Oct 18, 2016
Construction laws in several jurisdictions in Canada are currently under the microscope, and Ontario is awaiting legislation expected this spring based on proposed recommendations to the Construction Lien Act (the CLA) that were tabled in last fall after an extensive review of the CLA (the Ontario Report).
The construction and infrastructure sector in Ontario needs to understand the commercial and legal implications of the draft legislation, particularly as the proposed bill will proceed for discussion through the usual legislative process, which may include public hearings and consideration of possible amendments.
Commissioned by the Ontario Ministry of the Attorney General (the Ministry), the Ontario Report was produced after a broad-ranging canvassing process with industry participants including owners, general contractors, subcontractors, architects, engineers and surety companies. At over 500 pages long and with 100 recommendations, the Ontario Report addresses perceived pain points with respect to the current CLA, which hasn’t undergone a significant overhaul since 1983.
This presentation, moderated by Roger Gillott — a partner in Osler’s Litigation Group who specializes in construction litigation — offers an in-depth look at the proposed changes to the CLA and how participants may be impacted by the following matters:
- promptness of payment
- holdback and substantial performance
- next steps for legislation
ROGER GILLOT: OK. Well, good afternoon, everyone. My name is Roger Gillot, and I'm a partner in the construction and infrastructure group here at Osler, and it gives me great pleasure to welcome all of you here today to our panel discussion on the proposed changes to the Construction Lean Act. We're going to begin with a brief explanation of how we got here and how the government decided to commission the report that we're now all leafing through.
The report is over 500 pages long, and it makes over 100 separate recommendations. So what we're going to do today is to focus in on the three most important areas of recommendation. And they are, first of all, that a prompt payment regime be adopted here in Ontario for all construction contracts, secondly, that mandatory speedy adjudication of construction disputes be mandated by statute into all construction contracts in Ontario, and finally, some changes to the hold act release regime be made, including the mandatory release of holdback with the provision for some set off.
So we will look at the recommendations of the report in each area, and then we're going to invite our panelists to discuss the pros and the cons, the good and the bad of each of these recommendations. And then finally, we'll take a brief look at next steps and where the government is going next with the CLA reform process. So throughout our remarks today, I would like to encourage all of you as members of the audience to feel free to speak up and to ask questions and to make comments.
Don't hold your questions until the end. We do have some mics, as I understand it, that we can hand to you in the audience. So please feel free to make it known when you'd like to make yourself heard. And at the conclusion of today's event, we'd like to invite you to join us for drinks in the back of the room. And also, we will be sending out an Osler update in a few days time, summarizing a lot of what we've talked about today.
So I'd like to introduce to you our panelists directly to my left is Tanya Litzenberger. Tanya is a senior construction lawyer at the city of Toronto. She provides advice to the engineering and construction services division of major construction and P3 projects, and she was a member of the advisory group advising the Ministry of the attorney general about the Construction Lean Act review panel. She also organized in chairs and ad hoc owners group comprised of representatives of both the public and private sector owners to discuss the outcomes of this Construction Lean Act review.
Patricia Stringer, who is next to my left, is senior counsel at AECON Group, Inc., Canada's largest publicly-traded construction company. As in-house counsel, Patricia sees all of the industry issues from pre-bid, bid, to contract negotiation, project management, and dispute resolution. She is currently a member of the Executive of the OBA's construction and infrastructure section.
We are also very fortunate to have Doug Wass and Mark Lawrence joining us today from Macfarlanes LLP in London, England. The UK has had prompt payment and mandatory adjudication legislation in place for about 20 years. And so it'll be very interesting to hear the comments of Doug and Mark on what we can expect in Ontario if we actually go ahead with these two pieces of legislation.
Doug is a partner at Macfarlanes and a member of the construction and engineering group. He advises a range of clients, including owners, contractors, and funds on domestic and international construction and engineering projects. He acts in court arbitration and adjudication proceedings and has represented clients in a number of high court trials and Court of Appeal hearings.
Mark Lawrence is senior counsel at Macfarlanes. He acts for a wide range of clients in construction and engineering, environmental planning, and property disputes. And he has acted for claims in the high court, the Court of Appeal, and the Supreme Court and in arbitrations, as well as advising clients in adjudication mediation and other forms of ADR. So welcome, Doug and Mark. So please join us in welcoming all of our panelists.
So first of all, very briefly, how did we get here? Well, the current version of the Construction Lean Act was enacted in 1983, and we've not had a comprehensive review of the act in the years since it was passed. We've had amendment processes that have made some minor tweaks, but we've never had the kind of review that is undergoing today.
The main impetus behind the current government review process is the Prompt Payment Movement. Prompt Payment Ontario lobbied for a prompt payment regime in Ontario because of a broader international movement, which started back in the 1980s in the United States with some federal prompt payment legislation spread to the UK and other countries. A couple of years ago, in 2013, a private member's bill called Bill C-69 was introduced into the Ontario legislature, and that bill sought to bring in a prompt payment regime in Ontario.
Because of some perceived shortcomings in the bill, it ended up not being passed. However, it did provide the impetus for the current review of the Construction Lean Act. So that bill and that lobbying effort really resulted in the process that we are seeing here today. By way of process, the report that we're looking at today was the result of a broad-ranging canvassing process with members of the industry, which included owners, general contractors, subcontractors, architects, engineers, and surety companies.
So I'm going to briefly outline for you, first, the Prompt Payment recommendations that are in the report, then we'll have a discussion with the panel. And then we'll go on to adjudication and then to holdback. And I just wanted to begin by noting because a lot of people have been asking this that the report recommends retaining both the remedies of the construction lean and also the construction trust action. I know that there was consideration of potentially dropping lanes, but construction leans will stay as a major remedy as they are today basically under the recommendations of the report.
So in terms of prompt payment, the recommendation is that as between the owner and the general contractor, payment must be made within 28 days of receipt of a proper invoice. As between the general contractor and his sub or anyone down the chain, payment must be made within seven days from receipt of payment from the general contractor or the person above. Now, a proper invoice is intended to mean a properly-documented invoice, and the report suggests that the statute should set out the minimum requirements for a proper invoice, which are similar to in the American Federal Legislation, but then allow the contract to set out any additional documentation that is required in this particular contract.
One of the requirements in the American Legislation, in addition to the name and address of the contractor in the invoice number and that kind of thing, is a description of the quantity and price of the materials or services supplied. So the basic concept is that you can set out what a proper invoice is in your contract, but it has to be consistent with the intent of the act. And that's a common theme running through the report is it allows freedom of contract, but whatever the parties agree to has to be consistent with the scheme of the act. And I think that may provide a fertile ground for litigation in the future, but I guess we'll all have to see how that works out.
The Prompt Payment regime would apply to all construction contracts in Ontario in both the private and public sectors, and the terms will be implied by law into contracts that do not contain equivalent provisions. And it would apply all the way down the construction pyramid, owner general, general prime sub, sub, sub, all the way down. The report recommends that the owner or GC or other payer would be able to set off against the payment that is being requested in the proper invoice as follows.
The payer would be allowed to deliver a notice of intention to withhold payment within seven days of receipt or invoice. Set off notice must set out the quantum to be held back and adequate particulars of why the amount is being held back. And the set off rate would extend to all debts claims and damages but only on this particular project, not on other projects. So that's actually a change from the current Construction Lean Act, which in section 17 allows set off based upon debts that are outside of this particular project.
In terms of pay when paid causes, they would be allowed, subject to the requirement that if a general contractor or other paying down the pyramid wanted to defer payment on the basis of non-payment from the party above them. They would have to provide a notice to downstream subcontractors beneath them, number one, notifying them that payment had been withheld by the owner, number two, providing the reasons for non-payment, and number three, undertaking to commence proceedings to enforce payment.
