Construction Lien Act Review
October 12, 2016 – for a copy of the Construction Lien Act Recommendations and OGCA comments, please check out the News section (members only).
As the stakeholder community is aware, in February 2015 the Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure (the “Ministries”) retained Bruce Reynolds as Counsel to conduct an expert review (the “Review”) of the Construction Lien Act (the “Act”), with Sharon Vogel acting as Co-Counsel. The Review involves a review of the effectiveness of the Act in achieving its policy objectives within the modern context, and is also to address the issue of promptness of payment and the effectiveness of dispute resolution under the Act. A fundamental aspect of the Review is its inclusion of broad industry consultation.
By way of overview, in general the Act provides suppliers of services, materials and equipment to construction projects with:
- security for payment, in the form of the lien itself, and in particular the 10% hold-back;
- protection against the diversion of funds that were committed to the project, in the form of trust remedies; and
- a summary procedure for the enforcement of lien rights.
The Act has functioned reasonably well since its inception in 1983; however a number of significant developments have resulted in the need for its review and modernization, including:
- the increased sophistication of both standard form and bespoke construction contracts over the last three decades, including the widespread use of phasing of projects and of different project delivery systems such as EPC and design-build;
- the widespread adoption by contractors and major subcontractors of “pay when paid” and “pay if paid” provisions in their standard form subcontracts;
- the evolution of “prompt payment” or fairness of payment legislation in other common law jurisdictions, and the corresponding desire on the part of suppliers for similar rights to be adopted in Ontario;
- the international development and evolution of statutory adjudication and Dispute Review Boards as a means of promptly resolving construction disputes;
- the relatively recent advent of a major infrastructure renewal program in Ontario, which is now taking effect within the provincial transportation sector, including road-building, and regional and municipal mass rail, LRT and subway transit;
- the utilization of the Public Private Partnership method of project delivery for major public works, with its restricted rights to additional compensation for contractors and subcontractors, and its extended payment arrangements;
- the adoption by government entities and municipalities of procurement policies that allow the government entity or municipality to exclude potential bidders solely on the basis that the potential bidder has previously brought legal proceedings against them;
- the widespread use of electronic record keeping and communications on construction projects, resulting in massive numbers of documents that have to be “managed” within a significant construction lien litigation;
- the effect of quantitative easing on interest rates, diminishing the number of insolvencies in the construction industry and therefore the perceived importance of the availability of 10% of the contract price as holdback;
- the increased use of mandatory arbitration provisions in construction contracts at all levels, without providing for the consolidation of multiple arbitration relating to the same dispute(s);
- the increased utilization by insolvent companies of the federal Companies Creditors Arrangement Act, RCS 1985, c.C-36 (the “CCAA”), which may render lien and trust rights unenforceable;
- the enhanced powers of the Canada Revenue Agency to make third party demands that take priority over lien and trust rights; and
- the potential abuse of the right to serve a written notice of lien.
In essence, the issue of security of payment and the associated issues of promptness of payment and expeditious dispute resolution, highlight the tension between freedom of contract, on the one hand, and legislative intervention on the other. In Ontario, the policy decision to regulate security of payment to a limited degree has been accepted for generations, as embodied in section 4 of the Act which makes void any effort to contract out of the Act. Accordingly, the task of the Review is to provide the Government of Ontario with legal advice as to the form and extent of a regulatory intervention for the future in order to better achieve sound policy outcomes for the construction industry of Ontario.
The OGCA has undertaken to provide input into this review process. Recently we conducted a membership survey to clarify the interests of our members and to align our position with your needs.
This new section of the website will be dedicated to keeping you up-to-date on the Construction Lien Act review process so check regularly for posts and new information.