided a very short review period in relation to the timeline for the certification of payment, which would be difficult to achieve “particularly on larger or more complex projects where there might be a number of different design professionals involved”.[926]

    The City of Mississauga suggested as follows:

    It is recommended that any prompt payment regime that is being imposed should include the following:

    Many stakeholders opposed the inclusion of a legislative proof of financing requirement. Some stakeholders noted that such information can be obtained through the prequalification process and/or as a contractual requirement.[928]

    Public owner stakeholders noted that financial information, including budgets for capital projects, is publically available on the internet and that these budgets are subject to a rigorous process of review.[929]

    Enbridge noted that:

    …as a reporting issuer under provincial securities legislation, any requirement to disclose financial information in addition to information that is already publically disclosed would be onerous and, in the case of request for updated information that has not been disclosed to the public, potentially problematic.[930]

    4. Analysis and Recommendations

    In analyzing the advantages and disadvantages of a prompt payment regime for Ontario, it is important to take into account the experiences of other jurisdictions where such legislation has been introduced. In particular, U.S. prompt payment legislation has not proven to be a panacea; nor would Bill 69 have provided a balanced or effective solution to late payment. However, in our view, a customized solution that works in concert with an effective dispute resolution system would certainly be an improvement over the current situation.

    In examining the constituent elements of an appropriate, balanced prompt payment regime, it is also important to bear in mind that such a regime should impair only to the extent necessary the parties’ freedom to contract, and it should be flexible enough to accommodate the different types of actors in the construction industry and their differing reasonable needs.

    Below, we assess the key elements of a prompt payment regime and provide our recommendations in respect of each of these elements.

    4.1  What Types of Contracts Should Prompt Payment Apply To?

    Based on the global models reviewed, prompt payment legislation may be applied just to construction contracts or more broadly to other types of contracts as well. For example, as discussed above, the federal Prompt Payment Act in the U.S. is not limited to construction contracts but applies to all suppliers and service providers to federal agencies. Given that our mandate is to focus on the promptness of payment issue as it affects Ontario’s construction industry, we have not addressed whether or not such a regime should or should not be applied to other types of goods and service being supplied to other types of projects.

    In relation to construction projects, as can be seen from the detailed charts that are found in the Appendix B prompt payment legislation may be applied to one or the other of public and private projects, or both.

    As is apparent from the stakeholder positions set out above, we heard a very strong message from contractor and subcontractor stakeholders in Ontario that a lack of prompt payment is a problem in both the public and the private sectors. The Ipsos Reid survey, for example, indicates that receivables are frequently outstanding for lengthy periods of time on both public and private projects.[931]

    The reasons for late payment may differ as between public and private owners. Anecdotally, we heard from stakeholders that, in respect of private owners, a lack of adequate financing or funds may impede prompt payment. In respect of public projects, the need for appropriate check and balances to be in place in the payment approval process can slow down that payment process. Concerns about transparency, accountability and the prevention of fraud inform the nature of the procedures adopted by public entities approval processes. By way of example, public owners, in their payment processes, may try to ensure that there are separations between the person commissioning the work, the person reviewing the payment applications, and the person approving the payment application. Public entities have each developed their own internal processes and procedures and the efficiency of these processes can be affected by a lack of resources.

    Various entities, both private and public, submitted that they paid promptly and therefore should not be subjected to prompt payment legislation. We appreciate that there are entities that have sophisticated payment mechanisms in place developed over decades that operate smoothly, particularly as electronic commerce improves the speed of the movement of funds. However, there does not seem to be a rational or logical methodology for determining what entities would fall into this category, and, as noted above, there is no entity that made submissions to the Review that admitted that it does not pay promptly. In any event, for those entities that pay promptly, they should not have any issue with complying with legislation that requires them to do what they say they are already doing. The point of a prompt payment regime is to incent both public and private actors to keep funds flowing down the construction pyramid in the ordinary course and minimize blockages and delays.

    Recommendation

    1. We recommend that a prompt payment regime be legislated in Ontario and that it be applied to both the public and private sectors. Prompt payment should be implemented by creating a statutory scheme to be implied into all construction contracts that do not contain equivalent terms.

    4.2  In the Construction Pyramid, What Level of Contract Should Prompt Payment Apply To?

    In the vast majority of the jurisdictions considered, prompt payment is applied both at the owner-general contractor level and at the general contractor-subcontractor level and further down the construction chain.

    It makes sense to apply a prompt payment regime down the contractual construction pyramid, so that those at the base of the pyramid have a mechanism to ensure that funds flow down to them.

    However, there is a complicating factor when considering the flow of funds down the chain from the general contractor to its sub-contractors and beyond. In certain jurisdictions considered, the legislation provides that when prompt payment is imposed on the general contractor, there may be an ability on that general contractor to advise its subcontractors that it is not paying them if it has not been paid by the owner. Some have referred to such provisions as, in effect, a statutory pay-when-paid clause.

    A pay-when-paid clause is a form of contingent payment clause. Such contractual clauses have been the subject of debate within the construction industry internationally.[932] In fact, in respect of contractual pay-when-paid clauses, various jurisdictions have prohibited or substantially limited the use of such clauses, including the U.K.,[934], Australia,[935]New Zealand and several U.S. states,[936] including Massachusetts, Maryland, South Carolina, Illinois, Wisconsin, Missouri and North Carolina.[937]

    It is argued by some that the effect of pay-when-paid clauses is to shift most or all of the risk of an owner’s default to subcontractors.[938] The ultimate effect of such clauses, the “pay-if-paid” clause, is to potentially absolve the general contractor from having to pay the subcontractor at all if payment is not forthcoming from the owner, despite the subcontractor’s performance of the subcontract work.[939] A subcontractor may not have the bargaining power to refuse to accept a pay-when-paid clause or to negotiate more favourable wording.[940]

    On the other hand, the inability to utilize a pay-when-paid clauses leaves the general contractor liable to pay from its own pocket for work that was performed by a subcontractor for the benefit of an owner who fails to pay, whether as a result of insolvency or otherwise.[941] In a major claim/counter-claim situation where an owner deploys the right of set-off to withhold payment for an extended period, the lack of a pay-when-paid clause would leave the contractor in a particularly exposed position.

    In Ontario, at present, the case law indicates that a properly drafted pay-when-paid clause will be enforced.[942]

    In our view, the policy reasons for permitting pay-when-paid clauses continue to apply, such that a lack of payment by an owner constitutes a valid reason not to pay a sub-contractor, subject to the observation that the ability of general contractors, and downstream payers, to rely on such clauses should be circumscribed by requiring that appropriately detailed notices be provided to subcontractors in a timely way notifying that payment that has been withheld by an owner, or downstream payer, providing the reasons for non-payment, and undertaking to commence or to continue proceedings necessary to enforce payment.

    Recommendation

    1. We recommend that the prompt payment regime should apply at the level of the owner-general contractor, general contractor-subcontractor, and downwards, and that the legislation provide a mechanism for general contractors to notify subcontractors of non-payment by owners, with reasonable particulars, and to undertake to commence or continue proceedings necessary to enforce payment so as to defer their payment obligations.

    4.3  What Should the Trigger for Payment Be?

    Based on our review of the prompt payment regimes in the various jurisdictions considered and the proposals made to us by various stakeholders, there are three potential triggers to choose from, namely: (1) the receipt of a proper invoice, (2) the delivery of services or materials, or (3) the approval of the payment claim by the payment certifier.

    In respect of the latter trigger, most proponents of prompt payment do not favour the approval of the payment claim by the payment certifier as a trigger for the commencement of the payment period. They point out that the delays that prompt payment legislation is designed to ameliorate include the payment delays attributable to the slow review of progress payment applications.

    On the other hand, those responsible for certifying payment note that they have a professional obligation to conduct all necessary due diligence to ensure that the work is properly performed and frequently the documentation submitted with a progress payment application is incomplete or contains errors.[943]

    Some proponents of prompt payment advocate the second trigger such that the payment trigger is the delivery of goods and services and that payment is due with 31 days from that delivery, as required under Bill 69. Many opposed this proposal as it did not account for the possibility that a defective invoice would be delivered.

    If the first option is adopted such that the trigger utilized is the receipt of an invoice and if a requirement is imposed that the invoice be a “proper invoice”, it would have the advantage of ensuring that the payment period only starts to run from the date that a properly documented claim for payment is submitted. Adding the requirement of a “proper invoice” addresses the concern expressed by some owners, engineers, architects, and general contractors about the quality of paperwork submitted in relation to a request for payment.

    What do we mean by a “proper invoice”? Again we can look to other jurisdictions where the receipt of an invoice is used as the trigger for the commencement of the payment period. As noted in the section above summarizing the American prompt payment regimes, almost half of the states have adopted the receipt of invoice approach for both public and private sector contracts. The invoice must generally be a proper invoice in order to start the clock ticking. Under the U.S. federal prompt payment legislation an “invoice” is defined as a bill or a written request for payment submitted by a contractor for property delivered or services performed. A proper invoice under this legislation must meet the minimum contractual standards and must contain or be accompanied by:

    Similar criteria could be set out in Ontario prompt payment legislation so as to ensure that there is no lack of clarity about what constitutes a proper invoice but, at the same time, allows the parties the freedom under their contract to specify the supporting documentation or information that is to accompany an invoice, subject to the qualification that it should be made clear that certification cannot be made a contractual precondition to the issuance of a proper invoice. Rather, certification must follow submission.

    Recommendation

    1. We recommend that the trigger for payment should be the delivery of a proper invoice; provided that certification for payment (if there is certification for payment provided in the contract) must follow submission.

    4.4  What Should the Payment Period Be?

    As noted above, we recommend that the trigger that starts the clock ticking for payment is the submission of a proper invoice. The next question to be answered therefore is what is the appropriate payment period?

    An examination of the other jurisdictions considered indicates that 28 days is the most common payment period utilized. We do not see a reason to deviate from this commonly utilized period of time, as it should provide a payment certifier with adequate time to review the invoice and supporting documents and conduct necessary due diligence.

    At the same time, public and private owners will need to ensure that their internal processes are structured so as to validate payments expeditiously.

    In respect of subcontractors, the amounts they are invoicing for are generally submitted as part of the package being submitted to the owner for payment such that payment should then flow to subcontractors within a relatively short period of time after payment is made by the owner.

    Recommendation

    1. We recommend that:
      • As between owner and general contractor a 28 day payment period be applied, that is triggered by the submission of a proper invoice.
      • As between general contractor and subcontractor, a further 7 days from receipt of payment from the owner would be required, and so on down the contractual chain.

    4.5  When Is the Contractor Entitled to Render an Invoice?

    Over the course of the Review, we heard from many stakeholders about the need to have the ability to structure payment terms to suit the needs of the project at issue. By way of example, we heard repeatedly about the importance, in certain contracts, of being able to structure payments based on the achievement of project milestones, as opposed to being based on monthly progress payment applications.

    Based on the research conducted in various jurisdictions, it is usual practice in prompt payment regimes to allow parties to set out appropriate terms in their contracts that will describe when the parties are entitled to render an invoice. The legislation then becomes engaged to ensure that payment is in fact made within a specified period of time (often 30 days) after submitting a proper invoice that is submitted in accordance with the terms of the contract.

    In some contracts, the payment terms are unclear. We were asked by some stakeholders to consider a default provision if the parties have not set out a payment period in their contract.[945] Monthly payments were suggested. This suggestion seems to be a reasonable request as, based on the submissions from stakeholders, it is in keeping with good business practice and, on many projects, payments are made on a monthly basis so as to maintain cash flow for project participants.

    Recommendations

    1. We recommend that parties be free to contract in respect of payment terms, but that if they fail to do so, monthly payments should be implied (i.e. every 28 days).

    4.6  On What Basis Should Payment Be Allowed to Be Withheld and When?

    Owner and general contractor stakeholders were strongly of the view that if prompt payment legislation is to be introduced, they need to maintain an ability to withhold payment if there is a disagreement about:

    1. the amount of the payment;
    2. the quantity or quality of the services performed and/or the goods delivered; and
    3. contractor compliance with contract obligations.

    Essentially, these owner and contractor stakeholders are concerned about maintaining their contractual and common law rights of set off.

    The right of set-off often arises in relation to deficiencies in the work performed by contractors or subcontractors. These deficiencies may become apparent before or after certification of the work.

    Where significant problems arise in the performance of a contract or subcontract, the right to withhold payment pursuant to the right of set-off can be essential. However, experience also suggests that when a contractor raises a significant claim, the owner will frequently raise a significant claim for set-off in response and may not provide an adequate basis for its assertion of a right of set-off. An unsubstantiated and general assertion of a set-off can cause the flow of funds to stop entirely, adversely affecting subcontractors and suppliers, even if they are not involved in the dispute between owner and contractor. In other words, the assertion of a right of set-off, which can go untested for a lengthy period of time as the dispute resolution process proceeds, may prove to be an inviting strategy for a payer seeking bargaining leverage. Accordingly, the set-off issue has received significant attention in other jurisdictions, with forms of statutory adjudication having been adopted in some jurisdictions as a method of quickly resolving such “grid-locked” impasses.[946]

    The right of set off may be broadly drafted in a Contract so as to encompass any amounts owed to a contractor whether under the contract at issue or under some other contract.

    In our discussions with stakeholders, there was general agreement that the right of set off is a significant right. Generally, stakeholders accepted that such a right could be exercised, but that adequate notice must be given if the right is to be exercised in relation to both the quantum of the set-off and particulars of the set-off. Also, stakeholders objected to the notion that owners or general contractors could exercise a right of set-off under one contract in relation to amounts allegedly owing under a completely different contract. Under section 17(3) of the Act, an owner may set off any amount owing to the payee in relation to “outstanding debts, claims or damages, whether or not related to the improvement”. We are of the view that the right of set-off should be limited to amounts owing for an improvement under a specific contract and not other contracts.

    Recommendation

    1. We recommend that payers be permitted to deliver a notice of intention to withhold payment within 7 days following receipt of a purported proper invoice and that the notice of intention to withhold must set out the quantum of the amount withheld and adequate particulars as to why that amount is being held back. Undisputed amounts should be paid. Also, the right to withhold should relate only to the contract at issue.
    2. We recommend that a payer continue to be able to set off all outstanding debts, claims or damages but that the right of set off not extend to set-offs for debts, claims and damages in relation to other contracts.

    4.7  What Remedies Should Be Available in the Event of Non-Payment?

    In terms of potential remedies available to a payee who does not receive payment in accordance with the provisions of a prompt payment regime, there were two remedies that stakeholders advocated being:

    1. mandatory interest payments; and
    2. exercising a right of suspension.

    In respect of the first remedy, there was widespread support for the notion that interest should be paid if payments are not made promptly. Many stakeholders pointed out that even where there are contractual rates of interest applicable to late payments, it is difficult to enforce these provisions. We note that Bill 69 provided that interest would be paid on late payments at a rate of the greater of the pre-judgment interest rate in the Court of Justice Act or the contractual rate of interest.

    The more difficult issue to address is the issue of whether a contractor or sub-contractor should be permitted to exercise a right of suspension if it is not paid.

    Allowing the early exercise of such a right, would according to some stakeholders, be unfair, particularly where a bona fide dispute exists over whether or not payment should be made, i.e. in the event there is a legitimate set off being asserted.

    Under the American model, based on the litigated disputes, it appears that the existence of a dispute that is bona fide in nature, when viewed from an objective perspective, will prevent a payee from being able to rely on prompt payment legislation. As a result, a payee will be forced to pursue its remedies through the court system.

    As explained in Chapter 9 - Adjudication, we recommend the adoption of an adjudication model to deal expeditiously with payment disputes. As it relates to the right of suspension, the parties should be required to refer a dispute to adjudication and it would only be after the adjudication decision was rendered and if the payer then refused to comply with that decision that the right of suspension would arise.

    Recommendation

    1. Mandatory non-waivable interest should be required to be paid on late payments at a rate of the greater of the pre-judgment interest rate in the Court of Justice Act or the contractual rate of interest.
    2. A right of suspension should arise after an adjudication determination has been rendered and a payer has refused or failed to comply with the adjudicator’s determination.

    4.8  Should Financial Disclosure Be Included in a Prompt Payment Regime?

    Contractor and subcontractor stakeholder groups have expressed concerns about inadequately financed projects and a lack of transparency during the bid process about project financing. This notion has not been included in prompt payment legislation any of the jurisdictions reviewed.

    On the other hand, owner stakeholders raised significant concerns in relation to the nature of the financial disclosure required under Bill 69. Critics assert that this is an intrusive and unwarranted incursion and would require the disclosure of extremely sensitive financial data. Concerns were also raised about the significant increase in administrative burden and that the level and extent of the information to be disclosed would be very difficult to define. Also, stakeholders advised that ongoing obligations of financial disclosure could have a negative market impact on certain owner groups and could conflict with the requirements of other statutes, regulations and codes.

    On balance, and keeping in mind that such financial disclosure obligations are not a characteristic of prompt payment in any other jurisdiction, we are of the view that the intrusiveness of such a measure, combined with the consequent administrative burden, and the lack of clarity in respect of what information would be subject to disclosure, does not warrant legislative support. In addition, such a requirement is a requirement primarily directed at the procurement phase of a construction project, not the construction phase, while our mandate relates to construction and not procurement.

    Recommendation

    1. We do not recommend that financial disclosure be included in Ontario’s prompt payment regime; provided that the Act should require disclosure to all subcontractors that they are bidding on a project with a milestone-based payment mechanism.

    Chapter 9: Adjudication

    1. Overview

    On construction projects, if disputes arise, payments may stop due to the owner’s perceived need to protect rights of set-off, and sometimes work may stop due to the contractor’s need for payment and cash flow. Unresolved disputes of this nature may burden stakeholders for years, withdrawing unrecoverable human and financial resources from the Province’s construction economy.

    Adjudication is a swift and flexible mechanism of dispute resolution. While there are many variations of adjudication, the essential characteristics involve the determination of a dispute arising under a construction contract by an adjudicator who is a qualified person (not a judge) appointed to conduct an investigation and make a quick determination (in about 40 days, on average). The adjudicator’s decision is binding on an interim basis and enforceable. In certain adjudication regimes, parties are free to specify in their contracts the mechanisms for adjudication, as long as those mechanisms comply with the minimum requirements set out in the legislation and/or regulations. If they do not comply, the minimum standards set out in the legislation or regulation will be implied into the contract.

    Adjudication is a proven, pragmatic solution for projects gridlocked by disputes, a solution that frees cash flow and resources, while at the same time striking an appropriate balance among competing interests. The task, as we see it, is to adapt the known and proven model of adjudication in a way that suits Ontario, given the existing lien regime and given our recommendations in relation to promptness of payment as described in Chapter 8 – Promptness of Payment and the summary procedures described in Chapter 6 – Summary Procedure.

    2. Context

    Contractual adjudication originated in the private sector in the U.K. in the early 1970’s. As noted in Chapter 9 – Adjudication, Sir Michael Latham was commissioned to prepare a joint government/industry report on aspects of the construction industry in the U.K. This resulted in two reports: Trust and Money (December 1993) and Constructing the Team (July 1994).[947] In Constructing the Team, Latham noted that while “the best solution is to avoid disputes . . . nevertheless, disputes may arise, despite everyone’s best efforts to avoid them”.[948] It was in this context that he made his recommendations, giving rise to remedial legislation in the form of Part II of the U.K. Construction Act which gave parties the right to refer a dispute to adjudication.

    The provisions of the U.K. Construction Act addressing adjudication are very brief, because it sets out minimum requirements. If a construction contract does not comply with these requirements, the adjudication provisions of the “Scheme” will apply. The Scheme is a regulation to the U.K. Construction Act which articulates the procedures and timelines for both adjudication and prompt payment.[949]

    The U.K. Construction Act was considered revolutionary at the time it came into force. It provided for construction disputes to be decided promptly by an “adjudicator” who would reach an interim binding decision within 28 days, after which the parties could litigate or arbitrate. Adjudicators were granted wide discretion to implement just, expeditious and economical results.[950]

    As noted by authors Nicholas Gould and Charlene Linneman in their 2008 review of the U.K. Construction Act ten years after its inception, statutory adjudication in the U.K. has eight fundamental components:

    1. The right to refer a dispute at “any time”: A party to a construction contract does not need to wait until the project is finished in order to have a dispute determined by an adjudicator.
    2. Notices: A party to a construction contract must have the right to give a notice at any time of his intention to refer a particular dispute to the adjudicator.
    3. Appointment: A method of securing the appointment of an adjudicator and furnishing him with details of the dispute within seven days of the notice is mandatory.
    4. Time scales: The adjudicator is then required to reach a decision within 28 days of this referral. It will not be possible to agree in advance of any dispute that additional time may be taken for the adjudication. There are only two exceptions to this rule. First the adjudicator may extend the period of 28 days by a further 14 days if the party refereeing the dispute consents. Second, a longer period can be agreed by consent of all the parties. Such agreement can only be reached after the dispute has been referred.
    5. Act impartially: The adjudicator is required to act impartially.
    6. Act inquisitorially: The [U.K. Construction Act] requires that the adjudicator “takes the initiative in ascertaining facts and the law.” This gives the adjudicator power to investigate the issue in whatever manner he or she deems appropriate in light of the short time scale available.
    7. Binding nature: The decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration or by agreement […] The [U.K. Construction Act] does, however, go on to say that the parties may agree to accept the decision of the adjudicator as finally determining the dispute.
    8. Immunity: The adjudicator cannot be held liable for anything done or omitted in the discharge of his function as an adjudicator unless acting in bad faith. This protection is extended to any employee or agent of the adjudicator.[951]

    Canadian commentator Duncan Glaholt notes that the U.K. Construction Act sought to achieve two objectives:

    1. Cash flow efficiency and productivity; and
    2. Swift resolution of disputes without wasted profit and time in litigation.[952]

    Adjudication worked, and quickly took root. It is now used internationally in a wide range of contexts, sometimes to resolve interim payment disputes,[953] and sometimes to resolve disputes of much broader scope.

    2.1  The U.K. Adjudication Experience to Date

    The phrase “pay now, argue later” has been used to describe adjudication under the U.K. Construction Act.[954] By design, adjudication is “rough justice”, insofar as “the justice that is meted out is not always as pure and as well prepared for as cases which proceed to a full trial court or to a substantive hearing before an Arbitrator”.[955]

    Nevertheless, courts in the U.K. enforce adjudication decisions robustly. Adjudicator’s decisions remain binding and enforceable until the parties legal rights are finally determined.[956] The specifics of enforcement of adjudicated decisions in the U.K. are discussed below. U.K. courts have held that it is only in rare circumstances that they will interfere with an adjudicator’s decision. Courts actively discourage “simply scrabbling around to find some argument, however tenuous, to resist payment”.[957] Hudson’s states that “if the Adjudicator has answered the right question in the wrong way, their decision will be binding, and if they answered the wrong question, the decision will be a nullity.”[958]

    Statutory adjudication has resulted in judicial efficiency as well. In Ten Years on: Review of Adjudication in the United Kingdom,[959] authors Nicholas Gould and Charlene Linneman noted that “[a]djudication has substantially reduced the workload in court” and that the “volume of construction litigation [had] clearly reduced as a result of adjudication.”[960]

    2.2  Adjudication Now Adopted in Many Jurisdictions

    Adjudication has been adopted by many common law jurisdictions worldwide. While the legislated schemes vary, the general intent remains the same: remove gridlock, and eliminate late payment and non-performance.

    The Review has considered adjudication for construction disputes and security for payment legislation in the United Kingdom, various states and territories on the east coast of Australia including New South Wales, Victoria, the Australian Capital Territory, Tasmania and South Australia (referred to collectively as “Australia (East Coast)”[961], the states and territories on the west coast of Australia including Western Australia and the Northern Territory (referred to collectively as “Australia (West Coast)”), Singapore, Malaysia, Ireland[962], and New Zealand.

    We also note that several other countries are considering whether or not to introduce adjudication including Hong Kong[963], South Africa[965] Adjudication has not been implemented in U.S. legislation.

    2.3  Comparative Review

    For each jurisdiction reviewed[966], we have considered the following questions:

    1. Who can require adjudication?
    2. Who can adjudicate a dispute and how is the adjudicator nominated?
    3. What types of disputes can be adjudicated?
    4. What is the adjudication process and how are costs dealt with?
    5. How are adjudicated decisions enforced?

    Answers to these questions are summarized briefly below and further details including charts are found in Appendix C.

    2.3.1  Who Can Require Adjudication?

    The seminal U.K. model of statutory adjudication provides that any party to a construction contract[967] has the right to refer “a dispute arising under the contract” to adjudication.[968] Other jurisdictions have provided as follows:

    1. Australia (West Coast), New Zealand,[969] Ireland,[970] Malaysia[971] and Hong Kong (proposed) have followed the U.K. model such that any party to a “construction contract”, however defined, can refer a dispute to adjudication.
    2. Australia (East Coast), and Singapore have enacted more restrictive legislation. In these jurisdictions only a payee can initiate a statutory adjudication. A payee in these jurisdictions is usually an unpaid supplier of work, services or materials.[972] The policy underlying the Australian (East Coast) adjudication model was to “stamp out the practice of not paying contractors for work they undertake on construction”.[973] As a result, the Australian (East Coast) approach denies principals to a head contract (i.e. owners) or contractors in the context of a claim under a subcontract access to adjudication as an avenue of redress.[974]

    The various approaches as to who can require adjudication are depicted below:[975]

    U.K. New Zealand Ireland Singapore Malaysia Hong Kong (Proposed) Australia (East Coast) Australia (West Coast)
    Any party (s.108) Any party (s.25) Any party (s.6(1)) Payee only (s.12) Any party (s.7(1)) Any party Payee only (s.17(1)) Any party (s.25)
    2.3.2  Who Can Adjudicate a Dispute and How is the Adjudicator Nominated?
    2.3.2.1  Who Can Adjudicate a Dispute?

    The U.K. initially developed a roster of adjudicators drawn from the ranks of quantity surveyors, engineers, architects, and lawyers. Many of the initial adjudicators had their roots in arbitration.[976] A process was then created for additional adjudicators to be added to the roster. Training was implemented through a variety of institutions, known as Adjudicator Nominating Bodies (“ANBs”). Individuals successfully trained were added to the roster maintained by their specific ANB and were then available for nomination.[977] In the U.K., “the majority of Adjudicators are not chosen for their expertise as lawyers” but rather for expertise in relevant technical subjects.[978] Adjudicators in the U.K. are able to rely on expert submissions to assist in interpreting highly technical matters while also being able to take the initiative in ascertaining the facts and the law in the adjudication process, as discussed below.[979]

    In relation to who can be an adjudicator in other jurisdictions, we note as follows:

    1. Australia (West Coast) requires that adjudicators have certain credentials, including: a degree in law, architecture, engineering or other construction-related field, or that the adjudicator be a registered builder, or must have five years’ experience in administering construction contracts or dispute resolution related thereto and have completed a training course.[980]
    2. In Queensland, adjudicators must be registered under the legislation and hold a certificate of adjudication. While several Australians statutes stipulate that adjudicators are to have “qualifications, expertise and experience” prescribed by regulations, it is reported that most do not.[981] Authorized Nominating Authorities (“ANAs”) regulate their own adjudicators.[982]
    3. In Ireland, adjudicators must be qualified as a barrister or solicitor; Fellowship in the Chartered Institute of Arbitrators; chartered member status in the Institution of Engineers of Ireland; qualification as a registered professional “as defined in section 2 of the Building Control Act 2007”; or be a person with equivalent qualifications “obtained in any other Member State of the European union”.[983] Qualified adjudicators are selected either by agreement or the parties may seek the appointment of an adjudicator from the Construction Contracts Adjudication Panel appointed by the Minister of Business and Employment. As of January 2016, the Irish Government’s official publication published a notification of the first appointments of 30 adjudicators following an assessment conducted by the Minister on a series of applications in late 2015.[984]
    4. The New Zealand Act requires only that adjudicators: 1) must not be a party to the disputed construction contract; and 2) have no conflict of interest (or, if they do, a obtain a waiver of that conflict).[985]
    5. Regulations under the Malaysia Act require an adjudicator to have at least 7 years’ experience working in Malaysia’s building and construction industry; hold a Certificate in Adjudication from a recognized institution; not be an undischarged bankrupt; and not have been convicted of a criminal offence.[986]
    6. Regulations under the Singapore Act require that an adjudicator possess a degree or diploma in architecture, building studies, engineering, environmental studies, law, planning, real estate or urban design, or “such other qualification, as may be recognized by the authorised nominating body”; have at least 10 years’ work experience related to the “building and construction industry in Singapore”; and complete the assessment and training course administered by the ANB.[987]
    2.3.2.2  How is the Adjudicator Nominated?

    The nomination of an adjudicator involves a very specific process with strict timelines that vary from jurisdiction to jurisdiction. For example, the U.K. provides a wide variety of options as to how and when an adjudicator can be nominated, as follows:

    The Scheme sets out a statutory minimum process for the nomination of an adjudicator (subject to any other agreement by the parties that complies with the U.K. Construction Act) as follows:

    2.—(1) Following the giving of a notice of adjudication and subject to any agreement between the parties to the dispute as to who shall act as adjudicator—

    1. the referring party shall request the person (if any) specified in the contract to act as adjudicator, or
    2. if no person is named in the contract or the person named has already indicated that he is unwilling or unable to act, and the contract provides for a specified nominating body to select a person, the referring party shall request the nominating body named in the contract to select a person to act as adjudicator, or
    3. where neither paragraph (a) nor (b) above applies, or where the person referred to in (a) has already indicated that he is unwilling or unable to act and (b) does not apply, the referring party shall request an adjudicator nominating body to select a person to act as adjudicator.

    (2) A person requested to act as adjudicator in accordance with the provisions of paragraph (1) shall indicate whether or not he is willing to act within two days of receiving the request.

    […]

    5.—(1) The nominating body referred to in paragraphs 2(1)(b) and 6(1)(b) or the adjudicator nominating body referred to in paragraphs 2(1)(c), 5(2)(b) and 6(1)(c) must communicate the selection of an adjudicator to the referring party within five days of receiving a request to do so. […][989][Emphasis added]

    The Scheme also provides specific procedures for circumstances where the ANB fails to name an adjudicator pursuant to section 5(1) above or an adjudicator is unable or unwilling to act.[990] Parties are free to agree to different procedures for nominating adjudicators or adopt other contractual provisions.

    In relation to how an adjudicator is nominated in other jurisdictions, we note as follows:

    1. In New Zealand, an adjudicator can be selected either by the agreement of the parties or by allocation by an ANA.[991] Any agreement made in relation to the choice of an adjudicator or ANB/ANA made prior to the dispute will not be binding on the parties.[992] The New Zealand Act sets out specific timeframes for: a selected adjudicator to indicate whether he or she is willing to act (2 working days); the claimant to request that an ANB chosen by agreement between the parties select an adjudicator (5 working days); the claimant to request an ANA select an adjudicator in situations where no agreement can be reached on an adjudicator or an ANB (2 to 5 working days).[993]
    2. In Ireland, the parties may agree to appoint an adjudicator of their choice or an adjudicator will be selected from the Construction Contracts Adjudication Panel appointed by the Minister (i.e. the default option).[994]
    3. In Singapore, an adjudicator is selected by the Singapore Mediation Centre as the only ANB authorized to appoint adjudicators.[995] Within 7 calendar days of receiving an application from the claimant, the ANB must confirm the appointment of the adjudicator.[996]
    4. Malaysia also allows parties to agree on an adjudicator and if not, they are able to seek an adjudicator from the designated ANB (The Kuala Lumpur Regional Centre for Arbitration (KLRCA)).[997] Each of the steps involved is between 5 and 10 working days and the adjudicator is given time to negotiate his or her terms of appointment.[998]
    5. In Hong Kong, an adjudicator may be agreed upon by the parties to the dispute, or may be appointed by an agreed-upon ANB. The Hong Kong International Arbitration Center (HKIAC) will be the default ANB where no adjudicator or nominating body is agreed upon. The nomination process for an adjudication is expected to result in an adjudicator being nominated within 5 working days from the commencement of the adjudication.[999]
    6. In Australia (East Coast) and Australia (West Coast), parties apply to an ANA to nominate an adjudicator.[1000] The nomination periods vary however, many of the Australia (East Coast) jurisdictions require the ANA to appoint the adjudicator “as soon as practicable” and the Australia (West Coast) jurisdictions provide short timeframes (e.g. 5 calendar days).
    2.3.3  What Types Of Disputes Can Be Adjudicated?

