On April 30, 2016, a Report was delivered to the Ontario Government proposing amendments to the Ontario Construction Lien Act. This report may, in whole or in part, soon be implemented by the Ontario Legislature. For this reason, those engaged in the construction industry or construction litigation in Ontario must immediately become familiar with the recommendations.

There are 100 Recommendations in the report. They can be divided into seven parts:

  1. Amendments to the general provisions relating to the existence, protection and preservation        of liens;
  2. Summary procedures in lien actions;
  3. Construction Trusts;
  4. Prompt Payment;
  5. The introduction of Interim Adjudication in construction projects;
  6. Sureties;
  7. Technical Amendments.

There are 30 recommendations in the report relating to Summary Procedures and Interim Adjudication. Those recommendations concern the dispute resolution mechanisms for construction claims. While those recommendations are important, this article will concentrate on the recommendations relating to the existence and enforcement of lien claims, that is, the recommendations which affect the actual project, short of dispute resolution.

Those involved in the construction projects should be aware of all the important recommendations. They are listed in the Summary in Chapter 13 of the Report. That chapter indicates the page of the report where each individual recommendation is discussed, so the reader can then go back and review the Context, Stakeholder’s Views and the Analysis and detailed Recommendations of the authors of the Report with respect to each Recommendation.

The following are the Recommendations for changes to the Construction Lien Act that I consider to be particularly important or contentious, other than those in the Summary Procedures, Interim Adjudication and some of the Technical Recommendations. I have not included any of the Recommendations that the present provisions of the statute remain unchanged, only those where a change is recommended. The numbers of the Recommendations shown below are the actual numbers of the Recommendations in the Report.

The full Report may be viewed by googling Striking the Balance: Expert Review of Ontario’s Construction Lien Act, or at: https://www.attorneygeneral.jus.gov.on.ca/english/about/pubs/cla_report/

Lienability

            Improvement and Capital Repairs

1-2.The definition of “improvement” should be amended to refer to “any alteration or addition to the land and any capital repair to the land”.

“Capital repair” includes all repairs intended to extend the normal economic life or to improve the value and productivity of the land, or building, structure or works on the land, but not maintenance work performed in order to prevent the normal deterioration of the land or building, structure or works on the land and to maintain them in a normal functional state.

Owner

  1. The definition of “owner” should be amended to provide for multiple owners on public-private partnership projects (“AFP projects”) involving a project manager (“Project Co”) so that Project Co is included as an owner (along with the Crown) and Project Co is responsible for maintaining holdbacks.

Price

  1. The definition of “price” should be amended to include direct out-of-pocket costs of extended duration. However, “price” should exclude damages for delay.

Whether cost arising from delay may be part of a lien claim has been an issue in many cases. This recommendation is that they should not. It may be particularly contentious as it relates, not to clarifying the statute, but to a substantive issue upon which the views of owners and contractors may differ.

Municipalities

  1. Municipal lands should not be subject to a court-ordered sale. Lien claims against a municipality should be “given” by delivery of notice of the lien to the municipality, and not registered.

Preservation, Perfection and Expiry of Liens

  1. The time period for preservation of a lien under section 31 of the Act should be extended to 60 calendar days, commencing as currently stipulated by the Act.
  1. Termination should be added to the list of events that triggers the commencement of the time limit for preserving a lien.
  1. The Act should prescribe a mandatory form of Notice of Termination or Abandonment to be published specifying a date upon which a contract has been abandoned or terminated.

These two provisions may be contentious due to the legal nature of the “termination” of contracts. If the contract contains a termination clause and that clause is activated, there should be no difficulty, but a so-called “termination” may occur due to repudiation by one party. The report appears to proceed on the basis that the repudiation itself gives rise to termination, and that the termination is of the entire contract. However, under contract law the “termination” arising from repudiation is a termination of the obligation of continued performance, and that termination only occurs when the repudiation by one party is accepted by the other party. The factual existence of repudiation and acceptance may well be in dispute. In addition, the contract is not “terminated” in law, and remains in existence for dispute resolution purposes. All of these factors will require careful legislative drafting in the adoption of this recommendation.

  1. The time period for perfection under section 36(2) of the Act should be increased to 90 days from the last day upon which that lien could have been preserved.

Under this recommendation and Recommendation 9, the total time to preserve and perfect a lien would now be 150 days.

Exaggerated Claims

  1. Section 35 of the Act, which imposes penalties for exaggerated claims, should be amended to replace the concept of “grossly inflated” liens with the concept of “wilfully exaggerated” liens, refocussing the threshold at a more sensitive level. As well, the court should be given the discretion to discharge a claim for lien in whole or in part if on a balance of probabilities it is established that the claim is frivolous, vexatious, or an abuse of process.
  1. The court should be allowed to find, where there is wilful exaggeration, that the lien claimant is liable for any damages incurred as a result of the exaggerated claim, including bond premiums, costs, and, where the court considers it just, the lien amount should be reduced by an amount up to the amount of the difference between the wilfully exaggerated amount and the actual amount of the lien claim; provided that a defence of good faith should be available to the lien claimant.

