Contractor
payment protection in the modern era1
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ince the beginning of the 20th Century, Canadian provinces have had some form of security for parties in the construction industry, through construction (or mechanic’s) lien legislation (‘Liens’). Liens are generally limited to the amount of money owed to contractors that improved the property under a contract or in quantum meruit. Liens sought to encourage construction in developing economies allowing landowners to use their land as security for improvements, at a time when credit was limited, whilst permitting contractors the right to secure payment if the landowner failed to pay by enacting the lien. Liens are alien in most common law jurisdictions except for the US2, where the concept originated, because of the maxim quicquid plantatur solo cedit3 and privity to contract. Liens provided protection to the economically weaker party but brought about risks to the landowner if a dispute arose between the contractor and a party in its supply chain. To combat this, landowners sought bonded contracts to protect against unpaid subcontractors and suppliers from asserting lien claims over a project. Today’s construction market is now partly regulated by surety bond underwriters, pre-qualifying potential bidders using bonds, which in effect creates barriers to entry. While revolutionary at the time, lien legislation is now generally seen as outdated, complex, costly and time consuming to enforce. It doesn’t seem to have solved the problem of delayed payment, where cashflow is the lifeblood of the industry.4 Holdbacks, lien trusts and bonds only prevent default of payment, all essentially an after-the-fact remedy. International experience Delayed or disputed payment within in the industry is a global issue. In the past, construction disputes only had the mechanisms of mediation, arbitration, and litigation to resolve disputes. The UK identified that delayed payment was 28 | CONSTRUCTION ECONOMIST | www.ciqs.org | Winter 2020
hindering progress within its industry, introducing legislation in 1998 to address payment delays and improve the flow of money. The HGCRA 19965 provides entitlement to staged payments, prohibiting ‘pay-when-paid’ provisions, the right to refer disputes to adjudication, and suspension of performance for non-payment on construction contracts. Other common law jurisdictions swiftly adopted similar security of payment provisions, although the payment and adjudication provisions are slightly different in each jurisdiction. Reform in Ontario Lien legislation didn’t address the practical issues of timing of payments or dispute resolution, there was a clear gap in this legislation. In 2015 Ontario, as the first province, instructed an expert review of the effectiveness of the Construction Lien Act 1990 (‘Act’) in achieving its policy objectives within a modern context. The consequent report6 confirmed that there was consensus in retaining existing lien remedies by stakeholders at all levels, albeit requiring more effective amendments. Clearly lien protection is sacrosanct to parties down the supply chain and too extreme an amendment to remove. The Report recommended lien modernisation provisions, a new statutory system for prompt payment and targeted adjudication framework to resolve payment disputes quickly. These formed the basis to Bill 142-Construction Lien Amendment Act, 2017, being ‘the biggest change in construction law in over 34 years’.7 Amendments of the Act are in effect since 1 October 2019. (i) Lien modernisation Significant amendments: increasing the time for lien claimants to preserve and perfect their lien rights, holdbacks can now take permissible forms such, as letters of credit or a bond, and mandatory progressive release of holdback in certain cases. To return to Table of Contents CLICK HERE
