From Prompt Payment to a review of the Construction Lien Act

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By: Scott R. Fairley and Eric O. Gionet, Dooley Lucenti Barristers and Solicitors

Not long ago, we authored an article providing an update on the progress towards the enactment of the Prompt Payment Act. That proposed legislation was intended to improve the flow of funds on a construction project, although it did not contemplate amendments to the Construction Lien Act (CLA) itself.

Our review of the proposed Prompt Payment Act was that it was a step in the right direction, but the preference was to fix some issues with the CLA by amendment. Since the time of our last article on the issue, the Prompt Payment Act has stalled due to an intervening election, although it had gained significant momentum. The momentum has been redirected into reviewing the CLA, which we consider to be a positive development.

The CLA was enacted in 1983, and although it is confusing, it has performed a useful function, and has become an important aspect of the construction industry. The basic concepts of the CLA are that funds that enter the construction pyramid or construction project are to be held in trust for the party to which they are owed, and there is a statutory 10 per cent holdback against which those with valid construction liens can advance a claim. There are many more aspects to the CLA, but these are its most basic elements.

Issues have arisen over time demonstrating some of the weaknesses caused by the manner in which the CLA was drafted. For example, the CLA says that a lien arises as soon as materials or services are provided to an improvement. That lien can be maintained by a contractor or subcontractor if the lien is preserved and perfected within the required time periods.

The CLA requires a contractor to preserve or register its lien within 45 days of the date of completion or abandonment. A subcontractor must preserve or register its lien within 45 days of the date of its last supply.

The CLA on the other hand, allows an owner, or payor, under a contract to release the funds owed under a contract, including the statutory holdback, if no liens are preserved within that same 45 day period.

The effect of this is that the CLA tells contractors and subcontractors that they must register within 45 days to be a lien claimant and have a claim to the holdback, and it tells owners it can’t pay the holdback unless there are no liens registered in that 45 day period.

We are often asked “doesn’t that mean I have to lien every job?” Strictly speaking, as the CLA is currently drafted, the only way to fully protect a claim to the holdback is to lien, so the answer is yes.

Of course, the business reality is that no one can or should lien every job. However, this essentially means that with all the effort that has gone into the CLA, contractors and subcontractors or trades are left to trust their gut and decide on which projects a lien is necessary. To us, this is among the most significant weaknesses of the CLA.

The Prompt Payment Act would have imposed timelines and structure to the flow of payments on a project, which at least could have given a better sense as to whether a lien might be necessary. However, a more comprehensive and focused review of the CLA is now being undertaken, which will hopefully address the issues with the CLA more directly.

The Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure have retained construction lawyer R. Bruce Reynolds as counsel to conduct an expert review of the CLA and to provide the ministries with an opinion as to the effectiveness of the CLA in achieving its policy objectives, including addressing prompt payment issues and the effectiveness of dispute resolution under the CLA.

This review has begun and will elicit comments and input from a comprehensive list of stakeholders. There are 64 groups or associations that have been identified as stakeholders, including the Council of Ontario Construction Associations (COCA).

COCA has assembled a group of council members to provide it with comments. This council includes the co-author of this article, Eric Gionet. These various groups and associations are being asked to participate in meeting and conference calls to provide feedback on the current issues with the CLA.

The CLA review is entering its second phase, which includes the distribution of an information package to the stakeholders, followed by a series of consultation meetings and conference calls. The stakeholders have been invited to attend meetings and conferences and to provide written submissions outlining their respective submissions to review counsel.

The third phase will be the submission of a report to the Attorney General and Minister of Economic Development, Employment and Infrastructure by December of 2015 unless the ministries agree to an extension.

The ministries will then have to consider this report and undertake the necessary steps to propose amendments to the CLA and see them through to enactment.

The current process for the review of the CLA is the most comprehensive review since the enactment of the CLA in 1983. As mentioned at the outset of the article, the CLA has been performing fairly well since 1983. However, the weaknesses in the CLA, one of which has highlighted above, have become apparent over time. We are hopeful that this review will be meaningful and will lead to amendments to address weaknesses and improve the CLA’s ability to achieve its objectives.

Members of the Barrie Construction Association are encouraged to take advantage of the opportunity to participate.