    The U.K. model of adjudication is the broadest of all the jurisdictions examined, given that a dispute (which is defined as including any difference), arising under the construction contract can be adjudicated. There are certain exclusions to this general proposition, namely:

    1. Excluded construction operations: Certain types of construction operations are excluded including drilling or extraction of oil/natural gas, extraction of minerals, manufacture or delivery of certain products (e.g. building components or materials), assembly, installation or demolition of plant or machinery.[1001]
    2. Agreements with Residential Occupiers: Agreements with residential occupiers are excluded, where the agreement principally relates to operations on a dwelling which one of the parties (who must be a natural person) occupies, or intends to occupy, as his or her residence.[1002]
    3. Exclusionary orders and Private Finance Initiatives (“PFIs”)[1003]: Certain aspects of adjudication and prompt payment in the U.K. do not apply to certain construction contracts excluded by order of the Secretary of State.[1004] For example, PFI “head contracts” (i.e. Project Agreements) are excluded from adjudication, however “contracts for the works” (i.e. the design build contract and the subcontracts) are not.[1005]

    Examples of types of disputes that have been adjudicated in the U.K. include: final account claims; extension of time/loss and expense claims; value of variations; disputed terminations[1006]; a claim to enforce post-termination rights[1007] (in absence of agreement); and recovery of costs to complete a project following termination.[1008] The U.K. also allows adjudications to proceed in relation to disputes of a technical nature.

    Other jurisdictions adjudicate the following types of disputes:

    1. The New Zealand Act is similar to the U.K. Construction Act in that it provides for adjudication in relation to a dispute under a construction contract.[1009] Disputes that can be referred to adjudication include claims for amounts owing, disputes as to whether an amount is payable, the reasons for non-payment, or breach of contractual terms.[1010] Originally residential construction contracts were excluded from adjudication under section 10, however on December 1, 2015, the Construction Contracts Amendment Act 2015 repealed the residential exclusion.[1011] The amendments also provide that from September 1, 2016, design, engineering and quantity surveying work can be adjudicated, along with disputes related to land where planned construction work has yet to commence.[1012]
    2. The Ireland Act provides that adjudication can be initiated in relation to disputes under construction contracts that are created for the purpose of carrying out, arranging or providing labour for construction operations. The legislation provides a wide definition of both “construction operations” and “construction contracts”.[1013] Exceptions include construction contracts of a value of less that €10,000, or contracts between a state authority and partner in a public private partnership arrangement.[1014]
    3. In Singapore and Australia (West and East), only payment matters can be referred to adjudication. Some commentators have noted that, in reality, while not specifically provided for under statute in Australia or Singapore, issues such as delay and disruption are inextricably bound up in some payment disputes.[1015]
    4. In Malaysia, adjudication applies to any ‘dispute arising from a payment claim’ under “every construction contract made in writing relating to construction work carried out wholly or partly within the territory of Malaysia including a construction contract entered into by the Government.”[1016] A number of government contracts are exempt from adjudication, namely: 1) construction necessitated by emergency and unforeseen circumstances, such as natural disasters or fire; and 2) construction related to national security interests.[1017] The Malaysia Act does not apply to a construction contract entered into by “natural persons” for any construction work relating to a building less than 4 storeys high, and “wholly intended” for the contracting party’s occupation.[1018]
    5. Under the proposed Hong Kong security for payment (adjudication) legislation, adjudication arises “in the event of non-payment and when there are disputes about the value of work, services, materials or plant and/or disputes about extension of time and financial claims under the contract.”[1019] Thus, almost all relevant construction disputes will be subject to the new legislation once enacted, “whether they are subject to Hong Kong law or another law and regardless of the nationality of the parties”, so long as the relevant construction activities are carried out within Hong Kong.[1020] Where design services are outsourced to foreign parties, and the construction site is in Hong Kong, the legislation would still apply to those foreign parties.
    2.3.4  What Is The Adjudication Process and How Are Costs Dealt With?

    Each of the jurisdictions we considered has its own process which are reviewed in detail in Appendix C, but below we set out brief summaries of key timing, procedural and costs issues.

    2.3.4.1  What Is the Adjudication Process?

    The process for an adjudication is intended to be simple and flexible. In the U.K. the process has been described as “inquisitorial” in the sense that the adjudicator is given flexibility to develop a process to gain an understanding of the relevant facts. In this regard, section 13 of the Scheme (i.e. the regulations to the U.K. Construction Act that set out the minimum standards for adjudication and prompt payment) provides the statutory minimum procedural powers of an adjudicator as follows:

    13. The adjudicator may take the initiative in ascertaining the facts and the law necessary to determine the dispute, and shall decide on the procedure to be followed in the adjudication. In particular he may—

    1. request any party to the contract to supply him with such documents as he may reasonably require including, if he so directs, any written statement from any party to the contract supporting or supplementing the referral notice and any other documents given under paragraph 7(2),
    2. decide the language or languages to be used in the adjudication and whether a translation of any document is to be provided and if so by whom,
    3. meet and question any of the parties to the contract and their representatives,
    4. subject to obtaining any necessary consent from a third party or parties, make such site visits and inspections as he considers appropriate, whether accompanied by the parties or not,
    5. subject to obtaining any necessary consent from a third party or parties, carry out any tests or experiments,
    6. obtain and consider such representations and submissions as he requires, and, provided he has notified the parties of his intention, appoint experts, assessors or legal advisers,
    7. give directions as to the timetable for the adjudication, any deadlines, or limits as to the length of written documents or oral representations to be complied with, and
    8. issue other directions relating to the conduct of the adjudication.[1021]

    Other jurisdictions have taken a slightly more prescriptive approach. For example, in New Zealand, Australia (East Coast), Australia (West Coast), Malaysia and Singapore, the conduct of adjudication proceedings are prescribed in the legislation.[1022] Included in these legislative regimes are procedural timelines for processes such as referring a dispute to adjudication, the referral notice, conduct of the adjudication itself (including submissions and replies) and the decision. In addition to the prescribed timeframes, discussed below, the legislation also prescribes the procedural powers of the adjudicator.

    For example, while New Zealand prescribes specific timeframes for the delivery of a response and a reply, it also sets out broad powers for an adjudicator including: the power to conduct the adjudication in any manner he or she thinks fit; requesting further written submissions; requesting copies of documents that may reasonably be required; appointing an expert advisor; calling conferences; carrying out inspections of the work, issuing instructions, etc.[1023]

    One criticism of the U.K. process is that responding parties in an adjudication are prone to what is known as “ambush”, i.e. a situation where “the responding party believes it has not had sight of the claim (or part of it) at all, or there has been an insufficient time to consider and respond to the claim, such that a dispute has not formed.”[1024]

    The Hong Kong Development Bureau recently considered how to minimize the risk of ambush by allowing the adjudicator to “disregard any submission or evidence” submitted by the referring party “to the extent that the adjudicator considers the same comprises submissions or evidence which the responding party was unaware of at the time the notice of adjudication was served and which should reasonably have been served … in advance of the notice of adjudication”.[1025]

    In addition, it has been proposed that an adjudicator in Hong Kong will be entitled to resign if he or she considers that it is not possible to determine the dispute fairly in the time available.[1026]

    These two proposals were intended to reduce the likelihood that “a claimant deliberately holds back new submissions and evidence to deploy for the first time in adjudication in the hope of gaining a tactical advantage.”[1027]

    In New Zealand, an adjudicator’s power to determine a dispute will not be affected by the failure of: a) a respondent to serve a response; b) the failure of any of the parties to make a submission, comment, or provide specified information within the time allotted; c) comply with the adjudicators call for a conference; or d) do any other thing the adjudicator requests or directs.[1028] The New Zealand Act also provides the adjudicator with the ability to draw inferences and determine a dispute based on the information available in circumstances where these failures occur.[1029]

    2.3.4.2  Timing of Statutory Adjudication

    In terms of timing, the key questions to be considered are:

    1. What is the timeframe to deliver a notice of adjudication?
    2. What is the timeframe to refer the dispute to an adjudicator, after the adjudicator has been seled?
    3. What is the timeframe for a response and reply?
    4. What is the timeframe for a decision following commencement of the adjudication?

    Each of these questions is addressed below.

    (a) What Is the Timeframe to Refer a Dispute to Adjudication?

    The timeframe to deliver a notice of adjudication varies between the jurisdictions canvassed, however, the approaches can generally be grouped into two categories: not restricted (i.e. commence at any time) or restricted (i.e. within a certain time period following the date a dispute arises or a claim for payment is made)

    By way of brief summary, the following chart illustrates the general approaches taken in the jurisdictions we have considered:

    U.K.

    New Zealand

    Ireland

    Singapore

    Malaysia

    Hong Kong (Proposed)

    Australia (East Coast)

    Australia (West Coast)

    No restriction

    (s.108(2))

    No restriction

    (s.25)

    No restriction

    s.6(2)

    Restricted to a specific time period

    (7-14 days - s.12/13)

    Restricted (but no time period)

    (s.7(2))

    Restricted to a specific time period[1030]

    (28 days)

    Restricted to a specific time period

    (20 business days - s.17(2) NSW)

    Restricted to a specific time period

    (28 days - s. 26 WA)

    (b) What is the timeframe to refer the dispute to an adjudicator, after the adjudicator has been selected?

    After a notice of adjudication is delivered and an adjudicator is then selected, the next period of time to consider is the period of time allotted for the parties to refer the dispute to the adjudicator that has been selected or appointed.[1031] In some jurisdictions, this is not a separate step, as the notice of adjudication includes a “claim package” such that no separate notice of referral to an adjudicator is required. The following is a brief summary of the time frames employed in referring a matter to adjudication, where applicable:

    U.K.

    New Zealand

    Ireland

    Singapore

    Malaysia

    Hong Kong (Proposed)

    Australia (East Coast)

    Australia (West Coast)

    Yes

    (7 days - s. 108(2) / Scheme s. 7)

    Yes

    (5 working days - s. 36)

    Yes

    (7 days - s. 6(5))

    No – included with notice

    (s. 13)

    Yes

    (10 working days – s. 9)

    No – given to adjudicator on day of appointment

    No – included with application

    (s. 17 NSW)

    No – included with application

    (s. 26 WA)

    (c) What is the timeframe for a response and reply?

    The third timing issue to be considered relates to what time period is imposed by the statute, if any, for a responding party to deliver a response to the referral to adjudication. Again, a variety of approaches have been taken. Some jurisdictions have chosen to set no statutory period to respond whereas others have set a specific requirement. The following brief summary indicates whether or not each of the jurisdictions provides for a statutory period for a response and if so, the time limit for such a response:

    U.K.

    New Zealand

    Ireland

    Singapore

    Malaysia

    Hong Kong (Proposed)

    Australia (East Coast)

    Australia (West Coast)

    No[1032]

    Yes

    (5 working days - s.37)

    No[1033]

    Yes[1034]

    (7 days – s. 15)

    Yes

    (10 Business Days – s. 10(1))

    Yes

    (20 Working Days)

    Yes[1035]

    (5 Business Days – s. 20(1) NSW)

    Yes

    (14 days – s. 27 WA)

    Finally, some jurisdictions also prescribe a statutory time period for reply submissions to be made:

    U.K.

    New Zealand

    Ireland

    Singapore

    Malaysia

    Hong Kong (Proposed)

    Australia (East Coast)

    Australia (West Coast)

    Not prescribed [1036]

    Yes

    (5 working days – s. 37A)[1037]

    Not prescribed[1038]

    Not prescribed

    Yes (s. 11)

    (5 Business Days)

    Not prescribed

    Not prescribed

    Not prescribed

    (d) What is the timeframe for a decision following commencement of the adjudication?

    Finally, the most fundamental timing question to be addressed is the duration of the entire adjudication process. Commentators have noted that all adjudication regimes require three things in relation to timing: “(1) that the Adjudicator make a decision within a specific time frame, failing which (2) the decision is invalid and therefore not binding save that (3) the parties are permitted to extend the period for the decision by agreement.”[1039] The jurisdictions examined establish different approaches to the duration of the adjudication process as follows:

    1. Several jurisdictions focused on the fundamental objectives of cash flow and efficiency. Singapore, Australia (East Coast) and Australia (West Coast) emphasize speed, requiring an adjudicator to render a decision in no more than 14 calendar days or 10 business days (depending on the jurisdiction).[1040] The time periods selected by these regimes indicates that the adjudication regime is intended to be an extension of the prompt payment regime.[1041] This timing has resulted in some “due process” criticism, i.e. that there is not sufficient time to conduct necessary processes. Some commentators note that the industry has developed its own “hack” of this system, by simply agreeing to longer timelines.[1042] In Australia (West Coast) an adjudicator has the jurisdiction to simply dismiss the adjudication if it is too complex to be resolved within the specified timeframe.[1043]
    2. Trending towards middle ground, the U.K.[1044] and Ireland[1045] employ a 28 calendar day process which starts to run at the time a matter is referred to the adjudicator, with extension permitted on consent where necessary. In the U.K. the referring party can consent to extend the determination period by up to 14 days for a total of 42 calendar days (although both parties can agree to a longer extension under the Scheme).[1046]
    3. In New Zealand, the process can take approximately 30 working days depending on the length of time it takes for parties to file and serve relevant documents and whether there have been any extensions.[1047] Subject to any extensions agreed to by the parties, a respondent has 5 working days to serve a written response on the adjudicator from the later of: a) the date the respondent received the claim; or b) the adjudicator’s notice of acceptance.[1048] Following the receipt of a response, the adjudicator has 20 working days to make a determination.[1049] This timeline is subject to a possible extension of 10 working days if the adjudicator determines it necessary, or longer if both parties agree to an extension.[1050]
    4. The legislation proposed in Hong Kong grants the adjudicator 40 business days to adjudicate the dispute with an option to extend the overall period, but not to exceed 55 business days without consent of the parties.[1051]
    5. In Malaysia an adjudicator must reach a decision within 45 working days from the expiry of the period for serving the response or from service of the response, whichever is later.[1052]When you consider the maximum time available under each of the steps in the Malaysia Act, an adjudicator may have up to 19 weeks (133 days) to make a decision, which puts this jurisdiction at the far end of the spectrum.[1053]

    In summary, the length of the adjudication process in the jurisdictions examined falls along the following spectrum:[1054]

    Length of the adjudication process
    2.3.4.3  How Are Costs Dealt With?

    We have also considered the costs of adjudication. A number of the jurisdictions considered by the Review did not have enough empirical data or commentary to allow us to develop a reliable sense of the costs issue. However, it is apparent that adjudication offers significant cost savings in comparison to the costs of litigation or arbitration.

    The following are some interesting publicly available statistics on adjudication costs:

    1. In the U.K., studies have shown that the most popular ranges of fees for an adjudication were between £2,500 and £5,000,[1055] however a very close second range of fees was between £15,001 to £20,000 per adjudication.[1056] No survey reported a fee for adjudication costing more than £40,000.[1057]
    2. In New Zealand statistical data shows that the adjudication process costs on average about 12.3% of the amount claimed (16% of the total amount determined);[1058]
    3. The Singapore Mediation Centre’s Fee Schedule[1059] requires that, for claims valued at up to SGD$24,000,[1060] an adjudicator may charge up to SGD$321 (inclusive of tax) per hour,[1061] to a maximum of SGD$2,568 for the adjudication. For claims valued at above SGD$24,000, an adjudicator is entitled to charge the previously mentioned maximum, but on a daily basis. The total adjudicator fee cannot exceed 10% of the claimed amount.[1062]
    4. In Malaysia, if the parties and the adjudicator fail to agree on a fee schedule, Section 19(1) of the Malaysia Act sets the KLRCA’s standard terms of appointment and fees as the default. KLRCA’s recommended range is from RM8,400[1063] for a dispute of up to RM150,000[1064] to a cap of RM89,615.5[1065] for a dispute of up to RM15 million.[1066]

    The allocation of costs issue is addressed in Appendix C, including a consideration of who bears the costs of the adjudicator and the legal fees of the parties, what factors affect the allocation of fees, and the discretion of the adjudicator in the allocation of fees.

    2.3.5  How Are Adjudicated Decisions Enforced?

    In all jurisdictions considered, adjudicator’s decisions are binding on an interim basis and as such are enforceable through court processes as interim binding decisions. These processes are described in the Appendix C. However, by way of example, below we discuss the mechanics of enforcement of an adjudicator’s decision in the U.K.

    In the U.K., the Scheme provides:

    23.—(1) In his decision, the adjudicator may, if he thinks fit, order any of the parties to comply peremptorily with his decision or any part of it.

    (2) The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties.

    While an adjudicator’s decision does not have the “binding force of a judgment” it has a “temporary or provisional finality which the parties agree to respect”.[1067] U.K. courts have noted generally that, provided the adjudicator answers the question asked, his or her decision will be enforced even if it is wrong in law or based on an arithmetic error.[1068]

    In the 2007 decision of Carillion Construction Ltd v Devonport Royal Dockyard Ltd,[1069] the U.K. Court of Appeal reviewed the circumstances in which a court could decline to enforce an adjudicator’s decision. In that case, the court stated as follows:

    The objective which underlies the [U.K. Construction Act] and the [Scheme] requires the courts to respect and enforce the adjudicator’s decision unless it is plain that the question which he has decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair. It will only be in rare circumstances that the courts will interfere with the decision of an adjudicator.[1070] [emphasis added]

    In the U.K., an adjudicator’s decision gives rise to a cause of action in favour of the parties to the adjudication. The cause of action described by Tom Owen of Keating Chambers[1071] is said to have two components: a “facially valid” adjudicator’s decision and a contractual obligation on the parties to comply with such a decision.[1072]

    The U.K. Construction Act is silent on how an adjudicator’s decision should be enforced[1073]. In order to enforce an adjudication decision, a claimant typically brings an action and then moves for summary judgment in that action.[1074] The court judgment obtained engages all enforcement methods available in respect of a court judgment (e.g. charging orders, warrants of execution, third party debt orders and attachment of earnings orders).[1075]

    In 2010, it was estimated that only about five percent of adjudicated decisions in the U.K. were the subject of enforcement applications.[1076]

    Other jurisdictions have provided as follows in relation to enforcement:

    1. In Australia and Singapore an award can only be stayed (i.e. enforcement refused) if the conditions precedent for the adjudicator’s jurisdiction have not been met and/or there has been a material breach of natural justice.[1077]
    2. Hong Kong’s proposed legislation includes a provision that allows adjudicator’s decisions to be enforced in the same way as judgments of the court. The proposed legislation will not allow set off or deduction and only allows responding parties a short period within which to lodge any challenge to the validity of an adjudicator’s decision.[1078]
    3. In Ireland, the decision of an adjudicator is (unless otherwise agreed) binding on the parties for all purposes and may be relied upon by any party “by way of defence, set-off, or otherwise, in any legal proceedings”.[1079]
    2.3.6  The Interface Between Adjudication and Lien Legislation

    Most of the jurisdictions that have adopted adjudication do not have lien legislation, including the following: The U.K., Ireland, Hong Kong, Singapore and Malaysia. In New Zealand, the legislation which was in place to provide a measure of security for payments in the construction industry was repealed in the decade leading up to the adoption of adjudication.[1080]

    Certain Australian states and territories[1081] have a form of lien; however these liens are in relation to unpaid progress payments[1082] or in relation to amounts due pursuant to an adjudication award and are not directly comparable to a construction lien as conceived of by the Act.

    South Australia maintained its lien legislation, even after the introduction of adjudication. Under the Worker's Liens Act 1893, a worker, contractor or subcontractor is entitled to a registrable lien for the contract price or part thereof, so far as accrued due, on the estate or interest in land on which work was performed or materials provided, owned by any owner or occupier who assented expressly or implicitly to such work.[1083] A worker or subcontractor is also entitled to a charge on any money payable and owing for work done or materials supplied under the construction contract.[1084]

    In South Australia, the Worker’s Liens Act 1893 and the Building and Construction Industry Security of Payment Act 2009 work side-by-side.[1085] Contractors have a choice of procedures in the two Acts to enforce their rights to progress payments.[1086] Under the lien legislation, a contractor or subcontractor is entitled to lien under section 5 as follows:

    The legislation in Queensland and Western Australia provides for a charge in the nature of a security interest in favour of an employee over monies due to an employer from the principal.[1087] Queensland also allows for subcontractors to secure payment for work performed under the Subcontractors’ Charges Act 1974. As noted by the Economics Reform Committee of the Australian Senate, the “effect of making a claim under [the Subcontractors’ Charges Act 1974] is that a sum of money is taken out of circulation and charged for the benefit of the subcontractor. This puts the subcontractor in the position of a secured creditor.”[1088] This limited charge legislation has been noted to be of “little benefit in practice” and is often not used as the adjudication regime is the preferred alternative.[1089]

    In Tasmania, a form of attachment is created which is dependant for its final operation on a judgment obtained under the Contractors’ Debts Act, 1939. This system operates in tandem with Tasmania’s adjudication regime.

    Other Australian states and territories had lien legislation before adjudication was introduced, but repealed such legislation. In 1996, the Australian Procurement and Construction Council Inc. (“APCC”) (the council of departments responsible for procurement and construction policy of the Australian Federal, State and Territory Governments) in its review of the Australian construction industry, noted that “the use of statutory liens is not (or no longer) an appropriate mechanism for securing financial protection in the building and construction industry.”[1090]

    The Northern Territory, for example, elected to repeal its lien legislation. In a discussion paper by the Northern Territory Department of Justice,[1091] it was noted that: “related legislation in Queensland, The Contractors’ and Workers’ Lien Act 1906 (Qld), [was] judicially described as ‘a lawyer’s nightmare’ which should ‘be repealed’ and was repealed in 1964.”[1092] When the Northern Territory legislation was repealed in 2004, commentators in the construction industry noted that this legislation was “outdated and largely ineffective, in light of modern security of payment legislation”.[1093]

    Western Australia had considered lien legislation but concluded that it should not be introduced in part because it would “not materially assist subcontractors and would tend to create more difficulties than it seeks to solve.”[1094]

    Based on the regimes in place in other jurisdictions, it is clear is that the securitization regimes existing in these jurisdictions are not comparable to Ontario lien legislation. Accordingly, the adoption of adjudication into the Act in Ontario’s would be unprecedented in terms of its formulation and requires a “made-in-Ontario” solution. In order to develop such a solution, we have taken into account the submissions of Ontario stakeholders, which are summarized below.

    3. Summary of Stakeholder Views

    The EKOS Survey data reflected very positive feedback on adjudication as a concept.[1095] While not all stakeholders supported adjudication outright, most were very supportive and the balance expressed an interest in adjudication as an alternative.

    Those who were supportive of adjudication saw it was a mechanism to improve the speed of dispute resolution and cash flow including the following:

    1. Prompt Payment Ontario endorsed adjudication in its submissions and in its consultation meeting.[1096] Prompt Payment Ontario submitted that all participants in the construction industry “need a remedy for disputes that is impartial, technically competent, speedy, efficient and cost-effective” and noted that other jurisdictions appeared to have considerable success with adjudication in this regard.[1097]
    2. The Greater Toronto Sewer and Watermain Contractors Association supported mandatory alternative dispute resolution mechanism, such as adjudication, based on its successful application in the U.K and emphasized that “access to timely and efficient dispute resolution process(es) is paramount to mitigating delays in payment and ensuring that funds are properly disbursed”.[1098]
    3. The Carpenter’s District Council of Ontario noted that “any adjudication model that is quick and inexpensive is favored” and that “adjudication would take away the fear that subcontractors have” in initiating lien claims.[1099]
    4. The Council of Ontario Construction Associations supported adjudication, subject to the consideration of certain possible exclusions (e.g. no adjudication for contracts with consumers and no adjudication for funds previously certified as being payable by a payment certifier).[1100]
    5. The Ontario General Contractors Association encouraged consideration of adjudication, although noted that certain specific issues would need to be addressed such as: interplay with the lien legislation, developing qualified adjudicators, potential costs, adjudication in relation to insolvent parties, enforcement and adjudication in the context of AFP projects.[1101]
    6. The OBA CLA Reform Committee suggested that adopting a form of adjudication could help address current litigation cost issues by having “disputes dealt with in real time during the project, thereby reducing the chances that the disputes will escalate out of control”[1102]however, it noted that adjudication would need to be carefully dovetailed with the existing lien process.[1103]
    7. The Surety Association of Canada supported adjudication but suggested that there should be the option for parties to agree to something more efficient than what the Act ultimately provides.[1104] The Surety Association of Canada suggested that we consider adjudication in relation to claims for set-off, progress payment complaints and performance bond claims.[1105]

    Some stakeholders were more cautious in their approval or were wary of a potential infringement on the freedom of contract, including the following:

    1. The City of Toronto noted that “adjudication of owner’s claims may lead to many mini-hearings with focus of the participants shifting from completing the process to making/defending the claims”.[1106] The City of Toronto preferred an elective adjudication system.
    2. The Toronto Transit Commission, Infrastructure Ontario, Metrolinx and Ministry of Transportation suggested generally that the parties ought to be able to contract for the type of ADR that best fit their situation.[1107] Metrolinx noted that any solutions to a court process should be economical and not further burdensome from a financial, time or resource perspective.[1108]
    3. Infrastructure Ontario suggested the possibility of an exception to the mandatory adjudication regime, if recommended, for AFP projects.[1109] Infrastructure Ontario acknowledged that its current forms of Project Agreements include adjudication.[1110]

    As of January 2016, all Ministry of Transportation contracts will provide for a referee process, which has many strong similarities to the U.K. adjudication system under the U.K. Construction Act. The Ministry’s referee system was adopted from the British Columbia Department of Transportation model. The Ministry of Transportation referee model will generate binding interim decisions in relation to its construction contracts. The Ministry of Transportation has spent a significant amount of time and effort consulting with stakeholders (including the Ontario Road Builders’ Association and the Consulting Engineers of Ontario) in order to develop these new contract forms. Further information on the referee system can be obtained directly from the Ministry of Transportation.[1111]

    Certain stakeholders made submissions in relation to the enforceability of the decision of an adjudicator:

    1. The Council of Ontario Construction Associations’ suggested that an adjudicated decision should be enforceable even if there are alleged errors of law or fact provided that the ruling of an adjudicator is only binding until the end of a contract.[1112] The Council of Ontario Construction Associations also submitted that adjudicators should be able to rule on their jurisdiction without a right of appeal noting that a “slip rule” should be implemented to permit adjudicators to correct inadvertent clerical errors in their awards.[1113]
    2. The Surety Association of Canada submitted that a fast track adjudication process for resolution of payment disputes should be binding on an interim basis subject to appeal or review at some future milestone or contractual event.[1114] The Council of Ontario Construction Associations stated that allowing appeals on these grounds would frustrate the objective of resolving disputes on a summary basis.[1115]
    3. Prompt Payment Ontario submitted that the adjudicator’s decision should be “binding and enforceable upon issuance, with no right of appeal therefrom, or other review thereof in any judicial process, until the earlier of the completion of the claimant’s work or the completion of the project”.[1116]

    4. Analysis and Recommendations

    The current dispute resolution process under the Act attracted a significant degree of criticism during the stakeholder Consultation Process. Many expressed the view that, under the current regime, it simply takes too long and costs too much. Lien proceedings are well understood, but inefficient, and the industry is frustrated with this situation.

    The great benefit of adjudication lies in its potential to quickly unlock contractual gridlock in regards to issues such as disputed change orders, and set-offs, allowing funds to flow promptly down the contractual pyramid. Distinct advantages of adjudication include:[1117]: speed[1118], continuity[1119], reduced cost[1120], increased flexibility[1121], privacy[1122], familiarity[1123], availability[1124], choice of decision maker and the speed and certainty of enforcement.[1125]

    In other jurisdictions, adjudication is reported to have had an unexpectedly transformative effect by encouraging proper and prompt valuation of claims (for payment or otherwise) even in circumstances where litigation or arbitration is inevitable.[1126] Some commentators have noted that adjudication seems to make parties to a construction contract “think more carefully before adopting intransigent or unreasonable positions.”[1127]

    When originally implemented, adjudication was an unprecedented step,[1128] but now adjudication is well established and well understood. Statutory adjudication has been utilized successfully in the U.K. for almost 20 years successfully. It works.

    In fairness, it must be recognized that adjudication has been noted as having certain disadvantages including[1129]: some complain that the process is too summary,[1130] some say that the quality of submissions, adjudicators and ANBs is not yet there[1131], some say the summary process is ill-suited to large disputes[1132], some criticize the interim nature of the remedy[1133] and irrecoverable costs[1134], ambush tactics[1135], no automatic right to interest[1136], no statutory joinder[1137], no non-contractual claims[1138], and the fact that ”evidence” given to an adjudicator is not under oath.[1139]

    However, in our view, the benefits to be derived from targeted adjudication would clearly outweigh these potential disadvantages.

    In the jurisdictions considered above, adjudication allows parties to craft their own adjudication provisions, but provides for minimum statutory standards. These minimum standards are generally set out in a “scheme” that deals with the mechanics of the application of adjudication. For entities that are already using adjudicative models, such as Infrastructure Ontario or the Ministry of Transportation, they would retain the contractual freedom to craft their own solutions.

    Recommendations

    1. We recommend that adjudication be implemented as a targeted interim binding dispute resolution method available as a right to parties to construction contracts and subcontractors in both the public and private sectors in Ontario.
    2. In conjunction with our recommendations in Chapter 8 – Promptness of Payment in relation to prompt payment, we recommend that the Act allow the parties the freedom of contract to agree on provisions to be included in their contract for both promptness of payment and adjudication so long as such provisions are consistent with the Act. Should such provisions not be consistent with the provisions of the Act, a statutory default scheme should be implied into the contract (as further discussed below).
    3. The statutory default scheme should be set out in a regulation to the Act.

    5. “Made-in-Ontario’ Adjudication

    Below we articulate the key elements of a “made-in-Ontario” adjudication system, drawing on the experiences of other jurisdictions and the feedback received from stakeholders.

    5.1  Who Can Require An Adjudication?

    As discussed above, the jurisdictions examined that utilize adjudication fall into two camps: 1) those allowing any party to refer a construction dispute to an adjudicator;[1140] or 2) those allowing only any unpaid party to refer a construction dispute to an adjudicator.[1141]

    In our view, a more inclusive approach seems to make sense in the Ontario context, such that adjudication should be available to any party to a construction contract.

    Some stakeholders raised concerns about how adjudication works with multiple participants in the construction pyramid. Most of the jurisdictions canvassed do not contemplate multi-party adjudications. Adjudication is rooted in privity of contract. Multi-party adjudications do exist, but are relatively rare.[1142] It has been said that the rarity is largely a result of the desire to have a decision rendered in a relatively short period of time (i.e. 28 to 42 calendar days).[1143] In the U.K., a design professional may be joined in an adjudication by the owner or contractor if there is a materially identical and cross referential multi-party clause in the dispute resolution portion of both the contract with the designer and the contract with the general contractor. Without the use of a clause such as this, under the U.K. legislation there is no mechanism to compel a third party to join in the adjudication.[1144]

    In the Ontario context, a concern was raised about a need for back-to-back adjudications in relation to disputes as between an owner and a general contractor that flow down to a subcontractor. Given that an adjudicator’s decision in relation to a dispute as between an owner and general contractor is binding on an interim basis, it is our view that it makes sense for an adjudication between that general contractor and its subcontractor(s) to take place on a back-to-back basis.

    A further issue raised by stakeholders was how adjudication would account for multiple issues or ‘disputes’ occurring simultaneously on a project. Typically, in the U.K. (and other jurisdictions) disputes are addressed one at a time in adjudication, unless the parties agree otherwise, which is a practical way of proceeding if disputes are to be addressed swiftly. This issue was recently considered in the U.K. decision of Deluxe Art & Theme Ltd v Beck Interiors Ltd.[1145] In this decision, the Technology and Construction Court held that “[o]n its face, paragraph 8(1) [of the Scheme] allows the adjudicator to deal with more than one dispute at the same time, but only with the consent of all the parties.”[1146] As there was no consent, the Technology and Construction Court did not enforce the adjudicator’s decision.

    Recommendations

    1. Any party to a construction contract or subcontract should be given the right to adjudicate disputes arising under that contract or subcontract.
    2. Back-to-back adjudications should be permitted at the owner-general contractor and general contractor-subcontractor levels.
    3. Multi-issue adjudication should be permitted only through consensual contractual arrangements.

    5.2  Who Can Adjudicate a Dispute and How is the Adjudicator Nominated?

    The U.K. experience is that adjudicators must be able to appreciate complex legal and factual scenarios and quickly and accurately identify, isolate and analyze determinative issues.[1147] Subject matter knowledge is essential,[1148] as is ‘due process’ knowledge.

    5.2.1  Who Can Adjudicate a Dispute?

    In the U.K., adjudicators are natural persons, acting in their personal capacity, [1149] who understand the construction process; understand how construction contracts work; and can apply that knowledge in producing decisions that parties can either accept as resolving their dispute or use as a basis for such resolution.[1150] Various training programmes are offered by ANBs in order to become qualified as an adjudicator. That said, there are no prescribed requirements for an adjudicator under the U.K. Construction Act. This contrasts with all other jurisdictions, which have explicit requirements for adjudicators including training certifications, professional qualifications, number of years of experience, etc. We are of the view that explicit criteria will assist in ensuring that Ontario develops a well-qualified group of adjudicators, but that, in order to get the process underway, an initial pool of adjudicators should be created, as was done in the U.K.

