The payment terms for construction projects are changing across Canada. Prompt payment legislation includes mandatory payment terms intended to increase the cash flow of contractors and subcontractors.
Prompt payment legislation is in force in Ontario and Saskatchewan, will be in force in Alberta on August 29, 2022, and is being debated in British Columbia.
In Ontario, prompt payment requirements were enacted in October 2019 through an amendment to the Construction Act. The amendment is intended to ensure that contractors’ and subcontractors’ invoices get paid in a timely manner. The amended Construction Act includes:
- Invoice requirements: a “proper invoice” is defined in the Construction Act as a written bill or other request for payment that includes specific details.
- Payment timelines: unless the invoice is disputed within 14 days, the owner is required to pay the contractor within 28 days of receiving the invoice. The payment timeline cascades – the contractor must then pay its subcontractors within 7 days after receiving payment, and subcontractors must pay their sub-subcontractors within 7 days of receiving payment.
- Penalties: if payment deadlines are not met, interest begins to accrue when payment was due at the rate specified in the contract or at a statutory rate if no rate is specified.
- Dispute resolution: disputes are adjudicated by the Ontario Dispute Adjudication for Construction Contracts. The adjudicator may issue directions for the adjudication, conduct on-site inspections, obtain expert reports, and determine the adjudication. The determination is binding, unless it is overruled by the court, arbitration, or written agreement between the parties.
The amendments to The Builders Lien Act, S.S. 1984-85-86, c B-7.1, enacting prompt payment requirements are similar to those in Ontario. The prompt payment requirements are detailed in sections 5.1 through 5.9 of the Builders’ Lien Act and include:
- Exclusions: The prompt payment provisions do not apply to (1) persons who enter into a contract for services or materials for any improvement with respect to a mine or mineral resource, including any activities respecting exploration, development, production, decommissioning or reclamation; (2) architects, engineers and land surveyors; and (3) persons who enter into a contract for services or materials with respect to an improvement related to infrastructure in connection with the generation, transmission or distribution of electrical energy pursuant to The Power Corporation Act.
- Invoice Requirements: subject to regulations, The Builders’ Lien Amendment Regulations, 2020, proper invoices much get given to the owner on a monthly basis, unless otherwise provided for by contract.
- Payment timelines: unless the owner gives the contractor a notice of non-payment within 14 days of receiving a proper invoice, the owner shall pay the proper invoice no later than 28 days after receipt. Like in Ontario, payment timelines cascade, and a contractor is to pay subcontractors and suppliers no later than 7 days after receiving payment from the owner and is to pay its subs 7 days after that. Provisions are made for disputed subcontractor invoices and for circumstances where an owner does not pay an invoice in full.
- Penalties: where an invoice is not paid, interest begins to accrue when an invoice is due. Interest is at the greater of the pre-judgment interest rate pursuant to The Pre-judgment Interest Act or the contractually specified rate.
- Dispute Resolution: section 21 of The Builders’ Lien Act provides for adjudication of payment disputes.
- Invoice requirements: the contractor must issue a “proper invoice” to the owner at least every 31 days.
- Payment timelines: unless disputed within 14 days, the owner must pay a proper invoice within 28 days of receiving it. A contractor must pay its subcontractors within 7 days of receiving payment, and subcontractors must pay their sub-subcontractors within 7 days of receiving payment.
- Penalties: interest on late payments accrues at the rate specified in the contract or the current rate in the Judgment Interest Regulation if no rate is specified in the contract.
- Dispute Resolution: parties can refer disputes to adjudicators. The adjudication process and qualified adjudicators will be qualified by the applicable Minister. The adjudication is final and binding. However, the adjudicator may refer the dispute to the court, and the adjudicator’s decision may be subject to judicial review on grounds specified in the legislation.
British Columbia does not currently have prompt payment legislation. An amendment to the Builders Lien Act contemplated the introduction of prompt payment in 2019, but the bill (M 223) did not pass the first reading. It included provisions similar to those in force in Ontario including:
- Invoice specifications: “proper invoices” to be issued monthly by the contractor to the owner.
- Payment timelines: payment is to be issued within 28 days after receipt of the proper invoice, subject to the notice of non-payment due to a dispute. Upon receipt of payment, contractors are to pay the amount received on a proper invoice to subcontractors within 7 days.
- Dispute resolution: the contractor may dispute a subcontractor’s invoice.
Although the proposed amendment did not pass the first reading, the Attorney General promised to move forward with prompt payment legislation, and another version is expected to be tabled in fall 2022.
The British Columbia Government established an industry task force to advance the drafting of the legislation and provide expert input. The industry task force is managed by the Ministry of the Attorney General and includes representatives from the Electrical Contractors Association of BC, the Mechanical Contractors Association of BC, and the BC Construction Association.
Undoubtedly, prompt payment legislation is on the minds of the construction industry. Delayed payments and pay-when-paid clauses, regardless of the timelines, have led to many disputes that the legislation may help to avoid and may well lead to timely resolution of payment disputes. We will be closely watching how the legislation unfolds across Canada.
To minimize the risk of disruption and cost overruns in existing and future projects, it is important for industry participants to seek legal counsel that is familiar with recent prompt payment legislation. If you require further information or further assistance, please contact Daniel Thompson or Ian Breneman.