Finally, the report does recommend that the parties would be free to contract for a different payment periods, for example, milestone payments. There was a lot of consideration given in the report to the fact that the Construction Lean Act was drafted before the P3 and AFA era. And so there are a number of changes like this one, which are being recommended to facilitate the kinds of arrangements that are typical in P3's. OK. So that's just a very bare bones summary of the Prompt Payment provisions, and so I'd like to now start our panel discussion.
And I thought I would start up by saying the objective here that the government is trying to accomplish. And in responding to the Prompt Payment lobby is to address two forms of problem. One is the perceived delay in paying ordinary course draw requests. In other words, you make a draw request. How many days does it take to get the payment? They're saying 28 days maximum at the GC-owner level and then seven days below.
And then secondly, they're trying to address what we might call gridlock problems, and that's where you have a real dispute. You have the owner withholding funds in some cases. You may have a cessation of work by the contractor. But really, the second problem is when you have non-payment because of a dispute. And obviously, the mandatory adjudication provision is trying to address that problem. So I'd like to ask Mark and Doug based upon the UK experience and with the UK prompt payment and accompanying mandatory adjudication regimes. Do you think this system is going to be effective at speeding up the payments in construction projects in Ontario?
MARK LAWRENCE: OK. Let's start with the good news. I think the short answer is generally, yes. As in the UK, it seems that the scheme proposed for you guys is exactly the same. It's a pay now, argue later regime. And say, in our experience, in the last 20 years in the UK is that a similar system has resulted in payments being made to general contractors and subcontractors more regularly and more promptly than it did previously. And effectively, the regime puts in place a system where owners have to pay up or shut up.
And the reason it works is the second topic we're going to come on to you, which is adjudication. The Prompt Payment regime is great in theory, but it only works if it can be enforced relatively cheaply and effectively and quickly. And that's why you have a Prompt Payment regime, which supports prompt payments and arguments later, supported by a robust and relatively cost-effective dispute mechanism, where there is a dispute about what should be paid and when, i.e., adjudication which will come on to.
So as I say, those both taken together, to answer your question, Roger, in the shortest way possible, means that the Prompt Payment regime does over hear what it was always intended to do, which was to encourage more regular payments and payments being made more promptly.
DOUG WASS: I think one rider that we would just add to that is how effective the regime is will also depend upon how far our government is prepared to go in limiting the freedom of contract. And so for example, under our Construction Act, what parties are required to do is have a mechanism for providing for interim payments. And it's rather similar to the mechanism you have, where it's envisaged that while the parties have to make provision for interim payments, the periods between interim payments and how the amount it has to be paid is assessed is largely left to the parties to agree. We
Were involved in a court of appeal case where judgment was handed down last week, where what our client had done is agreed with the contractor. The monthly payments would be made up until the originally anticipated date for practical completion, which meant that if the works, as they were in this case, were delayed for a year, actually, the contractor would have no further entitlements for interim payment for the whole period of that delay, regardless of whether or not the contractor was at fault and whether or not the contractor could get an extension of time.
And the Court of Appeal had to decide whether that fell within the scope of what parties were left to agree by the act, or whether it was contrary to the intentions of the act. And I'm pleased to say the Court of Appeal came down on our client's side and said actually, no. Parties are able to agree that type of mechanism. The point that was taken against us and wasn't successful was, well, how far do you go with that because taken to its logical extreme, that would mean that if my client and the contractor had agreed that the contractor could have one interim payment of 1 pound, the day before practicable completion was granted, that would comply with the act?
The Court of Appeal said rather, well, the side sidestepped that as the Court of Appeal can and said, no, we don't have to decide that because that's not what happened in the facts of this case. But hat probably wouldn't comply. Now, of course, the problem there is that there's no clarity about exactly what complies and what doesn't. And you can see how parties might be encouraged when they're in a strong negotiating position, and the present economic climate might give rise to employers being in a strong negotiating position where they really do set up quite abusive payment regimes, which in principle, could comply. But with that, which actually doesn't achieve the objectives of the act of making sure contractors and then the supply chain get their regular payments.
So an important thing, I think, for people to look at is, OK, so the invoices are the trigger for payment. But how often can they be issued and that type of thing? And in what circumstances will you say, agreeing what invoice can be submitted after six months in a project that's going to go on for five years? It's not an adequate interim payment mechanism.
ROGER GILLOT: Thank you, Doug and Mark. Certainly, in the report, a theme that runs through it is the idea that the parties are free to contract, so long as they contract in a manner that is consistent with the intent of the act. Our panel was talking about the mandatory adjudication provisions just before we began today, and we were saying, well, what if the owner and the general contracted for a six-month adjudication, instead of a one month? Would that be viewed as consistent with the act?
And that's similar to what you're saying in terms of the Prompt Payment regime. How far will the courts allow the parties to go by way of contract while still viewing it as consistent with the intent of the act?
TANYA LITZENBERGER: Yeah. If I might say on a public project, if you have in your tender documents, that payments will just be made every six months, I think that would be consistent with the recommendations. But contritely, what can they do? I mean, if you want to bid on the job, you bid on the job, and you're stuck with that. So I think that's a really excellent point that was raised. I don't think that it's being addressed in this legislation because you can get around some payment issues by actually just establishing this really far off milestones.
ROGER GILLOT: But do you think, Tanya, that if, let's say, in theory, you did put out a tender providing for a payment once every six months. Let's say the general contractor bid on that and was awarded it. Don't you think that would be vulnerable to an action by a subcontractor? Let's say if that provision was cascaded down, and then the sub could bring an action and say, this payment regime is not consistent with the Prompt Payment provisions of the Construction Act or whatever it is that gets enacted?
TANYA LITZENBERGER: But I don't think there's a requirement. I mean, the timelines under these recommendations start from the payment application. I mean, the legislation would have to be drafted differently to be able to capture that because I don't think that there are protections, unless I've missed it, in reading through that actually protect the trade to ensure that they get some regular payments here. And they're actually keeping the peace when paid clause in, so money doesn't have to flow down, whereas I think in the UK, you don't have to pay when paid clause in? Or I don't recall--
MARK LAWRENCE: They've been outlawed by our Construction Act, so it's slightly different. But I think the point remains, and Doug was making it. It's taking us 20 years to get a Court of Appeal decision. We're looking at this particular issue. There's a huge gray area between the minimum compliance that the act sets out and what the parties are free to agree in their contract. And where that line of compliance is is perhaps a bit of a gray area, even for us 20 years later.
PATRICIA STRINGER: So I think it's also the timing of the invoice that can be contracted out of rather than the payments, right? So the payment stays at 20 days. It has to be done within the 28 days, but it's the invoice timing that can be-- so you can have six months to submit an invoice and be doing whatever behind the scenes to collect that and information and whatnot.
So that's where it gets a little funny. Does that meet the minimum requirement? I guess so. And then, in terms of the milestone payments or invoice, being able to submit an invoice based on milestones, I guess, there's a requirement or recommendation that that actually be disclosed in the tender documents that there's some knowledge of the subset. This is what they were signing up for that now, even though they have to be paid 28 days from the time the invoice gets issued, that invoice can only be issued every six months.
ROGER GILLOT: And it's interesting, isn't it? Because in a way, you could argue that the desire to facilitate milestone payments could be seen as conflicting with the normal monthly payment regime. But because the subjugates would get notice of it in the tender, I guess the assumption is they would have to build in a financing cost into their bid to the general to be able to carry that for six months. If it was every six months or whatever the payment period was--
TANYA LITZENBERGER: Which would ultimately cost the owner more, and I think owners want to be responsive to the industry. s I'm sure the private sector would disagree a lot but, the public bodies do try and meet with the different organizations to find out-- what do you hate about our tender documents? Or what are the time periods for payments? What are the issues that you have? And although they may see the changes being made very slowly by public bodies, their they're public sector is incented to make some changes because then, ultimately, the price of projects should drop.
