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A Changing Of The Tides In The World Of Construction:

THE PROMISE OF PROMPT PAYMENT B y J o h a n n a M c N u lt y

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here is one simple truth in the construction industry, money needs to flow for work to happen. For those who are involved in the construction sector of the economy, you will know that there has been a lot of buzz about the recent amendments to the newly styled Construction Act, R.S.O. 1990, c. C.30, formerly called the Construction Lien Act. Some of the most significant changes have come about as a result of the fact that prior to these new legislative changes (which will take effect on October 1, 2019) there has been what some may call a broken system of payment in the construction industry. Contractors and subcontractors in the present environment of payment delays effectively finance the completion of projects on their unpaid work and unlike lenders in traditional financing models, their additional costs incurred as a result of payment delays are largely uncompensated for. The problem is a simple economic one. In order to operate your business you need positive cash flow at all times. Where you have negative cash flow, you are unable to continue to cover your business operating expenses (called “cash outflow”); which in construction can be quite high, as salaries, material and equipment costs and mobilization/demobilization costs are high and must be paid throughout the course of a project. Where cash inflow from payments received for work performed is delayed, what results is a situation where contractors and subcontractors have negative cashflow and need to use and often exhaust, all credit options. There is often little option for trades to cease work in a delayed payment environment because a work stoppage will result in further delays for the payment which ultimately originates from an owner. Several changes to the construction lien legislation in Ontario came into force on July 1, 2018, but the changes that will likely have the most impact on trades will be the introduction of the prompt payment schedule and mandatory adjudication for certain disputes scheduled to come into force on October 1, 2019.

Determinations will need to be made if your project is subject to the new rules at the time they come into force. But for those contracts to which it applies, the changes will effectively do away with the paywhen-paid model for payment on construction projects. Once in force, owners, contractors and subcontractors must either pay or dispute the required payments through a procedure regulated through the Construction Act. Under the new regime, owners must either pay the amounts owing, under what are called “proper invoices,” no later than 28 days after receiving a proper invoice from a contractor, or provide a notice of non-payment with respect to some or all of the invoice, and pay any non-disputed amounts within those 28 days. Contractors receiving full payment from owners must pay each subcontractor who supplied services or materials under a subcontract that were included in the proper invoice to the owner within seven days after receiving payment from the owner. Where owners provide a notice of non-payment to a contractor, or if an owner fails to pay, a contractor will either pay a subcontractor within seven days of receiving the notice of non-payment from an owner, or the contractor will provide a subcontractor with a notice of non-payment and they will start adjudication within 21 days. Subcontractors have seven days from their receipt of payment from a contractor, or their receipt of a notice of non-payment from a contractor to either pay their sub-subcontractors or provide the sub-subcontractors with a notice of non-payment and start adjudication within the 21 days. Prior to the new rules coming into force, companies would be wise to consider reviewing their practices to ensure they are ready for compliance and consulting with a lawyer if they have any questions or need direction on how to comply with the rules in their business operations. BL Johanna McNulty is a member of the Construction Law Department at Lancaster, Brooks and Welch LLP and her practice focuses on helping contractors, developers and owners navigate the complex world of construction liens, disputes and litigation.

To read the full article please go to http://lbwlawyers.com/news/publications/ The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.

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BUSINESS LINK NIAGARA | JANUARY 2019

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