    Recommendations

    1. We recommend that the Ministries select a first tranche of eminently qualified individuals based in key centres such as Ottawa, Toronto, London and Windsor, with a distinct set of criteria (similar to those set out below) to act as the group of initial adjudicators until the training and qualification system described below is fully implemented.
    2. We recommend that an Ontario adjudicator should:
      • be a natural person;
      • not be a party to the disputed construction contract and have no legal conflict of interest (or disclose any conflict of interest and obtain the express prior consent of the participating parties);
      • be a member in good standing of a self-governing professional body, such as engineer, architect, accountant, lawyer, or quantity surveyor;
      • have at least 7 years of relevant working experience serving the Ontario construction industry;
      • have successfully completed a standardized Ontario training course and thereafter have received a certificate of authorization to adjudicate from the relevant body governing the Act (i.e. the Ministry or prescribed authorized nominating authority), renewable periodically upon proof of continuing education and a clear record; and
      • not be otherwise disqualified (i.e. by reason of bankruptcy, criminal conviction or for any other prescribed unsuitability).
    5.2.2  How is the Adjudicator Nominated?

    In nominating an adjudicator, there are two issues to consider: (1) timing; and (2) process.

    In respect of timing, an adjudicator can either be nominated at the outset of a project (as a “standing adjudicator”), at any time or when a dispute arises. In the U.K, parties can avail themselves of any of these opportunities to select an adjudicator. In other jurisdictions however, the adjudicator may not be selected until a dispute arises.[1151] Appointing an adjudicator when the dispute arises is a more sensible approach as it allows the parties to select an adjudicator who is available at the time and is suited to address the dispute at issue. It also avoids inequality of bargaining power that may exist at the outset of contractual negotiations.[1152]

    Several jurisdictions provide the parties with a short period of time in which to agree on an adjudicator following the notice of adjudication.[1153] In the absence of such agreement in most jurisdictions, adjudicators are appointed following a request by a party to either an ANB or an ANA. Following such a request, the ANB or ANA is typically allotted a brief amount of time in which it must communicate to the parties the selection of an adjudicator.[1154]

    In the jurisdictions canvassed, a number of ANAs or ANBs exist and adjudicators may sign up on the lists of more than one ANB or ANA. In the U.K. for example, there are over 20 ANBs[1155] of various sizes and forms managing approximately 847 registered adjudicators (as of 2015). These ANBs provide training programs. A key benefit to such a scheme is that administrative support and funding for the statutory adjudication process comes from the private sector.

    There are however some issues with this approach. One issue that has been raised in relation to multiple ANBs/ANAs is the resulting variation in quality of adjudicators because not all of these bodies are equal. In the U.K. the government has deliberately chosen not to regulate ANBs or adjudicators (thus taking no part in training or standardization) which compounds the problem of variations in quality of adjudicators and a lack of standardization though ANBs can ameliorate this problem through self-regulation through their member associations.[1156] Typically, a referring party selects the ANB to use to nominate an adjudicator in jurisdictions where there is more than one such body, which can result in perceived procedural unfairness.[1157]

    To avoid any perceived unfairness, the party delivering a notice of adjudication could be required to propose the name of an adjudicator in the notice of adjudication. The parties would then have two (2) business days to agree on an adjudicator, failing which either party would be able to request that the ANA appoint an adjudicator. The ANA would then appoint an adjudicator within five (5) business days. The adjudicator nominated by the ANA (or the parties, if they agree) would then have two (2) business days to confirm his or her availability. The party that issued a notice of adjudication would then have five (5) days from the date of the appointment of the adjudicator to refer the matter to the appointed adjudicator, as discussed in the process section below.

    In terms of the body that appoints adjudicators, given the size of the Ontario construction market, we suggest one body (i.e. an Adjudicator Nominating Authority) is appropriate rather than the multiple bodies in place in jurisdictions such as the U.K.

    In Ontario it may make sense to have the adjudication nomination function administrated by the Ministry of the Attorney General. Alternatively, establishing a single Ontario Adjudicator Nominating Authority to be managed and administrated by a private entity may allow the government to achieve some cost and administrative savings.

    One of the concerns raised in the early years of U.K. adjudication was the adjudicator’s immunity from liability. The experience in the U.K. demonstrates that to secure and encourage the most talented adjudicators, such individuals must be immune from liability in the exercise of their functions, as long as they do not act in bad faith. This has been implemented in the U.K.[1158] and other jurisdictions. As well, in jurisdictions such as New Zealand “[a]n adjudicator may not be required to give evidence in any civil proceedings on anything connected with an adjudication that has come to his or her knowledge in the course of adjudication proceedings.”[1159] Such measures make sense as a way to ensuring that adjudicators are not subjected to law suits unnecessary involvement in future proceedings.

    Recommendations

    1. An adjudicator should be nominated after a dispute has arisen, not at the outset of a Project.
    2. An adjudicator should be named in the Notice of Adjudication by the party delivering the notice.
    3. The parties should have two (2) Business Days after delivery of the Notice of Adjudication to agree on an adjudicator, failing which either party would request that the Adjudicator Nominating Authority appoint an adjudicator within five (5) Business Days.
    4. We recommend the creation of a single official Authorized Nominating Authority that will administer the appointments, certification and training of all adjudicators in Ontario to be administered either by the Ministry of the Attorney General or by a private entity designated by the Ministries as an Adjudicator Nominating Authority.
    5. Adjudicators should have immunity from liability in relation to their decisions and should not be compelled to give evidence in civil proceedings.

    5.3  What Disputes Get Adjudicated?

    Internationally, there are a number of schools of thought in terms of what kinds of disputes can be adjudicated. These schools of thought range over a spectrum, at one end of which are jurisdictions like the U.K. where a dispute arising under the contract[1160] can be adjudicated to the other end where only disputes in relation to certain types of payment claims are adjudicated (as in the Australia (East Coast) Model).

    As noted above, in the U.K., parties can refer any dispute (that includes any difference) that arises under a construction contract to adjudication. As to what constitutes a “construction contract”, the U.K. Construction Act defines a construction contract to be an agreement for the carrying out of, arranging for, or providing labour for construction operations,[1161] and includes contracts for architectural or engineering work, surveying work, design, landscaping or decoration work. Other jurisdictions, such as New Zealand, Malaysia, Singapore, and Hong Kong use broad definitions of what constitutes a construction contract. As described in Appendix C, the legislation in some jurisdictions carves out certain types of contracts from adjudication. For example, contracts of employment are excluded in many jurisdictions (e.g. U.K., Australia (New South Wales) and Singapore).

    In Ontario, the word “contract” is defined in the Act to mean “the contract between the owner and the contractor, and includes any amendment to that contract”.[1162] A subcontract is defined as “any agreement between the contractor and a subcontractor, or between two or more subcontractors, relating to the supply of services or materials to the improvement and includes any amendment to that agreement”.[1163] To give these concepts more content, one must look to the definition of improvement in the Act, which is a very broad definition as discussed in Chapter 3 ‑ Lienability and in relation to which we have proposed amendments. Therefore, adjudication could be applied to all contracts and subcontracts related to an improvement, as those terms are presently defined in the Act, which includes public and private projects. Certain possible exceptions could be implemented by way of regulation.

    In Ontario, the feedback we have received is that given the desire to continue to allow construction liens, the U.K. model, pursuant to which “any dispute” can be adjudicated is too broad.

    Some commentators have referred to adjudication regimes like that in the U.K as “unrestricted warfare”.[1164] In our view, a more focussed adjudication model is warranted for Ontario. The Hong Kong Development Bureau articulated its rationale for limiting the right to adjudication as follows:

    It ensures that the right is focused on disputes which are likely to delay payment. This is consistent with the overriding objective of introduction of [security of payment legislation] in Hong Kong which is to improve payment practices and reduce payment disputes and delays. Limiting the right to adjudicate financial claims to those which have been made as Payment Claims means it is possible to define and limit the circumstances and timescales for commencing adjudication … It means that there is less scope for ambush compared to the U.K. model which allows any dispute to be adjudicated at (literally) any time.[1165]

    In Hong Kong, it is proposed that adjudication apply to disputes concerning the time for performance or entitlement to extension of the time for performance of work or services or supply of materials or plant under the contract[1166] because such issues “are often crucial to unlocking financial disputes on construction projects both in terms of entitlements to loss and expense and employer entitlements to liquidated damages for delay”.[1167]

    In Chapter 8 – Promptness of Payment, we recommended that a regime be implemented to ensure that suppliers of materials and services on construction projects are paid promptly. One of the distinguishing features of our recommendations in Chapter 8 – Promptness of Payment is that if a payer does not comply with its payment obligations, the parties should be free to adjudicate.

    In addition, we are also mindful of our recommendation in Chapter 6 – Summary Procedure in regard to small claims court and a threshold minimum for claims of $25,000. We therefore propose that for disputes under a value of $25,000, parties to a construction contract should be able to elect to proceed either go to adjudication or to small claims court.

    Recommendations

    1. We recommend that parties to a construction contract or subcontract be entitled to refer a dispute to adjudication that flows from a proper invoice under a construction contract or subcontract (being a claim for payment under a contract or a subcontract in relation to an improvement) including:
      • The valuation of work, services, materials and equipment supplied to an improvement and claimed as part of a proper invoice;
      • Other monetary claims made in accordance with the provisions of the construction contract (that had been claimed in a proper invoice), including the change orders and proposed change orders;
      • A claim in relation to any security held by a party under the construction contract;
      • Set offs and deductions (i.e. for deficiencies) against amounts due under a proper invoice as set out in the notice of intention to withhold or otherwise; and
      • Delay issues as they relate to claims for payment.
    2. We recommend that for disputes valued at under $25,000, parties can refer such disputes to adjudication or to the small claims court.

    5.4  What Process and at What Cost?

    5.4.1  Process

    In terms of process, the point of adjudication is that the process is simple. In Australia, for example, it has been noted that “the ‘secret of the success’ of these [adjudication statutes] are the confluence of a number of factors such that the process is ‘quick, efficient, cheap, effective and fair’”.[1168] Adjudicators should have the ability to create their own processes in their “inquisitorial” role.

    Under the U.K. system, adjudication proceeds in accordance with the requirements of Part 1 of the Scheme or alternatively, as set out by contract so long as that contracted procedure is consistent with the U.K. Construction Act. In other words, where a construction contract does not comply with the requirements of the U.K. Construction Act, the Scheme takes effect as an implied term of the contract.[1169] We are of the view that this general approach makes sense.

    Recommendations

    1. If the parties do not agree on an adjudication process that meets the minimum standards of the new Ontario legislation, minimum standards for adjudication set out in a default scheme (under a regulation to the Act as noted above) should be implied with respect to: notice of adjudication, appointment of adjudicators, timetables for an adjudication, powers of an adjudicator (including the ability to draw inferences based on conduct of the parties), the adjudicator’s duties, allowing an adjudicator to establish a process (with appropriate limitations), and providing that the decision is binding on an interim basis.

      The following process and timelines should be considered:

    5.4.2  Costs

    Savings in costs is one of the main benefits of adjudication. That said, setting the specific fees of an adjudicator in advance is a difficult task. In jurisdictions such as the U.K. and New Zealand parties are free to agree on the payments to be made to an adjudicator. Conversely, in certain Australian states and Malaysia fee ranges are employed.

    The majority of adjudication regimes allow the parties the right to agree on an adjudicator’s fees and failing such agreement, a third party (such as an ANA or ANB) will determine what is reasonable. This approach makes sense.

    In addition to an adjudicator’s fees and expenses, the fees and expense of the parties should be considered as should the allocation of such fees and expenses. As noted in the Hong Kong Consultation Document, there are often circumstances where “larger paying parties will be able to resource and fund teams of lawyers and experts to represent them at high cost. The prospect of losing and becoming liable for these costs would be a major disincentive to adjudicating.”[1170] It is for this reason, among others, that Hong Kong and other jurisdictions suggest that each party bears its own legal costs regardless of the outcome of adjudication. However, in other jurisdictions such as Singapore and New Zealand, the adjudicator can award costs against a party in the case of bad faith or there has been frivolous or vexatious conduct, which is a sensible exception to the general rule.[1171]

    Recommendations

    1. In terms of the amount of the adjudicator’s fees, the parties should be free to agree on the fees of the adjudicator and if they cannot agree, the ANA should determine the fees of the adjudicator. The general rule should be that the fees of the adjudicator will be apportioned equally.
    2. In terms of the parties’ own costs, including legal fees, the general rule should be that each party should bear its own costs.
    3. However, the adjudicator should be given the ability to depart from: 1) an equal apportionment of the adjudicator’s fees/expenses; and 2) the principle that each party should bear its own legal fees and costs, if the parties have acted in bad faith or there has been frivolous, or vexatious conduct.

    5.5  How Are Adjudicated Decisions Enforced?

    As noted above, enforcement of an adjudicator’s decision on an interim basis is crucial to keep funds flowing and in all adjudication jurisdictions the local courts are enlisted to ensure that the adjudicator’s award is are enforced on an interim basis. Section 23(2) of the Scheme provides as follows with respect to the interim binding nature of such decisions:

    Effects of the decision

    23.—

    (2) The decision of the adjudicator shall be binding on the parties, and they shall comply with it until the dispute is finally determined by legal proceedings, by arbitration (if the contract provides for arbitration or the parties otherwise agree to arbitration) or by agreement between the parties

    A summary of each jurisdiction’s enforcement procedures is found in Appendix C. To oversimplify, these jurisdictions generally provide that an adjudicator’s decision will be enforced barring a breach of natural justice or want of jurisdiction. These fundamentals should carry forward into adjudication in Ontario.

    The enforcement of these interim adjudication decisions does not, however, make such decisions final and binding as parties remain free to pursue their existing remedies under the Act, or arbitrate their disputes (if the contract provides for arbitration) following adjudication.

    In Ontario, an adjudicator’s decision could be enforced in the same way as the award of an arbitrator under a domestic arbitration is enforced (i.e. notice of application, affidavit attaching original award or certified copy).

    Following such an application, the court will be required to give a judgment enforcing the adjudicator’s decision unless the two year period prescribed by the Limitations Act, 2002[1172] has expired, the award has already been set aside or declared invalid, or the court determines that there has been a material breach of natural justice or alternatively, that the adjudicator did not have jurisdiction to make the decision.

    In the UK, when adjudication was first introduced some were of the view that the interim nature of the decision meant the process was a waste of time and/or money when compared to the final determinations of a judge or arbitrator. However, one commentator has noted that: “the vast majority of adjudications provide a decision that both parties accept, and in effect, the decision becomes final. That is so even when either or both parties can identify clear flaws in the decision. There appears to be a significant premium placed by the parties on an adjudication as closure, even if the outcome is not one they had wished for.”[1173]

    We are of the view that adjudication can serve as an effective enforceable interim binding dispute resolution mechanism in Ontario given its potential to provide swift closure of disputes.

    Recommendations

    1. We recommend that the decision of an adjudicator should be binding on the parties and they should comply with the decision until either: a) the dispute is finally determined by legal proceedings (including lien proceedings) or arbitration (if provided for under the contract or the parties agree to arbitrate); or b) by agreement by the parties that the decision of the adjudicator is finally binding.
    2. We recommend the adjudication decisions be enforced, if necessary, by way of application to the Superior Court of Justice, in a manner similar to that employed in respect of the awards in domestic arbitrations under the Arbitration Act, 1991 (i.e. issuing a notice of application on notice to the person against whom enforcement is sought, attaching an affidavit and the adjudication decision or a certified copy, within two years of the decision).

    5.6  How Would Adjudication Interface with the Act?

    During the course of the Consultation Process and Advisory Group process, questions were asked about how adjudication would work within a lien regime. What became apparent to us was that there is a need not only to preserve rights under the current Act, but also to attempt to ensure that the preservation of those rights does not defuse the potential usefulness of an adjudication regime.

    It is our view parties should maintain lien rights. In the U.K., the existence of the adjudication regime does not prevent parties from litigating or arbitrating their disputes, and the U.K. has created a specialized Technology and Construction Court to litigate such disputes. Similarly, in Ontario, stakeholders and the Advisory Group expressed a strong preference that the lien remedy remain in place. In Chapter 6 – Summary Procedure, we made certain recommendations with respect to improving the efficiency of the summary procedures under the Act and in Chapter 4 – Preservation, Perfection and Expiry of Liens we provided lien claimants with additional time to pursue their lien rights. These changes, however, will not sufficiently ameliorate the problems with the efficiency and cost of dispute resolution in Ontario. Adjudication is the solution, particularly in conjunction with a prompt payment regime as articulated in Chapter 8 – Promptness of Payment. If successful, the need to resort to the lien as a remedy will, we anticipate, diminish.

    Under the adjudication regime we recommend, adjudicators are not judges. They are individuals who are tasked with attempting to resolve disputes on construction projects on an interim binding basis, and their authority is derived from the construction contracts entered into between the parties. A dispute between parties to a construction project would still be subject to final and binding determination through legal proceedings (including lien proceedings) or arbitration (if the contract provides for arbitration or the parties agree to arbitrate). The adjudication in that sense is not “like a s. 96 court” (in reference to section 96 of the Constitution Act 1867). Based on our research, we do not understand adjudicators to be acting as in contravention of section 96 of the Constitution Act, 1867.

    Recommendation

    1. We recommend that parties maintain their lien rights such that, if a party wants to have a dispute finally determined through a lien proceeding, they can proceed to preserve and perfect a lien and proceed with a lien action.

    Chapter 10: Surety Bonds

    1. Overview

    Surety bonds guarantee, among other things, payment of either fifty percent or one hundred percent of the amounts owed by general contractors to the suppliers of labour and materials, and guarantee the owner that, in the event of the insolvency of the general contractor, construction will be completed. Bid bonds are also commonly provided in support of the procurement process for both public and private projects. As well, lien bonds are the most common form of security used to vacate liens and allow funds to continue to flow in the event of a dispute between a general contractor and a subcontractor that gives rise to a lien.

    The surety companies that underwrite these instruments are regulated both federally and provincially and must meet capital and reinsurance requirements in order to comply with licensing requirements. Furthermore, sureties have indemnities in their favour from the entities they underwrite, and sometimes the shareholders and related companies. Accordingly, compared with the U.S., the solvency of surety bonding companies is a reliable assumption. As well, the surety industry has a strong voice in the form of its trade association, the Surety Association of Canada.

    Currently, while surety bonds are frequently used on both public and private projects, there is no provincial legislation that requires contractors to post surety bonds (performance or labour and material payment bonds). For the purposes of the Review, our primary focus is in respect of labour and material payment bonds, i.e. those instruments intended to protect the suppliers of labour and materials. Instead of providing for mandatory labour and material payment bonds (hereinafter referred to as “payment bonds”), Canadian provincial legislation provides for liens and holdbacks as the primary statutory safeguards in respect of security of payment, on both private and public projects. In the U.S., the principle of federal or state sovereign immunity prohibits encumbrances such as liens against public projects. Rather than drawing a distinction between liens that attach and liens that do not attach to the land, U.S. federal and state statutes, namely the Miller Act and the “Little Miller Acts” (described below), require that contractors post both performance and payment bonds on public projects to secure payment to the subcontractors and their suppliers.

    In respect of surety bonds, we considered the following issues:

    2. Context

    2.1  Surety Bonds Generally

    Surety bonds are “on default” instruments that provide different types of guarantees of the performance of underlying contractual obligations. In order to protect against the risk of the general contractor’s insolvency, an owner may require performance and payment bonds. (As well, and as noted above, as part of the procurement process, the owner may require a bid bond as part of the contractor’s tender package, to establish the contractor’s financial and technical pre-qualification by the surety.)

    In its main written submission to the Review, the Surety Association of Canada described the role of surety bonding as follows:

    Surety bonds have been in use since the late 19th century to bring accountability and stability to the construction industry. A bond is a financial instrument that protects construction purchasers, subcontractors and suppliers from the risks arising from a project contractor’s default by transferring these risks to a third party; the bonding company. Surety bonds provide two essential assurances to construction stakeholders:

    1. Prequalification – Surety companies undertake a thorough, comprehensive and ongoing review all bonded contractors to ensure that the contractor is capable of fulfilling the obligations under its contract; both financial and performance.
    2. Financial Security – A surety company protects an owner from financial loss in the event of a contractor default by funding any additional completion costs that exceed the original contracted value. Subcontractors and suppliers of a defaulted project contractor are also protected against the risk of financial loss arising from the inability or unwillingness of the bonded contractor to pay for labour and materials supplied.

    Protection through bonding is typically provided through two separate but interdependent instruments being: the Performance Bond; and the Labour and Material Payment Bond, defined as follows:

    The Performance Bond

    Generally, a Performance Bond constitutes a promise from the surety to the obligee that if the principal defaults in the performance of a specific contract, so long as the obligee has performed its obligations under the contract, then the surety, usually subject to certain conditions, will be obliged to either remedy the default, complete the contract or put bids for completion to the obligee.[1174]

    The Labour and Material Payment Bond

    Generally, a Labour and Material Payment Bond constitutes a promise by the surety to the obligee under the bond that if the principal fails to pay suppliers of services and/or materials to the principal with respect to a specific contractor or project then, subject to certain conditions being satisfied, the surety will pay the claims of those claimants pursuant to the bond.[1175]

    In respect of a payment bond, to oversimplify somewhat, and using the example of the general contractor’s bond, a payment bond constitutes a promise by the general contractor and the surety to the owner that if the general contractor fails to pay suppliers of services or materials (usually “first tier” subcontractors), then the surety will pay the valid claims of those unpaid subcontractors, subject to limits and certain conditions set out in the Labour and Material Payment Bond.[1176] The owner benefits from a payment bond because payment of the subcontractors makes it more likely that the subcontractors will agree to complete their remaining work for the replacement contractor. It also benefits the subcontractors directly as they will be paid instead of having to seek recovery from a potentially insolvent contractor.

    A contractor’s obligation to obtain a payment bond is provided for in the underlying contract between the owner and the contractor. As a result, subcontractors may not always be aware that a payment bond was issued with respect to the project. This is addressed in the current section 39 of the Act, which provides that a lien claimant or trust claimant is entitled to request a copy of any payment bond issued in respect of the contract.[1177]

    A surety’s liability to a claimant under a payment bond is, at most, co-extensive with that of its principal, that is to say the surety’s liability can be no greater than the liability of its principal, which means that a surety is not liable unless its principal is liable, such that the surety is entitled to raise any defence otherwise available to the principal.[1178] For example, if the subcontract between the principal and a claimant contains a “pay-when-paid” clause, then the surety will not be liable to the claimant under the bond if the clause is operative.[1179] In addition, the surety is also entitled to raise “surety defences”, which are either available under the specific bond wording in issue or generally at law.

    Because a surety bond is an “on default” obligation, before deciding whether to accept liability and making any payment under a bond, a surety is entitled to a reasonable amount of time to investigate the claim (and is obligated to its indemnitors to do so). The surety’s investigation typically involves a number of steps, including ensuring that the original executed bond is in the owner’s possession, notifying its indemnitors in writing of the claim(s), reviewing the bonded contract, the progress certificates and the accounting related to the contract and subcontracts, and ensuring that no changes were made to the underlying contract without the surety’s approval. Based on such factors, the surety will determine whether it is liable to pay the claimant(s).[1180] The surety is entitled to a reasonable amount of time to investigate even if the obligee attempts to press the surety into a quick decision.[1181] The decision to accept or deny liability must be carefully considered.[1182] It has been suggested that to a degree, a lack of clarity in respect of the best practices for surety adjusting gives rise to inconsistent expectations on the part of claimants. A number of stakeholders expressed frustration with the payment bond claims process.

    2.2  Mandatory Surety Bonds

    Currently, statutory mandatory bond regimes for public projects only exist in the U.S. but the use of payment bonds for the protection of subcontractors and suppliers is common in Canada. Fundamentally, payment bonds are currently a North American phenomenon. However, mandatory payment bonds have been considered in some other jurisdictions.

    2.2.1  United States
    2.2.1.1  The Federal Regime

    Prior to the enactment of the Miller Act (referred to above), “federal-project contractors were at risk because the federal government’s sovereign immunity prevented them from perfecting a mechanic’s lien”.[1183] In 1894, Congress enacted the Heard Act, which was intended to protect the interests of taxpayers against contractor defaults on federal projects by way of mandatory surety bonds.[1184] The Heard Act was repealed and was replaced with the Miller Act in 1935 when it became evident, with the large New Deal federal projects that could not be liened due to the principle of federal sovereign immunity, that subcontractors and suppliers needed protection from defaulting contractors.[1185] Therefore, the Miller Act was enacted to provide a statutory regime to protect the interests of persons supplying materials and services to contractors and subcontractors working on federal projects and to shift the ultimate risk of nonpayment from workers and suppliers to the surety.[1186] Commentators have noted that the Miller Act “provides recourse to such claimants who have not been paid for the materials and/or labor provided”[1187] and it “completely eliminated the right of a subcontractor or supplier to impose any form of mechanic’s lien or other encumbrance against federal public works projects”[1188]. All federal public construction projects valued over $100,000, with few exceptions, are subject to the provisions of the Miller Act[1189] which requires that “a payment bond must be provided by the principal or general contractor on every federal contract to protect the right of payment for those supplying materials or services to the federal project”.[1190] The Miller Act provides as follows:

    Before any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government […] [a] payment bond […] for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.[1191]

    Under the Miller Act, a contractor is also required to obtain a performance bond and as noted by some, “these bonds protect the interests of the federal government, taxpayers, subcontractors, and suppliers from defaulting parties”.[1192] While the performance bond ensures that the project will be completed, the payment bond provides for security of payment to anyone who supplies services and materials to the project.[1193] The onus is on a claimant who relies on the Miller Act to prove that:

    1. It supplied material or labor in prosecution of work provided for in the contract;
    2. Payment has not been made;
    3. There is a good faith belief that materials were intended for the specified work; and
    4. The jurisdictional requisites of timely notice and filing required by the Miller Act are satisfied.[1194]

    Commentators have noted, however, that the Miller Act does not protect the interests of the general contractor (which has a direct contract with the government or government agency) against default by the government or government agency.[1195] It is also important to note that the Miller Act only applies to a limited group of potential claimants:

    The Miller Act limits the right to make a claim and file a lawsuit to those suppliers and subcontractors who deal directly with the prime contractor and to those suppliers who, lacking any contractual relationship with the general contractor, have a direct contractual relationship with a subcontractor. A supplier to another supplier who then sells goods to the general contractor has no claim, nor does anyone whose relationship to the general contractor is more remote than a second tier subcontractor.[1196]

    2.2.1.2  The State Regimes

    Commentators explain that after the “success” of the Miller Act on federal projects, each one of the 50 states enacted a “Little Miller Act”,[1197] each modeled after the federal Miller Act, and each generally interpreted by state courts in conformity with the federal statute.[1198] The Little Miller Acts fulfill the same purpose as the Miller Act and provide security to trade contractors on state, county, municipal and other local projects, [1199] as they require a contractor to post a payment bond as a pre-condition to contract award.[1200] Commentators have described the requirement as follows:

    This payment bond takes the place of any right of a supplier or subcontractor to assert a mechanic’s or other type of lien. Since the substantive rights of the suppliers and subcontractors were not being adversely affected and, in fact, in many instances were being enhanced, public policy and constitutional protections permitted the elimination of the right to claim a mechanic’s lien on state and municipally funded public projects.[1201]

    Commentators have noted that, although similar to all other Little Miller Acts, each statute has its own particularities and differences from equivalent statutes in other states.[1202]

    For example, from state to state there is a wide range in contract values that trigger the statutory bonding requirement. Mandatory bonds are required in some states regardless of the contract value, in other states specific values of contracts ranging from $20,000, $100,000, $150,000 and $200,000 are used as threshold values for the requirement of bonds. In most states, bonds must equal the exact value of the contract price or original contract price, but in some cases, a bond is only required to 50% of the contract price.[1203] Finally, in other states, the required amount of the bond varies on a sliding scale proportionate to the contract price.[1204]

    In terms of the claims handling process, in the U.S., there are some states that “regulate or prohibit unfair claims practices”, and others do not.[1205]

    2.3  The Electronic Delivery of Surety Bonds

    The common law requires that, because it is a deed, a surety bond must be in writing, on paper, and be signed sealed and delivered in order to be effective.[1206] Stakeholders have expressed positive views on the amendment of the Act to expressly permit e-bonding. The Surety Association of Canada has drafted guidelines to ensure that electronic surety bonds are reliable and enforceable. For example, an electronic document must meet a number of requirements, including integrity of content (assurances that the document received is the true document executed), secure access (restricted access to those authorized to view or download the document), and verifiability/enforceability (assurances that the document was duly executed and enforceable in law).[1207]

    All provinces and territories have enacted legislation in place to regulate the electronic delivery of information.[1208] By way of summary, the electronic delivery of a document is not mandatory, but requires the consent of both parties. In the event that consent is granted, information that needs to be in writing can typically be delivered in electronic form. In some provinces (Newfoundland and Labrador, Nova Scotia, Nunavut, Ontario, Prince Edward Island, and Saskatchewan) the legislation provides that a contract may be formed, or any matter material to a contract may occur by way of electronic transmission of information or in the form of an electronic document.

    While all provinces have enacted legislation regarding delivery of a document electronically, only the legislation in Ontario and Nunavut specifically provide for sealing of electronic documents. In this regard, subsection 11(6) of the Electronic Commerce Act, 2000[1209] provides that a document shall be deemed to be sealed if the legal requirement that the document be signed is satisfied in accordance with Subsections 11(1), (3) and (4) of the Electronic Commerce Act and the electronic document meets the “prescribed seal equivalency requirements”.[1210] However, to date, no regulations have been prescribed in respect of the Ontario Electronic Commerce Act and thus there are no seal equivalency requirements that a document can meet. As a result, in Ontario, as long as seal equivalency requirements are not prescribed, arguably no document that is delivered electronically can be considered a deed and thus there is a risk that surety bonds delivered electronically could be alleged to be ineffective, by interested persons attempting to prevent a surety from accepting liability for example.

    2.4  Subcontractor Default Insurance

    Subcontractor default insurance (“SDI”) offers an alternative to performance and payment bonds but it is entirely different from performance and Labour and Material Payment Bonds. Default insurance can be obtained by an owner as a form of insurance (not a bond) against default by the contractor or by the contractor against default by a subcontractor.[1211] Contrary to a bonding agreement which is a three party agreement between the principal, the obligee and the surety, an insurance policy (such as a SDI policy) is a two party agreement between an insured and an insurer. The obligation of the insurer is triggered by an insurable event, which is typically an accidental event, error or omission.

    SDI transfers an initial portion of the risk of loss to the insured through non-qualifying losses and a deductible. It also transfers a portion of the remaining risk to the insured with a co-payment percentage clause, up to the limits of the policy.[1212] In addition, the insured is required to complete the work itself rather than rely on a surety under a performance bond.[1213]

    3. Summary of Stakeholder Views

    Respondents were almost evenly split regarding mandatory Labour and Material Payment Bonds. 32% of main group respondents suggested that payment bonds should be mandatory, 37% of main group respondents responded in the negative, and 32% of main group members did not respond.

    Of those who suggested that payment bonds should be mandatory, 71% of main group respondents believed they should be mandatory on all projects, while 51% of Ontario Association of Architects’ members believed they should be mandatory on some projects.

    As a preliminary matter, stakeholders were asked to provide their positions on whether prompt payment should be required in relation to undisputed amounts to be paid by payment bond sureties. In this regard, stakeholders provided as follows:

    1. Most of the responding stakeholders were in favour of requiring prompt payment of undisputed amounts by payment bond sureties.[1214]
    2. The Ontario Road Builders’ Association expressed the view that this could result in the more expeditious resolution of claims, and observed that withholding the entire amount where only a portion is disputed is illogical.
    3. The Surety Association of Canada supported the proposition so long as the provision does not prejudice a payer’s ability to seek a proper resolution to the disputed amounts.[1215] Specifically, the Surety Association of Canada stated as follows with regards to the issue:

      SAC would generally support a recommendation by the Review that undisputed amounts under a payment bond should be paid promptly, provided the recommendation:

      • avoids creating a scenario in which a surety under a payment bond would be required to pay more than the amount its principal would ultimately be required to pay under the subcontract, and
      • ensures that prompt payment under a payment bond does not prejudice the ability of the payer or of the surety to seek a proper resolution of disputed issues and amounts.

      This issue has been addressed by the surety industry in the United States… We would invite the Review to consider … recent efforts by the Canadian surety industry to improve the responsiveness of the payment bond and address the issue of prompt payment of undisputed amounts.[1216]

    In relation to the requirement for Payment Bond payees to complete their subcontracts, the stakeholders submitted as follows:

    1. The Canadian Institute of Quantity Surveyors and the Surety Association of Canada advised that they would not be in favour of amending the Act to require payment bond payees to complete their subcontracts.
    2. One stakeholder observed that the issues involved are typically more complex than the legislation could provide for,[1217] that there can be uncertainty as to which party may have custody of a construction site in an insolvency, and that the contractual structure of completion may be uncertain at the moment of settlement of the payment bond claim.[1218]
    3. Conversely, Infrastructure Ontario would support this proposal provided that it is the owner that determines what is in the best interests of the project.[1219]

    As noted above, stakeholders were asked whether payment bonding for public projects should be mandatory. The responses were split.