ROGER GILLOT: So I'd like to ask a question of you, Patricia. The act provides for a 28-day payment period as between the owner and the general contractor. That is 28 days after submission of a proper invoice, but it only provides seven days for the payment period on the part of a general contractor. So in your role as is the GC, how do you see that playing out?
PATRICIA STRINGER: Yeah. So I mean, in theory, I guess anything can work, right? You will have to now pay within seven days, which is very administratively burdensome. But in theory, I guess what would have to happen is a lot of this infrastructure for payment and proper payment will have to be established beforehand because obviously, the way this will work is the subs will submit their invoices to the GC. The GC will then submit to the owner.
So there is a process that happens ahead of time. And again, in the perfect world, you can agree on-- you can't vary the time period within which you have to pay. But what you can agree on is the preconditions for a proper invoice and the timing of the proper invoice. So you can have a lengthier period of time to assess everything that makes up that proper invoice and whether the sub has put it everything that needs to be put in. It's part of the preconditions.
I guess, you can have a very strict regime and detailed regime to make sure that everything is properly listed. So you've really assessed it. Will that be huge and burdensome? Yes. And if anyone all of us who have seen construction projects, things just don't happen that neatly. Things get forgotten. Things get sort of invoiced later. And then what happens? And that's where we run into some of the issues here, where the legislation will have to be crafted in a way that maybe addresses some of these things. Or if not, then the courts will decide how this all pans out.
But I mean, this is where we're going to run into. How burdensome are we going to have to be? Or because we're sort of giving up rights on that seventh day, we don't pay. Or if we haven't done something, submitted something that we should have submitted, or if a sub hasn't done that, are they pretty much out of luck?
TANYA LITZENBERGER: I think payers always going to take the position or will often take the position that it's not a proper invoice. And therefore, the clock doesn't start, so you can see that there'll be a lot of--
PATRICIA STRINGER: Litigation there.
TANYA LITZENBERGER: Litigation, yeah. I don't know if I don't know of a proper invoice leads to litigation or adjudication. That's not very clear. We got this question over here.
ROGER GILLOT: Yes. Question?
AUDIENCE: You've been talking about the terms of the construction [? administry. ?] How about on the A and E side, architects and engineers?
TANYA LITZENBERGER: Oh, same. Yeah. So contracture under the Construction Lien Act is anyone who's in a contractual relationship with the owner. So on a design bid builds a model, an owner would have a contract with your architect engineer. So it's the exact same thing that flows. Yeah.
ROGER GILLOT: And we'll talk a little bit about the ability to separate the design from the contract administration from a whole back perspective. We'll talk about-- yeah. That's what you wanted. We're going to talk about that--
TANYA LITZENBERGER: And you've going to like the answer
ROGER GILLOT: Yeah. You're going to like the answer. Yeah.
Talk about that in a minute.
TANYA LITZENBERGER: There's someone else.
ROGER GILLOT: Oh, sorry. Another question-- yes? [? Tober? ?]
ROGER GILLOT: Yes, so that is one of the recommendations, and that is that project co will be considered an owner.
PATRICIA STRINGER: But that's also an interesting part as well in terms of the 20 days payment and how honors will be to just pay as soon as it happens because on P3s, the contractor's work doesn't always coincide exactly with the milestones that trigger the payment and all of that. It gets very messy, right? So again, potential for things to get missed.
ROGER GILLOT: Yes?
AUDIENCE: All right. Here's the fault [? in Tober's ?] question. If project code is due to be a statutory owner, I know the ultimate revenue of the [INAUDIBLE] could sell the owner's features to the land. So what would they be selling? Do you-- consider that a holdback obligation?
ROGER GILLOT: Sure. Go ahead.
TANYA LITZENBERGER: Well, I think the holdback obligation is going to fall to Project Co. In those circumstances, I think that will be the intent, and then the lean will be against those holdback funds. I don't know how that's going to work in practice.
But I mean, the leans, if it's provincial lands, they're not actually being registered against those lands anyway or if it's roads, municipally, it's not against the land anyway. It's just a charge against the whole back that's being held, so there'd have to be some type of arrangement to make sure that that money is there because of project co disappears that there's something where the owner, the authority is, ultimately, has some type of liability.
ROGER GILLOT: I'd like to just follow up on something Patricia said a second ago and to ask Doug and Mark for the UK experience. When we were talking about the fact that the general is going to have to respond within seven days, which is obviously very quick, you were saying imagined that, basically, you'd have to start beforehand. And so I wanted to just ask Doug and Mark. Is that the experience in the UK?
As I understand it, in the UK, there is a submission of a proper invoice and then certification by the architect or engineer takes place. And then the owner has to decide whether to serve a notice to a pay less notice, basically, to set off money, and all of that has to occur within the 28 days or 30 days or whatever it is. So to Patricia's point, do the parties essentially get started early? And is there some kind of a pre-submission and then the payment certifiers gearing up in advance because that, in practice, I can imagine certainly for a seven-day period? I mean, that would have to happen, so I'm just wondering what the UK experiences on that front.
DOUG WASS: That's exactly what happens. In practice, parties are gearing up for the monthly valuation cycle well in advance. And generally, it's not always generally here. The process will be started by the contractor, making an application for payment. That's normally required to be seven days before what we call the due date.
And then five days after the due date, there has to be a certificate issued. And so we build in a bit more time than it appears to be envisaged under your act, but it's still only 12 days. And the way people get around that is really to make sure that they're well prepared in carrying out the valuation exercise in advance of the formal procedure. I mean, clearly, when parties start to fall out, then increasingly, they seek to take advantage of the short time scales.
ROGER GILLOT: Well, thank you. That's what I would have expected, and I know that's very helpful. I'd like to ask Tanya question. That is we were talking a minute ago about the pay when paid regime that's going to be allowable under the recommendations. And what it says is that, for example, if the GC or another payer doesn't get paid by the owner, then they would be able to not pay those below them.
But they would have to serve a notice to people downstream to say, number one, we've not been paid by the owner, number two, to provide the reasons for nonpayment, and number three, something I found very interesting, they would have to undertake to commence proceedings-- forced payment. So when you think about how this is all going to come together, when you look at the mandatory adjudication regime, does this basically mean that every single time an owner is paying a little less or is paying a little less, we're going to be into the adjudication process?
TANYA LITZENBERGER: That's-- how it reads to me. And I think that's an issue I'd be interested to hear what the UK perspective is on that because otherwise, there would be constant adjudications or litigation. I'm not sure. And the non-payment, maybe because there's a deficiency, or it could be because there's an issue with the invoice on whether or not it's a proper invoice, and it seems that there can often be non-payments.
But there's no time period. If the owner doesn't pay the GC, the GC doesn't pay us up. The GC has to tell the sub that it hasn't gotten paid, and the GC has an obligation to start these proceedings So it's not, if after 10 days or-- that, I think, will have to be adjusted. Yeah. I don't know if there's a UK similarity at all.
MARK LAWRENCE: The short answer is there's no equivalent because any pay when paid clause is void under our Construction Act. And say the whole regime about anyone is entitled to adjudicate any time is it's in the hands of the person who wants to adjudicate. There's no mechanism where a GC might have to promise its subcontractor that it's going to go after the owner for a payment. In Roger's example, if there was only a slight underpayment, then the general contractor and the subcontractor might simply take the view that it's not worth adjudicating over that sum in that month, whereas in these proposals, at least it seems that the general contractors might be forced, even for a very minor underpayment. Otherwise, it might be in breach of this undertaking.
ROGER GILLOT: And I guess we'll have to wait to see through the draft legislation, but it certainly seems like a bit of a draconian system if they're forced to adjudicate everything.
