Independent Review Spurs Major Changes to Ontario’s Construction Act

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The intent of the amendments is to continue to alleviate administrative burdens associated with payment matters and dispute resolution within the construction industry, namely, by improving access to adjudication, facilitating timely payment and improved cashflow on construction projects, and ensuring greater certainty with respect to the rules and requirements of the Act itself.^[5]

The key substantive changes we highlight in this article are with respect to:

1. Holdback requirements and lien provisions;
2. Invoicing and prompt payment; and
3. Interim adjudication.
   

In addition, the new legislation also contains “housekeeping” amendments, including transition provisions for applying the updated Act.

Pursuant to the transitional provisions, substantive amendments generally will apply to all improvements immediately upon coming into force, with exceptions for: (1) annual holdback release, which will be phased in, (2) improvements subject to the “old” Construction Lien Act (i.e., those prior to June 30, 2018) and (3) improvements not subject to adjudication and prompt payment (i.e., those prior to October 1, 2019).

1. Holdback Requirements and Lien Provisions

Annual Release of Holdback

Under the amended provisions, owners are now required to release holdback funds annually, unless a lien has been preserved or perfected in respect of the contract. This is a significant shift away from the preceding regime, which allowed (but did not strictly require) annual and phased release of holdback, and only for projects which exceeded the prescribed amount ($10 million per the regulations).

To ensure that the annual holdback release facilitates the flow of funds down the construction pyramid, the amendments provide for new deadlines for payments at various stages of the contracting chain. Contractors must pass on accrued holdback to subcontractors within 14 days of receiving payment from the owner, unless a lien has been preserved or perfected, while subcontractors must pay sub-subcontractors within 14 days of receiving their holdback payment.

Lien Rights

With respect to the new annual release of holdback, the amendments stipulate that liens arising from the supply of services or materials covered by an annual holdback notice will expire within 60 days after notice is published.

In addition, the amendments remove provisions which previously allowed for the extension of time to preserve lien rights for matters in interim adjudication. These provisions were well-intentioned but found to be unworkable as there was no way for an owner to know if an adjudication was taking place between other parties in the pyramid.

Finally, the amendments expand the definition of “written notice of lien” (Form 1 to the Act) to include a copy of the claim for lien. This is a practical change to correct a potential gap in situations where parties registered claims for lien but omitted serving written notices of lien.

2. Invoicing and Prompt Payment

Proper Invoices

In response to stakeholder dissatisfaction with the definition of “proper invoice,” which gave owners broad discretion to prescribe requirements, the amendments make two key changes.

First, the definition of “proper invoice” was circumscribed by the addition of a reasonable necessity standard for prescribed requirements. Rather than permitting owners to stipulate inclusion of “any information that may be prescribed,”^[6] the amendments permit owners only to require “any other information that is necessary for the proper functioning of the owner’s accounts payable system that the owner reasonably requests” (emphasis added).^[7]

Second, the amendments also add a deeming provision allowing an invoice, even if it does not meet stipulated requirements, to be considered a “proper invoice” if the owner does not give the contractor written notice within seven days of the deficiencies and what is required to address them.

There are also housekeeping amendments which now require proper invoices to identify the “period, milestone or other contractual payment entitlement to which the invoice relates” and a “contract number, contract line item number or purchase order number” under which services or materials were supplied pursuant to the invoice.

Definition of Price

Under the amended Act, the definition of “price” now permits regulations to specify a price for a contract or subcontract other than actual market value of supplied services or materials, in cases where the parties don’t agree to a different price. This amendment was responsive to stakeholder feedback that the current definition of price did not translate well into collaborative project delivery models and that the concept of “market value” was often more illusive than it was instructive.^[8]

3. Interim Adjudication

The Final Report described the amendments with respect to interim adjudication as expanding the “temporal and jurisdictional ambit of adjudication, while at the same time permitting party autonomy in the appointment of their desired adjudicator.”^[9]

Jurisdictional Ambit

The updated Act will no longer limit adjudication to prescribed issues but will permit parties to also adjudicate any issue agreed upon between the parties. This expands the ambit of which issues can be adjudicated during a project.

The list of prescribed matters available for adjudication will now be found in the regulations as opposed to the Act. The amendments expressly permit the regulations to include adjudication between parties to different contracts or subcontracts respecting the same improvement.

Temporal Ambit

The amendments extend the permissible time period in which adjudication can be accessed to 90 days after the date of contract completion, abandonment or termination. This is in contrast to the previous requirement that adjudication could only be commenced before the subject contract is “complete.”

Stakeholders observed that the pre-completion limitation often created challenges where amounts became due and owing only after project completion, such as payment of the holdback. Ultimately, the amendments reflect the view of stakeholders that “adjudication needs to be available in support of all payments due at all times under all contracts and subcontracts” (emphasis in original).^[10]

Party Autonomy

Under the amended Act, any party, and not just the contractor, may now require consolidation of adjudications respecting the same improvement, subject to the overriding discretion of the adjudicator. Consolidation is a procedural tool that promotes time and cost savings, while also decreasing the risk of inconsistent findings in respect of the same improvement. Accordingly, this amendment is aimed at extending access to these benefits where a party and adjudicator agree that consolidation is appropriate.

Additionally, parties are no longer limited in their selection of adjudicators to those listed in the Authorized Nominating Authority’s (“ODACC”) adjudicator registry but may select by agreement a private adjudicator. That adjudicator, however, must still be qualified by the ODACC.

Adjudication ‘Housekeeping’ Amendments

Parties are now expressly permitted to object to an adjudication’s jurisdiction to hear a matter, and the adjudicator may rule on his or her own jurisdiction (borrowing the competence-competence principle found in domestic and international arbitration).

Finally, to support certainty and finality in adjudication decisions, the amendments provide for a short five-day window in which adjudicators can catch and correct “slips of the pen.”^[11]

Key Takeaways

The amendments resulting from the Final Report are important to the continued success of Ontario’s lien regime and its construction industry, and will have an immediate impact on all stakeholders, including owners, contractors, subcontractors and decision-makers. All affected parties will need to be up to date on their new obligations under the Act.

The Construction Group at Aird & Berlis LLP will continue to monitor developments in regard to the amendments to the Act. If you have questions or require assistance related to dispute resolution under the Act, please contact the authors or a member of the group.

[1] Bill 216, An Act to Implement Budget Measures and to Enact and Amend Various Statutes, 1^st Session, 43^rd Leg, Ontario, 2024 (assented to 6 November 2024).