    1. The principal opposition to the idea came from certain public owners.[1220] The central concern expressed by these stakeholders was that mandatory bonding is a one-size-fits-all approach that would not be practical in certain circumstances, and would unnecessarily increase costs and administrative burden. Some public stakeholders also cited freedom of contract.
    2. Other stakeholders were in favour of mandatory payment bonding on public projects, with some expressing the view that bonding should be mandatory above a certain financial threshold ($100,000 and $250,000 were suggested).[1221]
    3. The Surety Association of Canada pointed out that payment bonds are interdependent with performance bonds and are therefore issued only in conjunction with performance bonds, and the Surety Association of Canada also proposed that consideration should be given to the adoption of standard forms of bonds that should include practical provisions for the claims process, timelines of payment, and dispute resolution provisions.[1222] It was further suggested that consideration should be given to whether the bonds should be mandatory with respect to prime contracts only, or also on subcontracts and trade contracts to protect payees further down the payment chain.[1223]

    In relation to imposing requirements in respect of adjusting bond claims, stakeholders submitted as follows:

    1. The Surety Association of Canada expressed support for requirements in respect of adjusting bond claims, for example, practical provisions for the claim process, timelines for payment, and dispute resolution provisions.[1224]

    On the issue of providing for electronic delivery of surety bonds, responding stakeholders were unanimous in their support for a provision allowing for the electronic delivery of surety bonds.[1225]

    Stakeholders were also asked to consider whether they would support the adjudication of bond claims:

    1. Several of the responding stakeholders expressed support for subjecting bond claims to adjudication.[1226]
    2. The Surety Association of Canada expressed support for an alternative dispute resolution process that would include fast-tracked timelines for the commencement of the process, the appointment of the adjudicator, and the delivery of an interim award. The Surety Association of Canada was also of the view that the process should also allow for full or partial security for a review or an appeal of an interim award. Further, the Surety Association of Canada submitted that the parties involved should be able to contractually agree to shorter timelines than what is statutorily required.[1227]
    3. Conversely, the Ontario Association of Landscape Architects suggested that adjudication would delay the progress in completing a project and expressed opposition to bringing bond claims within the ambit of adjudication.[1228]

    On the issue of the third party beneficiary rule:

    1. Few stakeholders responded when asked whether changes to the third party beneficiary rule are appropriate in order to enable payment by owners directly to subcontractors and suppliers.
    2. York Region was generally in favour of changes to this effect.[1229]
    3. The Ontario Association of Landscape Architects suggested that owners be able to take advantage of the third-party beneficiary rule if they are enabled to pay subcontractors and suppliers directly, although there would be some pushback by sureties to an amendment to this effect.[1230]
    4. The City of Toronto commented that there would be risk to an owner making direct payments to a third party without privity of contract to ensure that the amount being claimed and paid is justified. Thus, the provision would have to protect owners from future liability.[1231]

    Finally, Stakeholders were asked whether the Act requires any revisions in light of the existence of contractor and subcontractor default insurance.

    1. The City of Toronto suggested that the Act should not interfere with freedom of contract by mandating insurance or bonding; parties should be free to allocate and mitigate risks in their contracts.[1232]
    2. The Surety Association of Canada did not recommend changes to the Act in this respect, but commented that default insurance is designed to protect a general contractor from costs associated with the default of a subcontractor and does not provide security or payment protection for unpaid subcontractors, supplies, or others in the construction payment chain.[1233]

    4. Analysis and Recommendations

    Surety bonds are a well-understood product that provides targeted protection for both owners and subcontractors in circumstances where a general contractor has become insolvent. As discussed in Chapter 7 – Construction Trusts, this is the very area in which the evolution of case law in Ontario has left subcontractors and suppliers with little assurance of protection.

    As discussed in Chapter 7, the two available solutions to the core issue of insolvency risk are mandatory trust accounts, which are not certain of success in the face of a constitutional attack, and mandatory payment bonds. Having said this, as noted above, payment bonds are interdependent with performance bonds and the two instruments are issued in tandem for a single premium. Accordingly, if payment bonds are the appropriate solution to the core issue of insolvency risk, it must be recognized that this would result in owners obtaining additional security of completion as well, even though some owners – such as the Ministry of Transportation – do not wish to have surety bond security for the completion risk.

    If mandatory surety bonds are the most reliable solution to the insolvency problem – which it appears they are, the next question that arises is whether to adopt a statutory approach similar to the Little Miller Act regimes in the U.S., where surety bonds are required to be posted only on public sector projects, or whether to require surety bonds on both private and public sector projects in Ontario. In this respect, it is important to acknowledge that the U.S. approach was borne out of the general policy to the effect that subcontractors supplying to public projects should not go unpaid, and in recognition that, as constitutional matter, public projects cannot be subjected to liens. In Ontario, the former consideration applies, but not the latter, as the holdback maintained by public sector and broader public sector owners is subject to liens in Ontario, giving lien claimants at least the prospect of partial recovery. As well, if surety bonds were made mandatory for public and/or broader public sector projects, the applicable surety bond premiums would increase the cost of public projects to some extent – although there is no evidence that this has inhibited the development of public projects in the U.S. As for private projects, not only is there no precedent for such a requirement but it would be an obvious and major incursion into the freedom of contract if the Act were to mandate performance and payment security on private projects.

    Given the current uncertain economy, and recent indications that interest rates will gradually increase, as well as the multiple major infrastructure initiatives underway in Ontario, particularly in the linear transit sector, we are of the view that the fundamental objective of the Act, to protect subcontractors and suppliers, would be best served by making surety bonds mandatory for public sector projects in Ontario. One need only consider the current economic challenges being a faced by the provinces of Newfoundland and Labrador, Saskatchewan, and Alberta to appreciate how rapidly economic circumstances can shift. In our view, the core issue of insolvency risk can only be addressed with certainty by introducing into the Act a statutory requirement for mandatory surety bonds, and there is a powerful policy argument to the effect that suppliers to public projects should not go unpaid. The same policy consideration does not, however, apply in the case of private projects, in respect of which we recommend in Chapter 7 – Construction Trusts that Project Bank Accounts be the subject of pilot projects in the public sector in order to determine their potential efficiency for adoption more broadly in the private sector. As for AFP projects, we recommend that mandatory surety bonds not apply at the level of the Project Agreement but at the level of the contract(s) between Project Co and the Construction Contractor or Design-Builder. As for whether surety bonds should be required at the level of subcontract, the answer lies in the Surety Association of Canada broad form payment bond, which would provide payment bond protection at all levels of the contractual structure through a single payment bond. The Surety Association of Canada has an initiative underway in this respect, which it has described to us as follows:

    SAC is currently engaged in discussions with the Canadian Construction Documents Committee (CCDC) in an effort to update its standard performance and payment bond wordings and is contemplating major changes to the labour and material payment bond.

    In addition to modernizing the archaic language, SAC is proposing an optional expansion of the scope of protection which will address this very issue. This enhanced protection will be added to the bond by way of a “Broad Form Rider”, a sample copy of which is included as Appendix II (b). The rider expands the scope of the standard CCDC 222 payment bond by including:

    We should point out that this approach mirrors the current practice in the United States as set out in the standard American Institute of Architects (AIA) 312 Payment Bond Form (copy attached as Appendix A (iii). We refer to Clauses 7.1 and 7.2 which require the surety to pay any undisputed amount within 60 days of receipt of a claim.

    In fact, this requirement is also found in the statutes of numerous states across the country which call for bonds on all publicly funded construction work and regulate the manner in which they’re used. These statutes are collectively referred to as “Little Miller Acts” as they are derived from the federal legislation of the same name.

    Regarding surety claims adjusting, as noted above the Surety Association of Canada supports the mandatory payment of undisputed amounts, and supports the development of a best practices surety claims adjusting protocol. In our view, these are both valuable initiatives that should be recognized in the Act.

    Accordingly, we make recommendations as follows.

    Recommendations

    1. The Act should be amended to require broad form surety bonds to be issued for all public sector projects, the form of such surety bonds should be developed in consultation with the Surety Association of Canada, and once finalized they should become Forms under the Act.
    2. The Act should be amended to require sureties to pay all undisputed amounts within a reasonable time from the receipt of a payment bond claim.
    3. A Regulation to the Act should be promulgated to embody a surety claims handling protocol, and that such surety claims handling protocol be developed in consultation with the Surety Association of Canada.
    4. No change should be made in respect of the third party beneficiary rule, or default insurance. The adjudication issue is addressed in Chapter 9 - Adjudication above.

    Chapter 11: Technical Amendments

    1. Overview

    As part of the Review, stakeholders raised a variety of technical issues, primarily of concern to construction lawyers practising in Ontario. We have grouped these technical issues together in this Chapter.

    The following technical issues are considered in this section:

    2. Irregularities That Can Be Cured Under the Act

    Section 6 of the Act provides as follows:

    Minor irregularities

    1. No certificate, declaration or claim for lien is invalidated by reason only of a failure to comply strictly with subsection 32 (2) or (5), subsection 33 (1) or subsection 34 (5), unless in the opinion of the court a person has been prejudiced thereby, and then only to the extent of the prejudice suffered. R.S.O. 1990, c. C.30, s. 6.

    According to Glaholt & Keeshan in The 2016 Annotated Construction Lien Act,[1234] the “so-called ‘curative’ section of the Act was radically altered by the Construction Lien Act, 1983. The previous provision … had required only ‘substantial compliance’ with the statutory requirements of the claim for lien and the procedural aspects of a lien action.”[1235] This more liberal standard (of substantial compliance) is incorporated in the lien statutes of Alberta, Manitoba, Newfoundland, New Brunswick, Nova Scotia, PEI, Saskatchewan and the Northwest Territories.[1236] Importantly, no stakeholders asked the Review to consider moving back towards the application of a “substantial compliance” standard under the Act.

    The discretion under section 6 of the Act allows the court to cure minor or technical irregularities, but errors that cause prejudice (e.g. failure to name the owner) result in invalidation of the affected certificate, declaration, or claim for lien. Although Section 6 was originally viewed as a general curative power it has since become more rigidly limited in its application by the courts.[1237] Under this section, what is or is not curable may vary depending on the context of the case.[1238] However, some examples of items that may be, but are not always, cured include: incorrect date of last supply, failure to name person to whom materials and services were supplied (provided the owner was correctly named),[1239] registering against the wrong premises,[1240] the language of the prayer for relief,[1241] and inserting an owner’s name in the wrong part of a statement.[1242]

    Certain stakeholders submitted that greater precision should be provided for under Section 6,[1243] but no specific recommendations were provided by stakeholders in this regard.

    As the scope of the Review does not include drafting at this stage, we recommend simply that Section 6 be clarified as to what irregularities may be cured as long as no prejudice is caused to other parties, as noted in the current section.

    Recommendation

    1. Clarify the Act to confirm that the following irregularities may be cured so long as no prejudice is caused to other parties:
      • Failure to correctly name the owner and or person to whom materials and services were supplied;
      • Minor errors in the legal description; and
      • Inserting an owner’s name in the wrong part of a statement.

    3. Statutory Settlement Meetings

    Sections 60 and 61 of the Act provide a complete code for setting down and conducting a settlement meeting. This procedure is unique to the Act. Section 60(1) provides parties with the flexibility to concurrently fix a trial date and provide for a settlement meeting, or to take either step separately by making a motion to the courts.[1244] Section 60(2) requires that notice of a settlement meeting must be served at least ten days before the date appointed for the holding of the meeting. Subsection (2) lists the parties who must be served which includes all lien claimants, the owner, any other defendant or third party in any lien action, and where a lien attaches to the premises, any person with a registered interest in the premises or any execution creditor.

    The settlement meeting procedure under the Act is not the same as a pre-trial conference under the Rules of Civil Procedure.[1245] As a consequence, Rule 50 of the Rules of Civil Procedure does not apply. However, these two procedures share the objective of resolving or narrowing issues to be tried. Section 61 of the Act prescribes mandatory rules for the conduct of settlement meetings. As a general rule, settlement meetings are conciliatory in nature, not quasi-judicial or judicial.[1246] Parties can agree on issues of fact and issues of law, subject to the overriding discretion of the court in enforcing such agreements.[1247] A properly conducted settlement meeting should record both successes and failures, thereby streamlining specific issues for trial.[1248]

    Although ss. 61(1) through (4) codify the nature, purpose and conduct of the meeting, there is variety of practice across Ontario in terms of such meetings. For example, such settlement meetings are sometimes held without the participation of a judge in jurisdictions like Essex County, Chatham, Sarnia, Southwest Region and London.[1249]

    The results of a settlement meeting are formally set out in a statement of settlement that is filed with the court and becomes part of the court record and is binding upon all those served with notice at the settlement meeting. All attendees at a settlement meeting must sign this statement.[1250]

    The court has broad powers under section 61(5) of the Act to make whatever orders are necessary as a result of the meeting. However, in practice courts are reluctant to interfere with the results of a settlement meeting where the meeting was properly constituted and conducted.[1251]

    In their submission to the Review, the OBA CLA Reform Committee submitted that Rule 50 of the Rules of Civil Procedure could be adopted into the Act such that section 61(6) (i.e. the provision of the Act preventing the applicability of Rule 50) would be revoked.[1252] Importantly, however, while the purposes of Rule 50 and sections 60 and 61 of the Act are similar, in that both are mechanisms used to narrow the issues for trial, there are different practices applicable to each. A settlement conference takes place at an early stage of a lien proceeding and is a mechanism used to set the procedure for the lien action. A pre-trial is held much later. Furthermore, the implementation of a pre-trial conference under Rule 50 is a hearing presided over by a master or a judge, whereas a settlement meeting is generally conducted by the lawyers involved.[1253]

    Recommendation

    1. As the nature of each of these provisions and the intent differs, we recommend no change be made to the Act (sections 60 and 61) but note that practice directions would be helpful (to be included in the Practice Directions described in Chapter 12 – Industry Education and Periodic Review).

    4. Harmonization of the Act with the Registry Act

    During the Consultation Process, certain stakeholders advised that there is an unintended inconsistency between the Act and the Registry Act.[1254]

    During the consultation with the Construction Lien Masters of Toronto and Ottawa, the Masters stated that making the two statutes consistent would be helpful and suggested (by way of example) that there could be a prescribed form under the Act and that vacated liens would be registered using the form” and providing it be specific (i.e. as with other statutes that allow things to be registered as a Document General).[1255]

    In relation to electronic registration under the Registry Act, (i.e. the E-Reg system), author Roger J. Gillot stated that “two possibilities exist as to the appropriate electronic document to register to effect registration of the [order to vacate liens]: 1) An ‘Application to Amend the Register Based on a Court Order’; and 2) A ‘Discharge of Construction Lien’.”[1256]

    In relation to such registration, the Advocates Society noted that the “[d]isharmony between the two Acts has resulted in confusion and sometimes prejudice to lien claimants. In particular, […] the [Act] provides for the ability to either vacate or discharge a lien from title. Both have the effect of clearing title, but the latter results in the loss of lien rights to a lien claimant. However, the Registry Act forms have until recently provided only for a discharge of construction lien form; as a result, counsel inexperienced in the intricacies of the [Act] have sometimes inadvertently discharged their clients’ liens while attempting to vacate them from title.”[1257]

    In this regard, Gillot notes that in late 2012 it was reported that some Land Titles Offices were refusing to register orders vacating liens as “Applications to Amend.”[1258] This resulted in lawyers being forced by the Land Titles Office to use the “Discharge of Construction Lien” to register both discharges and vacating orders.[1259] Gillot identifies two issues resulting from the insistence of the Land Titles Office that the same form be used:

    1. First, title was unclear, because the term “Discharge of Construction Lien” would appear on the Abstract of Title, when the underlying instrument could be any of a Release of Lien, an Order vacating the registration of a claim for lien and/or certificate of action, or a Discharge of Construction Lien.
    2. The second issue stemmed from attempts to follow the instructions of the Land Titles Office. Having registered an “Application to Amend Based on Court Order”, with the Order vacating the registration of the claim for lien attached, and having perhaps advanced funds under a mortgage in reliance upon title being clear, parties were being faced with the Land Titles Office ordering that the Application to Amend be vacated and replaced with a Discharge of Construction Lien. Because the Land Registrar has 21 days to either “certify” or refuse to certify each title document, these rulings were sometimes being made long after the events in question.[1260]

    In view of this issue, in 2013 the Ontario Bar Association’s Construction Law Section Executive issued a notice to the profession.[1261] The notice identified that the registration problems “may be potentially confusing since it may appear to the unwary that a lien is “discharged” when it is only really vacated – creating problems both ways – inadvertent discharge potentially or inadvertent reliance on a lien being completely discharged, when in fact it has only been vacated from title.”

    Gillot noted that “[a]s a result of this controversy, the Construction Lien Masters in Toronto started including language in their vacating Orders requiring the Land Registrars to register their Orders as Applications to Amend the Register, and not as Discharges of Construction Lien.”[1262]

    If counsel do not use this language in their vacating orders, the Masters will apply a stamp with the language to the order. Notably, judges outside of Toronto may not have access to this stamp and if the language is not included, lawyers may be required by the Land Registry Office to register the Order through a Discharge of Construction Lien.[1263] In response to a request from the Ontario Bar Association, the Ministry of Government Services confirmed that it would “direct the Land Registrars to register the Orders as ‘Applications to Amend the Register’ in accordance with the wording of the Master’s order.”[1264]

    In its submission, the Advocates Society noted that while the situation was “improved by Teraview’s recent introduction of a new Application to Delete Construction Lien form” the Act could benefit from explicit harmonizing amendments so as to create separate prescribed forms for the registration, vacating and discharge of constructions liens.[1265]

    In this regard, separate forms could be prepared to harmonize the Act with the Registry Act.

    According to Gillot, “the E-Reg Sub-Committee of the OBA CLA Reform Committee raised [the issue of separate forms] with the [Ministry of the Attorney General] years ago, and suggested having three separate electronic documents, one to Release a lien, one to Discharge a lien by Court Order, and one to Vacate the registration of a claim for lien or certificate of action. However, at that time the [Ministry of the Attorney General] refused, on the grounds that they needed to minimize the number of different electronic documents.”[1266]

    Only one stakeholder submitted that the Act and the Registry Act are already sufficiently harmonized.[1267]

    Recommendation

    1. We recommend the implementation of separate forms (available electronically and physically). Specifically: one to release a lien, one to discharge a lien or certificate of action, and one to vacate the registration of a claim for lien or certificate of action.

    5. Right to Seize Machinery and Equipment

    The Ontario Electrical League submitted that the Act should include a provision to enable electrical contractor to seize machinery and equipment from a customer who has not paid the contractor for the installation of that property. They have noted that in the electrical industry the work done for process work far exceeds the “building” work and want an opportunity to seize machinery and equipment so as to encourage payment of outstanding accounts.[1268]

    This proposition was met with considerable opposition from other stakeholders. The Ontario Association of School Business Officials noted that allowing any subcontractor (electrical or otherwise) to remove materials from a construction site presents a myriad of challenges including, for example, that the Owner may have paid for work completed but for reasons outside of the owner’s control, the particular subcontractor that installed the equipment may not have been paid. The removal of materials or equipment would therefore put the owner and the project in a compromised situation.[1269]

    The City of Mississauga expressed concern that the proposal seems to suggest preferential treatment to a particular trade; and more importantly, the proposal amounts to an extraordinary remedy to seize any material and equipment (without specificity) for non-payment.[1270]

    The Ministry of Transportation also disagreed with the notion of removing machinery or equipment as, from the Ministry of Transportation’s perspective, such a mechanism could result in the potential seizing of highway safety devices such as traffic signals and power units for traffic signals removed from the highway. The Ministry of Transportation submitted that “[s]uch a right or ability would create chaos in the industry and impose a threat to the safety of the travelling public” and would “run in conflict to the goals of the Act to address payment issues in an orderly way”.[1271]

    Prompt Payment Ontario suggested that, with respect to machinery and equipment, trade contractors register a lien or seek a security remedy under the applicable conditional sales agreement pursuant to the Personal Property Security Act and that therefore no legislative amendment was required.[1272]

    We agree that such an amendment would impose an extraordinary remedy before any dispute resolution has taken place, essentially allowing enforcement before judgement, and such a measure could cause significant unintended consequences and would potentially involve treating one group of subcontractors differently than others. Accordingly, we recommend that this additional remedy for electrical contractors not be added to the Act.

    Recommendation

    1. There should be no amendment to add an additional remedy for unpaid electrical contractors and subcontractors that would allow them to seize machinery and equipment after installation.

    6. Additional Information in the Certificate of Substantial Performance

    Section 32(2) of the Act sets out the contents of a certificate of substantial performance as follows:

    Contents of certificate

    (2) Every certificate or declaration made or given under this section shall include,

    1. the name and address for service of the owner and of the contractor;
    2. the name and address of the payment certifier, where there is one;
    3. a short description of the improvement;
    4. the date on which the contract was substantially performed;
    5. where the lien attaches to the premises, a concise description containing a reference to lot and plan or instrument registration number sufficient to identify the premises; and
    6. the street address, if any, of the premises.[1273]

    Several Stakeholders submitted that further detail should be provided under this section requiring additional information for certification.

    The OBA CLA Reform Committee submitted that additional requirements should be added including “legal description, PINs, specific municipal address” and in the case of a lien to be given (i.e. where the lien does not attach to the land), the name and address of the persons to whom a claim for lien must be given. The OBA CLA Reform Committee also submitted that the Review should consider “sanctions for the failure to provide correct and complete information in the certificate/declaration of substantial performance in order to ensure better adherence to the content requirements.”[1274]

    Prompt Payment Ontario also made specific recommendations in relation to what further information should be provided. Specifically, it recommended that the additional right to information under section 39 should be integrated into the informational requirements of section 32(2). Prompt Payment Ontario submitted that the certificate of substantial performance should also provide: 1) the names of the parties to the prime contract(s) (if construction management) and the names of the parties between the “contractor(s)” and its/their subcontractors; 2) the state of accounts between the owner and the contractor and between the contractor and its subcontractors including the revised prime contract price as at the last certified payment; and 3) particulars of any labour and material payment bond by any contractor or subcontractor provided for that particular improvement.[1275]

    Clarity in relation to the certificate of substantial performance is an objective in accordance with the goals of the Act. It is our view however, that the addition of all information under section 39 would be too great an administrative burden to be required in addition to the existing contents of a certificate under Section 32(2).

    Recommendation

    1. We recommend that modifications be made to the requirements of section 32(2) of the Act to incorporate the legal description, including PINs and specific municipal address(es); and in the case of a lien to be given (i.e. where the lien does not attach to the land), the name and address of the person(s) to whom a claim for lien must be given.

    7. Sheltering

    Section 36(4) of the Act sets out specific rules in relation to the ‘sheltering’ of liens. This section permits sheltering of lien claims which effectively operates as an exception to the requirement that a lien be properly perfected under section 36.[1276] Sheltering provides a safety net for those lien claimants that do not perfect their liens in a timely way. This doctrine was developed “to avoid a multiplicity of actions relating to the same improvement and to simplify the procedure required to perfect small liens”.[1277] It was also created in order to provide further protection for subcontractors in the spirit of the Act. There is no comparable provision in the any of the provinces in Canada.[1278]

    Some commentators take the position that the sheltering provision contained in section 36(4) of the Act is “arguably an integral part of the ‘class proceeding’ concept of the Act”.[1279] According to author Karen Groulx of Dentons in a paper to the Ontario Bar Association, “the sheltering rules can provide protection to lien claimants who do not need to incur the expense of issuing and serving Statements of Claim where liens have been perfected prior to the expiration of the lien of the sheltering lien claimant.”[1280] In this regard, sheltering allows the lien claimants to proceed as a form of class and provides benefits to those persons with very small claims particularly when the prospect of retaining counsel and paying for a statement of claim is unreasonable.[1281]

    Author Duncan Glaholt notes “[t]he sheltering of a preserved lien under the perfected lien of another claimant is fraught with danger. The consequences can be fatal to the lien itself or to the jurisdiction of the Court over the lien, or both.”[1282] In his commentary, Glaholt notes that sheltering should only be looked upon in practice as a saving provision and not as an acceptable method of avoiding the cost of a lien action.[1283] Similarly, another commentator noted that “the potential consequences to the lien itself or to the jurisdiction of the Court over the lien are likely not worth what may amount to insignificant cost savings”.[1284]

    A significant risk of sheltering is that as the lien is only sheltered to the “defendants and the nature of the relief” claimed in the statement of claim, there can be consequences when sheltering, particularly where the sheltering claim is a nullity.[1285]

    In this regard, the OBA CLA Reform Committee recommended that we remove or abolish the sheltering provisions[1286] however, when asked for rationale, the OBA CLA Reform Committee noted that it did not have “a unified view on the advantages and disadvantages of removing the sheltering provisions.”

    A specific concern raised was that generally, construction lien claimants are not advised by their lawyers to shelter under section 36(4). The OBA CLA Reform Committee submitted that “[i]f these provisions remain in the Act, there should be a notice requirement and greater specificity.”[1287]

    The OBA CLA Reform Committee also noted that sheltering creates uncertainty because from a review of title you do not know whether a lien is sheltered or not.[1288]

    Some experienced construction practitioners advised that they did not necessarily share the view of the OBA CLA Reform Committee. Rather, it was suggested that the rules under section 36(4) provided clear steps in relation to sheltering that are detailed enough to follow and appropriate in consideration of not only the purpose of the Act but also the context of other provisions. Information about whether or not a lien has been sheltered under another lien can be obtained without undue burden. It is possible to sort out which liens are sheltered and which are not at the first case conference before a master in Toronto or Ottawa. Outside of these jurisdictions, this information is easily determined at a section 60 settlement meeting. In our view, given these available procedures temporary uncertainty as to whether a lien has been sheltered is not a compelling reason to modify section 36(4).

    The OBA CLA Reform Committee also noted that “the sheltering provisions force additional costs to parties where, particularly where there are multiple liens and multiple actions, knowing which liens are perfected, or allegedly perfected, under which actions.”[1289] However, conversely, the OBA CLA Reform Committee noted benefits of sheltering that included “(I) keeping costs down for small liens; and (II) preventing liens from being discharged in circumstances where the lien is perfected late, or not at all.”[1290] The OBA CLA Reform Committee submitted that “[i]f sheltering provisions remain in any lien act amendment, one possible avenue to maintain clarity is for the sheltering lien claimant to be required to provide notice (registered on title, or otherwise) of which action that lien claimant's lien is sheltering under.”[1291] We are of the view that notice is already provided through registration. Title searches would be performed regularly at the point in time where sheltering is of a concern and the additional burden for notice is not a pragmatic add on to an otherwise effective provision.

    Another issue raised by the OBA CLA Reform Committee in their supplementary submissions was in relation to the Ontario Superior Court of Justice case of The State Group Inc. v Quebecor World Inc. and 4307046 Canada Inc.[1292]The OBA CLA Reform Committee noted that in this decision “Master Wiebe held that a contractor can shelter under its subcontractor's lien”.[1293]

    The OBA CLA Reform Committee recommended that any proposed “[a]mendments to the sheltering provisions should include: (i) whether a lien claimant can shelter under any action, or whether it should only be permitted to shelter under an action in that same stream; and (ii) whether a lien claimant can only shelter under an action in that same class (i.e. expressly disallowing a general contractor to shelter under the action of a subcontractor)”.[1294]

    We do not agree. An action under the Act is essentially a class action.[1295] The scheme of the Act is intended to ensure that all lien claims against a premises are tried at once, where practicable, to avoid a multiplicity of proceedings.[1296] In this regard, we see no compelling reason to depart from this intent.

    Recommendation

    1. We recommend that no change be made to the section 36(4) sheltering provisions under the Act.

    8. Written Notices of Lien

    The purpose of the written notice of lien is to permit the payment of funds down the construction pyramid, but at the same time require the holdback of an amount sufficient to satisfy the lien.[1297] The payment of funds ought to continue in the face of a written notice of lien, subject to an increased holdback.[1298]

    Few Canadian jurisdictions have legislated written notice of lien provisions. In Saskatchewan, the written notice of lien provision mirrors that in Ontario, where “a payer may, without jeopardy, make payments on a contract or subcontract up to 90% of the price of the contract of subcontract price, less the [holdback] amount retained” following receipt of a written notice of lien.[1299] The written notice of lien in Saskatchewan is given in a prescribed form under the regulations.

    Responding stakeholders were split on the question of removing the written notice of lien provision from the Act. Those in favour of keeping it suggested that it serves a useful purpose in creating a notice holdback, while those opposed suggested that it has the effect of halting funds without the requirement of registering a lien.

    Most of the responding stakeholders were not opposed to keeping the notice provisions, but did note that there should be a simple regulated form to satisfy “the required elements set out in the jurisprudence and the project can be easily identified”.[1300] That is, the individual receiving the written notice of lien should know that it is a written notice of lien and it should be clear what it applies to.

    Infrastructure Ontario expressed support for the concept of a standardized form, further noting that the written notice allows for early resolution of lien claims.[1301] York Region suggested clarifying the notice of lien provisions.[1302] The Council of Universities also cited the early resolution of claims as a reason for keeping the written notice of lien.[1303]

    The Council of Ontario Construction Associations, which was also in favour of preserving the written notice provisions, suggested that any concerns with the written notice requirements could be addressed by clarifying the procedure to withdraw the written notice rather than eliminating the provision entirely.[1304]

    Goldman Sloan Nash & Haber LLP suggested that once a lien is vacated or discharged, any related notice of lien should be deemed to be withdrawn. Alternatively, a prescribed form could be used to include withdrawal of the notice of lien as part of the order sought in vacating or discharging a lien.[1305] The OBA CLA Reform Committee also suggested a prescribed form for the withdrawal of the written notice of lien.[1306]

    Prompt Payment Ontario suggested that the written notice of lien serves a useful purpose, that is, to allow for continued payments, but also suggested the creation of a further notice holdback in addition to the statutory holdback.[1307]

    Conversely, the Toronto Transit Commission submitted that the written notice of lien should be removed from the Act. There was concern that the informality of the written notice makes it too likely that project staff may not even know they have received a notice, and it has the impact of halting funds despite the claimant not having to swear a document, be subject to cross-examination, or be subject to costs under section 86 of the Act. As an alternative, the Toronto Transit Commission recommended the introduction of a new standardized form by Regulation that does not extend the time to lien. The Toronto Transit Commission also recommended defining “written notice of lien” to legislate what is to be included and effectively make the document a formal one.[1308] The Ontario Association of School Business Officials was also in support of removing the written notice section.[1309]

    There were also submissions about practical issues that arise from the delivery of a written notice of lien. For example, Antonio Azevedo described a scenario where a notice was sent by a contractor to an owner and no lien was ever registered, but the lender stopped advancing funds.[1310] Thus, the written notice of lien had the effect of stopping the advance of funds, but the owner did not have the ability to post security to vacate the lien.

    Stakeholders submitted that a central issue with regards to the written notice of lien is the variation in how it is submitted; often, it is difficult to ascertain what is and what is not a “written notice of lien”. Multiple stakeholders have proposed that written notices of a lien be in a prescribed form under the regulations to the Act due to the fact that the letters that are typically used for this purpose are frequently so vague as to raise issues in the mind of the recipient as to whether they are “written notice of a lien”. As well, stakeholders also suggested that the process for withdrawing a “written notice of lien” be simplified. This, too, should be done in a prescribed form to eliminate any ambiguities.

    Recommendations

    1. The definition of “written notice of a lien” should be amended to provide further particulars as to service and a form of written notice of lien should be added to the regulations.
    2. Section 44 should be amended to provide for the posting of security to vacate a written notice of lien.
    3. The withdrawal of a “written notice of lien” should also be in a prescribed form.

    9. Requests for Information

    Section 39 of the Act permits a person with a lien and/or trust claim to request information regarding the names of the parties to the contract, the state of accounts, substantial completion, and the existence of labour and material payment bonds, which is information they need to properly enforce their remedies.[1311] The intent of section 39 is to encourage transparency.[1312]

    The statutory right to information first appeared in The Mechanics’ and Wage-Earners’ Lien Act, 1896, SO 1896, c 35. However, the right has expanded significantly to its current form under section 39. Some authors have noted that the purpose of Part VI is to create a procedure to require the disclosure of information which can assist and enable enforcement of remedies under the Act.[1313] A person entitled to information under section 39 can bring a motion to compel disclosure at any time, “whether or not an action has been commenced”.[1314]

    Other provinces provide rights to individuals involved in the construction process through their respective legislation. For example, the BC Act provides lien holders with rights to certain information.[1315] In particular, section 41 of the BC Act entitles a lien holder to submit a written request to the owner requiring information in relation to the location of the holdback account, its account number, as well as particulars of credits to and payments from the holdback account. Other examples include: the Alberta Act, the Manitoba Act, the Saskatchewan Act, the New Brunswick Act, the Nova Scotia Act, and the PEI Act.[1316] These examples are similarly related to requirements to provide information in a lien action or other action under the legislation, rather than at the outset of the project.