PATRICIA STRINGER: And just to add to that, the other issue that we were chatting about beforehand is, what does that mean to start proceedings? Is it when you have, for example, P3 contracts? You have a very detailed dispute resolution process. It starts with negotiation. It goes to the ICC, and there's an adjudication process that's optional.
And the act says that, basically, I think it says that it has to be the adjudication process has to be the minimum that you can have other processes that are greater than in place. But then it leads to the question, what do you do? Does it just mean a notice of dispute, a notice to negotiate the issue, actual adjudication because then you get lead into that month's dispute starts?
And then the next monthly invoice gets published, and then that month's dispute starts. Well, this dispute is still going. And how do you deal with all of that? So there are certainly a number of questions that will have to be fleshed out in the legislation that deal with that, and I'm sure we'll touch on that later on as well.
ROGER GILLOT: No, that's an excellent point. It's hard to imagine how it would all--
PATRICIA STRINGER: Which process?
ROGER GILLOT: Exactly.
PATRICIA STRINGER: It's already confusing.
ROGER GILLOT: Is it just negotiation? Or is it a full-blown court proceeding? So it's interesting. I wanted to ask a quick question of Mark and Doug. Are trigger under this product payment legislation is the submission of a proper invoice? And I understand that in the UK, it's the same, but there's a debate in the literature about whether certification by the engineer or architect should be the trigger?
And obviously, from the perspective of an owner, I think it would provide more comfort that the payment certifier had said, yes, you should pay x dollars, and then you have a certain number of days to pay. But having lived through this in the UK, do you think it would be better to use the certification by the consultant as the trigger, as opposed to the submission of a proper invoice?
MARK LAWRENCE: The requirement under our Construction Act simply requires there to be an adequate trigger. Say the parties can agree that the contractor's invoice or application for payment is the trigger. Equally, they are free if they so wish to agree that certification is the trigger. But in our experience, it's almost invariably agreed that it's the contractor's request or application for payment that is the trigger, which is what's being proposed here as well.
And in my view, Doug will correct me if he disagrees, but I think it can work as a matter of logic. It does work as a matter of practice over here, simply because the application for payment is just the trigger. It's not the final say on the amount that's sowed. It just triggers evaluation process. But usually, in the UK, follows or runs as follows, the contractor applies for a payment. The certifier then certifies the payment that it thinks is due, which can be less than the application for payment by the contractor. And then on top of that, the employer can issue a pay less notice to indicate that it's paying less than even what has been certified.
So I think so long as the trigger is nothing more than that the trigger, then I think it works perfectly well. And it makes sense because, at least our experience, before our Construction Act came into place was that if you required a certificate, either from the owner or independent certifier, that process could be frustrated by the owner simply delaying issuing that certificate, for example, whereas in our current system, invariably, the person that wants the money gets to start the process, trigger the process. But that's all it can do. It doesn't set the amount that's ultimately going to be paid.
DOUG WASS: And something that you might--
ROGER GILLOT: Sorry, go ahead.
DOUG WASS: I was going to say something you might be interested to know is that in our original Construction Act, it was entirely left open to the parties to decide what the trigger was. And actually. We had to amend that because there was so much abuse with parties agreeing that it was something that the owner did and then the owner never doing it and there being a lack of clarity about what happened in those circumstances.
So now, there has to be a default. So if the parties agree that it's something the employer is supposed to do, there has to be a default mechanism, whereby the employee doesn't do it, then the contractor can trigger the payment mechanism. So it's actually something that we tried to do in a different way, and it didn't really work.
PATRICIA STRINGER: Can you lend us the timelines for the UK? I was just going to ask if you could remind us what the timelines are for the UK?
DOUG WASS: The timeline-- it's generally under the parties agree that there's going to be a 28-day period. So the final date for payment will be 28 days after what we call the due date. After the due date is generally five days for a certificate to be issued, and then the withholding notice has to be issued seven days in advance of the final date for payment, which is the 28 days, so after 21 days. And if the parties don't reach that agreement, then there's the scheme for construction contracts, which sets out a number of different days. But that all depends on who issues an invoice first, and it's very complicated. So parties tend not to end up relying on it.
ROGER GILLOT: But I think the interesting thing to me about what you've said is that in the UK, the parties have the freedom to adopt different mechanisms. But obviously, the owners and payment certifiers have made themselves capable of processing these proper invoices and determining certification and determining the amount of set offs all within the 28-day period. So it can be done, I guess, is the answer that I'm hearing.
DOUG WASS: That's absolutely right
MARK LAWRENCE: Absolutely.
DOUG WASS: It's routinely done, and we make sure that the employer gets the last word by issuing the final notice because the idea is really that the employer or owner gets to set out what they think is due because they have to set it out and specify exactly how they reach that calculation. The contractor then has the opportunity to challenge it. The problem we had before is that the owner never really had to set out how they calculated the was due. And so the contractor didn't know what it could challenge and when and how.
TANYA LITZENBERGER: Right. I know it, though. If you have 21 days to serve your pay last notice under this proposed or these recommendations, it's only seven days. So from the time an owner receives a payment application, they have seven days to go get or have their consultant certifier to go out and review the work, see what all the deficiencies are, list them, show it to the owner, say, we think x has not been done.
Do you agree? Yes. Then that owner has to sign off on the letter that goes to the general contractor to tell them they're not going to pay them that amount, and that's all within seven days. And that just, to me, seems to tight of a time frame. Do you agree with that?
MARK LAWRENCE: Yeah. I mean, it comes back to your point, Roger, that Roger made earlier and, I think, Patricia about the process actually starts way before the formal trigger starts. If you know that you're going to have a monthly payment regime, the reality is the consultant team and the owner start looking and listing out the potential deficiencies and defects well in advance of that seven-day period in anticipation of the general contractor applying for the maximum payment that it feels able to apply for. But certainly, within seven days that process is open to abuse.
ROGER GILLOT: Such a short period. I'd like to ask the panelists to think for a moment about the milestone payment regime, and I'm going to ask Patricia to comment and Doug and Mark in particular. Prompt Payment Ontario recommended that if milestone payments were going to be allowable, there would be about six different requirements that would have to be met. Some of those requirements were adopted in the recommendations of the report. Some of them were not.
And some of the ones that were, number one, that the milestones should be based solely on work within the control of the payee, secondly, that a sub can only be subject to milestone payments if the general is subject to milestones, so in other words, sort of cascading them down the pyramid, and then finally, that no milestone could last longer than three months. I think it's interesting because we're in this P3 world. And in some cases, milestones are huge and enormous, and your job as a general contractor on a P3 is to understand your business and to finance that whole period. I'm sure. But do you think that the report should have adopted any of these recommendations for milestone payments? Or do you think that it's sufficient what the report has done.
PATRICIA STRINGER: I think it's probably sufficient. I mean, stepping back to where this all originated, the Prompt Payment legislation, which was sort of the sledgehammer approach and very rigid in the way it was structured and not adaptable to the P3 and to alternative financing scenarios, this went the other way, considering that and think and saying, OK. There's going to be a little bit more of the freedom of contract. So parties to those projects are in the best position to really evaluate their risks and to know what milestones should look like, how long they should be, how they should coincide with the balloon payments are being made, all of that.
So as long as the sort of transparent enough process, I guess, so that during the tendering process, a sub would know which was one of the recommendations that there's a milestone payments period or invoice submission period. That's probably ticks off that box that they know that, and that's what they're getting into, and they can protect themselves. Some of the other stuff went a little bit too rigid, I guess, the three month period, a little bit too constraining. Again, parties should have a bit more of the freedom of contract to decide those things. So I think it's probably sufficient.
ROGER GILLOT: And presumably, as you go down the pyramid if it's a milestone regime, at a certain point, you'll have to switch from milestones to monthly payments or labor materials that have to be paid when they're procured. So do you think that, let's say, it's a milestone regime. Your prime subs have notice of it through the tender process.
