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Following the lead of Ontario, Saskatchewan has introduced amendments to The Builders’ Lien Act to provide for a “prompt payments” regime. Although the amendments are aimed at the timing and process for payment of invoices as between owners, developers, contractors and subcontractors, many or most large and small construction projects are financed and lenders will need to understand how their current procedures for progress advances to their borrowers will need to change. Many of you will have read the recent piece published by Troy Baril and Chad Eggerman on this topic; this discussion incorporates certain parts of Troy and Chad’s communiqué, but also expands on it to consider specifically the implications that the new regime will have on lenders.
Bill 152, The Builders’ Lien (Prompt Payments) Amendment Act, 2018 (Bill 152 or the Bill) received first reading in the Saskatchewan Legislature on November 20, 2018. The Bill is expected to get a 2nd reading soon with development of a regulatory framework to follow, though nothing has yet been made public.
Shortly after the Bill was introduced, several lenders were quick to pose questions to us about the Bill and its implications. This post represents a preliminary effort to summarize what we know now, recognizing that it likely will be some time before the amendments start to apply to transactions, and that further changes are probably to be expected in the meantime as stakeholders provide their views to the government.
Broadly speaking, the Bill proposes:
- a defined invoicing cycle with deadlines for payment;
- an adjudication system for resolving disputes;
- the right to suspend work after adjudication, determination, and non-payment; and
- interest on any overdue payments.
These changes are in line with legislative changes that have been introduced in Canada’s largest construction market, the province of Ontario. However, Ontario’s prompt payment and adjudication provisions are not yet in force. They are scheduled to start to apply on October 1, 2019. As a result, we have not yet had the chance to see the effects of those new provisions “in action” in Canada. It may be that Saskatchewan follows a similar extended process in rolling out its own dramatic changes.
Nevertheless, it’s not too early for lenders to start to grapple with what is likely coming in the not too distant future.
Defined invoicing cycle
A “proper invoice” must be submitted by the contractor to the owner monthly unless the contract provides otherwise.
“Proper invoice” and the process for “giving of proper invoices” are defined in the Bill. When lending into construction projects it will by critical for the lender to review key construction contracts to determine the invoicing schedule proposed for the project, as the lender will need to be able to process loan draws in that timeframe to facilitate the schedule.
The current language of the Bill suggests that it will be possible for owners and contractors to opt out of monthly invoicing and set their own invoicing schedule, so it is unclear as to whether the current common practice of having contractors invoice when certain progress milestones are achieved (commonly set out as a percentage of completion) will need to change. The Bill allows for regulations to be made respecting the frequency with which an owner must be invoiced.
With new legislation, it is common for the most important details to be contained in regulations which may not even be published until a Bill is passed into law by a Legislature. As a result, we simply do not know yet whether it will be easy or hard, common or uncommon, for contracts to provide for a schedule other than monthly invoicing.
One thing we probably know is that the time frame for owners to pay contractors for invoices will be strict and short, compared to what has been the prevailing practice.
The Bill establishes numerous new deadlines under the prompt payment process. Such deadlines are something that all parties – owners, contractors, subcontractors and lenders – should be intimately aware of so deadlines are not missed. Key deadlines established under the proposed Bill are as follows:
- Payment of Proper Invoice: An owner has 28 days from the date of receipt of a “proper invoice” to provide payment of such invoice. The exception to this is where an owner disputes an invoice or any portion thereof. Payment of any disputed amount would be delayed until adjudication of the issue, but any portion of a proper invoice that is not disputed must still be paid within the 28 days.
- Notice of Dispute of Proper Invoice: Where an owner disputes a proper invoice, the disputing party must provide the contractor with a notice of non-payment in the prescribed form not later than 14 days from receipt of the proper invoice. It will be important for owners and lenders to move quickly upon receiving a proper invoice, as any potential dispute must be identified and the notice of non-payment filed within the 14 days. If the owner or the lender require certification of the invoice it must also be completed within this timeframe, as any refusal to certify after the 14 days will leave the owner and consequently the owner’s lender without recourse.
- Payment of Subcontractors: A contractor must pay all subcontractors and suppliers who provided services in relation to a proper invoice within 7 days of receipt of payment of any sums from the owner.
- Timeframe for Adjudication: If any issue is referred for adjudication, the adjudicator must make a determination of the issue within 30 days of receiving the prescribed documents from the parties, unless an extension is agreed to by all parties.
- Payment following Adjudication: Payment of any amounts awarded by an adjudicator must be made within 10 days of the determination.
The examples set out above are among the most important new deadlines established in the Bill, but there are numerous other deadlines that would also apply.
When we say we “probably know” that the time frame for paying invoices will be shorter and more strict, the Bill allows for regulations concerning the period within which an owner must pay the amount payable after receiving a proper invoice from the contractor. It seems unlikely that regulations will depart from the 28 day deadline but they do allow for some wiggle room, perhaps for very specific types of situations.
One of the most important changes made by the Bill is the introduction of the adjudication system. A party to a contract can refer valuation, payments, change order, costs, certification issues and other matters to an adjudicator for determination. A party to a contract or a subcontract may refer a matter to adjudication even if the matter is the subject of a court action or of an arbitration pursuant to The Arbitration Act, 1992 (Saskatchewan). Adjudicators are appointed and trained by the Adjudication Authority established in the Bill. A contract cannot appoint a non-adjudicator to adjudicate an issue. As mentioned above, payment of any amounts in dispute is suspended until the conclusion of the adjudication.
To address concerns that the adjudication system may be misused, if an adjudicator determines that a party to the adjudication has acted in a manner that is frivolous, vexatious, an abuse of process or other than in good faith, the adjudicator may provide, as part of the adjudicator’s determination, that the party be required to pay some or all of the other party’s costs, any part of the fees that would otherwise be payable by the other party, or both. Therefore ample consideration should be given prior to proceeding to adjudication for a particular project.
Following a determination by an adjudicator a party can file the determination with the court to allow the determination to be enforced as a court order.
It should also be noted that the Bill allows limited grounds for judicial review of a determination of an adjudicator.
Right to suspend work after adjudication, determination and non-payment
After the adjudication process is complete and a determination is made, if an amount deemed payable is not paid, only then can a contractor or subcontractor suspend work. A contractor or subcontractor does not have a de facto right to simply send an invoice and then suspend work for failure to pay. However if a contractor or subcontractor follows the process correctly and does suspend work in accordance with the Bill, then the contractor or subcontractor is entitled to reasonable costs incurred.
Interest on late payments
Interest begins to accrue on an amount that is not paid when it is due to be paid at the pre-judgment interest rate in effect pursuant to The Pre-judgment Interest Act (Saskatchewan) or, if the contract or subcontract specifies a different interest rate for the purpose, the greater of the pre-judgment interest rate and the interest rate specified in the contract or subcontract. Interest also accrues on amounts deemed payable by the adjudicator in a similar fashion.
Application to Existing Projects
Contracts entered into prior to the coming into force of the Bill will continue to be governed by the old legislation and the new amendments will not apply.
Miller Thomson will continue to follow these important changes impacting construction projects in Saskatchewan in the future, as the Bill evolves and regulations are introduced. As always, connect and talk to one of our Saskatchewan Financial Services Team lawyers about these changes and how they may affect any current or future projects that you may be lending into.
If you have any questions about Bill 152 and the proposed Saskatchewan prompt payment process, please feel free to contact David Gerecke, Sean Bryden or Fraiba Jalal of our Saskatchewan Financial Services Team.
This article is just a general overview of the proposed changes. Along the way as the process advances, we will be exploring and providing further updates as Bill 152 makes its way through the legislature.