Prompt payments and adjudication are set to arrive in Alberta’s construction industry

( Disponible en anglais seulement )

17 novembre 2020 | Anna Kosa, Steve Rehak, Leanna Olson, Lori Goldberg

Major changes could be coming for the construction industry in Alberta as new prompt payment legislation is being proposed.  While other provinces have considered and implemented prompt payment and other changes to their lien legislation, Alberta is proposing its own changes which are similar in some respects but different in others and you should be aware of what those changes are.

Background to Bill 37

On October 21, 2020, Bill 37, the Builders’ Lien (Prompt Payment) Amendment Act, 2020, passed its first reading in the Legislative Assembly of Alberta, following its introduction by the Minister of Service Alberta. The bill has since passed its second reading, and is now being reviewed for amendments by a committee.

Bill 37 contains the Minister’s recommended changes to the province’s Builders’ Lien Act, which will become the Prompt Payment and Construction Lien Act if the bill becomes law. The introduction of Bill 37 follows the adoption of similar legislation by the federal government, as well as by the provinces of Ontario, Saskatchewan, and Nova Scotia. The aim of Bill 37 is to address issues within the construction industry regarding timely payments and the resolution of disputes.

The proposed changes in Bill 37 will apply to agreements entered into on or after the date where the bill becomes law, which will likely be sometime in July of 2021. Contracts and subcontracts entered into prior to these amendments coming into force would still be governed by the existing Builders’ Lien Act. Below are summaries of some of the major changes that Bill 37 is proposing.

Prompt Payment

One of the most significant changes Bill 37 brings is the creation of a prompt payment system, which introduces strict timeframes for payments between owners, contractors, and subcontractors.

With the proposed changes, an owner under a construction contract will have 28 days to pay a proper invoice (see the section below regarding what a proper invoice is). Once payment has been received by the contractor within this 28-day timeframe, contractors will have 7 days to pay their subcontractors, and those subcontractors will then have 7 days to pay their subcontractors.

Parties to a construction contract will have 14 days after receiving a proper invoice to issue a notice of non-payment and dispute for either a portion or the entirety of the invoice amount. This notice will have to follow a prescribed form and clearly indicate why there has been a refusal to pay.

Bill 37 stipulates that any undisputed portion of the proper invoice must be paid within the 28-day timeframe. If a notice of dispute is not provided for within the 14-day timeframe, then the full amount of the proper invoice must be paid within that payment cycle.

If a party to a contract does not pay an invoice within the required timeframe, then the statutorily prescribed interest rate, to be set by regulation, begins accruing and is due. If the payment amount is still owing after an adjudication takes place and a decision is made, the party awaiting payment can suspend work or terminate the contract.

If Bill 37 becomes law, it will be important that parties to construction projects update their payment procedures to reflect these new requirements, including reviewing invoices in detail to determine if an invoice should be disputed within the required time.

Proper Invoice

Under Bill 37, a contractor’s invoice will need to contain the following items in order to be considered a proper invoice:

  • the full name and business address of the contractor or subcontractor;
  • a description of the work or materials provided;
  • the period of time during which the work or materials were provided and the date of the invoice;
  • the authority, whether through a written or verbal contract or otherwise, for the work or materials to be provided;
  • the amount of the invoice and corresponding payment terms broken down for the work or materials provided;
  • the name, title and contact information of the person to whom the payment is to be sent;
  • a statement indicating that the invoice provided is intended to constitute a proper invoice; and
  • any other information that may be prescribed through regulation or otherwise.

It is important to note that the 28-day timeframe for prompt payment does not begin until a proper invoice with all the statutorily required information is received.

As well, contracts will not be able to stipulate that a proper invoice be conditional on the prior certification of a person or the prior approval of the owner to provide the invoice. This requirement, however, will not apply to provisions in contracts that provide for the testing and commissioning of completed work.

Subject to the regulations, contractors must also provide proper invoices to an owner at least every 31 days, unless there are conditions in the contract for the testing and commissioning of the work or material provided, and these conditions are not met.

‘Paid-When-Paid’ Clauses

‘Paid-when-paid’ clauses in construction contracts stipulate that contractors will only pay subcontractors once payment is received from the owner.  While the initial draft of Bill 37 said that pay when paid contractual provisions will have no force or effect, the amendment introduced on November 4, 2020, removed that prohibition.  The discussion regarding the amendment on this matter explained that the prohibition is no longer required and the payment timelines in the Bill governs, and as such “ ‘pay-when-paid’ clauses can no longer be abused to delay payments.”

In circumstances where a contractor has received only partial payment from an owner, and the unpaid portion is specific to the work or materials provided by specific subcontractors, then the other subcontractors must be paid first, with any remaining amounts to be paid to the subcontractors implicated in the dispute on a proportionate basis.

Even if an owner does not pay all or some of the amount payable under a proper invoice, then a contractor must make a payment to each subcontractor for work or materials furnished within 35 days after the proper invoice was provided to the owner. This requirement does not apply if a contractor provides to their subcontractor a notice of non-payment, an undertaking to refer the matter to adjudication no later than 21 days after providing the notice to the subcontractor, and a copy of any notice of dispute from the owner.

Adjudication Process

Under Bill 37, any party to a construction contract or subcontract will have the ability to initiate dispute resolution before an adjudicator. Once a party to a dispute has issued a notice of dispute against a proper invoice within the 14-day timeframe, then the parties are entitled to refer a dispute to the adjudication process.

The new adjudication process will supersede any existing provisions in a contract that run contrary to the procedures set out by regulation or by the nominating authority. Adjudications will have to be carried out by an approved adjudicator that has been appointed by the nominating authority. The nominating authorities are set to be appointed in April of 2021, and they in turn will nominate adjudicators in May of 2021.