Would you then envision negotiating with the prime subs about whether you were going to make milestone payments to them, they would then speak to their sub-subs and so on? And whoever it is who is at the switch point, if I can put it that way, knows they're going to have a financing risk and knows that they're going to have to finance regular payments in the interim until they get the milestone payment cascading down. Is that sort of what you would envision?
PATRICIA STRINGER: Yeah. And I mean, this goes back towards again putting-- because we're against in the middle of this at certain points because we do act as-- we do have companies within our umbrella that act as prime subs. I wear different hats depending on the day sometimes. So this goes back to the leverage point, I guess.
The reason some of these other scenarios were put in place, like the three months and all of that, is, I guess, going back to the leverage that the subs will say they don't have and that they need a little bit more protection because even though you envision this process where they're aware and they can account for this risk, no, they'll say, if we don't want to, we still can't do anything about it. This is going to be imposed on us effectively, even though, really, that negotiation option is there.
TANYA LITZENBERGER: Yeah. And they might not know about it, really. All the way down, the material supply arm and just actually might not get notice of it and not realize, OK, I just dropped off all of these bricks. But OK, I'm not going to get paid for four months. That can be problematic.
But I mean, that's where the pay when paid clause is-- it's hard to make all these changes to the Lean Act to introduce prompt payment and adjudication and everything but to leave the pay when paid clause in. And I appreciate why it's really helpful for a general contractor because otherwise, they're going to have to pay the money. But then for the lower subcontractors in the pyramid, yeah, it's much harder.
But I like the flexibility with the milestones because there are projects where, for instance, the City of Toronto will have pumping stations and have them all being retrofitted. And there might be monthly payments, but then there's a completion of each pumping station. And it's all under one contract. But right now, it's just these monthly payments, and you have to retain hold back the whole time, everything there. If you could switch it up and have actual milestones every time when it's completed, you're done and move on to the next. It's helpful, and I think that subcontractors and contractors like that. It's a good change.
ROGER GILLOT: Thank you. And yes, Jake.
AUDIENCE: Hi, Roger. So just going on this topic, and related to the seven day notice for pay less notice mechanism, what I'm struggling to reconcile is a milestone based payment regime by definition means you have a single binary event. Yes or no, did it achieve it or not. And there is a single dollar amount of payment for that event.
So is this saying now, in an owner and GEC context, where there's a milestone based payment at play, is this saying that the owner within seven days of receiving an invoice has to somehow parse that whether the milestone has been achieved. And then to somehow say here's my value of uncompleted portion of the milestone? It's supposed to be binary. I don't get it.
ROGER GILLOT: I agree with you. I think it's a problem and Tanya or Patricia, would you like to comment on that? To me, the report doesn't really address that.
TANYA LITZENBERGER: Yeah, I agree.
PATRICIA STRINGER: Yeah, it goes without saying that same scenario, right? That the milestones don't just don't coincide with exactly what the subs are doing and how they're going to invoice, right? There's that disconnect between the two. So that's definitely not addressed, and it's one of those, who knows.
AUDIENCE: It's like taking a literal extension, the owners can say, you didn't achieve, so I'm paying less by 100%. Paid nothing, right? That's how much I'm paying less.
ROGER GILLOT: Yeah, either the pumping station is--
PATRICIA STRINGER: What the sub did or didn't do, or the GC did or didn't do in terms of the value of the work they've done to that point.
AUDIENCE: It's not equipped to say, it's not a schedule of values based concept. This whole thing, mechanical completion of the pumping station or whatever was worth x. How are you meant to parse that?
ROGER GILLOT: And that's a very good question. And I think the people who drafted the act will have to grapple with that. But in my view, anyway, it's not addressed by the report.
TANYA LITZENBERGER: I agree. It's not addressed.
ROGER GILLOT: Yeah. And I just wanted to ask Doug and Mark, obviously there's a focus on milestone payments. Because what we're seeing is our legislation moving from the dinosaur age in 1983 to today, the word world of P3's, with milestone payments obviously being more common. Do you have a regime under your UK statute to deal with milestones, and how does that work?
DOUG WASS: Milestones are a completely acceptable way of assessing interim payments under our system. And it rather comes back here to the point I was making on the court of appeal decision we recently had. It seems that it would be acceptable here to set a milestone which couldn't be achieved until the day before practical completion, and that would be an adequate mechanism.
And so it seems as if there's almost complete freedom of contract, and there's always something that generates a payment before the final payment. And then that's a fine.
Milestone payments as a matter of industry norm is pretty unusual here now. Most of the time, it's its monthly interim payments that are agreed in the industry, not by reference to particular milestones. It happens, but it's pretty rare.
ROGER GILLOT: Thank you. Well, I'd like to move on now to the mandatory adjudication provisions of the report. And so I'm going to give you a brief summary now and then we'll go on to a discussion with the panel.
So what the report recommends is a system of mandatory adjudication be read into all construction contracts in Ontario. Parties will be free to create their own adjudication regimes in their contracts, so long as those provisions are consistent with the act. And if they're not consistent, then the mandatory provisions will be read in.
What the provisions will basically say is that any party to a construction contract or subcontract will have the right to refer disputes to adjudication. The adjudicators will be, at first instance, selected by the ministries, and they will have a minimum of seven years of experience in the construction industry. And they will be certified by a nominating authority, which will be created under the act. And they will be a member of a self-regulating profession, such as an engineer, architect, lawyer, accountant, or quantity surveyor.
One important provision is that the adjudicator will be nominated after the notice of dispute is served. So you will not have a situation where you appoint your adjudicator for the life of the project. And the idea is that you'll assign an adjudicator with experience in the particular dispute that is being referred. If it's a legal dispute, it'll be a lawyer. If it's a dispute about an engineering issue, it'll go to an engineer. That's the intent.
The way it will work is a very, very fast track adjudication system. The notice of dispute will suggest an adjudicator. The parties will have two days to decide whether they agree on one. And if not, it will go to the nominating body, and the nominating body will indicate within five days who the adjudicator is going to be.
And then at that time, it will go into a very fast track system involving 30 calendar days from the time of the appointment of the adjudicator to the written decision.
So in that 30 day period, the adjudicator will investigate, gather evidence, documentary production, a hearing if the adjudicator decides to have one, interviews, expert reports, on site investigations, everything. So it's quite a stunningly fast process.
The decision of the adjudicator will be binding on an interim basis. And what that means is that if there's an order for payment, that payment must be made. It will be enforceable by the courts. However, it will only be an interim decision. So at the end of the day, if the parties decide, they can then go to the courts and have a full blown trial on the issues. So the decision will be interim until either finally determined by the courts or agreed by the parties that it is a permanent decision.
The claims which can be submitted to this form of adjudication is actually a little bit unclear. And we've had a discussion about this among the panelists. But it basically is all monetary claims flowing from a submission of a proper invoice. So that would include the valuation of work, the valuation of change orders, the valuation of set offs.
The report says delay issues as they relate to claims for payment. So there are some ambiguities in the report. Because what does that mean? Does that just mean if you pay me late, under the prompt payment regime, does that mean schedule but not consequential loss attendant upon delay?
So it's a little bit unclear if all delay claims would be included in the mandatory adjudication regime. And it's also a little bit unclear whether negligence claims involving design professionals, and whether fee claims for design professionals, would be included either.
But certainly, the intent is clear that anything to do with entitlement to payment, change orders, or set off as against payment would be included in this very, very quick regime.
So that's what we're looking at. And I'd like to turn first to Mark and Doug, because the UK has had, as I understand it, a similar regime in place for a number of years. And so I think, based upon the discussions I've had with people here, this is quite a shocking prospect for the Ontario industry if I can put it that way.
So what was the UK experience over the last 20 years?