Condominiums

  1. After registration, the common elements in condominium buildings should have a single PIN that is subject to a lien, and the interests of all owners should be subject to this lien.
  1. Notice of lien should be given to the condominium corporation and the unit owners by way of a prescribed form.
  1. Condominium unit owners should be able to post security proportionate to their share of the lien to have the lien vacated.

Subdivisions

20. Section 20(2) should be removed from the Act and liens should not be required to be preserved on a lot-by-lot basis.

Landlord and Tenant

  1. For improvements to leasehold properties, lien claims should attach to the interests of the tenant named in the lease and to the interest of the landlord if the landlord funded the improvement through a cash allowance or otherwise required the improvement; provided that the landlord’s liability should be limited to any deficiency in the holdback.
  2. Section 39 of the Act should be amended to allow lien claimants to obtain from landlords, tenants, and secured lenders all relevant information about the lease, the lender’s security, the funding available from the landlord and lender, and the state of accounts.

Holdback and Substantial Performance

  1. Section 2(1) of the Act should be amended to provide that a contract is substantially performed when the improvement or a substantial part thereof is ready for use or is being used for the purposes intended and if it is capable of completion at a cost of no more than 3 percent of the first $1,000,000.00 of the contract price, 2 percent of the next $1,000,000.00 of the contract price, and 1 percent of the balance.
  1. Section 2(3) of the Act should be amended to provide that “a contract shall be deemed to be completed and services or materials shall be deemed to be last supplied to the improvement when the price of completion, correction of a known defect or last supply is not more than the lesser of (a) 1 percent of the contract price; and (b) $5,000”.
  1. The Act should be amended to provide for the mandatory release of holdback, but not the mandatory early release of holdback; that is to say, “may” should be revised to “shall” in sections 26 and 27 of the Act. The owner should be required to publish a notice of non-payment/set-off to interdict the obligation to pay where the owner, in good faith, intends to assert a set-off in relation to the contract.
  1. The Act should be amended to permit partial release of holdback on either a phased or annual basis, if provided for in the construction contract entered into by the parties, subject to a significant monetary and time-based threshold in the case of annual release.
  1. The Act should be amended to allow for the segmentation of holdback for projects involving clearly separable improvements.
  1. There should be no provision for mandatory early release of holdback for design consultants in respect of services supplied up to the commencement of construction; but the Act should permit the designation of a design phase for the purposes of phased release of holdback.
  1. The Act should be amended to allow for deferral agreements to be entered into between owners and contractors provided that such agreements are for the purpose of allowing certification and publication of substantial performance, subject to an appropriate threshold.
  1. The current holdback scheme should be supplemented by allowing the replacement of cash holdback with a Letter of Credit or a demand-worded Holdback Repayment Bond.

Construction Trusts

43. The Act should be amended to require that a trustee must follow specific statutory requirements in relation to trust fund bookkeeping similar to that applied in the New York Lien Law, including the following:

  • If a trustee deposits trust funds they are to be deposited in the trustee’s name;
  • The trustee is not required to keep the funds of separate trusts in separate bank accounts or deposits provided that his books and records of account clearly show the allocation to each trust of the funds deposited in the general account;
  • The trustee must keep separate books for each trust for which it is trustee (and if funds of separate trusts are in the same bank account, the trustee is to keep a record of such account showing the allocation to each trust of deposits and withdrawals); and
  • The books and records of each trust must show specifically articulated particulars with respect to assets receivable, assets payable, trust funds received, trust payments made with trust assets and any transfers made for the purpose of the trust.

Promptness of Payment

47. A prompt payment regime should be legislated in Ontario and it should apply to both the public and private sectors. Prompt payment should be implemented by creating a statutory scheme to be implied into all construction contracts that do not contain equivalent terms.

The introduction of a prompt payment regime may be one of the most contentious Recommendations as the interests of owners and contractors are not necessarily aligned on this issue. In addition, a prompt payment regime is often intended to address a “pay when paid” clause, and such a clause and its effect and enforceability are themselves contentious issues.

48. The prompt payment regime should apply at the level of the owner-general contractor, general contractor-subcontractor, and downwards, and the legislation should provide a mechanism for general contractors to notify subcontractors of non-payment by owners, with reasonable particulars, and to undertake to commence or continue proceedings necessary to enforce payment so as to defer their payment obligations.

