Practical Law

This summer I had the pleasure of traveling to Toronto and meeting Canadian construction lawyers to discuss the introduction of a prompt payment and adjudication regime in Ontario on 1 October 2019.

As Matt Malloy outlined in his blog from 2017, the provisions of the Ontario Construction Act take inspiration from the UK. However, while for the most part, prompt payment and adjudication in Ontario will be familiar to UK practitioners, there are a few subtle, but interesting, differences that take account of, and arguably improve on, the UK system.

Prompt payment in the UK

In the UK, the Housing Grants, Construction and Regeneration Act 1996 (Construction Act) provides for the giving of payment notices on a bilateral basis between a payer and payee (the employer and contractor, for example). The Construction Act does not legislate for the flow of payments all the way down the contractual chain from the employer to contractor, contractor to subcontractors and so on.

Consequently, while a contractor is likely to align the timing of contractual payment cycles for its subcontractors with the payment cycle in its contract with the employer, the payment cycles operate independently. As a result, the Construction Act’s intention of promoting cash flow down the contractual chain can be subverted.

For example, if a contractor doesn’t receive payment from the employer in respect of sums validly claimed for a subcontractor’s work, the contractor has little choice but to issue its own pay less notice to the subcontractor, unless it wishes to absorb the cost itself. One potential consequence is that the contractor could find itself on the receiving end of a “true value” adjudication from its subcontractor as a means of recovering payment for the work done. If the subcontractor succeeds it will be awarded sums that the contractor has not yet received from the employer. In that scenario, the contractor bears the cost and burden of financing the payment to the subcontractor and the cost and risk of commencing an adjudication to recover the unpaid sums from the employer.

The Ontario approach to prompt payment

Unlike the UK payment regime, the Ontario Construction Act expressly provides for the flow of payments from the employer to the contractor then down to subcontractors and sub-subcontractors. In doing so, it aims to avoid disputes down the contractual chain that arise as a result of a party higher up the chain failing to make payment.

The Ontario legislators have sought to do so by introducing two varieties of notice of non-payment (the equivalent of the UK pay less notice). The first type can be given where a contractor or subcontractor disputes the entitlement of their subcontractor/sub-subcontractor to the amount applied for. Valid service of the notice limits the payer’s obligation to paying the amount stated in the notice and requires no further action on their part.

The other variety of notice of non-payment is more interesting and seeks to avoid the kind of dispute in my example above. It can be given by a contractor/subcontractor that has not received payment from the party immediately above them in the payment structure, but only if they undertake to commence an adjudication up the line in respect of the unpaid sum.

That mechanism seeks to align the interests of the unpaid parties. Rather than being set against each other, the parties are encouraged to work together to recover payment from the non-paying party up the chain via adjudication. If that adjudication is successful, the contractor and subcontractor need not adjudicate against each other and the contractor does not have to finance a payment to its subcontractor while it seeks to recover the sum from the employer. In such a scenario, the Ontario Construction Act minimises conflict, reduces costs and does a better job of promoting cash flow than the UK provisions.

Best laid plans…

However, if the UK experience of prompt payment and adjudication proves anything, it’s the law of unintended consequences. It remains to be seen how the Ontario regime will work in practice and how the legislation and the contracts that incorporate it will be interpreted by the courts. So, watch this space!

Efforts in Ontario to lower the cost of adjudication

Another point of difference between the regimes is the steps taken in Ontario to ensure the costs of adjudication are proportionate to the sums in dispute. Those efforts have been made by the sole mandatory adjudicator nominating body, ODACC, which is responsible for the nomination of all adjudicators.

Steps taken in Ontario to encourage proportionality in the adjudication process

Much like in the UK, the Ontario adjudication legislation prescribes that certain adjudication notices must be given within certain timeframes and requires the entire adjudication to be completed within thirty-five days, but otherwise leaves the adjudicator to decide the finer details of process.

In an effort to streamline the adjudication process and ensure proportionality of cost, ODACC has created four distinct adjudication processes which can be proposed by the referring party. Each provides for an increasing level of procedural complexity. The most basic, designed for straightforward low value disputes, allows each party to submit a maximum of two pages of written argument and for the adjudicator to give a two page written award. The parties’ evidence is limited to a copy of the contract, the disputed invoice and a limited set of photographs. The fee for the adjudicator is CA$800.

The most complex of the four processes has an adjudicator fee of CA$3,000 and allows the parties ten pages of submissions, twenty-five pages of supporting evidence and an oral hearing.

Ultimately, the adjudicator has the final say about which process is most suitable and can decide not to use any of the pre-designed processes, instead setting their own procedural rules (while still complying with the legislation’s mandatory rules on the adjudication timetable).

It’s positive that ODACC is encouraging the use of proportionate procedures that support the aims of the legislation.

The introduction of fixed fees and rates

ODACC is also seeking to promote access to adjudication by way of a fee schedule that applies if the parties and the adjudicator do not agree an alternative fee. That schedule provides for fixed adjudicator fees for disputes worth less than CA$50,000, rising from CA$800 for a dispute valued less than CA$10,000 to CA$3,000 for a CA$49,999 dispute.

For disputes worth CA$50,000 or more, adjudicators will be paid an hourly rate that increases with the value of a dispute, from CA$250/hour for disputes worth less than CA$250,000 to $750/hour for disputes worth more than CA$1,000,000.

Lessons that could be learnt in the UK from the Ontario regime

I welcome the steps taken in Ontario to manage the length of adjudication submissions. Many of us in the UK will have been on the receiving end of submissions that are out of all proportion to the value of the dispute. That in turn can create a sort of arms race, where it feels necessary to respond at a similar level of detail, increasing legal costs for both parties.

I also think the introduction of an overriding fee scale in Ontario will promote access to adjudication. I note that in the UK, TeCSA has recently made permanent its pilot low value disputes adjudication service for claims of up to £100,000 and reduced the application fee for adjudicator nomination from £350 to £250. This service incorporates a sliding scale of fixed adjudicator fees depending on the dispute value. Its permanent roll-out is a very positive step and may well encourage other adjudicator nominating bodies (ANBs) to do the same.

But I think there’s more room for improvement in the UK. If UK adjudicators routinely scale the fees they charge according to the value of the dispute, that’s news to me. It’s unfortunate because complaints about adjudicators charging eye-watering rates that aren’t reflected in the quality of decision-making are not unheard of. Although that is not the norm, it undermines faith in the process when adjudication is viewed as providing poor value for money.

Ultimately, I think that there is an opportunity for ANBs in the UK to differentiate themselves by introducing fixed fee and fixed rate appointments which deliver better value to consumers. But, on a more fundamental level, innovative pricing is important because the Construction Act’s objectives are not achieved when adjudication cannot be utilised cost-effectively.