MARK LAWRENCE: It's an interesting experience. I can tell you that. I'm still in shock after 18 years. I mean, adjudication, just to give you a sort of potted history of how it came about in the UK. It was an attempt, after abortive attempts to make arbitration shorter and cheaper than court proceedings had pretty much failed. And the construction industry in particular had to look for something else.
And what we came up with was this 28 day adjudication. It's a bit rough and ready, as I think we'll come on to discuss. A lot has to be done. A lot of information has to be digested by the parties and by the adjudicator in that time.
But what you get in return for that sort of rough and ready justice is a relatively inexpensive, very quick decision making process. And in the context of a prompt payment regime, as we're looking at here, that's absolutely critical to making sure that the prompt payment regime has the sort of police force behind it. So that money keeps flowing in the construction industry and doesn't get held up by a dispute, which a court might take 12 months to resolve.
So I think it certainly has its criticisms, and no doubt we'll come onto that, but it's an absolutely essential process. Certainly from our client's point of view-- you might hear differently from the lawyers-- but the clients and the construction industry as a whole sees this is a very good thing.
TANYA LITZENBERGER: Have a question. In the UK, you don't have liens, whereas this is supposed to be happening alongside lines. And I feel, there's a subcontractor, let's say, that's owed $50,000 and they're about to finish work. They're going to lien the job, but then it might also trigger some form of adjudication.
And let's say they succeed in that, and they get paid $50,000. But they don't know what will happen at the end of the job, so they keep their line in place. So from an owner's perspective, that means you're paying $50,000, and you're having to post a lien bond to get that $50,000 lien off of title. The end of the day, I don't know how that gets resolved. How an owner is compensated for that, or a general contractor, if the owner ultimately passes on that cost to the general contractor, which is what owners like to do.
PATRICIA STRINGER: Yes. And--
TANYA LITZENBERGER: And that adjudication won't happen between the owner and the trade. Even if it's a prime sub, it's adjudication between the owner and the general contractor, and then a back to back adjudication between the general contractor and the sub. So the GC has to go to two adjudications. They're stuck in the middle of this problem.
I see it. I don't know how to resolve it. I'm just raising it as an issue, and what differentiates this new proposed legislation a little bit from the UK.
PATRICIA STRINGER: And my understanding is the UK looked at our lien act and said no. We're not going to have a lien remedy. So I don't know if you can maybe comment a little bit on, was that part of the issue? That there was sort of a conflict within the different processes. But my understanding is UK did not want the lien.
DOUG WASS: We looked at a number of different processes. I don't know why we rejected the lien. But the real problem that we had in the industry before the construction act was insolvencies. Because owners and main contractors who are just holding on to money for no good reason-- and I'll explain why they were holding on to the money-- and there was no quick, cheap process for people to try and move cash flow on.
The interesting thing that we've seen in the UK is it was always thought that this would really all be about cash flow, and then everyone would go on and fight out their disputes in litigation or arbitration. What the industry has found really useful is that adjudication tends to facilitate settlement. And it doesn't mean that the parties say, OK, we're going to respect the decision of the adjudicator and accept it.
But what it does is highlight to the parties what even an initial view of a very, very experienced construction lawyer or other professional would take of the particular facts and scenario that's put before them.
And even though they will say, well, there might be a different outcome in court when people have got more time to go over everything, actually they take it as a pretty good steer and a pretty good starting point for negotiations.
So we tend to find that much less is finding its way through to the more expensive court and arbitration processes than we used to, which isn't necessarily a good thing for lawyers, but it's one of the things that the industry really, really loves about it.
We have got-- and we can go through with you-- there are problems with adjudication. You can imagine here, and it's rather unlike the system that you're proposing to have, absolutely everything can be referred to adjudication, including large fund account disputes on a project that's gone for five years, extension of time disputes on a project that was overrun by several years.
And all of those things can be referred to adjudication and have to be decided within that timescale, and that really is a difficulty. And it leads to ambush, because of course, a contractor who's submitting an extension of time to adjudication can spend six months preparing that and then serve you with 50 lever arch files and lots of expert evidence and witness statements. And then that has to be dealt with through this short process.
And so the claimant, if you like, has a very, very large advantage in those circumstances. And so there is a bit of rough justice about it.
What we have found here, as the process has developed, is that the court's given guidance about what it is and isn't prepared to accept. And so while it is a 28 day process, and adjudications don't generally become very long here, the courts have given pretty clear guidance to our adjudicators that if they really do think that a party has been ambushed, then the adjudicators should be suggesting what timetable the parties ought, sensibly, to be agreeing.
And there might be two consequences to the parties not agreeing that sensible timetable. One might be that the adjudicator will resign, because he or she says they can't comply with the principles of natural justice.
Or alternatively, and this is the real reason that parties tend to agree slightly longer timetables, is because if you're the party that says, no, I'm not going to agree a more reasonable timetable, you're irritating your decision maker, which of course is never a good thing.
And secondly, the adjudicator might go on to make a decision, but you've got a pretty good idea that the adjudicator is going to start from the position that you are requiring him or her to decide this much more quickly than he or she really wants to. Because you're hoping you're going to pull the wool over their eyes and you need to rely on these short time scales, and therefore the adjudicator is going to be looking at what you've put forward very, very carefully.
So that we have kind of invented mechanisms to deal with things like ambush, but I wouldn't want to give the impression that they've really solved the problem. Because the starting point is always the sort of 28 days.
And my view-- experiences will vary-- but an adjudication that goes on for much longer than twice that length of period, so effectively two months, is a long adjudication. It's very, very rare for them to go on for longer than about six to eight weeks, even on the big final account like disputes.
And you do just have to accept it. It's rough justice, and you gradually develop tactics and ways of dealing with that. And get used to putting, as a defendant, a very negative case undermining the evidence relying on the burden of proof, as opposed to putting forward the positive case that certainly, 10 or 15 years ago, construction [INAUDIBLE] here were always much more comfortable with.
ROGER GILLOT: Yes.
AUDIENCE: Just on this point, I'd like to get an understanding in the UK as to whether or not the qualifications they've set forward in Ontario [INAUDIBLE] years experience is comparable? I'll tell you, I've been in this role for 20 years. I know when I finished my seventh year, I thought I could conquer the world. But after 20 years, I realized if I had been asked to make a communication in my year, I certainly would not have gotten any of those decisions right.
ROGER GILLOT: So the question, Mark and Doug, is relating to the qualifications of adjudicators. And here in Ontario, the proposal is, as I mentioned a minute ago, that some of these professionals with only seven years' experience in the construction sector would be making decisions. And Rocco Sebastiano, one of my partners in the construction group here, is saying, when he was seven years out, he would not like to have thought he would be making decisions.
So what are the qualifications in the UK? What are the minimum qualifications? And how do you find that in practice?
DOUG WASS: You will be surprised to hear that we have no minimum qualifications in the UK. And one of the things. I think there's two things that you're doing rather better than us, if I may say so, if these procedures were adopted. One is having a system for training and making sure that your adjudicators are appropriately qualified.
And I tend to agree that they probably need a bit more experience than the level of experience that's been suggested at the moment. But at least, you're suggesting that they do need to be qualified and have certain levels of training. That's one thing I think that is a big improvement on the system that we have. And a real issue that we have is the quality of our adjudicators.
We have somebody being appointed all the time, because they're well known for being good, and lots of others that end up being nominated and not doing a terribly good job.
The second thing that I think is a great idea, although I could see the scope for challenges through litigation, is ability for an adjudicator to make a costs award, which we don't have here. Which means that you do get parties running really, really poor cases for adjudication on the hope that they can just get away with it and they can confuse the adjudication. Do rather better than they might do in other circumstances.
Claims that are really very, very badly put together and sort of very misleading, evidence that you wouldn't dare put before a court or even an arbitrator. And people really just trying to mislead an adjudicator into making a bad decision in a short period of time. And there is absolutely no sanction here for that.
