Prompt Payment and Adjudication – What Does it Mean for Subcontractors and Suppliers?
Most players in the construction industry are now aware that the second round of Construction Act reforms (including prompt payment and adjudication) came into force on October 1, 2019.
Adjudication and prompt payment are designed to work hand in hand. Although disputes that are unrelated to payment can be referred to adjudication, one of the goals of adjudication is to ensure that parties comply with the timelines established by the new prompt payment provisions of the Construction Act (the “Act”).
The prompt payment and adjudication scheme should benefit subcontractors and suppliers. The goal is for cash to flow more quickly down the construction pyramid.
Do these provisions apply to my job?
The Act specifies that prompt payment and adjudication only apply to prime contracts entered into on or after October 1, 2019.[i] The date of your subcontract does not matter.
How does it work?
An owner has 28 days from receipt of a “proper invoice” to pay a contractor, who then has 7 days to pay its subcontractor after receiving payment from the owner. A subcontractor, in turn, has 7 days from the date it receives payment from the contractor to pay its subcontractors or suppliers. Essentially, this means that a subcontractor must be paid within 35 days of a proper invoice being delivered, unless the contractor disputes the amount owing. Likewise, a subcontractor’s own subs and suppliers must be paid within 42 days of a proper invoice being delivered, unless the subcontractor disputes the amount owing.
An owner who wishes to dispute all or part of an invoice must issue a Notice of Non-Payment within fourteen (14) days of receipt of a proper invoice. This must be accompanied by an undertaking to refer the matter to adjudication within 21 days. The same process applies contractors and subcontractors with the necessary modifications. Contractors must pay their subcontractors unless they deliver a Notice of Non-Payment, even if the reason for not paying the subcontractor is because the contractor was itself not paid by the owner.
What if I have already registered a claim for lien, do I have to start a court action?
Where a lien is preserved (normally by registering a claim for lien on title to the property) and the dispute has been referred to arbitration but the lien has not been perfected (i.e. by commencing a court action) the time to perfect is extended. Instead of being 60 days from the date the lien could last be perfected, the period is extended to 45 days following the delivery of all documents required to be delivered to the adjudicator in support of the dispute. This is because the adjudication timelines normally require an adjudicator to make a decision within thirty days from the receipt of those documents.
How will adjudication work?
The Ontario government has appointed the Ontario Dispute Adjudication for Construction Contracts (“ODACC”) as the body responsible for administering construction-related adjudications. The ODACC has devised several pre-designed adjudication processes ranging from hearings conducted in writing with limited submissions to hearings with more detailed oral and written arguments. More information can be found on the ODACC’s website at: https://odacc.ca/en/
What happens after the decision?
Payment is required to be made within ten 10 days of receiving the decision, failing which the party which has not been paid may suspend work. The adjudicator’s decision is binding until there is a further determination of the matter by a court or arbitrator.
What can I do?
Be ready for a dispute. Make sure that you have collected and organized your documents, as these must be delivered quickly. No later than five days after an adjudicator is appointed, the party who gave the notice of adjudication shall deliver a copy of the applicable contract and any other documents they intend to rely upon. As noted above, the adjudicator then has thirty days to make a determination (subject to certain rules regarding extensions).
Review your contracts. Look to see if the contractor has included any language regarding how a matter will be adjudicated, or whether there is pre-agreement with respect to any extensions of time. You may also want to inquire as to whether the owner and the general contractor have agreed upon a schedule for the submission of invoices. Unless the contract specifies otherwise, the invoices must be submitted monthly.
What if the general contractor has not delivered an invoice?
A subcontractor still has a right to deliver a notice of claim for lien which will stop the flow of money on the project. A subcontractor may also refer a payment dispute with the other party to the subcontract to arbitration.
[i] If the procurement process for the improvement that is the subject of that contract was commenced prior to October 1, 2019 then prompt payment and adjudication do not apply.