  1. The trigger for payment should be the delivery of a proper invoice; provided that certification for payment (if there is certification for payment provided in the contract) must follow submission.
  1. As between:
  • The owner and general contractor a 28 day payment period should be applied, that is triggered by the submission of a proper invoice.
  • The general contractor and subcontractor, a further 7 days from receipt of payment from the owner would be permitted.
  1. Parties should be free to contract in respect of payment terms, but that if they fail to do so, monthly payments should be implied.
  1. Payers should be permitted to deliver a notice of intention to withhold payment within 7 days following receipt of a purported proper invoice and that the notice of intention to withhold must set out the quantum of the amount withheld and adequate particulars as to why that amount is being held back. Undisputed amounts should be paid. Also, the right to withhold should relate only to the contract at issue.
  1. A payer should continue to be able to set off all outstanding debts, claims or damages but that the right of set off not extend to set-offs for debts, claims and damages in relation to other contracts.

The proposed exclusion of set-offs for debts, claims and damages relating to other contracts is a very material change from the present statute.

54. Mandatory non-waiveable interest should be required to be paid on late payments at a rate of the greater of the pre-judgment interest rate in the Court of Justice Act or the contractual rate of interest.

The removal of any discretion not to award interest is a departure from the usual authority that a court has to not award interest.

55.  A right of suspension of further work should arise after an adjudication determination has been rendered and a payer has refused or failed to comply with the adjudicator’s determination.

56. The Act should require disclosure to all subcontractors that they are bidding on a project with a milestone-based payment mechanism.

Surety Bonds

45, 46 and 79. The Act should be amended to require broad form surety bonds to be issued for all public sector projects. The form of such surety bonds should be developed in consultation with the Surety Association of Canada, and once finalized they should become Forms under the Act.

  1. The Act should be amended to require sureties to pay all undisputed amounts within a reasonable time from the receipt of a payment bond claim.
  1. A Regulation to the Act should be promulgated to embody a surety claims handling protocol, and that such surety claims handling protocol be developed in consultation with the Surety Association of Canada.

Technical Amendments

  1. The Act should be clarified to confirm that the following irregularities may be cured so long as no prejudice is caused to other parties.
    • Failure to correctly name the owner and or person to whom materials and services were supplied;
    • Minor errors in the legal description; and
    • Inserting an owner’s name in the wrong part of a statement.

This recommendation would permit the court to relieve against mistakes in the lien claim relating to the name of the owner or lien claimant which under present case law are not correctable under section 6 of the Act.

  1. Separate forms (available electronically and physically) should be implemented: one to release a lien, one to discharge a lien or certificate of action, and one to vacate the registration of a claim for lien or certificate of action.
  1. Modifications should be made to the requirements of section 32(2) of the Act to incorporate the legal description, including PINs and specific municipal address (es); and in the case of a lien to be given (i.e. where the lien does not attach to the land), the name and address of the person(s) to whom a claim for lien must be given.

Notice of Liens

  1. The definition of “written notice of a lien” should be amended to provide further particulars as to service and a form of written notice of lien should be added to the regulations.

This recommendation will clarify the present case law relating to what amounts to the delivery of notice of a lien.

  1. Section 44 should be amended to provide for the posting of security to vacate a written notice of lien. And the withdrawal of a “written notice of lien” should also be in a prescribed form.
  1. Section 39 should be amended to clarify what type of information the person making the request is entitled to and, in particular, what constitutes a “state of accounts” under section 39(1)1.iii, and should include: the value of the work done, the amount paid, the amount held back pursuant to the Act, the balance owed, and leasehold information.
  1. The amount of security that to be posted to vacate a lien under section 44(1) should be amended to include the total of the full amount claimed as owing in the claim for lien and the lesser of 25% or $250,000 of the amount of the lien claim as security for costs.
  1. Letters of Credit with reference to International Commercial Conventions should be accepted as security, provided the Letter of Credit is unconditional, the International Commercial Convention is written into the terms of the credit, and it is accepted by a bank listed under Schedule I of the Bank Act, S.C. 1991, c. 46. Sched. 1 operating in Ontario.

This recommendation should clear up the contentious case law about what security is acceptable under the International Commercial Conventions.

Mortgages

  1. When a mortgagee makes a loan for the purpose of financing both land acquisition and the construction of an improvement, the mortgagee should be required to identify the amount intended for the acquisition of land and the amount intended for the improvement(s) to and/or on the land in mortgage documents.

See Heintzman and Goldsmith on Canadian Building Contracts, (5th ed.), chapter 16

Building contracts –construction and builders liens –amendments to Ontario’s Construction Lien Act

Thomas G. Heintzman O.C., Q.C., LLD (Hon.), FCIArb                         May 1, 2017

www.heintzmanadr.com

www.constructionlawcanada.com

 

This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.