So I think a deterrent to that in your proposed system is going to be this ability to award costs for frivolous claims or claims that are made in bad faith.
Now, I do appreciate. I suspect you're going to say to me, that that's all going to be quite challengeable under your court. But I think it is good to have some kind of deterrent to people who just pursue spurious cases. Because even if you end up successfully defending them, of course, the problem is, you've racked up some costs in doing that, and you can't recover it from anywhere.
ROGER GILLOT: Well, that's fascinating, Mark and Doug, to hear about the UK experience. And it sounds to me like there's a good side to this mandatory adjudication. But that the fears that we've heard about the sort of rough justice aspect to it, and also the ambush aspect, are well-founded.
We've got about 15 minutes left, so I want to move on to hold back in a second. But I just wanted to give Tanya and Patricia the opportunity to comment on the mandatory adjudication regime proposal. If you have any comments that you'd like to share.
TANYA LITZENBERGER: Well, I had a question, just because in the normal course of a project, when there's disputes, you deal with that at the end, sometimes long after the project has been built. But now in this scenario, you could be running off to adjudications many times throughout the project.
And are there lawyers retained and hired for pretty much all adjudications to represent the different sides in each of these cases?
MARK LAWRENCE: Not necessarily, no. The whole idea behind adjudication in the UK, at least as it started out, was that this was a relatively simple process that, if you have a simple low value claim as a subcontractor or even a GC, you should be able to run that in-house without necessarily any lawyers touching any of the papers whatsoever.
The reality is, I mean, it's slightly self-serving, because what comes across our desks is the work that lawyers are doing. But lawyers are heavily involved in substantial adjudications when the stakes are high.
And that does mean that a GC or an owner might find themselves retaining external counsel several times during the course of a project. Not just, the project is completed and we have the following dispute we need resolved, and handing over that package to external lawyers.
I think it's a very real risk that you will be instructing lawyers throughout the project if you face substantial adjudication claims, or indeed if you are making substantial adjudication claims. Lawyer involvement can vary from zero, to shadowing and reviewing draft submissions, to actually putting together the entire case as we might for litigation.
And so it depends on the circumstances. Our experience is very skewed in that we are the lawyers that get involved in the adjudications. But it does happen a lot.
TANYA LITZENBERGER: Thank you. I do think it's helpful that adjudication is happening contemporaneous to the issues, so that you have everyone there. I know, certainly the city public body, by the time a project, is done if it's a long project, those individuals that were working on it at the beginning, where there might be some issues identified, may be working in another area of the city or in the private sector or in a different province completely. So yeah. I think adjudication is helpful in that sense.
MARK LAWRENCE: And with the best will in the world, even with the almost perfect recordkeeping, frankly several years after the event, not all the documents are there, not necessarily in the right order. Emails go missing. And so having a dispute resolved nearly contemporaneously does have huge benefits in terms of the evidence, both witnesses of fact and the documentary evidence.
And frankly, an adjudicator can walk onto the site at that time and see a problem before it's been covered up, potentially.
ROGER GILLOT: All of which is huge. Sorry.
PATRICIA STRINGER: No, I was just going to add. And I can see, because the concern is the fact that we're able to then reopen this at the end of the day. What I'm hearing is people normally don't. And the adjudicators work hard to sort of come up with oftentimes a middle ground, which makes it difficult for both sides to then open it up at the end, because they might get a result they like less. So I can see that.
Although in situations where one party-- a sub, for example-- doesn't get what they want at all, they're still going to have that lead at the end of the job. It's still going to continue.
So yeah, all those sort of considerations will come into play. And I guess we'll see how it will pan out at the end of the day.
ROGER GILLOT: Thanks. So I'm going to move on now to the hold back portion of our talk. So basically, the issue of hold back was very controversial in the report, and it was very polarizing. There was a lot of frustration on the part of contractors and subs that owners were not releasing hold back after the 45 days after substantial.
On the other hand, owners were equally vigorous in saying, well, they had to have the ability to set off for deficiencies. So it was a very fraught issue.
At the end of the day, what the report is recommending is that the sections of the Construction Lien Act, which at the present time are permissive. In other words, they say a payer may release hold back under the following conditions. That those will be changed to shall. So it will be mandatory hold back release.
However, the owner or other payer, will be entitled to assert a set off, but the owner would be required to publish a notice of non-payment due to set off, listing the claims and the amounts claimed as being set off against the hold back.
So the compromise that the report is trying to reach is to say that addressing the concerns of contractors, that owners have a sort of an amorphous, undefined set off claim, and they're not telling us why they're setting off, and so on. But on the other hand, allowing owners the opportunity to still assert that set off.
So they're trying to say, you have to release it, unless you can actually list what you're setting off for and for how much. So that's the proposed compromise.
Also, the recommendations are that the Construction Lien Act should be amended to allow for the phased annual or segmented release of hold back. And in the case of phased or annual hold back release, that would only be available on very large and multi-year projects. And for segmented hold back release, it would be permissible only for projects involving clearly separable improvements. And particularly, it's viewed as being applicable in the AFP or P3 space.
In the case of design consultants, to get to the question that was asked earlier, the report recommends that the parties be allowed to designate a segment of the consulting services contract as being design. Such that the holdback for the design portion of the work would be released after that part of the work was completed.
However, the report does not recommend that that be mandatory. So it would be up to the design professional or the consultant and the owner to decide.
The amount of the holdback is to stay at 10%. And there were some suggestions that it either be raised or lowered, but at the end of the day, the recommendation is that it remain at 10%.
The substantial performance formula is recommended to be updated basically for inflation. So when you have the 3-2-1 formula, it's going to be 3% of the first $1 million instead of the first $500,000, 2% of the next $1 million, instead of $500,000 and then 1% of the balance. And basically what the committee did there was just to look at the consumer price index since 1983, and that was the basis for that change.
So basically what we're looking at is, mandatory release of holdback subject to the right to set off, but the set off has to be very clearly defined, and a notice has to be sent. And also the other major change is facilitating phased annual or segmented release of holdback.
So I wanted to ask Tanya to comment as an owner, what is your reaction to the proposal that, yes, you can set off, but you have to service this notice.
TANYA LITZENBERGER: Yeah. I think it's fine. I think it's fair. I think when a payment isn't going to be made, that an owner should articulate what the reasons are. They should be well known already to the general contractor. It's probably an area of dispute leading up to the receipt of the payment application. So I think that's fair.
It says to publish, so I'm not sure whether that is Daily Commercial News, or what the intent is.
The set off amount, though, how it currently stands in the Lien Act, is that you can set off for damages, debts, claims, whatever, that you might have within that project as an owner, or outside the project. And that is being restricted now to just being within the project under these new recommendations.
And I appreciate that the intent of the Lien Act is to keep project funds within the project, and have the money from the top flow down and to make sure that all of the trades get paid.
I just suppose that sometimes there are circumstances where the city might have a job being done, let's say, some road work being done in Scarborough. And that same contractor and same crew has another contract in the [INAUDIBLE] and that's starting next week, when they're not done on Scarborough. And they just kind of throw their hands up and say, OK, well, we don't have much to do here. So we're just going to leave and we're going to start our work in the [INAUDIBLE]
And this does happen. And currently, the city is able to set off the costs of having that work completed in Scarborough by another contractor off a roster, probably slightly higher cost. So you can only claim the differential. And it can set that off against a payment that it might make in a [INAUDIBLE]. Well, that's going to be taken away.
So I think, in that circumstance, it's unfair to an owner. It's a tough one. Because I appreciate why trades, especially, want that removed to general contractors, because they want to see the money flowing down. But that is an issue. I can speak to the segment of holdback, but maybe you want to comment on this.
PATRICIA STRINGER: Yeah, interestingly enough, the recommendations don't talk about the contractor being able to set off. It only mentions the owner, which is a little strange, and may have just been a miss, so that's one head scratcher.
