REUTERS | Mark Blinch

Adjudication and payment (under the Construction Act 1996) go to Canada

If you think of Canada, what do you think about? Maple syrup, ice hockey, skiing, Whistler, Bryan Adams, Celine Dion, Justin Beiber?

It probably depends on your age as much as anything. However, what you are unlikely to think about is the Latham Report from 1994. It is unsurprising really, since the two are unrelated.

I mention this because I had a chat with a chap from Ontario the other week. You may think there is nothing unusual in that, after all, London is a multi-cultural city and construction is an industry that attracts professionals from all around the world. However, there was more to it than that. This chap was part of a working party that is carrying out a review of Ontario’s Construction Lien Act. As part of that review, Ontario is considering introducing a prompt payment system and implementing adjudication.

The Construction Act comes to Ontario?

If you are like me, I doubt you know little (if anything) about Canadian law. A quick internet search and you can find lots of information, including a really useful website called the Construction Lien Act review. This is the review I’m talking about.

This website explains what the Construction Lien Act is and what the review is all about. Essentially, it seems that Ontario has had legislation since the early 1980’s governing security for payment in the form of a lien and something called a holdback. Parties are unable to contract out of these provisions and any attempt to do so will be void.

The lien sounds like the concept as we understand it under English law, whereby a supplier of services or materials has a lien in the:

“…interest of the owner in the premises improved for the price of those services or materials.”

That lien arises when the services or materials are supplied to carry out improvements to land, which can include demolition as well as new build or renovation works. Without getting into the detail, it appears to apply to most construction projects. The lien entitles a contractor/ sub-contractor or supplier of services to start court proceedings within a set time frame – to claim a lien – for the price of the services or materials supplied.

The holdback also sounds familiar, being akin to the retention that is commonly deducted from contracts here, especially under the JCT standard forms. As here, it is intended to protect the owner/employer in the event that the works are not completed or are defective. Also, as here, there are issues with getting the holdback released at the end of the project. I’m sure contractors and sub-contractors here would consider the statutory fixed rate of 10% to be eye-wateringly high and I’m not surprised that there is a suggestion in Ontario that it should be reduced to 5% (which may still be considered high here, with the “norm” under JCT being 3%).

The review

It seems that the review looked at how the Construction Lien Act was working, and considered whether it was “fit for purpose” and reflected current industry practices. It also looked at the promptness of payment and whether the Act’s dispute resolution provisions were effective.

The review’s proposals

So that sets the background. The review was published last year after considerable consultation and, as I said at the start, my chat with the chap from Ontario was part of the follow-up.

The review came up with a number of proposals that sound very familiar to those of us used to working under the Construction Act 1996, including the language being put forward for adoption and the fact that if parties agree to terms that are inconsistent with the statutory regime (or no terms at all), the statutory scheme will be implied. A bill introducing the proposals (Bill 142) was put forward at the end of May.

In terms of the proposed prompt payment system, it is suggested that:

  • Parties shall be free to agree when invoices are submitted, failing which they will be required on a monthly basis.
  • Payment obligations will be triggered by a “proper invoice”, which should be defined in the contract or implied by statute.
  • Payment (employer/owner to contractor) shall be made within 28 days of the invoice.
  • Payment (contractor to sub-contractor) shall be made within seven days of payment from the employer/owner. Payment down the chain (such as sub-contractor to sub-sub-contractor) shall also be within seven days of payment.
  • Any certificate of payment (like an interim certificate) shall be issued after the invoice and cannot be the trigger for payment.
  • The employer/owner may serve a notice of non-payment (provisionally called a “notice of intention to withhold payment”) within 14 days of the invoice, if there is a dispute over the sum claimed or the quality of the works. Successive payers may serve their notice of non-payment within seven days. All payers have the right to set-off but only in relation to issues arising under the contract.
  • Statutory interest will be applied to late payments.

It all sounds remarkably familiar to our payment rules doesn’t it. The adjudication provisions are too. For example:

  • Parties will be free to include in their contracts an adjudication mechanism that is consistent with the statutory scheme, or the statutory scheme will be implied.
  • Parties will be able to refer a dispute under the contract to adjudication. Multiple disputes or issues being referred to one adjudicator at the same time will only be permitted if both parties consent.
  • A dispute will be referred to adjudication by giving a notice (the notice of adjudication). The identity of the adjudicator will then either be agreed by the parties or one will be nominated by the relevant body.
  • Payment disputes arising out of a “proper invoice” may be referred to adjudication. It is envisaged that this would catch claims such as those arising out of valuation, variation, withholding and set-off and delay relating to a claim for payment. However, it seems the scope of what may be referred may be more limited than here, as professional negligence claims against design professions may be excluded from the outset.
  • The adjudication process will take 30 days from the notice of adjudication.
  • Parties will be liable for their own costs and will share the adjudicator’s costs equally, unless there is bad faith or frivolous or vexatious conduct (when the adjudicator can apportion his costs, as appropriate).
  • The adjudicator’s decision shall be interim binding until the matter is resolved by litigation, arbitration or by agreement. Parties will have the right to enforce the decision in a similar manner to how arbitration awards are enforced.

One obvious difference is the suggestion that there will be only one body to manage the training and certifying of adjudicators, and also the administration of adjudicator appointments (just like in Ireland).

Back to my discussions

It is clear that those involved in the Ontario review have taken note of what we’ve been doing in the UK for the best part of the last 20 years. They have the advantage of being able to consider it objectively and to decide which bits they think work well and would like to adopt, and which bits may not be so attractive and they will leave well alone. I’m sure some would say this could work well in reverse. For example, having the retention on a statutory footing would certainly be welcome in some quarters.

The UK has a mature adjudication market and, during our conversation, it was interesting to hear how the UK’s legislation is perceived abroad. It was also interesting to hear some of things the chap had been told by others he has been talking to over here (other adjudicators, lawyers and judges).

It may not come as a surprise to hear that adjudication has had a big impact on litigation and arbitration. We see this in the number of enforcement applications there are (and the paucity of other judgments), and the quality and complexity of the submissions that a court has to consider, particularly if it is a Part 8 application. I’m sure judges are often surprised at the scope of what is adjudicated. It certainly is a far cry from the idea of a simple payment dispute to keep cash flowing. They are probably also surprised (as my chap was) at the scale of the documents that an adjudication can generate (one of my current cases generated over 30 lever arch files as one submission).

We also discussed domestic arbitration and the effect adjudication has had on it. My chap said the feedback he had received suggested that adjudication had all but killed domestic arbitration. That isn’t my recent experience, and he was surprised that I had seen an upturn (perhaps I’m not representative of the wider market). That said, there is a balance to be struck. On the one hand, you get a cheaper and quicker outcome: on the other, there is more time to consider and investigate matters, but this undoubtedly comes at a price. I’ll leave others to decide whether you get a better decision or outcome when you pay more!

Either way, one of the biggest pluses for adjudication is the temporary finality so that there is (assuming insolvency is not an issue) always a further option if a party cannot live with the outcome. It will be interesting to see where Ontario ends up.

MCMS Ltd Matt Molloy

One thought on “Adjudication and payment (under the Construction Act 1996) go to Canada

  1. Interesting article Matt. Particularly as I am now based in Canada. We have used aspects of the Construction Act even though it is UK based as it offered a fair approach to dealing with payment. There are too many company’s in Canada whom seem to think that payment isn’t a right. If you are going to withhold, you should do so fairly so that the other party understand why.

    It would be interesting to see how this will effect federal land where the Lien Act doesn`t apply.

    Ad maiorem Dei gloriam

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