    While the equivalent provisions across Canada are similar, British Columbia and Saskatchewan add two more items which owners must provide:

    1. the name and address of the savings institution in which a holdback account has been opened, and the account number,
    2. particulars of credits to and payments from the holdback account, including the dates of credits and payments, and the balance at the time the information is given

    The central concern among stakeholders was the lack of clarity in the section, particularly the vagueness of the term “state of accounts”. With respect to this term, Corbett J held in Urbacon Building Groups Corp. v Guelph (City) that “‘state of accounts’” includes, at minimum: (a) the value of the work done; (b) the amount paid; (c) the amount held back pursuant to the Act; (d) the balance owed”.[1317] Corbett J went on to note that the purpose of this section is “to enable lien claimants to obtain information ‘pertinent to the decision of whether or not to preserve a lien claim or to prosecute a lien action”.[1318]

    While stakeholder submissions on requests for information varied, the predominant concern was with the lack of clarity in the section. Several stakeholders suggested that section 39 should be amended to clarify what type of information the requester is entitled to and what constitutes a “state of accounts” under section 39(1)1.iii.[1319]

    Other stakeholders suggested minor amendments. For example, the Canadian Bankers Association suggested that mortgagees should not have to provide information regarding advances on revolving lines of credit that were made prior to the registration of the lien, as producing those records can cause unnecessary costs and delays.[1320] The Provincial Building and Construction Trades Council of Ontario and the International Union of Operating Engineers Local 793 suggested in their joint submission that the responding party should also be required to provide an “estimated statutory holdback position” along with supporting documentation,[1321] while the Ontario Road Builders Association suggested including all statutory declarations issued by the contractor as part of the information provided.[1322]

    The Council of Ontario Construction Associations suggested several additions to the requirements under section 39: that owners disclose the names of any tenants on the property and any amounts paid by tenants pursuant to a leasehold improvement allowance, and that trustees produce current records of receipts and disbursements of trust funds. The Council of Ontario Construction Associations also suggested that trust beneficiaries receive a production of the trust accounting upon request.[1323]

    It is clear from the review of legislation in other jurisdictions and comments from stakeholders that more clarity is required in respect of section 39 requests for information. The purpose of the section is to provide lien claimants with pertinent information to allow them to decide whether to lien and whether to prosecute a lien action.

    Recommendation

    1. We recommend that section 39 should be amended to clarify what type of information the person making the request is entitled to and, in particular, what constitutes a “state of accounts” under section 39(1)1.iii, and should include: the value of the work done, the amount paid, the amount held back pursuant to the Act, the balance owed, and the leasehold information described in Chapter 3 – Lienability.

    10. Vacating Liens Through the Posting of Security

    A lien can be removed from title by being vacated, discharged or released. Vacating the registration of a lien will result in the lien claimant using the security in the Court in place of an interest within the premises or subject of the construction.[1324] The amount paid into the court will be statutorily defined or otherwise agreed upon.[1325] Once a lien is vacated, “the lien becomes a charge upon the security and no longer attaches to the premises…or the holdback.[1326] Instead, the entitlement that exists is a charge upon the security posted with the court.[1327]

    10.1  Who is Permitted to Vacate a Lien

    Goldman Sloan Nash & Haber LLP suggested that there is an issue with section 44(1) of the Act, which allows any person to vacate the lien, without notice, upon payment into Court in accordance with subsections (c) and (d) and does not require that the person posting the security be a ‘payer’ within the meaning of section 1 of the Act or otherwise involved in the construction project in any way.[1328] Goldman Sloan Nash & Haber note that this “permits persons/entities outside the construction lien chain with no liability contractually, statutorily, or otherwise (i.e. the mortgagee) to post security, vacate a lien, and thereafter seek to have the full amount of security posted returned to them without any liability to the lien claimant”.[1329] They recommended that the Act should be amended to state that even though any person may post security to vacate a lien, that person stands, at best, in the same position as the owner or building mortgagee or subsequent mortgagee (as the circumstances may require) upon the posting of security to vacate the lien.

    10.2  Amount of Security

    In Ontario, the statutory amount includes the full amount owing in the claim for lien and the lesser of $50,000 or 25% of the amount owing for costs.[1330] This $50,000 amount has not changed since 1983.[1331] The only other province to prescribe a specific amount for costs is Saskatchewan, where the amount of security mirrors that in Ontario.[1332] In most other provinces, the amount for costs is fixed by the court. In Alberta, for example, the court may order that the moving party pay the amount of the claim or “such lesser amount as the court determines”, and the court will fix costs.[1333] Ontario and Saskatchewan are the only provinces that specify that the motion to post security can be brought on an ex parte basis. In Alberta, the court will make the order on application.

    The Mechanics Lien Act, which was the precursor to the Act prior to 1983, did not provide any monetary limits for the security of costs when vacating a lien. Instead, the applicable section gave discretion to the judge or master to set “such costs as he may fix”.[1334]

    While the amount required to be posted for security for cost has not changed, legal costs and expenses have increased significantly since the Act came into force. The most commonly cited reasons for price rises included increasing overhead costs, inflation, and greater complexity of the work lawyers are taking on.[1335] Other law firms also cite competitor pricing as a drive to increase their hourly rates.[1336] Between 2013 and 2014 the rates for five-year calls and ten-year calls both increased 4%. In the same time frame, lawyers with twenty-years of experience increased on average 7%.[1337] The trend of increasing fees seems unlikely to cease in the coming years. In 2015, 48% of practitioners were planning to increase their fees further.[1338]

    All of the stakeholders who commented on the security regime recommended, to some degree, continuing the current regime for posting security to vacate liens. The Council of Ontario Universities[1339] and the Surety Association of Canada[1340] expressed support for a continuation of the current regime while other stakeholders suggested increasing the amount posted for security. Infrastructure Ontario[1341] and the City of Toronto[1342] both cited increased legal costs as a reason why the minimum posted for security for costs ought to be increased. The Ontario Public Works Association further suggested clarification on the effects that posting security and vacating liens has on lien claimants. The OBA CLA Reform Committee suggested that consideration be given to amendments that would make it easier to settle with a particular lien claimant in a situation where security has been posted for all liens, and if security should stand only for a particular lien claim.[1343]

    During the Consultation Process, it was suggested that in circumstances where costs are awarded to a lien claimant and there remains a balance (in the fund secured for costs), that balance should be applied against interest (calculated on the basis of the interest stipulated in the contract or failing which, in accordance with the Courts of Justice Act). We did not receive any substantive submissions or suggestions from the Stakeholders in relation to this issue.

    According to the OBA CLA Reform Committee, in some circumstances “counsel have adopted a practice of asking the court for leave to allow the posting of security where the delivery of a written notice of lien has interrupted the flow of funds and the payer needs to post security even before the lien is preserved.”[1344] The OBA CLA Reform Committee noted that in order for this amendment to be successful, a further amendment is required that allows the payer to obtain an order from the court vacating the actual registration of the lien where this occurs based on the security already posted. Alternatively, the court would be able to declare that any lien to be preserved in respect of the written notice of lien no longer attaches to the premises and shall be preserved by giving the claim for lien to the owner and person to whom the lien claimant provided services.[1345]

    10.3  Acceptable Types of Security

    The only forms of security which will be accepted by the Court are bank drafts, certified cheques payable to the Accountant of the Superior Court of Justice, or financial guarantee bonds in the prescribed form.[1346]

    Section 44(2) requires that the court must be satisfied that the amount paid into court or the security must be reasonable in the circumstances to satisfy the lien. While the Act does not specify the kind of security needed to bond off a construction lien, the court reserves the right to approve any security posted to vacate a construction lien.[1347] In addition, case law in Ontario has developed so as to allow a letter of credit to be treated as satisfactory security in a similar manner to cash.[1348]

    In Toronto, “Construction Lien Masters have insisted that [letters of credit] posted as security must not contain any reference to international commercial conventions concerning letters of credit”.[1349] If present, such references will result in the refusal to approve the letters of credit.

    In a 2012 decision by Master Polika, Naylor Group Inc. v Enfinity Canada EPC Inc., the Master confirmed that letters of credit must be absolutely unconditional.[1350] In that case, Enfinity “intended to post a letter of credit that was ‘subject to’” ICC Publication 590 of the International Chamber of Commerce”.[1351] Enfinity’s European parent company had arranged for the letter of credit from a European bank the beneficiary of which was the Royal Bank of Canada. That letter of credit was to be used as security for a letter of credit issued by Royal Bank to bond off the construction lien. The party’s motion to vacate the lien and post security was dismissed because “by inserting the term, on its face the letter of credit is subject to ICC Publication 590 and there is a potential that the term will be invoked to deny payment.”

    In his text Conduct of a Lien Action Duncan Glaholt suggested that, “[b]y insisting on unconditional language, the masters simply ensure that there is no chance of the Accountant of the Superior Court being embroiled in litigation because of some conditional language”.[1352] Therefore, the letter of credit “must be irrevocable and unconditional and from a well-known financial institution, preferably a Canadian chartered bank” [emphasis in original].[1353]

    It has been suggested that the crux of the problem with respect to the position taken by the Construction Lien Masters is “that international conventions in letters of credit are essential in a global economy.” Specifically,

    “when a letter of credit is issued by an Ontario bank at the request of (and on the security of) an international company, the Ontario bank cannot recover the funds it pays out to that international company under the letter of credit without referencing an international convention. Similarly, a foreign bank putting up the security for a Canadian Bank to issue a letter of credit, would not do so if the letter of credit that bonded off the lien did not include the terms of an international convention, because it would make the terms of that international transaction uncertain.”[1354]

    Many common law jurisdictions are not as hesitant as Ontario in accepting these international conventions. For example, the UK allows for letters of credit to reference the Uniform Customs and Practice for Documentary Credits (“UCP”), developed by the International Chamber of Commerce “[t]o standardise terms and procedures and avoid misunderstandings […] the UCP standards give definitions to important terms that are used in letters of credits” and “[w]hen referring to letters of credit, banks and others involved in international trade will generally use the UCP definitions of key terms and phrases”.[1355]

    Similarly, Australia and New Zealand allow for UCP to be included in letters of credit.[1356] Since UCP is of no legal force in either Australia or New Zealand, “[i]t is therefore necessary for the UCP or [ICC International Standby Practices (ISP98)] system to be specifically written into the terms of the credit”.[1357]

    Each of UCC 5, UCP and ISP98 (as used in the European Union) detail how a bank issuing a letter of credit may draw upon the security of its customer when the letter of credit is paid. It has been suggested that “[w]ithout reference to an international convention, no Ontario bank would have reliable rules for the collection on a letter of credit issued for a foreign company unless that company had assets in Canada. By insisting that posted letters of credit not contain these international terms, the Construction Lien Masters are creating a competitive disadvantage for foreign construction companies in Ontario”.[1358]

    Some stakeholders submitted that letters of credit with international commercial conventions should be accepted as security[1359] or in one example, they were open to their use provided they were accepted by the major Canadian banks.[1360]

    It has been also been suggested that the type of security that will be accepted under section 44(1) of the Act be narrowed. By way of example, Goldman Sloan Nash & Haber LLP submitted that outside of Toronto, there is an issue with respect to lien bonds being presented and accepted by the Court that are not from recognized sureties and in some cases, from individuals without bonding capacity and unknown financial status.[1361] In this regard, it was submitted that we should recommend a specific type of security to be used in order to vacate liens.

    10.4  Procedure for Posting Security

    During the Consultation Process, an issue was raised that relates to procedural matters that are outside of the Act’s contemplation. These include procedural restrictions such as identifying whether or not the court has assigned a specific judge to oversee motions and matters under the Act; if so, the time and dates that specific judge is sitting and available to hear motions; and the procedure by which the court deals with ex parte motions where no action has been commenced.[1362]

    In Toronto, the Construction Lien Master’s Office of the Superior Court of Justice has the jurisdiction to oversee section 44 motions.[1363] They sit every day and have generally accepted section 44 motions that concern non-Toronto properties if the lien action is not too advanced.[1364]

    According to the Advocates’ Society, there exists an issue in relation to the urgent nature of posting security to vacate a lien outside of Toronto.[1365] In regions outside of Toronto, a person seeking to post security does not have certain “luxuries” available in Toronto (i.e. set windows available before Masters to vacate liens) but rather, “must wait for the regular motions sittings (unless the person moves on an urgent basis, the onus being on the moving party to demonstrate the urgency) or obtain an order over the counter.”[1366]

    Procedurally, the problem created in this circumstance is that if a person were to wait for a regular motion date, that person is still subject to waiting for his or her motion to be called based on the scheduling at court on that particular day. Importantly, in the construction industry, when liens are registered on title that constitutes “reason for a payer to withhold payment” and thus project funds are “frozen” until monies have been posted as security and the liens are vacated under section 44 of the Act.[1367] The freezing of project funds can, and typically does, have a detrimental effect on the whole of the project (whether by impacting schedule or otherwise).

    The Advocates’ Society also notes the problem of backlogs in waiting for the security to be delivered to the Accountant’s Office of the Superior Court of Justice (particularly outside of Toronto). In relation to this issue, the Advocates Society suggested that the forms of security typically used (e.g. certified funds, construction lien bonds, letters of credit) are already acceptable to the Court prior to the Court granting any relief (i.e. while the step of taking it to the Accountant’s office for verification may be technically prudent, it could be considered an extraneous step).

    Accordingly, the Advocates’ Society submitted that the Act be amended to remove the “urgency” required under the Rules of Civil Procedure in order to bring a motion immediately and without administrative delay. In relation to the nature of the security, the Advocates Society submitted that the Act be further amended such that when the Court is satisfied with the form of security, an order permitting a person posting security to vacate could be released to that person immediately (i.e. without requiring filing of the security or payment with the Registrar or Accountant as under the Rules of Civil Procedure).

    Recommendations

    1. We recommend that the amount of security that is to be posted to vacate a lien under section 44(1) should be amended to include the total of the full amount claimed as owing in the claim for lien and the lesser of 25% or $250,000 of the amount of the lien claim as security for costs.
    2. We recommend that Letters of Credit with reference to International Commercial Conventions should be accepted as security, provided the Letter of Credit is unconditional, the International Commercial Convention is written into the terms of the credit, and it is accepted by a bank listed under Schedule I of the Bank Act, S.C. 1991, c. 46. Sched. 1 operating in Ontario.
    3. We make no recommendations with respect to procedural issues that are outside of our remit (i.e. in relation to the Rules of Civil Procedure), however, we suggest that the Ministries further investigate the procedural and resourcing issues identified that have caused issues in respect of members of the construction industry gaining access to the courts to vacate a lien; particularly outside of Toronto and Ottawa.

    11. Statement of Allocation of a Mortgagee

    Under section 78(2) of the Act, lien claimants have priority over mortgagees for building mortgages to the extent of any deficiency in the holdback required to be retained by the owner.

    In the 1982 Report of the Attorney General’s Committee, it was noted that “it is only fair that the mortgagee’s interest be partly subordinated to the liens of the suppliers to the improvement”.[1368] While the timing of the mortgage or advance is crucial under sections 78(3) to (6), the intention of the mortgagee is crucial under section 78(2), as the “building mortgage…is subordinate to the liens arising from an improvement to the extent of any deficiency in the holdbacks…regardless of when the mortgage is registered” [emphasis added].[1369]

    A building mortgage finances construction on the land, which is distinct from a mortgage that finances the acquisition of the land itself.[1370] Lien claimants, and courts, as the case may be, must look to the intention of the lender, not the borrower, to determine if a mortgage should be classified as a building mortgage.[1371]

    In many cases, a single mortgage will be taken with a “dual intention” to “finance the acquisition of the lands” and finance “the construction on the lands”.[1372] In these cases, the onus is on the lender to establish intention on a balance of probabilities. On amounts that were intended to finance the acquisition of land, the lender has priority over the lien claimants.[1373]

    Where a mortgage carries a “dual intention”, the mortgagee must “establish [its] intention very clearly upon a balance of probabilities by solid evidence, preferably contemporaneous documentary evidence establishing its intention”.[1374]

    With respect to the registration of mortgages and whether the purpose of the financing should be disclosed, stakeholders suggested the following:

    1. The City of Toronto suggested that mortgagees should be required to identify their financial purpose so that “building mortgages” could be easily identified.[1375]
    2. The Ontario Road Builders’ Association agreed with this proposition, although commented that it is already a fairly simple determination to make based on the mortgagee, lender, and interest rate.[1376]
    3. The Canadian Institute of Quantity Surveyors noted that the purpose of the financing may not be known at the time financing is arranged as the lender financing the land purchase will carry on and finance the construction.[1377]

    While we agree with the comment by the Ontario Road Builders’ Association that it may be simple to determine the intentions of mortgagees, requiring mortgagees to segregate their intentions with regards to mortgages between funds for the acquisition of land and funds towards improvement(s) to and/or on the land is a non-onerous requirement that would dispense with the need for litigation on the issue and would, in any case, provide greater clarity for lien claimants when assessing their position in the priorities regime.

    Recommendation

    1. When a mortgagee makes a loan for the purpose of financing both land acquisition and the construction of an improvement, the mortgagee should be required to identify the amount intended for the acquisition of land and the amount intended for the improvement(s) to and/or on the land in mortgage documents.

    Chapter 12: Industry Education and Periodic Review

    1. Overview

    As part of the Review, stakeholders expressed concern in relation to the Act being overly complex and/or not being accessible to the average construction industry participant. While many of our recommendations have been aimed at streamlining processes (i.e. increasing the efficiency and efficacy of procedures under the Act) we remain aware of the overarching need for understanding amongst not only the stakeholder communities, but also to those who may wish to know more about the Act and how it works.

    In that regard, we have considered certain options that could be undertaken to ameliorate the complexities of the Act from an educational perspective, and we have considered standards of review to keep the Act modernized and accessible as the industry evolves over time. Accordingly, the following issues are considered in this Chapter:

    2. Practice Guides and Interpretive Bulletins

    The Stakeholders who commented on this issue uniformly agreed that alongside amendments to the Act, a practice guide or series of interpretive bulletins would be a beneficial recommendation.[1378]

    In its original submission the City of Toronto effectively summarized the issue as follows:

    For the first time in decades, all of the sectors in the construction industry have been engaged to provide input as part of a full review of Act. Alongside the amendments to the Act, the City suggests that consideration be given to developing a practice guide and interpretation bulletins.

    It is well established to have Practice Directions issued by the Court to explain details of court procedure that are absent from the Rules of Civil Procedure. It might be helpful to have additional guidance complement the Act for other issues. Given the complexity of the Act, changing technologies, and the broad cross-section of individuals affected, supplementary documentation could both explain the Act and facilitate the delivery of construction projects.

    A practice guide could assist in the application of the Act and could also include other non-legislated steps that may be adopted on agreement of the parties. For instance, the guide could include a chart or drawing to more clearly show priorities that are only described with words under the Act. Also, if suggestions are made to impose a process for mandatory mediation and they do not end up being incorporated into the Act, the structure could instead be set out in the guide as a reference tool for parties who agree to use mediation to resolve a dispute and want to adopt an established process.

    The idea to introduce interpretation bulletins, like those used by the CRA for income tax, or a similar document, is to help resolve confusion in interpreting the Act. For example, an interpretation bulletin could set out specific examples of what is and is not lienable.[1379]

    Given the support of the stakeholders and interest in efficiency and clarity of the Act, we make the following recommendations:

    Recommendations

    1. We recommend that the Ministries provide education, awareness and support for industry participants. In this regard, we recommend the implementation of a practice guide and interpretative bulletins to be provided following the enactment of any amendments to the Act.
    2. We recommend that any practice guide and/or interpretation bulletins implemented should be updated periodically on a website designated by the Ministry of the Attorney General.[1380]
    3. We recommend that the stakeholders should be proactive in educating and training their constituents on the recommendations from this report that are ultimately adopted by the Ministries and implemented under the Act, if any.

    3. Instituting a Periodic Review of the Act

    As noted in the Information Package, the Act was last amended as part of Ontario’s Open for Business Act, 2010; but was last reviewed in a holistic manner in the early 1980s. Amendments made to the Act in the last thirty years have often been reactive rather than proactive. During the Consultation Process, the relative slow pace of amendments to the Act was compared with the relatively fast pace of evolution of the construction industry. In this regard, certain stakeholders recommended that the Review consider a periodic review of the Act in order to maintain currency, to the best degree possible.

    The Canadian Institute of Quantity Surveyors, the City of Toronto, the Council of Ontario Construction Associations, Infrastructure Ontario, Metrolinx, the Ontario Association of Landscape Architects, Ontario Public Works Association, the Ontario Road Builders Association and York Region all recommended a periodic review of the Act. Specific recommendations were made in terms of how often a review should be undertaken which ranged from 5 to 10 years.

    No stakeholder expressed opposition to a periodic review of the Act.

    There are a variety of Canadian statutes that require periodic reviews in the legislation itself. For example, the following statutes require periodic reviews: BIA,[1381] Companies’ Creditors Arrangement Act,[1382] Copyright Act,[1383] Canada Not-for-Profit Corporations Act,[1384] and the Motor Vehicle Transport Act.[1385]

    In Australia certain statutes related to the construction industry also stipulate periodic reviews; typically between 3 and 5 years following the date of assent.[1386]

    Recommendation

    1. We recommend that an independent review of the Act to be conducted within 5 years of the enactment of the recommendations of this Report, and every 7 years thereafter (keeping in mind that the pilot project for project bank accounts will be subject to a much shorter review period, as described in Chapter 7 – Construction Trusts).

    Chapter 13: Summary of Recommendations

    The following are our recommendations:

    Lienability

    1. Part (a) of the definition of “improvement” should be amended to refer to “any alteration or addition to the land and any capital repair to the land” (p 16).
    2. “Capital repair” should be added as a definition and defined to include all repairs intended to extend the normal economic life or to improve the value and productivity of the land, or building, structure or works on the land, but not including maintenance work performed in order to prevent the normal deterioration of the land or building, structure or works on the land and to maintain them in a normal functional state (p 16).
    3. The definition of “improvement” should not be amended to specifically include IT services, materials, equipment and software (p 16).
    4. The definition of “owner” should be amended to provide for multiple owners on AFP projects such that Project Co is included as an owner (along with the Crown) and it is Project Co that should be responsible to maintain holdbacks (p 20).
    5. The definition of “price” should be amended to include direct out-of-pocket costs of extended duration and exclude damages for delay (p 22).
    6. The current definition of “supply of services” is sufficiently broad and need not be amended (p 23).
    7. Municipal lands should not be subject to a court-ordered sale, such that lien claims against municipalities should be “given” and not registered, provided that there should be clarity in respect of to whom the lien must be given (p 32).
    8. Liens should continue to attach to hospital, university, and school board lands due to the fact that they are private entities. As well, attempting to identify certain “broader public sector” owners would likely cause more confusion than clarity, such that the lands of these entities should continue to be liened by registration (p 32).

    Preservation, Perfection and Expiry of Liens

    1. The time period for preservation of a lien under section 31 of the Act should be extended to 60 calendar days, commencing as currently stipulated by the Act (p 38).
    2. Termination should be added to the list of events that triggers the commencement of the time limit for preservation of liens under subsections 31(2)(a)(ii), 31(2)(b), 31(3)(a), and 31(3)(b) of the Act (p 40).
    3. The Act should prescribe a mandatory form of Notice of Termination or Abandonment to be published specifying a date upon which a contract has been abandoned or terminated. (p 40).
    4. Certificates of completion of subcontract should not be made mandatory (p 42).
    5. The time period for perfection under section 36(2) of the Act should be increased to 90 days from the last day upon which that lien could have been preserved (p 46).
    6. The 2 year time period under section 37 of the Act should not be changed (p 48).
    7. Section 35 of the Act, which imposes penalties for exaggerated claims, should be amended to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level. As well, the court should be given the discretion to discharge a claim for lien in whole or in part if on a balance of probabilities it is established that the claim is frivolous, vexatious, or an abuse of process (p 50).
    8. The provision should further be amended to allow the court to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant (p 50).
    9. After registration, the common elements in condominium buildings should have a single PIN that is subject to a lien, and the interests of all owners should be subject to this lien (p 54).
    10. Notice of lien should be given to the condominium corporation and the unit owners by way of a prescribed form (p 54).
    11. Condominium unit owners should be able to post security proportionate to their share of the lien to have the lien vacated (p 54).
    12. Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis (p 57).
    13. For improvements to leasehold properties, claims for lien should attach to the interests of the tenant named in the lease and to the interest of the landlord if the landlord funded the improvement through a cash allowance or otherwise required the improvement; provided that the landlord’s liability should be limited to an amount equal to any deficiency in the holdback (p 61).
    14. Section 39 of the Act should be amended to allow lien claimants to obtain from landlords, tenants, and secured lenders all relevant information about the lease, the lender’s security, the funding available from the landlord and lender, and the state of accounts (p 61).

    Holdback and Substantial Performance

    1. The amount of holdback should remain at the current amount of 10% of the value of the services, materials and equipment actually supplied to the improvement (p 65).
    2. Section 2(1) of the Act should be amended to provide that a contract is substantially performed when the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and if it is capable of completion at a cost of no more than 3 percent of the first $1,000,000.00 of the contract price, 2 percent of the next $1,000,000.00 of the contract price, and 1 percent of the balance (p 68).
    3. Section 2(3) of the Act should be amended to provide that “a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of (a) 1 percent of the contract price; and (b) $5,000” (p 68).
    4. The finishing holdback provisions of the Act should remain unchanged (p 71).
    5. The Act should be amended to provide for the mandatory release of holdback, but not the mandatory early release of holdback; that is to say, “may” should be revised to “shall” in sections 26 and 27 of the Act. The owner should be required to publish a notice of non-payment/set-off to interdict the obligation to pay where the owner, in good faith, intends to assert a set-off in relation to the contract (as further provided for in Chapter 8 – Promptness of Payment) (p 77).
    6. We recommend that the Act should be amended to permit partial release of holdback on either a phased or annual basis, if provided for in the construction contract entered into by the parties, subject to a significant monetary and time-based threshold in the case of annual release (p 85).
    7. We also recommend that the Act should be amended to allow for the segmentation of holdback for projects involving clearly separable improvements, particularly for AFPs (p 85).
    8. We recommend that there be no provision for mandatory early release of holdback for design consultants in respect of services supplied up to the commencement of construction; but the Act permit the designation of a design phase for the purposes of phased release of holdback (p 85).
    9. We recommend that the Act should be amended to allow for deferral agreements to be entered into between owners and contractors provided that such agreements are for the purpose of allowing certification and publication of substantial performance, subject to an appropriate threshold (p 87).
    10. The Act should not be amended to provide for a statutory deficiency holdback; nor should it be amended to restrict the deficiency holdback provisions that parties may negotiate between themselves in their contracts (p 89).
    11. We recommend that the current scheme should be supplemented by allowing the replacement of cash holdback with a Letter of Credit or a demand-worded Holdback Repayment Bond (p 91).

    Summary Procedure

    1. The requirement to seek leave of the court to bring motions under section 67(2) should be removed from the Act, but, as noted below, construction lien actions should be case managed (p 99).
    2. The requirement to seek leave of the court to conduct oral examinations for discovery and examination of documents under section 67(2) should be removed from the Act, but, as noted, lien actions should be case managed so that production of documents and examinations for discovery can be appropriately streamlined, applying the principle of proportionality (p 100).
    3. The use of discovery plans should be at the discretion of the case management judge (p 100).
    4. The requirement to seek leave of the court to bring third party claims under section 56.2 should be removed from the Act (p 100).
    5. The prohibition of appeals from interlocutory orders under section 71(3) should be amended to allow appeals from interlocutory orders with leave of a judge of the Divisional Court (p 100).
    6. The prohibition on joinder of lien claims and trust claims under section 50(2) should be removed from the Act, subject to a motion by any party that opposes joinder on the grounds of undue prejudice to other parties (p 102).
    7. Lien actions should become subject to case management in all regions (p 107).
    8. Regarding small lien claims, including most home renovation claims, of an amount less than $25,000, the Act should be revised to require such lien claims to be referred to the Small Claims Court for a report on liability, amounts owing, and the allocation of holdback by a Deputy Judge, with a Superior Court judge retaining ultimate jurisdiction (p 113).
    9. Regarding claims between $25,000 and $100,000, the Act should be revised to provide for a simplified procedure with limited examinations for discovery and a summary trial procedure (p 113).

    Construction Trusts

    1. We recommend that the Act should be amended to require that a trustee must follow specific statutory requirements in relation to trust fund bookkeeping similar to that applied in the New York Lien Law, including the following (p 148):
      • If a trustee deposits trust funds they are to be deposited in the trustee’s name;
      • The trustee is not required to keep the funds of separate trusts in separate bank accounts or deposits provided that his books and records of account clearly show the allocation to each trust of the funds deposited in the general account;
      • The trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and
      • The books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.
    2. We recommend the identification of a pilot project for project trust accounts utilizing a representative number of projects in the public sector. Over a period of two years, the selected pilot projects should be evaluated based on appropriate metrics in relation to their effectiveness and cost. After two years, the performance of project trust accounts on the pilot projects should be published and industry consultation conducted regarding their general adoption in the private and public sectors (p 149).
    3. We recommend that, in order to adequately protect suppliers of labour and materials from the risk of contractor insolvency on public projects, all public sector projects be required by the Act to be surety bonded, adopting the Miller Act and Little Miller Act approach to the protection of subcontractors and suppliers from the risk of contractor insolvency on public projects (p 151).
    4. Accordingly, the Province should enter into a dialogue with the Surety Association of Canada to agree on standard form surety bonds to be incorporated into the Act by regulation. As well, such regulations should include a protocol for investigation and payment, as discussed in Chapter 10 –Surety Bonds (p 151).

    Promptness of Payment

    1. We recommend that a prompt payment regime be legislated in Ontario and that it be applied to both the public and private sectors. Prompt payment should be implemented by creating a statutory scheme to be implied into all construction contracts that do not contain equivalent terms (p 192).
    2. We recommend that the prompt payment regime should apply at the level of the owner-general contractor, general contractor-subcontractor, and downwards, and that the legislation provide a mechanism for general contractors to notify subcontractors of non-payment by owners, with reasonable particulars, and to undertake to commence or continue proceedings necessary to enforce payment so as to defer their payment obligations (p 194).
    3. We recommend that the trigger for payment should be the delivery of a proper invoice; provided that certification for payment (if there is certification for payment provided in the contract) must follow submission (p 196).
    4. We recommend that (p 197):
      • As between owner and general contractor a 28 day payment period be applied, that is triggered by the submission of a proper invoice.
      • As between general contractor and subcontractor, a further 7 days from receipt of payment from the owner would be permitted.
    5. We recommend that parties be free to contract in respect of payment terms, but that if they fail to do so, monthly payments should be implied (i.e. every 28 days) (p 197).
    6. We recommend that payers be permitted to deliver a notice of intention to withhold payment within 7 days following receipt of a purported proper invoice and that the notice of intention to withhold must set out the quantum of the amount withheld and adequate particulars as to why that amount is being held back. Undisputed amounts should be paid. Also, the right to withhold should relate only to the contract at issue (p 199).
    7. We recommend that a payer continue to be able to set off all outstanding debts, claims or damages but that the right of set off not extend to set-offs for debts, claims and damages in relation to other contracts (p 199).
    8. Mandatory non-waivable interest should be required to be paid on late payments at a rate of the greater of the pre-judgment interest rate in the Court of Justice Act or the contractual rate of interest (p 200).
    9. A right of suspension should arise after an adjudication determination has been rendered and a payer has refused or failed to comply with the adjudicator’s determination (p 200).
    10. We do not recommend that financial disclosure be included in Ontario’s prompt payment regime; provided that the Act should require disclosure to all subcontractors that they are bidding on a project with a milestone-based payment mechanism (p 201).