But it's sort of the same. Comments are the same. The mandatory release makes sense. And the recommendations generally make sense.
There's going to be some ambiguity. So I keep coming back to this because it's sort of the common theme as to it's sort of started by the fact that some of these recommendations are fairly broad, and their legislation's not yet in place, and we don't know exactly how these things will be drafted.
But some of the items that may arise is the owners retaining things like deficiency holdbacks. Because they have to release the hold back. So these sort of things might come up. And maybe that will be limited by the legislation. Maybe not. So all these things are sort of ambiguities that arise from these broad recommendations.
ROGER GILLOT: And Tanya, you said you had a comment about the segmented release of hold back.
TANYA LITZENBERGER: Yeah. I'm very supportive of that. I know design consultants have been wanting hold back release for a long time, especially at the completion of design, before they may be retained to be the contract administrator during the project build. Although under the Lien Act, they're just still a contractor and you have to retain those funds all the way through.
The City of Toronto are hearing constantly from design consultants. Release the money. No one else is keeping this hold back. Why are you keeping the hold back? Well, because we have to under the statute, or we might be liable for it.
So it's nice because internally the owners don't want to keep hold back forever. They're fine with releasing it. That work is done, so let's compartmentalize that work. Release the hold back, and move on to the next piece of work. And then it allows the money to flow, which ultimately should make it less expensive for the project. Especially for long duration projects, you don't have to have 10% of hundreds of millions of dollars being retained.
Yes. There's a question.
AUDIENCE: Quick question. [INAUDIBLE] alteration to the question. In the P3 law for infrastructure in terms of development, they have layered onto the requirements of substantial completion of the test [INAUDIBLE] Lien Act about substantial performance. And they've got other requirements around commissioning, delivery of documentation, what have you.
So you could certainly have a situation where you achieve substantial performance under the Act, and you actually have a certificate to publish it, but under the contract not be entitled to be paid, [INAUDIBLE]. Does this mean that still have an obligation to pay the whole debt? Even though they might not have an obligation to actually make the substantial completion payments?
TANYA LITZENBERGER: I would think that in any environment, the substantial performance should have all of the commissioning, everything done. Especially with the current formulas, there should be almost nothing left between substantial performance and completion.
So I'm not sure if you want to speak to that.
AUDIENCE: But I have a situation right now, and it's this [INAUDIBLE] project, where the independent certifier has agreed that the test of the act has been achieved. In his view, the requirements under the contract for substantial completion haven't been achieved. He's prepared to issue the certificate, but he's not prepared to certify substantial completion under the contract.
TANYA LITZENBERGER: Right. Because the Lien Act and the P3 models don't really work well together. And I think Infrastructure Ontario would like to set the Lien Act aside. Not there shouldn't be hold back or something, but just to follow the structure of the contract. And that's why, I think, the intent is that there will be certain exemptions or different definitions that will be used for the P3 model.
AUDIENCE: Yeah, because at the end of the day, you wouldn't be able to contract out of it. So if there is a requirement for the release under the act, you would be subject to it, which may not necessarily jive. And I'm hoping this is part of this process, where we're going to address some of these things that don't work well.
TANYA LITZENBERGER: But currently, the act is boss, so if that's beneficial to you, use it.
ROGER GILLOT: And I guess the question is whether you could set off, because of the failure to complete the additional requirements for substantial completion under the contract. I guess the problem is that presumably what the act is going to say is you can set off only within the definition of substantial performance. So I think the only way you'd be able to set off for those requirements would be if the act allowed it.
AUDIENCE: I actually did not think that as what they were saying. From an owner's perspective, you may actually have incurred a cost, because the contractor was delaying completion.
TANYA LITZENBERGER: By owner, do you mean the authority? Project co--
AUDIENCE: Well, let's take project code. So to the extent the project code was delayed, there may be a basis for contractual setoff for certain costs that were incurred [INAUDIBLE].
That may not go to the test of whether you achieved substantial performance. Whatever the test ends up being [INAUDIBLE]. So that may be a separate thing. You said you can't set off the [? back? ?]
ROGER GILLOT: No, I think you can. I think you can set off for that. Yeah. But I guess what I'm saying is it may be hard to monetize some of the other requirements that are free. Like maintenance manuals, or commissioning of equipment, or whatever. So it may be hard to make those two dovetail. Yeah.
AUDIENCE: [INAUDIBLE] The discussion's focused on purely the formal aspect of it. But as of yet they've found no part of it. [INAUDIBLE] The thing is ready for the owner's use.
So we've often had to define what does the owner's use mean in the construction contract to say, you have to do these things, because that's the definition of what it means for [INAUDIBLE] owner's use.
So we usually have to say the commission must be done. The [INAUDIBLE] manuals must be done. All those aspects to get around this whole argument, what does that mean?
TANYA LITZENBERGER: There is a recommendation now to speak to that issue. Where if there's going to be a delay, if you know, we can't commission this, because now it's December, and this has to be commissioned in the summer time. We're testing an air conditioning unit. So on agreement, it talks about there being consensual agreement between the owner and the general contractor.
You can agree to change the mark of what is essentially ready for use, so that you can move things up, and the formula. So you can say, OK, substantial performance should be at an earlier time, because there's going to be a delay that's known and understood by both parties.
So I think that's a helpful recommendation.
AUDIENCE: OK. What we've been doing in the past, it's not really described in the act that you can do that. But we've been doing it, and all the contractors do it. Because it's explained out in front of the tendered documents. That is how the owner would find it. So there's nothing in the new act that's going to actually prevent us from doing that?
ROGER GILLOT: No, the ready for use is going to be retained. So in theory, you could still do that. I don't see why you couldn't.
And what Tanya is talking about is, the report recommends a liberalization of section 2.2 of the Construction Lien Act, which at the moment says that the payment certifier can say that a portion of the job cannot be performed. For example, if winter has arrived, and so you can't do the winter work.
But what the courts have said about 2.2 is quite restrictive. You can only use it to take a piece out of the formula for substantial performance if it's an external unavoidable condition, like winter, that has brought that about.
What the report is recommending is that the parties can simply agree to change the definition to remove something from substantial performance. And so to Tanya's point, if you wanted to take out the commissioning or something, if there was circumstances which didn't permit it, then you could do that.
TANYA LITZENBERGER: Sometimes for a public body, it's that the funding gets lost, or there's been a change. And they say, OK, we don't want to do this other piece of the project right now. We're going to go back to council, and we're going to maybe do it next year. And you're like, OK, well what do we do? We don't want to be holding on to a hold back for an extra 12 months. Can we just carve it out, pay it, and then start up again in a year? And now it'll be easier to do that.
ROGER GILLOT: OK. So we're coming to the end of the panel portion of our evening. I'm going to briefly talk about what's next.
The Ontario Ministry of the Attorney General has already started discussions with the various stakeholder groups. And they've described these discussions as brief, one hour meetings, where they basically take the temperature of the industry reaction to the proposals.
And the timelines that have been discussed in the media are surprisingly short. They're talking about this stakeholder review process taking place in the fall, winter of 2016. And there have been references to draft legislation as early as spring 2017, which I would find absolutely mind blowing if they were to do it that quickly. I think that's probably a lot of false optimism.
But certainly the whole context here is that the government wants action. They want to do this. This process is going. And so everything that we can see suggests that this is a very real legislative initiative that will ultimately bear fruit in the form of some kind of legislation. Likely, I would say, more to the end of 2017, or even early 2018. But certainly, the government is moving on this.
So I'd like to thank each of our panelists for coming out today and for hooking in today from the UK, and particularly to Mark and Doug for staying up late England time and joining us. I have really enjoyed today's discussions. I found them very interesting and informative, and I hope you have, too. Please watch out for our Osler update, which will be coming out likely early next week. And please join us for a drink in the back of the room. And have a great evening.