Decisions reached during this adjudication process will be binding and final unless an application is made for judicial review of the decision. Adjudicators’ decisions will not be stayed pending a judicial review.

An adjudicator’s decision could be set aside on an application for judicial review, but only if one of the following is established by the applicant:

  • the adjudicator committed a mistake of law;
  • the adjudicator did not have the jurisdiction to decide the matter;
  • the contract was invalid or did not exist at the time the dispute arose;
  • the determination was of a matter for which adjudication under the legislation was not permitted, or of a matter entirely unrelated to the subject of the adjudication;
  • the adjudication was conducted by someone other than a duly qualified adjudicator;
  • the procedures followed in the adjudication did not accord with the procedures to which the adjudication was subject under the regulations or established by the responsible nominating authority;
  • there was a reasonable apprehension of bias on the part of the adjudicator; or
  • the determination was made as a result of fraud.

Unlike in the Ontario Construction Act, the proposed amendments do not limit or set out the specific matters that may be addressed through adjudication procedures, and timelines for the new adjudication process have not been established in Bill 37.  We will likely have to wait until the regulations are created for more details on this later component of the proposed legislation.

Lien Registrations: Changes as to timing and amount

Bill 37 also includes changes to timeframes for registering liens. The registration period for any construction liens, aside from liens related to oil and gas wells and sites, will be extended from 45 to 60 days. Oil and gas well projects would continue to have 90 days for lien registrations under the new legislation.

Currently, the proposed legislation has a different time period for registering liens on work and materials related to the production and provision of concrete and will increase the deadline required to register a lien from 45 to 90 days. The deadline for concrete-related liens is proposed to be extended longer than other liens due to the special nature of working with concrete and the time required for the concrete to properly cure.

Owners under a contract will be required to maintain the lien funds during these periods of time.

As well, the minimum amount on which a lien could be registered will also change, increasing from $300 to $700.

Holdback Release

Bill 37 also introduces a system of progressive release for the holdback of funds if a construction project lasts longer than a year or over a prescribed amount (to be determined in the regulation).

Access to Payment Information

Bill 37 will also expand the right to request information about a particular construction contract or subcontract. Under the current statute, only a lienholder may request production of contractual documents, but Bill 37 would expand this right to information to also include beneficiaries of trusts and any contractor or subcontractor working under a specific contract.

If the requested documents are not provided within 6 days of the initial request, and the requesting party suffers a loss as a result of these documents being withheld, then the withholding party is liable for this loss.

Comparison with the Ontario Construction Act

Ontario recently implemented a number of changes to its Construction Act, including but not limited to, extending the lien preservation and perfection periods, the introduction of prompt payment timelines, and the adjudication process.  As noted above, not all of the recent amendments to Ontario’s legislation have been proposed in Bill 37.

For example, Ontario’s Construction Act introduced the following amendments to its legislative regime that Bill 37 has not addressed, including:

  • allowing lien matters valued at $35,000.00 or less to be tried in the Small Claims Courts;
  • limiting the right of a party to claim a set-off against amounts owing to that party on another project, except in very specific circumstances;
  • increasing the amounts required to be paid into Court as security for costs in order to vacate a lien;
  • increasing the monetary thresholds to achieve substantial performance and final completion;
  • imposing mandatory bonding requirements on certain public projects;
  • introducing a statutory requirement that the landlord maintain a holdback equivalent to 10% of the value of any tenant leasehold improvement allowance;
  • codifying that a landlord may be declared an “owner” of the premises if the landlord meets the statutory definition of an “owner”;
  • including timelines and procedures for the adjudication process; and
  • codifying that the work and services provided by architects and engineers give rise to lien rights.

As the Construction Act in Ontario transitioned in two phases, with the first phase, including the change in the extension of the lien preservation and perfection timelines coming into force on July 1, 2018, and the second phase, which introduced prompt payment and adjudication coming into force on October 1, 2019, the effects of many of the legislative changes are just beginning to appear both in the field and in the courts.

The extended timelines for the preservation of their lien rights and the commencement of any lien actions have been well received in Ontario as these extensions permit the parties additional time to resolve their disputes without the additional costs and pressures of litigation.

There has also been a general acceptance of using the date of delivery of a ‘proper invoice’ to the owner as the triggering provision for the right of payment. Trade contractors are regularly finding ‘proper invoice’ type language included in contracts that are grandfathered under the pre-July 1, 2018, regime.

The remainder of the prompt payment provisions, including the shortened timelines for payment, is starting to become more common as new projects begin. There have, however, been some administrative challenges for larger general contractors and trade contractors who currently have a single accounting department paying contracts under both prompt payment and paid-when-paid systems. As the contracts subject to paid-when-paid clauses are completed, these issues will resolve on their own.

Adjudication in Ontario has also had a slow start. In its first fiscal year, the Ontario Dispute Adjudication for Construction Contracts (ODACC) reported that 32 adjudications were commenced in Ontario, with 3 resulting in a determination, 22 withdrawn on consent, and 7 remaining to be determined as of the date of the report. The majority of the adjudications were commenced in the residential sector, followed by commercial, transportation and infrastructure, and public buildings. The average value of the claims varies by sector, with the average amount of a residential claim being the lowest at $22,148.87 and the average amount of commercial claims being highest at $361,349.37. As more contracts begin, it is expected that the number of adjudications will increase.

More to Come

Alberta’s legislators have already made numerous amendments to Bill 37 since its introduction on October 21, 2020, and more changes may be coming as the bill progresses through the legislature, perhaps including some of the above listed features.

Miller Thomson will be monitoring for any changes to Bill 37, and industry members should stay tuned for further updates as more information becomes available.

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