    Adjudication

    1. We recommend that adjudication be implemented as a targeted interim binding dispute resolution method available as a right to parties to construction contracts and subcontractors in both the public and private sectors in Ontario (p 230).
    2. In conjunction with our recommendations in Chapter 8 – Promptness of Payment in relation to prompt payment, we recommend that the Act allow the parties the freedom of contract to agree on provisions to be included in their contract for both promptness of payment and adjudication so long as such provisions are consistent with the Act. Should such provisions not be consistent with the provisions of the Act, a statutory default scheme should be implied into the contract (as further discussed below) (p 230).
    3. The statutory default scheme should be set out in a regulation to the Act (p 230).
    4. Any party to a construction contract or subcontract should be given the right to adjudicate disputes arising under that contract or subcontract (p 232).
    5. Back-to-back adjudications should be permitted at the owner-general contractor and general contractor-subcontractor levels (p 232).
    6. Multi-issue adjudication should be permitted only through consensual contractual arrangements (p 232).
    7. We recommend that the Ministries select a first tranche of eminently qualified individuals based in key centres such as Ottawa, Toronto, London and Windsor, with a distinct set of criteria (similar to those set out below) to act as the group of initial adjudicators until the training and qualification system described below is fully implemented (p 233).
    8. We recommend that an Ontario adjudicator should (p 233):
      • be a natural person;
      • not be a party to the disputed construction contract and have no legal conflict of interest (or disclose any conflict of interest and obtain the express prior consent of the participating parties);
      • be a member in good standing of a self-governing professional body, such as engineer, architect, accountant, lawyer, or quantity surveyor;
      • have at least 7 years of relevant working experience serving the Ontario construction industry;
      • have successfully completed a standardized Ontario training course and thereafter have received a certificate of authorization to adjudicate from the relevant body governing the Act (i.e. the Ministry or prescribed authorized nominating authority), renewable periodically upon proof of continuing education and a clear record; and
      • not be otherwise disqualified (i.e. by reason of bankruptcy, criminal conviction or for any other prescribed unsuitability).
    9. An adjudicator should be nominated after a dispute has arisen, not at the outset of a Project (p 235).
    10. An adjudicator should be named in the Notice of Adjudication by the party delivering the notice (p 235).
    11. The parties should have two (2) Business Days after delivery of the Notice of Adjudication to agree on an adjudicator, failing which either party would request that the Adjudicator Nominating Authority appoint an adjudicator within five (5) Business Days (p 235).
    12. We recommend the creation of a single official Authorized Nominating Authority that will administer the appointments, certification and training of all adjudicators in Ontario to be administered either by the Ministry of the Attorney General or by a private entity designated by the Ministries as an Adjudicator Nominating Authority (p 235).
    13. Adjudicators should have immunity from liability in relation to their decisions and should not be compelled to give evidence in civil proceedings (p 235).
    14. We recommend that parties to a construction contract or subcontract be entitled to refer a dispute to adjudication that flows from a proper invoice under a construction contract or subcontract (being a claim for payment under a contract or a subcontract in relation to an improvement) including (p 238):
      • The valuation of work, services, materials and equipment supplied to an improvement and claimed as part of a proper invoice;
      • Other monetary claims made in accordance with the provisions of the construction contract (that had been claimed in a proper invoice), including the change orders and proposed change orders;
      • A claim in relation to any security held by a party under the construction contract;
      • Set offs and deductions (i.e. for deficiencies) against amounts due under a proper invoice as set out in the notice of intention to withhold or otherwise; and
      • Delay issues as they relate to claims for payment.
    15. We recommend that for disputes valued at under $25,000, parties can refer such disputes to adjudication or to the small claims court (p 238).
    16. If the parties do not agree on an adjudication process that meets the minimum standards of the new Ontario legislation, minimum standards for adjudication set out in a default scheme (under a regulation to the Act as noted above) should be implied with respect to: notice of adjudication, appointment of adjudicators, timetables for an adjudication, powers of an adjudicator (including the ability to draw inferences based on conduct of the parties), the adjudicator’s duties, allowing an adjudicator to establish a process (with appropriate limitations), and providing that the decision is binding on an interim basis (p 239).
    17. In terms of the amount of the adjudicator’s fees, the parties should be free to agree on the fees of the adjudicator and if they cannot agree, the ANA should determine the fees of the adjudicator. The general rule should be that the fees of the adjudicator will be apportioned equally (p 241).
    18. In terms of the parties’ own costs, including legal fees, the general rule should be that each party should bear its own costs (p 241).
    19. However, the adjudicator should be given the ability to depart from: 1) an equal apportionment of the adjudicator’s fees/expenses; and 2) the principle that each party should bear its own legal fees and costs, if the parties have acted in bad faith or there has been frivolous, or vexatious conduct (p 241).
    20. We recommend that the decision of an adjudicator should be binding on the parties and they should comply with the decision until either: a) the dispute is finally determined by legal proceedings (including lien proceedings) or arbitration (if provided for under the contract or the parties agree to arbitrate); or b) by agreement by the parties that the decision of the adjudicator is finally binding (p 243).
    21. We recommend the adjudication decisions be enforced, if necessary, by way of application to the Superior Court of Justice, in a manner similar to that employed in respect of the awards in domestic arbitrations under the Arbitration Act, 1991 (i.e. issuing a notice of application, on notice to the person against whom enforcement is sought, attaching an affidavit and the adjudication decision or a certified copy, within two years of the decision) (p 243).
    22. We recommend that parties maintain their lien rights such that, if a party wants to have a dispute finally determined through a lien proceeding, they can proceed to preserve and perfect a lien and proceed with a lien action (p 244).

    Surety Bonds

    1. The Act should be amended to require broad form surety bonds to be issued for all public sector projects, the form of such surety bonds should be developed in consultation with the Surety Association of Canada, and once finalized they should become Forms under the Act (p 258).
    2. The Act should be amended to require sureties to pay all undisputed amounts within a reasonable time from the receipt of a payment bond claim (p 258).
    3. A Regulation to the Act should be promulgated to embody a surety claims handling protocol, and that such surety claims handling protocol be developed in consultation with the Surety Association of Canada (p 258).
    4. No change should be made in respect of the third party beneficiary rule, or default insurance. The adjudication issue is addressed in Chapter 9 - Adjudication above (p 258).

    Technical Amendments

    1. Clarify the Act to confirm that the following irregularities may be cured so long as no prejudice is caused to other parties (p 261).
      • Failure to correctly name the owner and or person to whom materials and services were supplied;
      • Minor errors in the legal description; and
      • Inserting an owner’s name in the wrong part of a statement.
    2. As the nature of each of these provisions and the intent differs, we recommend no change be made to the Act (Sections 60 and 61) but note that practice directions would be helpful (to be included in the Practice Directions described in Chapter 12 – Industry Education and Periodic Review) (p 262).
    3. We recommend the implementation of separate forms (available electronically and physically). Specifically: one to release a lien, one to discharge a lien or certificate of action, and one to vacate the registration of a claim for lien or certificate of action (p 265).
    4. There should be no amendment to add an additional remedy for unpaid electrical contractors and subcontractors that would allow them to seize machinery and equipment after installation (p 266).
    5. We recommend that modifications be made to the requirements of section 32(2) of the Act to incorporate the legal description, including PINs and specific municipal address(es); and in the case of a lien to be given (i.e. where the lien does not attach to the land), the name and address of the person(s) to whom a claim for lien must be given (p 267).
    6. We recommend that no change be made to the section 36(4) sheltering provisions under the Act (p 270).
    7. The definition of “written notice of a lien” should be amended to provide further particulars as to service and a form of written notice of lien should be added to the regulations (p 272).
    8. Section 44 should be amended to provide for the posting of security to vacate a written notice of lien (p 272).
    9. The withdrawal of a “written notice of lien” should also be in a prescribed form (p 272).
    10. We recommend that section 39 should be amended to clarify what type of information the person making the request is entitled to and, in particular, what constitutes a “state of accounts” under section 39(1)1.iii, and should include: the value of the work done, the amount paid, the amount held back pursuant to the Act, the balance owed, and the leasehold information described in Chapter 3 – Lienability (p 274).
    11. We recommend that the amount of security that is to be posted to vacate a lien under section 44(1) should be amended to include the total of the full amount claimed as owing in the claim for lien and the lesser of 25% or $250,000 of the amount of the lien claim as security for costs (p 280).
    12. We recommend that Letters of Credit with reference to International Commercial Conventions should be accepted as security, provided the Letter of Credit is unconditional, the International Commercial Convention is written into the terms of the credit, and it is accepted by a bank listed under Schedule I of the Bank Act, S.C. 1991, c. 46. Sched. 1 operating in Ontario (p 280).
    13. We make no recommendations with respect to procedural issues that are outside of our remit (i.e. in relation to the Rules of Civil Procedure), however, we suggest that the Ministries further investigate the procedural and resourcing issues identified that have caused issues in respect of members of the construction industry gaining access to the courts to vacate a lien; particularly outside of Toronto and Ottawa (p 280).
    14. When a mortgagee makes a loan for the purpose of financing both land acquisition and the construction of an improvement, the mortgagee should be required to identify the amount intended for the acquisition of land and the amount intended for the improvement(s) to and/or on the land in mortgage documents. (p 282).

    Industry Education and Periodic Review

    1. We recommend that the Ministries provide education, awareness and support for industry participants who may wish to access any existing remedies under the Act or any of the remedies that are implemented as a result of this Report. In this regard, we recommend the implementation of a practice guide and interpretative bulletins to be provided following the enactment of any amendments to the Act (p 284).
    2. We recommend that any practice guide and/or interpretation bulletins implemented should be updated periodically on a website designated by the Ministry of the Attorney General (p 284).
    3. We recommend that the stakeholders should be proactive in educating and training their constituents on the recommendations from this report that are ultimately adopted by the Ministries and implemented under the Act, if any (p 284).
    4. We recommend that an independent review of the Act to be conducted within 5 years of the enactment of the recommendations of this Report, and every 7 years thereafter (keeping in mind that the pilot project for project bank accounts will be subject to a much shorter review period, as described in Chapter 7 – Construction Trusts) (p 285).

    Chapter 14: Conclusion and Acknowledgments

    We are grateful to have had the opportunity to conduct this review of the Construction Lien Act. As the Act was last holistically reviewed in the early 1980s it was more than time for a thorough reconsideration. In the course of the review, we have attempted to take into consideration the varying needs of the stakeholders and we have tried to strike a balance in relation to key values and objectives, including the fundamental tension between regulation versus freedom of contract, as well as taking into consideration the competing values of cash flow versus collateralization. In the result, we have proposed a solution which respects the nature of the existing lien regime, but incorporates the principles of promptness of payment and recommends a swift mode of dispute resolution in the form of adjudication. Looking to the future, we have also proposed a pilot project in respect of project bank accounts. We recognize that one size does not fit all, a message we received from many stakeholders, so we have attempted to craft recommendations that permit flexibility.

    Importantly, we would like to conclude by thanking a number of people without whom the Report would not have been possible. To begin with, we would like to thank the Attorney General, the Honourable Madeleine Meilleur, and the Honourable Brad Duguid, Minister of Economic Development, Employment and Infrastructure, for entrusting us with this mandate. The opportunity to meet with them at the commencement of our mandate was very important to us, as it established the ethos of the Review as being inclusive, transparent and collaborative, and allowed us to report to the stakeholders that “the train is leaving the station” in the sense that the Act will be amended. In regards to the management of our solicitor-client relationship with the Ministries, our principle contact has been through Irwin Glasberg, the Assistant Deputy Attorney General, Policy & Innovation, and his team comprised of Andrea Strom and Sheryl Cornish, along with Jerry Khouri, Senior Policy Advisor to the Attorney General, to each of whom we are very grateful for their consistent support.

    As well, we would like to thank our esteemed friend and colleague, the Honourable Dennis O’Connor QC, who generously drew upon his experiences in respect of the Walkerton and Maher Arar inquiries to assist us in designing the process for the Review. Dennis was an invaluable source of wisdom and advice throughout.

    In addition, the subject matter experts who form the Advisory Group accepted great responsibility and invested a significant amount of their time and effort to assist us. As noted elsewhere, they are: Glenn Ackerley, Geza Banfai, Ray Bassett, Glenn Clarke, Marni Dicker, Derek Freeman, Duncan Glaholt, Howard Krupat, Tanya Litzenberger, Jeffery Long, Bernie McGarva, Jerry Paglia, and Howard Wise, to each of whom we extend our gratitude and respect. In particular, we would like to emphasize our debt of gratitude to our long-time colleague and competitor Duncan Glaholt, a leading expert in the field of construction liens and trusts and an early champion of adjudication in Canada, whose unflagging support and wise counsel was of great assistance to us throughout. We would also like to extend our thanks to the “friends” of the Review, each of whom is a leading international expert in construction law, including Sir Vivian Ramsey, Doug Jones AO, Independent Arbitrator (London, Toronto, and Sydney), Steven GM Stein of Stein Ray LLP in Chicago, whose assistance with respect to our U.S. research was invaluable, Andrew Stephenson of Corrs Chambers Westgarth LLP in Melbourne, and Helmut Johannsen of Singleton Urquart LLP in Vancouver.

    Finally, we would like to dedicate our work on this very important project to our families and to Kenneth W. Scott, Q.C.

    All of which is respectfully submitted:

    Bruce Reynolds, Counsel

    Sharon Vogel, Co-Counsel

    April 30, 2016

    Appendix A: List of Participating Stakeholders

    Appendix B: Promptness of Payment Internationally

    This appendix provides detailed answers to questions posed in the body of Chapter 8 – Promptness of Payment in relation to the global spread of prompt payment outside of the U.S. and the U.K. Specifically, we considered:

    All of our detailed recommendations in relation to these issues are set out in Chapter 8. For a detailed response to the types of contracts prompt payment (and adjudication) apply to, please see the charts in Section 1.2 of Appendix C.

    1. New Zealand

    New Zealand’s prompt payment regime is set out in the New Zealand Act and the associated Construction Contracts Regulations 2003[1387] (the “New Zealand Regulations”). The statutory regime is overseen by the Ministry of Business, Innovation & Employment.[1388]

    Section 3 of the New Zealand Act states that the purpose of the regime is to “reform the law relating to construction contracts and, in particular:

    1. to facilitate regular and timely payments between the parties to a construction contract; and
    2. to provide for the speedy resolution of disputes arising under a construction contract; and
    3. to provide remedies for the recovery of payments under a construction contract.[1389]

    The New Zealand Act and New Zealand Regulations came into force on April 1, 2003 and were last amended in 2015. A study paper prepared by the New Zealand Law Commission during the development of the New Zealand regime considered security of payment legislation in the U.K., New South Wales, and Queensland, but noted that the regime “most relevant to current New Zealand conditions is contained in the New South Wales statute”.[1390]

    An amending bill, the Construction Contracts Amendment Bill, was introduced on January 29, 2013 and passed by Parliament on September 22, 2015.[1391] The bill enacted the Construction Contracts Amendment Act 2015, which received royal assent on October 22, 2015 and amended the New Zealand Act.[1392] The New Zealand Regulations were similarly amended in 2015 by the Construction Contracts Amendment Regulations 2015[1393] (collectively, the “2015 NZ Amendments”).

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    As the New Zealand Act applies to a construction contract as defined above, it follows that the legislation applies to all levels of contract including subcontractors and suppliers.

    The New Zealand Act prohibits “pay-when-paid” provisions or other such “conditional payment provisions”[1394] so a payer is not able to rely on such clauses in its payment schedule.

    (b) What is the Trigger for Payment?

    Under the New Zealand Act, parties are free to agree between themselves on a mechanism for determining the following: the number of payments; interval of payments; amount of payments; the date on which a payment becomes due.[1395] Should the parties fail to agree on such a mechanism the New Zealand Act provides a default scheme. Under the default scheme, a payment under a construction contract becomes due and payable 20 working days after a payment claim is served.[1396]

    (c) What is the Payment Period?

    Under the default scheme, the New Zealand Act provides a payment period that commences on the day of the month when the construction work was first carried out under the construction contract and ending on the last day of that month. This period is then followed by each month after the first period.[1397]

    (d) When is the contractor entitled to render an invoice?

    A payee may serve a payment claim for a payment in the following circumstances: when the contract provides for it at the end of a relevant period; if the contract does not provide for it, at the end of the period specified under the default scheme; or if the contract does not provide for the matter in the case of a single agreed payment (i.e. lump sum), then following the completion of all construction work under the contract.[1398] The payment claim must meet several requirements (e.g. be in writing, contain sufficient details, identify the construction work, state the claimed amount, indicate the manner in which the payee calculated the claimed amount) and be accompanied by an outline of the process for responding to the claim and an explanation of the consequences of not responding or paying the amount.[1399]

    (e) On What Basis Can a Payment be Withheld and When?

    When a payment claim is received, a payer has the right to respond by providing a payment schedule. The payment schedule must be in writing, identify the relevant payment claim and state a scheduled amount.[1400] If the scheduled amount is less than the amount claimed by the payee in the payment claim, the payment schedule must also include certain details including: the manner in which the payer calculated the scheduled amount; the payers reasoning for the difference in the amounts; and, in the case where the difference is due to withholding payment on any basis, the payer must provide reasons for withholding.[1401] The payer becomes liable for payment on the due date for payment to which the payment complains if the payee had served the payment claim on the payer and the payer fails to provide the payment schedule within the time specified in the construction contract (or 20 working days if the contract does not provide a deadline).[1402]

    (f) What remedies are available in the event of non-payment?

    In the event of non-payment when the payer fails to provide a payment schedule, the payee may recover (as a debt due to the payee) in any court, the unpaid portion of the claimed amount and the actual and reasonable costs of recovery awarded against the payer by that court. In addition, the payee may serve a notice on the payer of its intent to suspend the carrying out of construction work.[1403] These remedies are similarly available in the event of non-payment in accordance with a payment schedule.[1404]

    Further, and as discussed in Chapter 9 – Adjudication, any party to a construction contract under the New Zealand Act has a right to refer a dispute (i.e. a dispute over whether or not an amount is payable under the contract) to adjudication.[1405]

    The right of suspension under the New Zealand Act is triggered for a payee if the following circumstances apply: a) a claim amount is not paid in full, and no payment schedule is provided; b) a scheduled amount is not paid in full by the due date for payment even though a payment schedule given indicates a scheduled amount proposed to be paid; the payer has not complied with an adjudicator’s determination that it must pay an amount to the payee.[1406] In addition, the payee must service notice on the payer (as noted above) and the amount to be paid has not been paid, or the adjudicator’s determination has not been complied with within 5 working days after the date of such notice (i.e. within 5 days of the adjudicator’s decision).[1407]

    The right to suspend work ceases when the payer pays the amount in full or complies with an adjudicator’s determination.[1408]

    2. Ireland

    In 2010, at a time when almost ten construction business failures occurred per week in Ireland, Senator Feargal Quinn introduced the Ireland Construction Contracts Bill 2010 to Seanad Eireann (upper house of Oireachtas, the Irish Parliament) and explained that the objectives of the Bill were to:

    Improve payment practices in the Construction Industry by providing clarity and transparency in the payment of monies due in construction contracts. This will improve crucial cash-flow to those sub-contractors working in the Industry, thus helping companies in the construction sector to survive and keep people in employment.[1409]

    The Ireland Act was enacted by Seanad Eireann in July 2013 but is currently dormant, as it is subject to a Ministerial commencement Order from the Minister of Business and Employment. It was originally expected to be effective in the spring of 2015 but, to date, commencement has not yet occurred. On August 20, 2015, however, Minister Nash announced that the application process for appointment to the Ministerial Panel of Adjudicators had begun and that “(w)ork is continuing on the preparation for the full implementation of the Irish Act as soon as possible”.[1410]

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    The Ireland Act applies to contractors, subcontractors, suppliers and also services contracts that are ancillary to the construction contract.[1411]

    To ensure that the objectives of the legislation will not be circumvented, its application cannot be waived by contract provisions and conditional pay-when-paid provisions are expressly prohibited, except in the event of the payer’s insolvency.[1412]

    (b) What is the Trigger for Payment?

    The prompt payment scheme in the Ireland Act gives parties a certain level of flexibility in setting payment deadlines, provided that the minimum requirements with respect to subcontracts are met. Contracts must expressly identify the amounts and due dates of progress and final payments. Alternatively, they must provide for appropriate mechanisms to determine payment amounts and payment schedules,[1413] failing which the Schedule to the Ireland Act will apply to the main contract and subcontracts (i.e. a series of default provisions under the Ireland Act will apply in lieu of contractual mechanisms).

    The initial trigger under the Schedule is 30 days after the commencement date of the construction contract.[1414]

    (c) What is the Payment Period?

    If the parties do not agree on a payment period, then the Schedule of the Ireland Act applies. The Schedule provides that progress payments must be made every 30 days and 30 days after the date of final completion, unless the stipulated duration of the work is less than 45 consecutive days.[1415] With respect to subcontracts, the parties may not agree to pay periods exceeding 30 days, otherwise the Schedule will be deemed to apply.[1416]

    (d) When is the contractor entitled to render an invoice?

    The payment claim date (i.e. the date on which a payment claim in relation to an amount due is required to be made) is provided by the construction contract. Failure to do so results in the applicability of the Schedule.[1417]

    No later than 5 days after the payment claim date, the payee in the construction contract can deliver a payment claim notice relating to the claim.[1418] If a payer intends to dispute a payment claim notice, it must deliver a notice to that effect, setting out the disputed amount, how it is calculated and the reasons why the claimed amount is disputed, with full particulars.[1419]

    (e) On What Basis Can a Payment be Withheld and When?

    The Ireland Act requires that a payer wishing to withhold or set-off from a payment claim must provide a response to a payment claim that sets out the proposed amount of payment as well as the reasons for the difference between the amount claimed and the amount being paid and the basis on the calculation for the proposed amount.[1420]

    (f) What remedies are available in the event of non-payment?

    The Ireland Act provides that contractors and subcontractors are entitled to suspend their work where any amount due under the construction contract is not paid in full by the day that payment is due. The suspending party must deliver a notice in writing at least 7 days prior to the proposed suspension commencement but not before the date payment became due.[1421]

    Work may not be suspended in two circumstances: 1) after payment by the payer of the amount due; or 2) after a notice of adjudication has been served in relation to the payment dispute.

    Any party to a construction contract also has the right to refer a dispute related to payment to adjudication.[1422]

    3. Singapore

    The Singapore Act and the Building and Construction Industry Security of Payment Regulations[1423] (the “Singapore Regulations”) create a statutory adjudication regime but also address prompt payment.

    The preamble to the Singapore Act states that the purpose of the regime is to “facilitate payments for construction work done or for related goods or services supplied in the building and construction industry, and for matters connected therewith.”[1424] According to the Building and Construction Authority, the purposes of the Singapore Act are:

    1. to improve cash flow by “upholding rights of parties to seek progress payments”;[1425] and
    2. to provide “quick and low-cost resolution of payment disputes through adjudication”.[1426]

    During the development of the regime in Singapore, the Building and Construction Authority conducted extensive consultations with industry and public agencies and reviewed security of payment regimes in Australia, the U.K. and New Zealand.[1427] The Singapore Act was passed on November 16, 2004.[1428] No major amendments have been made to the Singapore Act since it came into force in 2005.

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    As the Singapore Act applies to written contracts where a person has carried out construction work or supplied goods, it is therefore understood that parties who can make payment claims under the Singapore Act include all levels of the construction pyramid. Specifically, according to Singapore’s Building and Construction Industry Security of Payment Act 2004 Information Kit, the persons who can make a payment claim are as follows:

    1. Main contractor claiming from project owner;
    2. Nominated / domestic subcontractors claiming from main contractors;
    3. Sub-subcontractors claiming from nominated / domestic subcontractors;
    4. Consultants claiming from project owners or main contractor, if engaged by the main contractor under a design & build arrangement;
    5. Suppliers, plant and equipment hirers or related service-providers claiming from nominated / domestic subcontractors, main contractors or owners.[1429]

    The Singapore Act prohibits pay-when-paid clauses.[1430] Section 9 of the Singapore Act was “s 9 of [Singapore Act] was designed to prevent the avoidance of payment obligations by contractors who took advantage of the imbalance inherent in the “pay when paid” provisions by withholding payments to subcontractors for reasons unrelated to the latters’ performance.”[1431]

    (b) What is the Trigger for Payment?

    Where a construction contract under the Singapore Act provides a date on which a progress claim becomes due and payable, that progress payment is due and payable on the earlier of the date specified in the contract or the expiry of 35 days from the date a tax invoice is submitted to the respondent (if the claimant is a taxable person to the Singapore Goods and Services Tax Act) or the date on which a payment response (under section 11(1)) is due). When the construction contract does not provide for a date for progress payments, the payment is due 14 days after a tax invoice is submitted to the respondent or the date when the payment response is required.[1432]

    For a supply contract, if the contract provides a date for progress payment to become due and payable then it becomes due and payable on the earlier of the date in accordance with the contract or within 60 days from the date of a payment claim. If the contract does not provide a date for progress payments to become due and payable it becomes due and payable immediately after 30 days following a payment claim.[1433]

    (c) What is the Payment Period?

    As noted above, the payment period under the Singapore Act for a construction contract will be designated as the earlier of two time periods: 1) the period provided for under the construction contract or a period of 35 days from the date of receipt of a tax invoice.[1434]

    In cases where the construction contract provides no payment period, the payment period is 14 days from receipt of a tax invoice.[1435] As noted above, in both circumstances the tax invoice relates to the Singapore Goods and Services Tax Act (Cap. 117A).

    (d) When is the contractor entitled to render an invoice?

    A claimant under the Singapore Act is entitled to serve a payment claim within the period (i.e. the payment claim date) stated in the contract or mutually agreed in writing.[1436] If such a period is not agreed to or provided within the contract, a payment claim can be made at such intervals that a claimant elects (however such a claim may not be made more than one time per month).[1437]

    A respondent named in a payment claim is to respond to the claim (i.e. with a payment response as set out under section 11(3)) by the date specified in or determined within the terms of the contract (or within 21 days after a payment claim is served (whichever is earlier)) or if the contract does not provide such a date, within 7 days following a payment claim.[1438]

    (e) On What Basis Can a Payment be Withheld and When?

    The respondent to a payment claim must specify any reasons for withholding payment according to section 11. The respondent may deduct or set-off any sum for which the claimant is or may be liable if allowed under the contract. As noted above, no pay-when-paid provisions are not permitted in relation to construction contracts or supply contracts by virtue of section 9 of the Singapore Act. As such, a respondent is expected to “value the claimant’s work or services separately and independently according to the work done or services supplied by the claimant”.[1439]

    (f) What remedies are available in the event of non-payment?

    The unpaid amount of a progress payment that is due and payable accrues interest.[1440]

    As discussed further in Chapter 9 – Adjudication, the claimant who fails to receive payment in accordance with the provisions of the Singapore Act is entitled to make an adjudication application under section 13 of the Singapore Act.[1441]

    4. Malaysia

    The Malaysia Act does not contain a statement of purpose, but the full title of the Malaysia Act suggests the purpose of the regime is: “to facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, [and] to provide remedies for the recovery of payment in the construction industry”.[1442] According to the Kuala Lumpur Regional Centre for Arbitration, the primary objective of the Malaysia Act is “to address cash flow problems in the construction industry”.[1443]

    The Malaysia Act grants a statutory right to, and default terms for, progress payments if not already provided for by the construction contract.[1444]

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    The Malaysia Act applies to every party to a construction contract.[1445]

    (b) What is the Trigger for Payment?

    Under the Malaysia Act, the parties may agree to payment terms under the construction contract with regards to the frequency and amounts of payments. Where the construction contract does not provide terms specifying the frequency and amount of payment, a default scheme is provided under the Malaysia Act. Under the default scheme, progress payments are to be made monthly,[1446] and payment for “the supply of construction materials, equipment or workers in connection with a construction contract” must be made within 30 days of the receipt of an invoice.[1447]

    If payment is not made pursuant to the terms of a construction contract, or, absent terms, the default terms under the Malaysia Act, the unpaid party may issue a “payment claim”.[1448] The payment claim must include: the amount claimed and the due date for payment, details to identify the cause of action including the provision in the construction contract to which the payment relates, description of the work or services to which the payment related, and a statement that it is made under the Malaysia Act.[1449]

    (c) What is the Payment Period?

    The parties can set out payment terms in the contract. Under the default scheme, monthly progress payments are legislated for construction work and consulting services. Payment for the “supply of construction materials, equipment or workers in connection with a construction contract” must be made within 30 days of receipt of the invoice. [1450]

    (d) When is the contractor entitled to render an invoice?

    A payment claim may be rendered by an unpaid party on a non-paying party for payment pursuant to a construction contract.[1451] The payment claim must be in writing and include certain information such as: the amount claimed; due date for payment; details to identify the cause of action; description of the work and a statement that it is in relation to the Malaysia Act.[1452]

    If the construction contract does not provide terms for rendering an invoice, an invoice should be rendered at the end of the period specified in the default terms: once monthly for progress payments, or “upon the delivery of supply, for the supply of construction materials, equipment or workers”.[1453]

    (e) On What Basis Can a Payment be Withheld and When?

    Payment can be withheld when there is a dispute with regards to the amount owing in relation to a payment claim. Within 10 days of receipt of a payment claim, a responding party that disputes a payment is to deliver a payment response.[1454] Should there be no dispute, the payment response with the whole amount claimed (or any amount admitted) is to be provided.

    Reasons for withholding a payment are not otherwise enumerated in the legislation,[1455] however it is important to note that the Malaysia Act prohibits “conditional payment provision[s]”, meaning that any payment provisions where the obligation of one party to make payment is conditional “upon that party having received payment from a third party” or “the availability of funds or drawdown of financing facilities of that party” is void.[1456]

    (f) What remedies are available in the event of non-payment?

    If a dispute arises as to payment, it can be referred to adjudication. The Malaysia Act does not provide for pre-adjudication remedies outside of the “payment claim” and “payment response” procedure. If, after adjudication, the non-paying party still does not pay, the unpaid party may “suspend performance or reduce the rate of progress of performance of any construction work” under a construction contract[1457] or seek payment from the “principal” – the party that is responsible for paying the non-paying party under a separate construction contract – if payment is owing from the principal to the non-paying party.[1458]

    5. Hong Kong (Proposed)

    The Development Bureau of the Hong Kong Special Administrative Region Government (“Hong Kong Development Bureau”) has proposed security of payment legislation (“Hong Kong SOPL”) which would provide for prompt payment and adjudication with respect to construction contracts. Stakeholders were welcome to submit comments by August 31, 2015 with respect to the Hong Kong SOPL. The Hong Kong SOPL is expected to be introduced by 2017.[1459] For the purposes of this summary, it is important to note that the Hong Kong SOP is, at the time of publishing this Report, in the consultation stage and its provisions are subject to change.

    The Hong Kong Development Bureau has published a Consultation Document and a Summary and Guide to the Hong Kong SOPL. As noted in the Consultation Document, the purpose of the Hong Kong SOPL is to “help main contractors, sub-contractors, consultants and suppliers receive payments on time for work done and services provided. It also provides a means to rapidly resolve disputes”.[1460]

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    The Hong Kong SOPL will apply to all tiers in the construction pyramid for those contracts that are governed by the Hong Kong SOPL, as outlined above.[1461] In that regard, “[w]hen the main contract is not covered by SOPL then sub-contracts will not be covered by SOPL regardless of tier or value.”[1462]

    It is important to note that the Hong Kong SOPL prohibits “pay when paid” and conditional payment clauses as they “have the potential to harm smaller sub-contractors and traders who are generally the parties least able to fund and withstand significant delays in payment”.[1463]

    (b) What is the Trigger for Payment?

    The Hong Kong SOPL provides that parties are entitled to “Progress Payments but the parties to the contract will be free to agree [on] the number of Progress Payments, when they can be claimed and the basis for calculating amounts due”.[1464] Parties will also be able to agree that payment is only after completion. Therefore, the baseline trigger for payment is contractual. The Hong Kong Development Bureau noted these recommendations limited interference in freedom of contract; maintained flexibility of approach for procurement; and accords with the wide degree of freedom to agree with entitlements to payment seen in other jurisdictions.[1465]

    Where parties do not specify when payment can be claimed in their contract, it is anticipated that default provisions of the Hong Kong SOPL will apply.[1466]

    (c) What is the Payment Period?

    While parties will be free to agree on the frequency and value of payments, payment periods cannot exceed “60 calendar days for interim Progress Payments and 120 calendar days for final Progress Payments”.[1467] Payment Period “refers to the period between a claim for payment being made and the date when the amount due has to be paid”[1468] and a Progress Payment refers to payments made to a party who has undertaken work or provides related services, materials or plant under a Hong Kong SOPL contract.[1469]

    According to the Hong Kong Consultation Document, “[i]f a paying party included a Payment Period longer than 60 or 120 calendar days in their contract then any adjudicator, court or arbitrator deciding a dispute under the contract would disregard the longer period and treat the contract as providing the 60 or 120 calendar day period as appropriate.”[1470] Similarly, if the Hong Kong SOPL default provisions apply, the Payment Period will be 60 calendar days (interim Progress Payments) or 120 calendar days (final Progress Payments) after receipt of a Payment Claim.[1471]

    (d) When is the contractor entitled to render an invoice?

    As noted above, the ability to ‘invoice’ under the Hong Kong SOPL will be a contractual right. IF the parties fail to agree to appropriate payment mechanisms in line with the Hong Kong SOPL, default provisions will apply. Under the default provisions, Payment Claims can be made monthly by any party “undertaking work or providing services, materials or plant”.[1472] The Hong Kong Development Bureau noted the rationale for the default provisions was that they “bring certainty in situations where parties have failed to make any relevant agreements themselves either in writing or orally”.[1473]

    The term Payment Claim refers to a statutory claim for payment made under the proposed legislation that will require certain minimum criteria to be met (e.g. details of the amount claimed, the relevant work carried out and the basis of calculation). A claiming party is not entitled to claim more than they would otherwise be entitled to under their contract through a Payment Claim nor can they claim amounts sooner than provided for by the contract.[1474]

    (e) On What Basis Can a Payment be Withheld and When?

    The Hong Kong SOPL does not enumerate reasons why a payment can be withheld, other than proposing that “payers will have the right to defend Payment Claims in adjudication by arguing that amounts claimed are not due”.[1475]

    Upon receipt of a Payment Claim, a payer may serve a Payment Response within 30 days outlining how much, if anything, they will be paying under the payment claim. The Payment Response must also set out the amounts disputed (and reasons why) and any amounts intended to be set-off against amounts due (and the basis for the set-off).[1476]

    Failure to serve a Payment Response on time (i.e. within 30 calendar days (or earlier if contracted) of receipt of the Payment Claim) will not make the paying party “automatically liable for the full amount of the Payment Claim but they will not be able to raise any set off against amounts properly due against the Payment Claim”.[1477]

    (f) What remedies are available in the event of non-payment?

