April 1, 2020
Contracts in the age of payment and adjudication processes

Contracts in the age of payment and adjudication processes

BY ROBERT KENNALEY

Most provinces in Canada, along with the federal government, have either passed, or are considering, legislation to impose prompt payment and adjudication processes on the construction industry. Prompt payment requires the owners of construction improvements to pay the proper invoices of the contractors they hire within certain timeframes, unless they provide a specific form of notice of their intention not to do so (along with the reasons why) within a specific period of time. In Ontario, the timeframe is 14 days. Generally, the payment obligations are then repeated down the construction ladder in specified intervals, as each payee is required to make payments within certain timeframes unless they, too, give specific notice of their intention not to do so.  

Adjudication will allow construction disputes to be resolved, at least at first instance, through interim and binding determinations made in very tight timeframes, usually before non-lawyers and often on the basis of written materials alone. Appeals from an adjudicator’s decision will not generally be available, such that an unsuccessful party’s only recourse will be to commence litigation or arbitration proceedings in an effort to obtain a contrary, final, decision. In the meantime, unsuccessful parties will have to live with the decision: they can be required to pay disputed amounts or to perform work they believe to be outside the scope of their contracts or subcontracts. Accordingly, an unfavourable determination can have significant consequences, as the road to a different, final decision through the courts or arbitration can be a lengthy, expensive and uncertain process. As the structure of the legislation being passed and considered in Canada’s other jurisdictions is substantially similar to Ontario’s, what follows is a review of the importance of contracts and subcontracts with reference to the Ontario legislation.

WHERE PROMPT PAYMENT APPLIES, the payment provisions of every construction contract or subcontract in Ontario are void unless recently amended to comply with the new statutory requirements. This includes every Canadian Construction Documents Committee (CCDC), Canadian Construction Association (CCA), Ontario Provincial Standard Specification (OPSS) and municipal standard form, along with every other construction contract, subcontract or PO issued, regardless of who has prepared them. Contracts and subcontracts should be amended to be consistent with the legislation. Many a dispute can be avoided, of course, if the contract documents accurately reflect the deal between the parties. Laying out the proper payment terms will also promote a better relationship and help ensure that payments flow as seamlessly as possible.    

In addition, the parties to a contract or subcontract can agree on much of how prompt payment is going to work, including how proper invoices are to be given, what requirements are to be met as a condition of giving a proper invoice and what is to occur if an owner believes those requirements have not been met. The ability to specify the requirements of a proper invoice is particularly important. Owners can and should use this ability to ensure they have enough information to review a proper invoice within the applicable 14-day window. Options in this regard include the potential for invoices to be given other than monthly, the requirement that invoices be submitted at specific times and in specific ways, pre-invoice meetings, the provision of interim information and the requirement that (potentially substantial) backup be provided with an invoice (such as as-built drawings, third party quantity or quality assessments or backup to all costs incurred).  

WHERE THE FORM OF CONTRACT is put out to tender or otherwise prepared by the owner, contractors should accordingly ensure (before they submit a bid or execute a contract) they are aware of what will be required for the purposes of invoicing. In some circumstances, the owner’s requirements may be difficult, impossible or expensive to provide. Subcontractors should be aware that some or all of these obligations might be passed down the construction ladder.  

As is the case with prompt payment, Ontario’s Construction Act allows parties to agree on much of how adjudication is to work. This includes the nuts and bolts of document exchange and the role of witnesses, etc., so long as the Act is not contradicted. The parties can agree to submit more than one matter to adjudication at a time and to allow adjudication of disputes even if the contract or subcontract at issue is complete. They can also agree on who will be appointed as adjudicator, which is particularly important because, in the absence of an agreement, an adjudicator will be appointed without consideration for the subject matter of the dispute. Indeed, because the appointment of a person with no legal experience or background in the matters at issue can have predictably uncertain consequences, parties should agree on the adjudicator wherever possible. Just as CCDC standard form contracts call for the appointment of a Project Mediator, contracts and subcontracts can require that acceptable adjudicators be agreed upon before disputes arise.

We also submit that, given the potential adjudication of disputes, parties must be increasingly diligent to make sure their contracts and subcontracts are clear. This is because, in the context of an interim determination to be made in a short timeframe on the basis of limited submissions, an adjudicator might not be inclined to look beyond the contractual language. Rather, he or she may be inclined to say essentially, “I am not convinced that you are right and, accordingly, if you want to pursue this you will have to do so in litigation or arbitration.” This likelihood will be increased if the party seeking the remedy is the party that drafted the document. Similarly, parties should be increasingly diligent in following their contracts and subcontracts. This is because adjudicators may be less likely to grant a remedy if the party seeking it has failed to comply with a contractual term or condition (such as a notice, approval or record-keeping requirement), knowing that he or she may seek relief from the breach in litigation or arbitration, where the circumstances can be more fully and completely vetted.  

IN THE END, where prompt payment and adjudication apply, everyone involved in the construction industry should be taking steps to revise their contract and subcontract forms, to bring them into conformity with the new legislation, to reasonably control the prompt payment and adjudication processes and to better manage the associated risks. They should also take steps to ensure their contracts and subcontracts are both clear and followed, to increase the likelihood interim adjudication will result in desired outcomes.

Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.