    The Hong Kong SOPL would allow unpaid parties to “suspend all or part of their works or reduce the rate of progress in the event of non-payment.”[1478] The right of suspension “will only arise after either non-payment of an adjudicator’s decision or non-payment of an amount admitted as due in a Payment Response”.[1479]

    6. Australian Prompt Payment Legislation

    In Australia, the objective of prompt payment legislation has been described as follows:

    A common objective of all the legislation has been the eradication of unfair contractual provisions and practices with regard to payment. The aim is to get cash flowing in as fair a manner as possible down the hierarchical contractual chains that exist on most commercial construction projects.[1480]

    Another Australian commentator notes that in Australia, construction law was almost exclusively founded in the common law and freedom of contract prevailed until the provincial legislatures were called upon to address systemic issues in the industry.[1481] The legislature recognized that due to unequal bargaining power, subcontractors were unable to negotiate contract terms to protect their interests and needed some form of protection[1482]. As a result, Australian provinces enacted prompt payment statutes which “may impact on freedom of contract in respect of construction contracts, or may constrain the way in which work under construction contracts may be legally carried out”.[1483]

    Each state and territory in Australia[1484] has its own prompt payment legislation. One commentator explained that the objectives of the Australian legislatures when considering and drafting prompt payment legislation included “address[ing] the mischief of poor cash-flow” improving “the flow of cash in a swift manner down the hierarchical contractual chain on construction projects”.[1485] The various statutes have been grouped into two different models, the “East Coast” model and the “West Coast” model.[1486]

    6.1  Australia (East Coast)

    The Australia (East Coast) model was first embodied in the New South Wales Act and was adopted in the Victoria Act, the Queensland Act, the Tasmania Act, the South Australia Act and the Australian Capital Territory Act. When it was enacted, the New South Wales Act introduced new statutory rights such as a right to progress payments even in the absence of payment terms in the contract, a right to interest on late payments, and a right to suspend work.[1487] The New South Wales Act also provided for a rapid adjudication procedure, which is discussed at Chapter 9 – Adjudication.

    The New South Wales Act was amended in November 2013, in response to the New South Wales Government’s Final Report of the Independent Inquiry into Construction Industry Insolvency (also known as the “Collins Inquiry”), which examined ongoing high levels of insolvency in the construction industry and assessed the existing protections available for subcontractors.[1488] The amendments to the New South Wales Act came into force on April 21, 2014 and included the following significant changes:

    Currently, the New South Wales Act provides that a progress payment claim may be served up to 12 months after the relevant work was carried out, that payment to a subcontractor must be made within 30 days after the payment claim is made while payment to a contractor must be made within 15 days.[1493] Among the Australia (East Coast) states and territories, the mandatory statutory time frames vary greatly. Interestingly, the time to serve a payment claim varies from 3 months after the relevant work was carried out to 12 months and the mandatory pay periods vary from 10 business days to 30 days after a payment claim is made.[1494]

    Although some commentators have argued that the New South Wales Act “effectively establishes a default entitlement to payment”, they have also indicated that “on balance [it is] beneficial”.[1495]

    Commentators have noted that, the implementation of the Australia (East Coast) model has assisted in improving the cash flow issues encountered by trades and suppliers, and expediting resolution of progress payment claim disputes.[1496] Under the Australia (East Coast) model there is a progress payment claims statutory regime, which is not initially imposed on the parties but can be invoked by a claimant. Specifically, a claimant can serve a payment claim upon the respondent and “endorse” it as being made under the New South Wales Act.[1497] There is a concern that, under the Australia (East Coast) model, a claimant must make the choice of “endorsing” its payment claim, or not, and will often refrain from doing so for fear of being (in practice and not as a statutory remedy) “blacklisted” out of future work for being litigious.[1498]

    For the purpose of the following discussion, we have referred to provisions of the New South Wales Act as the leading jurisdiction on the Australia (East Coast) model. The other East Coast states generally followed this model.

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    The New South Wales Act applies to any construction contract as defined under the legislation, even if the contract is expressed to be governed by the law of a jurisdiction other than New South Wales.[1499] Accordingly, it applies to all level of contract so long as it meets the definition of “construction contract” under the New South Wales Act.

    Importantly, the New South Wales Act expressly prohibits pay-when-paid clauses.[1500] The New South Wales Minister for Public Works and Services at the time, referred to pay-when-paid clauses as “inequitable” and “unAustralian”, because it’s “all too frequently the case that small subcontractors ... [are] not paid for their work.”[1501]

    (b) What is the Trigger for Payment?

    The trigger for payment under the New South Wales Act is the reference date (i.e. progress payment in this case). On and from each reference date, a person who has undertaken to carry out construction work or to supply related goods and services under the contract is entitled to a progress payment.

    In this context, a reference date can be defined as: the date determined by contract as the date on which a claim for a payment may be made in relation to work carried out or undertaken to be carried out under the contract; or in cases where the contract does not expressly provide for such a date, the last day of the month in which the construction work was first carried out and the last day of each subsequent month.[1502]

    (c) What is the Payment Period?

    Progress payments under the New South Wales Act are to be payable in accordance with the terms of the applicable contract, subject to other requirements.[1503] The requirements include the following:

    (d) When is the contractor entitled to render an invoice?

    A person entitled to a progress payment may serve a payment claim who, under the construction contract concerned, is or may be liable to make the payment.[1505] The payment claim must: identify the construction work to which the progress payment relates; indicate the amount of the progress payment that is claimed to be due; and in the case of an exempt residential construction contract, the payment claim must state that it is being made in relation to the New South Wales Act.[1506]

    A payment claim may only be served within the period set out under the construction contract or within the period of 12 months after the construction work to which the claim relates was last carried out (i.e. date of last supply in the Ontario context).[1507] Payment claims made by head contractors to principals (i.e. to owners) must be accompanied by supporting statements and must not be knowingly false or misleading.[1508] Failure to do so subjects the head contractor to a penalty.

    (e) On What Basis Can a Payment be Withheld and When?

    A person who receives a payment claim may reply by providing a payment schedule that: identifies the payment claim to which it relates; and indicates the amount of payment (if any) that the respondent proposes to make.[1509] In cases where the payer proposes an amount (termed scheduled amount) that is less than the amount claimed in the payment claim, the payment schedule must indicate why that amount is less and provide reasons for withholding payment.[1510]

    If the respondent receives a payment claim and does not provide a payment schedule within the time provided in the contract or within 10 days after the receipt of the payment claim (whichever is earlier), the respondent becomes liable to pay the claimed amount.[1511]

    (f) What remedies are available in the event of non-payment?

    If a progress payment becomes due and payable, the claimant is entitled to exercise a lien in respect of the unpaid amount over any unfixed plant or materials supplied in connection with carrying out the construction work.[1512] In addition, interest is payable on the unpaid amount of a progress payment.[1513]

    In the event that a respondent to a payment claim provides no payment schedule and fails to pay the payment claim, the claimant may do the following: a) recover the unpaid portion as a debt due to the claimant in any court of competent jurisdiction; or b) make an adjudication application.[1514] The claimant may also serve a notice of intent to suspend carrying out construction work under the construction contract.[1515] Similar remedies are available in circumstances where the respondent provides a payment schedule however fails to pay the whole or part of the proposed amount under the payment schedule.[1516]

    A claimant may suspend the carrying out of construction work if at least 2 business days have passed since the claimant caused notice of intention to suspend to be given to the respondent. The right to suspend exists under 3 business days following the date the claimant receives payment for the amount payable to the respondent in accordance with the payment schedule or otherwise. The New South Wales Act also stipulates certain liabilities in relation to suspension (e.g. liabilities to the owner in relation to loss or damages suffered as a result of the removal by the respondent from the contract of any part of work or supply).[1517]

    6.2  Australia (West Coast)

    The general purpose of the Australia (West Coast) model is to provide for timely payments between parties to construction contracts and provide for the rapid resolution of payment disputes under construction contracts.[1518]

    The Australia (West Coast) model is different from the Australia (East Coast) model in that the Australia (West Coast) model does not override the ordinary course payment terms agreed to between the parties under the contract. The distinction between the two models, with respect to payment provisions has been summarized as follows:

    The West Coast model adopts a more simplistic approach that attempts not to interfere with the contractual rights and obligations of the parties to a construction contract. That is, rather than establish new statutory rights that override the contract, the West Coast model operates by reference to the parties’ own contractual arrangements.[1519]

    Commentators have noted the significant challenge facing Australian contractors who operate in various states and territories, due to the differences between jurisdictions,[1520] for example in the “counting of days” provisions, matters to be included or not in payment claims under the legislation, and varying definitions which affect the scope of application of the statute.[1521]

    Generally, the consensus among stakeholders across Australian jurisdictions is that, although underutilized, where the legislation is relied upon and is used by the intended parties, it has successfully made a positive impact on the flow of payments in the industry.[1522]

    (a) In the Construction Pyramid, what Level of Contract does it apply to?

    The Australia (West Coast) model applies to all “contractors”, which is defined as a person that is obligated, under a construction contract, to carry out construction work, to supply goods in relation to the construction work, to provide professional services related to the construction work, or to provide on-site services that are related to the construction work.[1523]

    Importantly, the Australia (West Coast) model also renders pay-when-paid and pay-if-paid provisions inoperative.[1524]

    (b) What is the Trigger for Payment?

    The trigger for payment under the Australia (West Coast) model is contractual by default; however, in the absence of contractual provisions on contractor’s obligations under a contract, the Australia (West Coast) model will imply default provisions (e.g. contracts that do not provide for an amount due, how such amounts are calculated, entitlement, variations of obligations, or how payment claims are made).[1525]

    When the parties fail to provide for a payment regime by way of contract and the default provisions apply, payment is triggered upon service of a payment claim, which, when served by a contractor must: be in writing; be addressed to the party to which the claim is made; state the name of the claimant; state the date of the claim; state the amount claimed; in the case of a claim by the contractor — itemise and describe the obligations that the contractor has performed and to which the claim relates in sufficient detail for the principal to assess the claim; in the case of a claim by the principal — describe the basis for the claim in sufficient detail for the contractor to assess the claim; be signed by the claimant; and be given to the party to which the claim is made.[1526]

    (c) What is the Payment Period?

    The Australia (West Coast) model allows parties to contract for payment periods, however, for contracts that require payment to be made more than 50 days after payment is claimed, the contractual provision will be read down to require payment to be due within 50 days after it is claimed under the Western Australia Act and within 28 days after it is claimed under the Northern Territories Act.[1527]

    (d) When is the contractor entitled to render an invoice?

    A payment claim may be made in the Australia (West Coast) model “at any time after the contractor has performed any of its obligations”.[1528]

    (e) On What Basis Can a Payment be Withheld and When?

    A payment can be withheld under the Australia (West Coast) model if the paying party either “believes the claim should be rejected because the claim has not been made in accordance with” the contract, or “disputes the whole or part of the claim”.

    According to the default provisions of the Australia (West Coast) model, the paying party must give the claimant a “notice of dispute” within 14 days of receiving the claim outlining its objection. The notice of dispute must: be in writing; be addressed to the claimant; state the name of the party giving the notice; state the date of the notice; identify the claim to which the notice relates; if the claim is being rejected under subclause (1)(a) — state the reasons for the belief that the claim has not been made in accordance with this contract; if the claim is being disputed under subclause (1)(b) — identify each item of the claim that is disputed and state, in relation to each of those items, the reasons for disputing it; and be signed by the party giving the notice.[1529]

    (f) What remedies are available in the event of non-payment?

    If interest provisions are not stipulated in the construction contract, the Australia (West Coast) model provides for interest on overdue payments. Interest will begin to accrue on the day after the amount is due. The rate of interest is determined by the Civil Judgments Enforcement Act 2004 under the Western Australia Act and by the Supreme Court Act under the Northern Territories Act.[1530]

    Contractors also have a right of suspension that arises if they are not paid according to an adjudicator’s determination.[1531]

    Chart 1 - Comparison of Payment Periods in Prompt Payment Legislation in the United States

    Chart 2 - Comparison of Notice, Witholding and Other Provisions in Prompt Payment Legislation in the United States

    Appendix C: Adjudication Considerations and Mechanics

    This appendix provides detailed answers to questions posed in the body of Chapter 9 –Adjudication being:

    Following these charts, we have provided a detailed analysis of how adjudication should be adopted in Ontario, that is to say a “made-in-Ontario approach”. This analysis includes recommendations based on our views of the best modality in which to implement Adjudication in Ontario given: a) the views of the stakeholders; b) relevant experiences of international jurisdictions; and c) the interaction with the Act.

    The Review has closely examined the differences in implementation of statutory adjudication in the U.K., New Zealand, Ireland, Singapore, Malaysia, Hong Kong and Australia:

    Jurisdiction Legislation Title
    United Kingdom Housing Grants, Construction and Regeneration Act 1996
    New Zealand Construction Contracts Act 2002
    Ireland Construction Contracts Act 2013
    Singapore Building and Construction Industry Security of Payment Act 2004
    Malaysia Construction Industry Payment and Adjudication Act 2012
    Hong Kong Act proposed, currently in consultation process
    South Africa[1532] Regulations proposed, currently seeking public comment
    Australian States
    New South Wales Building and Construction Industry Security of Payment Act 1999
    Victoria Building and Construction Industry Security of Payment Act 2002
    Queensland Building and Construction Industry Payments Act 2004
    South Australia Building and Construction Industry Security of Payment Act 2009
    Tasmania Building and Construction Industry Security of Payment Act 2009
    Australian Capital Territory Building and Construction Industry (Security of Payment) Act 2009
    Western Australia Construction Contracts Act 2004
    Northern Territory Construction Contracts (Security of Payments) Act 2004

    1. Who can require adjudication?

    Jurisdiction Who can require adjudication?
    U.K. A party (i.e. any party) to a construction contract has the right to refer a dispute arising under the contract to adjudication.[1533]
    New Zealand Any party to a construction contract has the right to refer a dispute to adjudication.[1534] This right may be exercised even though the dispute is the subject of proceedings between the same parties in a court or tribunal. Parties must consent to adjudication if the parties had previously contracted for arbitration.[1535] Parties must also give consent if multiple disputes are to be dealt with in one adjudication proceeding.[1536]
    Ireland A party to a construction contract may refer “any dispute relating to payment arising under the construction contract” to adjudication.[1537]
    Singapore Any party who has carried out work or supplied goods or services under a construction contract (a “claimant”) may make an adjudication application in respect of a payment claim.[1538]
    Malaysia Either party may refer a “dispute arising from a payment claim” to adjudication.[1539]
    Hong Kong Both parties to a construction contract will be entitled to refer a dispute (limited to certain disputes including, for example, value of work, services, materials and plant supplied and claimed in a payment claim) to adjudication.[1540]
    Australia
    NSW A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent).[1541]
    Victoria A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent”).[1542]
    Queensland A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent”).[1543]
    South Australia A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent”).[1544]
    Tasmania A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent”).[1545]
    ACT A party who claims to be entitled to a progress payment (a “claimant”) may make an adjudication application in respect of a payment claim made against a party owing payment (the “respondent”).[1546]
    Western Australia Any party to a construction contract may apply to have the dispute adjudicated.[1547]
    Northern Territory Any party to a construction contract can unilaterally refer a “payment dispute” to adjudication.[1548]

    2. Who can adjudicate a dispute and how is the adjudicator nominated?

    2.1  Who can adjudicate a dispute

    Jurisdiction

    Who can adjudicate a dispute?

    U.K.

    Neither the U.K. Construction Act nor the Scheme specifically set out requirements for adjudicator eligibility.

    Some commentators have noted that adjudicators are typically those who understand the construction industry; understand how construction contracts work; and can apply that knowledge in producing decisions that parties can either accept as resolving their dispute or use as a basis for such resolution.[1549]

    New Zealand

    In order to become an adjudicator, a person must meet the statutory eligibility criteria set out in section 34 of the New Zealand Act. Currently, the criteria are adjudication-specific, and require an adjudicator to:

    • not be a party to the disputed construction contract; and
    • have no conflict of interest or disclose any conflict of interest and obtain consent from the participating parties.[1550]

    Section 34(1) of the New Zealand Act permits additional criteria relating to qualifications, expertise and experience to be prescribed, but no additional criteria are provided in the current New Zealand Regulation.[1551]

    Ireland

    An adjudicator must be qualified as a barrister or solicitor; a fellow of the Chartered Institute of Arbitrators; a chartered member of the Institution of Engineers of Ireland; a registered professional “as defined in section 2 of the Building Control Act 2007”; or a person with equivalent qualifications “obtained in any other Member State of the European union”.[1552]

    Singapore

    Adjudicators are required to:

    • possess a degree or diploma in architecture, building studies, engineering, environmental studies, law, planning, real estate or urban design, or “such other qualification, as may recognized by the authorised nominating body”;[1553]
    • have at least 10 years’ work experience related to the “building and construction industry in Singapore”; and[1554]
    • complete the assessment and training course administered by the authorized nominating body.[1555]

    In order to be appointed to a specific adjudication, the adjudicator must not be related to any party as an employee, director, partner, shareholder of the party or parent/subsidiary of the party; as a parent, spouse or sibling of the party; or as a person who has “assisted the party to prepare any document for, or has provided any advice to, the party in relation to the contract”.[1556]

    Malaysia

    Adjudicators are required to:

    • have at least 7 years’ working experience in Malaysia’s building and construction industry or in any other fields recognized by the KLRCA;
    • hold a Certificate in Adjudication from a recognized institution such as the KLRCA;
    • not be an undischarged bankrupt;
    • not have been convicted of any criminal offence within or outside Malaysia.[1557]

    An adjudicator must, at the time of appointment, declare in writing that they have no conflict of interest in respect of the appointment, that they will act “independently, impartially and in a timely manner and avoid incurring unnecessary expense”, that there are no circumstances “likely to give rise to justifiable doubts as to the adjudicator’s impartiality and independence”, and that they will comply with the principles of natural justice.[1558]

    Hong Kong

    Most adjudicators are expected to be experienced construction professionals such as surveyors, engineers and architects or construction lawyers.[1559]

    Australia

    NSW

    An adjudicator must be a natural person, and have “such qualifications, expertise and experience as may be prescribed by the regulations”.[1560] A person may not act as an adjudicator to a particular contract if they are a party to the contract, or in any circumstances proscribed by regulation.[1561] The New South Wales Regulations do not presently prescribe additional criteria.

    The Authorized Nominating Authority Code of Practice requires Authorized Nominating Authorities to determine the “necessary core competencies” of adjudicators; select, train and monitor adjudicators continuously; and to develop a “training, accreditation and pre-qualification scheme where necessary”.[1562]

    Victoria

    An adjudicator must be a natural person who meets any “qualifications, expertise and experience that may be prescribed”.[1563] An adjudicator is not eligible to adjudicate a particular construction contract if they are a party to the contract, an employee of a party, or in other prescribed circumstances.[1564]

    Queensland

    The Queensland Building and Construction Commission Adjudication Registry, consisting of the Adjudication Registrar and staff of the Registry, in responsible for receiving and determining applications for registration as an adjudicators.[1565] The Registrar may consider the following criteria in order to determine whether an application for registration should be granted:

    • whether the applicant holds one of either adjudication qualification or another qualification that the Registrar considers to be equivalent;[1566]
    • whether the applicant held a previous or corresponding registration that was suspended or cancelled, or have been refused registration;[1567]
    • the “experience and qualifications” of the person;[1568] and
    • anything else “relevant” to the person’s ability to carry out the functions of an adjudicator.[1569]

    The Registry has developed a qualification course and expects to have its first candidates in early to mid-2016.[1570] This represents a transfer of the functions formerly performed by authorized nominating authorities under the pre-December 2014 version of the Queensland Act.[1571]

    South Australia

    An adjudicator must be a “natural person” and have “such qualifications, expertise and experience” as may be prescribed by regulation.[1572] In relation to a particular construction contract, a person is not eligible to be an adjudicator if they are a party to the contract; if the parties to the contract have nominated the person as an adjudicator; or under any other circumstances prescribed by regulation.[1573]

    Under the Building and Construction Industry Security of Payment Regulations 2011 adjudicators are required to:

    • successfully complete a formal course of training of at least 2 days’ duration and pass a written examination; and
    • hold a university degree, diploma, or other qualification in architecture, building surveying, building, construction, law, project management or quantity surveying, or be eligible to be a member of certain listed professional bodies, or hold registration as a building work supervisor under the Building Work Contractors Act 1995.[1574]

    Tasmania

    The Security of Payments Official may authorize a nominating authority to select adjudicators.[1575] A person is eligible to serve as an adjudicator if they are a natural person with the “qualifications, expertise and experience” required of adjudicators by the Security of Payments Official.[1576]

    An adjudicator is not eligible to make a decision on an adjudication application if they have a “material personal interest” in a “building or construction contract, dispute, or party to the contract, to which the application relates.”[1577] The adjudicator also may not be a party to the contract.[1578]

    Australian Capital Territory

    In order to be appointed an adjudicator, a person must:

    • be an individual;
    • have the “qualifications, expertise and experience” to perform adjudications;
    • successfully complete a relevant training course;
    • not be a party to the contract that is the subject of the adjudication;
    • not be employed by or represent a building and construction industry organization;
    • any other circumstances prescribed by regulation. Presently, no Regulations have been promulgated.[1579]

    Western Australia

    To become registered adjudicators, applicants must:

    • have a university or other tertiary degree in architecture, engineering, quantity or building surveying, building, construction, project management, or law;
    • be a builder registered under the Builders’ Registration Act 1939 or be eligible for membership in one of the following professional institutions: The Royal Australian Institute of Architects, Institution of Engineers Australia, Australian Institute of Quantity Surveyors, Australian Institute of Building Surveyors, The Australian Institute of Building, The Institute of Arbitrators and Mediators of Australia, Australian Institute of Project Management;
    • have at least five years’ experience in the administration of construction contracts or dispute resolution relating to construction contracts; and
    • have successfully completed a training course which qualifies the person for “the performance of the functions of an adjudicator under the Western Australia Act”.[1580]

    Northern Territory

    In order to become a registered adjudicator, a person must:

    • not be disqualified (e.g. for bankruptcy, or other unsuitability);
    • hold a tertiary degree (e.g. from a university) in architecture, building, building surveying, construction, engineering, law, project management, quantity surveying, or equivalent, or be eligible for membership in a construction industry-related regulatory body (including the Law Society Northern Territory ), or be registered as a building contractor;
    • have at least five years’ experience in administering or dispute resolution relating to construction contracts; and
    • have successfully completed a training course.[1581]

    2.2  How are they nominated?

    Jurisdiction

    How are they nominated?

    U.K.

    An adjudicator can be selected as follows:

    a) the parties can agree on a person to act as an adjudicator (i.e. during the project, prior to a dispute);

    b) the appointment can be made by prior agreement (i.e. naming the adjudicator(s) in the construction contract;

    c) the appointment can be made when the dispute occurs by agreement; or

    d) a party may appoint an adjudicator unilaterally by referring the dispute to an adjudicator nominated by an Adjudicator Nominating Body (“ANB”) of their choice.[1582]

    The nomination process for an adjudicator under the Scheme is as follows (subject to any agreement between the parties):[1583]

    a) Following the giving of the notice of adjudication, the referring party shall request the person (if any) specified in the contract to act as adjudicator.[1584]

    • Within 2 days of receiving the request, the person named as adjudicator must indicate whether or not they are able and willing to act.[1585]

    b) If the person named as adjudicator in the contract is not able or willing to act or does not respond within the timeframe allotted, the referring party may request another person (if any) specified in the contract, or request the nominating body (if any) referred to in the contract to select an adjudicator, or request any other adjudicator nominating body to select a person to act.[1586]

    • Within 2 days, the person requested to act as adjudicator must indicate whether or not he or she is willing to act.[1587]

    c) If no person is named in the contract, or the person named has indicated that they will not act, the referring party must refer the dispute to the nominating body specified in the contract, if any,[1588] or must request an adjudicator from an adjudicator nominating body of their choice.[1589]

    • Within 2 days, the person requested to act as adjudicator must indicate whether or not he or she is willing to act.[1590]
    • Within 5 days of receiving an appointment request, the nominating body must communicate the selection of an adjudicator to the referring party.[1591]

    d) Where a nominating body fails to comply with the timelines above, the referring party may agree with the other party to request a specified person to act as adjudicator, or request any other adjudicator nominating body to act as adjudicator.[1592]

    • Within 2 days, the person requested to act as adjudicator must indicate whether or not he or she is willing to act.

    New Zealand

    An adjudicator can be selected as follows:

    a) by consent of both parties; or

    b) by allocation by an authorized nominated authority.[1593]

    The nomination process for an adjudicator is as follows:

    a) As soon as practicable after the notice of adjudication is served, the claimant must request the person (if any) chosen by agreement between the parties to act as adjudicator.[1594]

    • Within 2 working days of receiving the request, a person requested to act as adjudicator must indicate whether he or she is able and willing to act.[1595]

    b) If the person named in the contract has indicated that they are unable or unwilling to act, as soon as practicable after the notice of adjudication is served, request any other person chosen by agreement between the parties to act as adjudicator.[1596]

    • Within 2 working days of receiving the request, a person requested to act as adjudicator must indicate whether he or she is able and willing to act.[1597]

    c) If no person is agreed upon, within 5 working days after the notice of adjudication has been served or any further period that the parties may agree, the claimant must request a nominating body chosen by agreement between the parties to select a person to act as adjudicator.[1598]

    • The nominating body has a duty to select a person and request that person to act as adjudicator as soon as practicable.[1599]
    • Within 2 working days of receiving the request, a person requested to act as adjudicator must indicate whether he or she is able and willing to act.[1600]

    d) If no nominating body is chosen by agreement, within 2 to 5 working days after the notice of adjudication has been served or any further period that the parties may agree, the claimant must request an authorized nominating authority of their choice to select a person to act.[1601]

    • The nominating authority has a duty to select a person and request that person to act as adjudicator as soon as practicable.[1602]
    • Within 2 working days of receiving the request, a person requested to act as adjudicator must indicate whether he or she is able and willing to act.[1603]

    An agreement about the choice of an adjudicator or a nominating body or authorized nominating authority is not binding on the parties if that agreement was made before the dispute between them arose.[1604]

    Ireland

    An adjudicator can be selected as follows:

    a) the parties may agree to appoint an adjudicator of their choice (who may accept or decline the appointment); or

    b) the parties may seek an adjudicator from the Construction Contracts Adjudication Panel appointed by the Minister (i.e. the default option).[1605]

    The nomination process for an adjudicator is as follows:

    a) Within 5 days beginning on the day on which notice of intention to refer the payment dispute for adjudication is served, the parties may agree to appoint an adjudicator of their choice or from the panel appointed by the Minister.[1606]

    • A person requested to accept an appointment following agreement of the parties shall respond to accept or decline within 2 days.[1607]

    b) Failing agreement, the adjudicator shall be appointed by the chair of the panel selected by the Minister.[1608]

    • The chair of the Minister’s panel must appoint an adjudicator and notify the parties within 7 days of receipt of a request, but no sooner than 5 days after the date of service of the notice of adjudication.[1609]

    Singapore

    An adjudicator will be selected by the Singapore Mediation Centre (SMC), presently the only authorized nominating body authorized by the Minister to appoint adjudicators and undertake related functions.[1610]

    The nomination process for an adjudicator is as follows:

    a) Within 7 days after receipt of an adjudication application from the claimant, the authorized nominating body must serve a notice in writing confirming the appointment of an adjudicator.[1611]

    • Within this time, the authorised nominating body must refer the adjudication application to a person who is on the register of adjudicators and whom the authorised nominating body considers to be appropriate for appointment.[1612]
    • Within this time, such person(s) may agree or decline to determine the adjudication.[1613]

    Malaysia

    An adjudicator can be selected as follows:

    a) the parties may agree to appoint an adjudicator of their choice (who may accept or decline the appointment); or

    b) the parties may seek an adjudicator from the KLRCA.[1614]

    The nomination process for an adjudicator is as follows:

    a) An adjudicator may be appointed by agreement of the parties in dispute within 10 working days from the service of the notice of adjudication by the claimant.[1615]

    • Within 10 working days of being notified, the adjudicator shall propose and negotiate his terms of appointment and indicate acceptance.[1616]
    • If the adjudicator rejects his appointment or fails to indicate acceptance within the period specified, the parties may proceed to appoint another adjudicator by agreement or by request to the Director of the KLRCA, and in the manner provided for under the legislation.

    b) An adjudicator may be appointed by the Director of the KLRCA upon the request of both parties or either party, if there is no agreement of the parties to appoint an adjudicator within 10 working days from service of the notice.[1617]

    • Within 5 working days of receiving a request, the Director of the KLRCA shall appoint an adjudicator and notify the parties and adjudicator.[1618]
    • Within 10 working days of being notified, the adjudicator shall propose and negotiate his or her terms of appointment and indicate acceptance.[1619]
    • If the adjudicator rejects his or her appointment or fails to indicate acceptance within the period specified, the parties or the Director of the KLRCA may appoint another adjudicator in the manner provided for under the legislation.[1620]

    Hong Kong

    An adjudicator may be agreed upon by the parties to the dispute, or may be appointed by an agreed-upon “adjudicator nominating body”. The HKIAC will be the default ANB where no adjudicator or nominating body is agreed upon.[1621]

    The nomination process for an adjudicator is expected to be as follows:

    a) Within five working days of commencement of the adjudication, and regardless of the method of appointment, the adjudicator must be appointed.[1622]

    Australia

    NSW

    An adjudicator will be selected by an authorized nominating authority chosen by the claimant.[1623]

    The nomination process for an adjudicator is as follows:

    a) An authorized nominating authority has a duty to refer an application to an adjudicator as soon as practicable.[1624]

    b) An adjudicator may accept an adjudication application by causing notice of the acceptance to be served on the parties, but no required timeframe for doing so is specified by the legislation or regulations.[1625]

    Victoria

    An adjudicator will be selected by an authorized nominating authority chosen by the claimant,[1626] and if the construction contract to which the payment claim relates lists 3 or more authorized nominating authorities, the application must be made to one of the listed authorities chosen by the claimant.[1627]

    The nomination process for an adjudicator is as follows:

    a) An authorized nominating authority has a duty to refer an application to an adjudicator as soon as practicable.[1628]

    b) An adjudicator may accept an adjudication application by causing notice of the acceptance to be served on the parties, but no required timeframe for doing so is specified by the legislation or regulations.[1629]

    c) Within 10 business days of acceptance, an adjudicator must give a copy of a notice of acceptance to the authorized nominating authority.[1630]

    Queensland

    A claimant must make an adjudication application to the Queensland Building and Construction Commission Registrar, who will appoint an adjudicator.[1631]

    The nomination process for an adjudicator is as follows:

    a) As soon as practicable, the registrar must refer the application to a person eligible to be an adjudicator.[1632]

    b) An adjudicator may accept an adjudication application referred to him or her by serving notice of acceptance on the parties, but no required timeframe for doing so is specified by the legislation or regulations.[1633]

    South Australia

    An adjudicator will be selected by an authorized nominating authority chosen by the claimant.[1634]

    The nomination process for an adjudicator is as follows:

    a) An authorized nominating authority has a duty to refer an application to an adjudicator as soon as practicable.[1635]

    b) An adjudicator may accept an adjudication application by causing notice of the acceptance to be served on the parties, but no required timeframe for doing so is specified by the legislation or regulations.[1636]

    Tasmania

    An adjudicator will be selected by a nominating authority chosen by the claimant.[1637]

    The nomination process for an adjudicator is as follows:

    a) A nominating authority has a duty to refer an application to a person who is a qualified adjudicator as soon as practicable.[1638]

    b) An adjudicator may accept an adjudication application by causing notice of the acceptance to be served on the parties, but no required timeframe for doing so is specified by the legislation.[1639]

    Australian Capital Territory

    An adjudicator will be selected by an authorized nominating authority chosen by the claimant.[1640]

    The nomination process for an adjudicator is as follows:

    a) The authorized nominating authority has a duty to refer an application to an eligible adjudicator as soon as practicable.[1641]

    b) An adjudicator may accept an adjudication application by giving notice of the acceptance to be served on the parties, but no required timeframe for doing so is specified by the legislation.[1642]

    Western Australia

    An adjudicator can be selected as follows:

    a) the parties may agree to appoint a registered adjudicator of their choice (who may accept or decline the appointment); or

    b) the parties may agree on a prescribed appointer who will appoint the adjudicator; or

    c) if the parties have not agreed on an adjudicator or prescribed appointer, the claimant may choose a prescribed appointer;[1643] or

    d) failing the making of an appointment by a prescribed appointer, the Building Commissioner will appoint the adjudicator.[1644]

    The nomination process for an adjudicator is as follows:

    a) Within 5 days after being served with an application for an adjudication, a prescribed appointer must:

    • appoint a registered adjudicator to adjudicate the payment dispute concerned;
    • send the application and any response received to the adjudicator; and
    • notify the parties and the Building Commissioner.[1645]

    b) If a prescribed appointer does not make such an appointment, the Building Commissioner may appoint a registered adjudicator (although the required timeframe is not specified by the legislation or regulations),[1646] and must:

    • notify the prescribed appointer in writing and require the appointer to serve the application and any response received by it on the appointed adjudicator; and
    • notify the parties of the appointment.[1647]

    Northern Territory

    An adjudicator can be selected as follows:

    a) the parties may agree to appoint a registered adjudicator of their choice (who may accept or decline the appointment); or

    b) the parties may agree on a prescribed appointer who will appoint the adjudicator; or

    c) if the parties have not agreed on an adjudicator or prescribed appointer, the claimant may choose a prescribed appointer to appoint the adjudicator;[1648] or

    d) failing the making of an appointment by a prescribed appointer, the Construction Contracts Registrar will appoint the adjudicator.[1649]

    The nomination process for an adjudicator is as follows:

    a) In the absence of an agreed appointment, within 5 working days of being served with an application for adjudication, a prescribed appointer must:

    • appoint a registered adjudicator to adjudicate the dispute;
    • send the application and any response received to the adjudicator; and
    • give notice to the parties and Registrar.[1650]

    b) If a prescribed appointer does not make such an appointment, the Registrar may appoint a registered adjudicator,[1651] and must:

    • give notice of such appointment to the prescribed appointer and require the appointer to serve the application and any response received on the adjudicator; and
    • give notice of the appointment to the parties.[1652]

    3. What types of disputes can be adjudicated?

    Jurisdiction

    What types of disputes can be adjudicated?

    What is excluded?

    U.K.

    A dispute arising under the construction contract may be referred to adjudication. For this purpose, a “dispute” includes any difference.[1653]

    A “construction contract” means an agreement for the carrying out of, arranging for, or providing labour for construction operations, and include contracts for architectural or engineering work, surveying work, design, landscaping or decoration work.[1654]

    “Construction operations” are operations of a variety of descriptions described under the U.K. Construction Act including, for example: construction, alternation, repair, maintenance, extension, demolition or dismantling of buildings or structures or works forming part of land; installation of fittings; cleaning carried out in the course of construction; or operations which form an integral part of, or are preparatory to, or are for rendering complete, construction operations; tunnelling, boring, laying of foundations, access work; and painting or decorating internal or external surfaces of any building or structure.[1655]

    Excluded from the definition of “construction operations” are operations such as: drilling for oil/natural gas; extraction; assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery on certain sites; manufacture or delivery to certain sites; or the making, installation and repair of artistic works.[1656]

    Contracts of employment and contracts with residential occupiers are excluded.[1657]

    Adjudication does not apply to certain contracts excluded by order of the Secretary of State including, for example, private finance initiatives and insurance contracts related to construction projects are excluded by Order.[1658]

    New Zealand

    A “dispute” under a construction contract may be referred to adjudication.[1659] “Dispute” is defined as “a dispute or difference that arises under a construction contract”.[1660]

    A “construction contract” is defined as a “contract for carrying out construction work”.[1661]

    “Construction work” encompasses a variety of work defined under the New Zealand Act including, for example: include installation, alteration, maintenance, removal, repair, restoration, demolition, or dismantling work on buildings and structures (including temporary structures) and works; installation of fittings within a building; any operation that forms an integral part of, or is preparatory to or is for rendering complete the previously mentioned construction work; as well as “related services”.[1662]

    The New Zealand Act excludes certain arrangements that might otherwise qualify as “construction contracts”, including:

    • work involved in drilling for or extracting oil or natural gas or minerals;[1663]
    • contracts for construction work between an employee and employer/owner;[1664]
    • contracts under which a party undertakes to carry out construction work as a condition of a loan agreement, or where a party undertakes to lend or repay money, guarantee money, or provide an indemnity for construction work.[1665]

    Ireland

    A dispute relating to payment arising under a construction contract may be referred to adjudication.[1666]

    “Construction contract” is defined in the Ireland Act as an agreement, whether or not in writing, between parties for one or more of the following: carrying out, arranging or providing labour for construction operations.[1667] References to a construction contract include agreements ancillary to the construction contract, such as agreements for architectural, surveying, archaeological, engineering, project management or design work.[1668]

    “Construction operations” are defined under the Ireland Act and include, for example, “any activity associated with construction”, including “construction, alteration, repair, maintenance, extension, demolition or dismantling of” buildings, structures or works forming part of land; installation of fittings such as water supply, heating, lighting, security or communication systems; cleaning associated with construction work; operations “which form an integral part of, or are preparatory to, or are for rendering complete” previously described activities; painting or decorating building or structure surfaces; and making, installing or repairing artistic works attached to real property.[1669]

    The Ireland Act does not apply to contracts that would otherwise be construction contracts if:

    • the contract is for a value of less than €10,000;
    • the contract relates only to a “dwelling” smaller than 200 square metres and intended to be occupied as a residence by one of the contracting parties;
    • a contract of employment;
    • a contract between a state authority and its partner in a public-private-partnership arrangement;[1670]
    • contracts for the manufacture or delivery of components, equipment, materials, plant or machinery unless the contract also provides for their installation.[1671]

    Singapore

    Adjudication applications may be made for any unfulfilled “payment claims” arising from “construction contracts” and “supply contracts”.[1672]

    Payment claims may be made for “progress payments” in the contract or under the Singapore Act. A “progress payment” is defined by the Singapore Act to include single or one-off payments” or payments “based on an event or date”,[1673] but the Building and Construction Authority notes that payment claims may be made for payments that are due at intervals, and final payments covering work done, services provided, provision of supply, “authorized variation work” or interest on overdue payments.[1674]

    A “construction contract” is defined under the Singapore Act as an agreement under which “(a) one party undertakes to carry out construction work, whether including the supply of goods or services or otherwise, for one or more other parties; or (b) one party undertakes to supply services to one or more other parties”.[1675]

    A “supply contract” is defined under the Singapore Act as an agreement under which “(a) one party undertakes to supply goods to any other party who is engaged in the business of carrying out construction work or who causes to be carried out construction work; (b) the supply is for the purpose of construction work carried out or caused to be carried out by the second-mentioned party; and (c) the first-mentioned party is not required to assemble, construct or install the goods at or on the construction site”.[1676]

    The Singapore Act does not apply in the following circumstances:

    • construction work on residential properties not requiring the approval of the Commissioner of Building Control under the Building Control Act;[1677]
    • employment disputes involving construction work or supply;[1678]
    • any work done or supply of goods or services for work done outside Singapore;[1679]
    • or contracts excluded by Regulation.[1680]

    Malaysia

    A “dispute arising from a payment claim” pursuant to a construction contract may be referred to adjudication.[1681]

    A “construction contract” is defined as “a construction work contract or construction consultancy contract”.[1682]

    A “construction work contract” is a contract to carry out construction work, which includes the “construction, extension, installation, repair, maintenance, renewal, removal, renovation, alteration, dismantling, or demolition of” any building or structure above or below ground level, any civil works, drainage or irrigation works, water, gas, oil, petrochemical or telecommunication work, and any works which form “an integral part of, or are preparatory to or temporary” for the aforementioned works. Procurement of necessary construction, materials, equipment or workers for the aforementioned works is also covered by the definition.[1683]

    A “construction consultancy contract” means a contract to carry out “consultancy services in relation to construction work”, including engineering, surveying, decoration, landscaping, and project management services.[1684]

    Construction contracts “entered into by a natural person” for any construction work relating to a building less than 4 storeys high, and “wholly intended” for the contracting party’s occupation are excluded (i.e. a residential contract).[1685]

    Hong Kong

    Both parties to a construction contract will be entitled to refer a dispute to adjudication but limited to disputes concerning:

    • the value of work, services, materials and plant supplied and claimed in a Payment Claim; and/or
    • other money claims made in accordance with any provision of the contract and claimed in a Payment Claim; and/or
    • set offs and deductions against amounts due under Payment Claims; and/or
    • the time for performance or entitlement to extension of the time for performance of work or services or supply of materials or plant under the contract.[1686]

    The proposed legislation is expected to apply to written or oral “construction contracts”, which include contracts for construction work and related service (e.g. engineering and architectural design services), material or equipment supply contracts.[1687]

    Coverage for projects involving public entities will be more extensive than for those involving private entities.

    • Public Sector Coverage - All construction contracts, consultancy appointments, supply contracts and sub-contracts for Government works and works procured by specified statutory/public bodies or corporations will be covered regardless of value.[1688] Relevant works will include virtually all construction activities and maintenance, installation of fixtures and fittings, repair and renovation.[1689]
    • Private Sector Coverage – Only construction contracts, consultancy appointments, supply contracts and sub-contracts relating to a “new building” as defined by the Building Ordinance (Cap 123)[1690] will be covered, where the main contract for the new building has an original value in excess of HK$5,000,000 or consultancy and supply-only contracts in excess of HK$500,000 for consultancy and supply-only contracts). When the legislation applies to the main contract then it will also apply to all sub-contracts. Where the legislation does not apply to the main contract, it will not apply to the sub-contracts.[1691]

    Generally, disputes outside of the scope of “payment” or “extension of time” will not be subject matters that can be considered through adjudication.[1692]

    Australia

    NSW

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the New South Wales Act timelines.[1693]

    A “construction contract” is defined as a “contract or other arrangement” under which “one party undertakes to carry out construction work, or to supply related goods and services, for another party”.[1694]

    “Construction work” includes:

    • installation, alteration, maintenance, repair, restoration, extension, demolition, or removal work done on buildings, structures (including temporary structures) and infrastructure such as roads, drainage systems, power lines, docks and harbours;[1695]
    • installation of fittings in any building, structure or works, including heating, lighting, drainage, fire protection, security and communication systems;[1696]
    • any operation “which forms an integral part of, or is preparatory to or is for rendering complete” work of the kind described above;[1697]
    • the painting or decorating of surfaces of any building, structure or works;[1698]
    • any other “work of a kind prescribed by the regulations”. Presently there are no additional types of “work” so prescribed.[1699]

    The phrase “related goods and services” is defined to cover any materials or components to form part of any building, structure, or “work arising from construction work”, and “plant or materials” for use “in connection with the carrying out of construction work”, as well as the following kinds of services required in preparation for or to carry out construction work: construction labour, architectural, design, surveying or quantity surveying, building, engineering, decoration or landscape advisory services.[1700]

    There are a number of excluded arrangements that might otherwise qualify as construction contracts, including:

    • construction contracts forming part of a loan agreement, contract of guarantee, or contract of insurance;
    • construction contracts for residential building work within the meaning of the Home Building Act 1989 on “such part of any premises as the party for whom the work is carried out resides in or proposes to reside in”;
    • construction contracts for which the consideration payable is to be calculated “otherwise than by reference to the value” of the work, goods, or services provided; or
    • contracts between employers and employees for construction work.[1701]

    Victoria

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the Victoria Act timelines.[1702]

    A “construction contract” is defined as “a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services”.[1703] A construction contract may be written, oral, or a combination of both.[1704]

    “Construction work” and “related goods and services” are defined nearly identically to the equivalent sections 5 and 6 definitions in the New South Wales Act.

    Domestic contracts between a builder or supplier and residential home-owner are not covered under the Victoria Act, but rather under a separate regime in the Domestic Building Contracts Act 1995.[1705]

    The Victoria Act does not cover construction work done or materials supplied as part of a “loan agreement, a contract of guarantee or a contract of insurance”; in the course of employment; or where the consideration is “to be calculated otherwise than by reference to the value of the work carried out or the value of the goods and services supplied”.[1706]

    The following amounts are excluded from any payment claim disputes that could otherwise be adjudicated: “variations that are not “claimable variations” as defined in section 10A of the Victoria Act; latent conditions; time-related costs and claims for damages; and losses arising from changes in regulatory requirements.”[1707]

    Queensland

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the Queensland Act timelines.[1708]

    “Construction work” is defined to include:

    • “construction, alteration, repair, restoration, maintenance, extension, demolition, or dismantling” work done on buildings, structures (including temporary structures) and infrastructure such as roads, sewers, pipelines, docks and harbours;[1709]
    • installation of fittings in any building, structure or works, including heating, lighting, drainage, fire protection, security and communication systems;[1710]
    • any operation “which forms an integral part of, or is preparatory to or is for rendering complete” work of the kind described above;[1711]
    • the painting or decorating of surfaces of any building, structure or works;[1712]
    • carrying out the testing of soils and “road making materials” during the construction and maintenance of roads;[1713]
    • building work within the meaning of the Queensland Building and Construction Commission Act 1991 and any other “work of a kind prescribed by the regulations”. Presently there are no additional types of “work” so prescribed.[1714]

    The phrase “related goods and services” is defined to cover any materials or components to form part of any building, structure, or “work arising from construction work”, and “plant or materials” for use “in connection with the carrying out of construction work”, as well as the following kinds of services required in preparation for or to carry out construction work: construction labour, architectural, design, surveying or quantity surveying, building, engineering, decoration or landscape advisory services.[1715]

    The Queensland Act does not apply to:

    • a construction contract to the extent that it forms part of a loan agreement, contract of guarantee or contract of insurance; a construction contract involving “the carrying out of domestic building work [relating to a building where the owner resides] if a resident owner [as defined under the Queensland Building and Construction Commission Act 1991] is party to the contract”;[1716]
    • construction work carried out by an employee for their employer; construction work for which the consideration payable is calculated “other than by reference to the value of” the work, goods, or supplies provided;[1717] or
    • construction work involving drilling and extraction of oil, natural gas, or minerals.[1718]

    South Australia

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the South Australia Act timelines.[1719]

    A “construction contract” is any contract or “other arrangement”, written or oral, to carry out “construction work” or supply “related goods and services” within South Australia.

    The definition of construction work in section 5 of the South Australia Act is essentially identical to the definition set out in the New South Wales Act. The South Australia Regulations expand the definition of related goods and services to include project management, construction management, and consultancy services in relation to construction work.

    Construction work does not include:

    • the drilling for, or extraction of, oil or natural gas;
    • the extraction (whether by underground or surface working) of minerals, including tunnelling or boring, or constructing underground works, for that purpose;
    • other work of a kind prescribed by the regulations;[1720]
    • a construction contract that forms part of a loan agreement, a contract of guarantee or a contract of insurance
    • a contract for domestic building work where the contract at issue is with the resident owner.[1721]

    Tasmania

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a building or construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the Tasmania Act timelines.[1722]

    A “building or construction contract” is a contract “relating to the supply of ‘building or construction-related goods and services’ by a person in Tasmania.

    “Building work or construction work” is defined to include the construction, erection, alteration, repair, restoration, maintenance, extension, underpinning, removal, demolition, or dismantling of buildings or works or structures forming part of land.[1723], This includes works forming part of energy or telecommunications infrastructure, marine infrastructure, railway or aviation infrastructure; installation of systems and services forming part of land, such as heating, power supply, elevators, and fire safety and security systems; and any operation “that forms an integral part of, preparatory to, or completes” work previously referred to.[1724]

    The Tasmania Act does not apply in the following circumstances:

    • where a claim for the payment has been made in another jurisdiction;[1725]
    • to a contract that forms part of a loan agreement, a contract of guarantee, insurance or indemnity;[1726]
    • where it is agreed that the consideration payable is not calculated by reference to the value of the work carried out or the related goods and services supplied;[1727]
    • to a contract to the extent that a party undertakes to carry out work or supply related goods and services as an employee;[1728] and
    • to a building or construction contract, or a class of building or construction contracts, prescribed to be a contract or class of contracts to which the Tasmania Act does not apply.[1729]

    The definition of “building work or construction work” explicitly excludes work relating to the extraction of oil, natural gas, or minerals.[1730]

    Australian Capital Territory

    An adjudication application may be made in respect of a payment claim made against a party owing payment in connection with a construction contract who has failed to provide the payment sought, or a payment schedule for the full amount sought, in accordance with the Australian Capital Territory Act timelines.[1731]

    A “construction contract” is a contract or arrangement to carry out “construction work” or “supply related goods and services” within the Australian Capital Territory.[1732]

    “Construction work” is defined in section 7 of the Australian Capital Territory Act and by exclusions in sections 7(1)(h) and 9(2)-(3). The phrase “related goods and services” is defined in section 8. These sections essentially adopt the definitions and exclusions set out by the equivalent provisions in the New South Wales Act.

    “Construction work” also includes “building work” within the meaning of the Australian Capital Territory’s Building Act 2004.[1733]

    The Australian Capital Territory Act does not apply to a construction contract to the extent that it forms part of a loan agreement, contract of guarantee or contract of insurance; a construction contract for carrying out “residential building work if a resident owner is a party to the contract”; construction work carried out by an employee for their employer; construction work for which the consideration payable is calculated “other than by reference to the value of” the work, goods, or supplies provided; or to construction work involving drilling and extraction of oil, natural gas, or minerals.[1734]

    Western Australia

    Any party to a construction contract may apply to have a payment dispute adjudicated, unless the dispute is already the subject of an order, judgment or other finding in another dispute resolution forum.[1735]

    A “payment dispute” arises if an amount claimed by a payment claim has not been paid when due, or has been rejected or disputed; any money retained by a party and due to be released has not been released; or any security held by a party is due to be returned and has not been returned.[1736] If a construction contract does not contain express terms governing a due date for payment, the Western Australia Act requires that the time for payment will be 28 days from receipt of a payment claim.[1737]

    A “construction contract” is a “contract or other agreement, whether in writing or not”, to carry out construction work, “supply to the site … any goods that are related to construction work” and/or to provide related professional services or related on-site services.[1738]

    “Construction work” is defined broadly by the Western Australia Act to include:

    • the reclamation, draining or prevention of subsidence or erosion of land, and the installation, extension, maintenance, dismantling, demolition or removal of any works, apparatus, fittings, machinery, or plant associated with the land-related work;[1739]
    • constructing the whole or part of any civil works on land or “sea bed”, and installing, altering, repairing, maintaining, extending, demolishing or removing any associated fittings (e.g. electricity, gas, sanitation, irrigation, telecommunications, air conditioning, fire protection, security);[1740]
    • any work that is “preparatory to, necessary for, an integral part of, or for the completion of” work mentioned above;[1741]
    • any work prescribed by regulation to be construction work (although the Western Australia Regulations do not currently contain any such prescriptions).[1742]

    Construction work is defined by the Western Australia Act to exclude:

    • construction of a shaft, pit or quarry, or constructing a plant for the purposes of discovering or extracting oil, natural gas, or any “mineral bearing or other substance”;[1743]
    • construction, installation, repair, restoration, extension, demolishment or removal of “wholly artist works (e.g. sculptures, installations and murals);[1744] or
    • work done or services supplied by an employee for their employer;[1745]
    • work prescribed not to be construction work or contracts to which the Western Australia Act or provisions are prescribed not to apply by the regulations (although the Western Australia Regulations do not currently contain any such prescriptions).[1746]

    Northern Territory

    Any party to a construction contract can unilaterally refer a “payment dispute” under a “construction contract” to adjudication.[1747]

    A payment dispute arises if a payment claim has been made under a contract and the claim was “rejected or wholly or partly disputed”, the amount claimed was due to be paid but not paid “in full”, an amount retained by a party to the contract is due to be paid but not paid, or when any security held by a party under the contract is due to be returned, but has not been returned.[1748]

    A “construction contract” is defined as a contract under which a person (the “contractor”) has “one or more of the following obligations:

    1. to carry out construction work;
    2. to supply to the site where construction work is being carried out any goods that are related to construction work;
    3. to provide, on or off the site where construction work is being carried out, professional services that are related to the construction work (including architectural, design, engineering, surveying and project management services, but not including accounting, financial or legal services);[1749]
    4. to provide, on the site where construction work is being carried out, on-site services that are related to the construction work (including labour).”[1750]

    Construction work is defined to include:

    • reclaiming land, draining land or preventing the subsidence, movement or erosion of land;
    • installing, altering, repairing, restoring, maintaining, extending, dismantling, demolishing or removing any works, apparatus, fittings, machinery or plant associated with any work mentioned in paragraph;
    • constructing the whole or a part of any civil works, or a building or structure, that forms or will form, part of land or the seabed; and
    • fixing or installing on or in anything mentioned above and any fittings forming, or to form, part of the thing.[1751]

    The Northern Territory Act does not apply to contracts for:

    • drilling, or constructing a shaft, pit or quarry for the purpose of resource extraction (e.g. oil, natural gas, or minerals);[1752]
    • constructing, repairing, maintaining or removing “wholly artistic works” such as sculptures or murals;[1753]
    • constructing the whole or part of any watercraft.[1754]
    • construction contracts between employees and employers;[1755]
    • construction contracts that are expressly excluded by Regulation.[1756]

    4. What is the adjudication process and how are costs dealt with?

    4.1  Process Timeframes

    Jurisdiction

    Timeframe to apply for adjudication

    Timeframe for response

    Timeframe for adjudication decision

    U.K.

    The Notice of Adjudication is served following the crystallization of a dispute at any time, even after the acceptance of repudiation or the expiry of the limitation period, or while there are proceedings pending in court or by arbitration.[1757]

    Within 7 calendar days of the Notice of Adjudication, the referring party must send a Referral Notice and associated documents to the adjudicator and every other party to the dispute.[1758]

    Adjudicator will then set out a timetable, which can include requesting written submissions, directing the responding party to serve a response, meeting the parties, requesting documents, etc.[1759]

    The adjudicator must reach his or her decision no later than 28 calendar days after the Referral Notice; or 42 days from the Referral Notice if the referring party so consents (or any other period if both parties agree).[1760]

    New Zealand

    Subject to limitations legislation, a claimant serves a prescribed notice of adjudication at any time in relation to a construction contract.[1761]

    All notices of adjudication must be accompanied by a prescribed form that includes a statement of the respondent’s rights and obligations as well as a brief explanation of the adjudication process.[1762]

    Within 5 days of receipt of adjudicator’s notice of acceptance, the claimant must serve its claim.[1763]

    Within 5 days receipt of such claim (or the adjudicator’s notice of acceptance), the respondent may serve a written response.[1764]

    Within 5 days of such response, a claimant may serve a reply.[1765]

    Determination within 20 working days of the response of the responding party (or within 30 working days if extended).[1766]

    Ireland

    A party to a construction contract has the right to refer for adjudication any payment dispute by serving the other party at any time notice of intention to refer the payment dispute for adjudication.[1767]

    Within 7 days of the appointment, the claimant must refer the payment dispute to the adjudicator with associated documents.[1768]

    Adjudicator will then set out a timetable, which can include requesting written submissions, directing the responding party to serve a response, meeting the parties, requesting documents, etc.[1769]

    Decision within 28 calendar days of the day the referral was made, or within 42 days by extension of the adjudicator and consent of the claimant, or within such further time as agreed by the parties after the referral is made.[1770]

    Singapore

    A claimant can apply to an ANB for adjudication of a payment claim dispute within a range of 7 to 14 days depending on whether a payment schedule was received.[1771]

    Within 7 days of the receipt of the application, an ANB must release a Notice confirming the appointment.[1772]

    Within 7 days of receipt of the application, a responding party must serve a Response.[1773]

    Decision within 7 days of the commencement of the adjudication (if the respondent fails to make a payment or pay a response amount)[1774] or 14 days in any other case.[1775]

    Malaysia

    An unpaid party may serve a payment claim on a non-paying party for payment pursuant to a construction contract. An unpaid party or a non-paying party may refer a dispute arising out of the payment claim to adjudication following the payment claim response period (10 days).[1776] This right is subject to Malaysia limitations legislation.[1777]

    10 Business Days from receipt of claim, respondent must serve response.[1778]

    5 Business Days from receipt of a response, the claimant may issue a reply.[1779]

    Decision within 45 working days of expiry of period for response. May be extended by agreement of parties.[1780]

    Hong Kong

    Notice of Adjudication must be served within 28 calendar days of dispute arising (or certain other events), and claim must be served on or before appointment or nomination of adjudicator, within 5 working days of commencement of adjudication.[1781]

    20 working days after the receipt of claim, a responding party must serve a written response.[1782]

    Decision within 20 working days of receipt of the responding party’s submissions extendable by the adjudicator up to 55 working days from appointment, unless extended on consent.[1783]

    Australia

    NSW

    A claimant may apply for the adjudication of a payment claim within a range of 10 or 20 business days depending on applicable circumstances related to payment due dates under the legislation.[1784]

    A respondent may lodge a response at any time within 5 business days after receiving copy of application; or 2 business days after receiving notice of adjudicator's acceptance of application.[1785]

    Within 10 business days of notifying claimant and respondent of acceptance of application but not before the end of the timeframe for a response.[1786]

    Victoria

    Depending on the application, a claimant may apply for adjudication of a payment claim within a range of 7 to 10 days depending on whether a payment schedule[1787] was received.[1788]

    5 business days after

    receiving copy of

    application; or 2 business

    days after receiving

    notice of adjudicator's

    acceptance of application.[1789]

    Within 10 business

    days of notifying

    claimant and respondent of

    acceptance of application; with claimants agreement

    longer—but no longer than 15business days.[1790]

    Queensland

    A claimant may apply for adjudication of a payment claim within a range of 10 or 20 business days depending on whether the respondent provided a payment schedule[1791] in response to the payment claim.[1792]

    For standard claim:

    Within 10 business days of receiving application;

    or 7 business days of receiving notice of adjudicator's acceptance of application.[1793]

    For complex claim:

    15 and 12 business days respectively,[1794] with option of extending by 15 business days.[1795]

    For standard claim:

    10 business days after receiving respondent's response.

    For complex claim:

    15 business days.[1796]

    South Australia

    A claimant may apply for adjudication of a payment claim within a range of 15 or 20 business days depending on whether the respondent provided a payment schedule[1797] in response to the payment claim.[1798]

    5 business days after

    receiving copy of application; or 2 business days after receiving notice of adjudicator's acceptance of application.[1799]

    Within 10 business days of respondent's response, or if no response–the date response is due.[1800]

    Tasmania

    A claimant may apply to an ANA for adjudication of a payment claim within a range of 10 or 20 business days depending on whether the respondent provided a payment schedule[1801] in response to the payment claim. [1802]

    Within 10 business days

    after receiving copy of the application; or 5 business days after receiving notice of

    adjudicator’s acceptance of the application.[1803]

    Within 10 business days

    of receiving the respondent's response.[1804]

    Australian Capital Territory

    A claimant may apply to an ANA for adjudication of a payment claim within a range of 10 or 20 business days depending on whether the respondent provided a payment schedule[1805] in response to the payment claim. [1806]

    Within 7 business days after receiving copy of the application; or 5 business days after receiving notice of

    adjudicator’s acceptance of the application.[1807]

    Within 10 business days

    of receiving the respondent's response.[1808]

    Western Australia

    To have a payment dispute adjudicated, a party to the contract must apply within 28 days after the dispute arises.[1809]

    Within 14 days of being served with an application for adjudication.[1810]

    Within 14 days from date of

    service of the response.[1811]

    Northern Territory

    Within 90 days after the dispute arises.[1812]

    Within 10 working days after being served.[1813]

    Within 10 working days

    of receiving the respondent's

    response.[1814]

    4.2  Costs of Adjudication

    Jurisdiction

    How much does adjudication cost?

    U.K.

    Hourly fees for adjudicators run between £75 to over £200 per hour, with most adjudicators charging over £200 per hour or between £175 and £200 per hour.[1815]

    According to a 2011 study by Kennedy et al,[1816] the most popular range of fees for an adjudication was between £2,500 and £5,000, however a very close second range of fees was between £15,001 to £20,000 per adjudication. No survey return identified a fee in excess of £40,000.[1817]

    New Zealand

    The New Zealand Department of Building and Housing estimates that filing a statutory adjudication claim can cost between NZD$500 and NZD$3000, while litigation filing fees can range from NZD$143 to over NZD$4,000 (not including legal costs).[1818]

    The Building Disputes Tribunal has estimated based on statistical data that the adjudication process itself costs on average, about 12.3% of the amount claimed (16% of the total amount determined).[1819]

    Ireland

    The Ireland Act has not yet been enacted so there is no current data on the cost of adjudication.

    The draft code in Ireland however, requires the adjudicator to provide the parties with proposed terms of appointment, including fees and costs, immediately following appointment.[1820] The Ireland Draft Code also requires the adjudicator’s fees and costs to be reasonable, “having regard to the amount in dispute, the complexity of the dispute, the time spent by the adjudicator and other relevant circumstances.”[1821]

    Singapore

    The Singapore Mediation Centre’s Fee Schedule[1822] requires an application fee of SGD$642 or a review application fee of SGD$1,284. For claims valued at up to SGD$24,000, an adjudicator may charge up to SGD$321 (inclusive of GST) per hour, to a maximum of SGD$2,568. For claims valued at above SGD$24,000, an adjudicator is entitled to charge the previously mentioned maximum, but on a daily basis. The total adjudicator fee may not exceed 10% of the claimed amount.

    Malaysia

    The Malaysia Regulations set out the fees to be paid to an adjudicator. However, the KLRCA believes that the schedule of fees in the Regulations may not be sufficient to attract individuals with the necessary qualifications and professionalism, and has therefore released an alternative fee schedule based on the amount claimed and timeline.[1823] If the parties and the adjudicator fail to agree on a fee schedule, section 19(1) of the Malaysia Act set the KLRCA’s standard terms of appointment and fees as the default.[1824]

    KLRCA’s recommended fees are as follows:

    • for a dispute of up to RM150,000, fees of RM8,400;
    • for a dispute of RM150,001 to RM300,000, fees of RM8,400 plus 3.5% of the amount beyond RM150,000;
    • for a dispute of RM300,001 to RM800,000, fees of RM13,650 plus 1.3% of the amount beyond RM300,000;
    • for a dispute of RM800,001 to RM1.3 million, fees of RM20,150 plus 1.25% of the amount beyond RM800,000;
    • for a dispute of above RM1.3 million to RM1.8 million, fees of RM26,400 plus 1.1% of the amount beyond RM1.3 million;
    • The fee schedule continues in this fashion until the claim reaches a value of above RM15 million, at which point the adjudicator’s fees are capped at RM89,615.[1825]

    Expenses are also to be borne by the parties, but must be of reasonable value and submitted to the KLRCA for approval.[1826]

    Hong Kong

    A specific costs schedule has not been released, but the Consultation Document notes that adjudication should be a “relatively low cost option, especially for smaller contractors, subcontractors and suppliers.”[1827]

    Australia

    NSW

    In 2012/13, the average adjudication fee was AUD$3,036, but the highest fee recorded was AUD$67,747.[1828]

    According to the University of New South Wales, which monitors adjudication statistics, “the data indicates that adjudication is providing a financially viable option, particularly for those making claims less than $100,000, to have progress payment disputes heard and determined, albeit on an interim basis, by an independent third party.”[1829] Almost 78% of adjudication applications made under the NSW Act in 2012/13 were for claims lower than $100,000.[1830]

    Victoria

    Nominating authorities may set their own fee schedules. As an example, Adjudicate Today, a nominating authority active in Victoria, charges the following fees for adjudication (inclusive of GST):

    • Application fee: AUD$0.
    • Adjudicator hourly fee: approximately AUD$260 – $400 depending on experience.
    • For small claims, a fixed fee schedule is available:
    • up to $15,000 - fixed fee of AUD$1,089;
    • from $15,001 to $25,000 - fixed fee of AUD$2,178;
    • from $25,001 to $40,000 - fixed fee of AUD$3,300.
    • Additional cost for issuance of a certificate ranging from AUD$110 for awards up to $15,000 to AUD$825 for awards over $750,000.
    • Unless otherwise advised in advance, disbursements are charged at cost.[1831]

    In 2014-15, adjudication fees ranged from an average of AUD$350 for claims smaller than AUD$5,000 to over AUD$40,000 for claims higher than AUD$5 million.[1832]

    Queensland

    The application fee schedule is set by the Queensland Building and Construction Commission and suggested adjudicator’s fees are provided for adjudicators, who may set their own fees:

    • Application fees: ranging from AUD$51.75 for a claim for less than AUD$10,000 to AUD$672.75 for a claim of between AUD$750,000 and AUD$1,000,000. Claims of greater value are charged at 0.07% of the claimed amount, but capped at a maximum of AUD$5,175.
    • For small claims of up to AUD$25,000, a capped fee schedule (including disbursements) is suggested as follows:
    • up to AUD$5,000 – flat fee of AUD$610;
    • from AUD$5,001 to AUD$15,000 – flat fee of AUD$900;
    • from AUD$15,001 to AUD$20,000 – flat fee of AUD$1,800;
    • from AUD$20,001 to AUD$25,000 – flat fee of AUD$2,000.
    • Reasonable adjudicator hourly fees (including disbursements) for claims over AUD$25,000 would range from AUD$260 to AUD$385 per hour, depending on the adjudicator’s experience.[1833]

    South Australia

    Nominating authorities may set their own fee schedules. As an example, the Resolution Institute, a nominating authority active in South Australia, charges the following fees for adjudication (exclusive of GST):

    • Application fee: AUD$0.
    • Adjudicator hourly fee for claims below AUD$200,000 in value: AUD$220 per hour.
    • Adjudicator hourly fee for claims equal to or above AUD$200,000 in value: AUD$330 per hour.
    • For small claims, a capped fee schedule is available:
    • up to AUD$9,999 – maximum cost of AUD$1,100;
    • from AUD$10,000 to AUD$19,999 - maximum cost of AUD$2,200;