The Alberta government is signaling major changes to the construction industry with its proposed prompt payment legislation. Bill 37, the Builders' Lien (Prompt Payment) Amendment Act, 20201, passed a second reading on October 28, 2020 and is expected to come into force in July 2021 along with detailed regulations.
Here are some of the significant changes Bill 37 would introduce:
- short timelines (28 days) for paying "proper invoices" (discussed below)
- prohibiting 'pay-when-paid' clauses;
- a new, faster statutory adjudication system for contract disputes;
- longer deadlines to register liens (from 45 to 60 days for most projects);
- increased minimum amount for a lien (from $300 to $700);
- introduction of a progressive release of the statutory holdback;
- improved access to payment information;
- changing the name of the Alberta Builders' Lien Act (the "Act") to the "Prompt Payment and Construction Lien Act".
Background - Why is Bill 37 Needed?
In a press release, the Minister of Service Alberta (Nate Glubish) said the amendments respond to concerns raised by the construction industry about protecting jobs and ensuring everyone in the supply chain is paid on time for their work.2 Following in the footsteps of other jurisdictions including Ontario, Bill 37 recognizes many practical problems with the current dispute resolution process and introduces changes to move projects forward and keep capital flowing.
The amendments address two major issues:
- Delay in payment: There is currently no legislative deadline in place for contractors or owners to pay those who provide construction services. The average time for payment has increased to over 70 days in recent years.3 This is compared with payment times of roughly 45 days in other industries.4 Currently, the sub-trades, who generally have the smallest revenues and the obligation to incur the capital cost of procuring and supplying the materials, carry the risk of non-payment on most construction projects. A sub-contractor's only bargaining chip is to withhold performance until payment is received, further delaying the project.
- Delay in resolution of disputes: The current Act contemplates an expedited process for resolving construction disputes. The existing framework removes the presumptive application of the oral discovery rules under Part 5 of the Alberta Rules of Court,5 and contains an invocation that claims are to be determined in a summary fashion "so far as is possible".6 However, despite these existing provisions, they still operate within the confines of the broader court system, which presently require a lien claimant to: i) file a lien, ii) commence an action, iii) receive a Statement of Defence, iv) file affidavit evidence and be cross-examined thereon, v) obtain time before the court, likely in a special chambers application, and vi) have the court determine the matter in a summary fashion. In practice, this means that contested claims are not resolved for months or years, as lien claimants squarely confront two significant issues Alberta courts are currently grappling with: 1) timelines to have contested matters heard by the courts, and 2) the general reluctance of courts to make a summary determination of contested issues.7
Summary of Key Changes
In this section, we will highlight the most significant proposed changes and answer some of your anticipated questions.
(a) What triggers prompt payment?
The prompt payment timelines are triggered when a payer receives a "proper invoice" under an existing contract. A proper invoice must include specific information, such as:
- names, business addresses, and contact information;
- a description of the work performed;
- the authority under which the work was undertaken;
- the period during which the work was performed;
- the amount requested and corresponding breakdown; and
- a statement that the invoice is intended to be a "proper invoice".
(b) What are the payment deadlines and what steps must be taken?
When an owner, contractor, or subcontractor on a project receives a proper invoice, the payer has 14 days to dispute the invoice. If the payer does not dispute it, he or she must pay it within 28 days. Interest will accrue on any unpaid amounts, though the interest rate is not stipulated.
These strict timelines override any contrary provisions in the contract.
If the payer does not pay the invoice or disputes it, and the parties cannot resolve the dispute themselves, it can be referred to an adjudicator.
(c) How will the adjudication regime work?
Bill 37 will create a statutory adjudication system to determine construction disputes in a quicker, more economical manner than the current court process. The new system is expected to follow the process introduced in the UK in the 1990s and Ontario in 2019.
The Minister of Service Alberta will appoint a nominating authority by April 2021. The nominating authority, in turn, will i) qualify individuals to be eligible to act as adjudicators of disputes and ii) appoint adjudicators to hear and determine specific disputes. Bill 37 permits the minister to appoint more than one adjudicating body.
Regulations outlining the adjudicator's procedures and timelines have not yet been published. Examining Ontario's adjudication regime may give some insights however. Under Ontario's Construction Act, RSO 1990, c C.30, an adjudication is commenced by a party to an eligible construction contract submitting a Notice of Adjudication on the nominating authority and the opposing party to the dispute.8 The parties then have 4 days to agree on the appointment of an adjudicator, failing which, the claimant shall request for the authority to appoint one.9 Once the adjudicator is appointed, the claimant has 5 days to provide the adjudicator with a copy of the Notice of Adjudication, together with the documents the claimant intends to rely on during the adjudication.10 The respondent may provide a response to the Notice of Adjudication, but in any event, the adjudicator is to make a determination of the matters in dispute no later than 30 days after receiving the notice of adjudication and the claimants documents, subject to the parties' agreement to an extension.11 In general, broad discretionary powers are conferred to the adjudicator in conducting the adjudication and rendering a decision.12
Adjudication is intended to be a more flexible, informal, 'real time', summary process. If the adjudicator determines payment is due, money will exchange hands and the project will continue without further delay.
Importantly, adjudication is final and binding, subject only to narrow grounds of review on grounds including mistake of law, lack of jurisdiction, bias or fraud.
(d) What issues can be adjudicated?
Under Bill 37, an adjudicator may hear "any matter" prescribed under Part 5 and may refer a matter to the court if the adjudicator does not have jurisdiction. Exactly which types of matters can be adjudicated will hopefully be clarified in the regulations. For example, the Ontario regime restricts adjudication to contractual disputes such as valuation of services or materials, payment under the contract including change orders, or other issues that the parties agree to be heard.
(e) What are the new limitation periods for placing a lien?
The proposed amendments would increase the limitation periods for filing a lien as follows:
- General construction: 60 days;
- Oil and gas well improvements: 90 days;
- Concrete work: 90 days (what constitutes "concrete work" and whether it applies only to the pouring of the concrete itself or extends to the associated preparatory work as well is not yet spelled out in the bill or the regulations).
(f) What is the significance of eliminating 'pay-when-paid' provisions?
Currently, a contractor can rely on a 'pay-when-paid' clause to withhold payment to subcontractors until the contractor is paid in full. The government has recognized that these provisions unfairly transfer the risk of non-payment to subcontractors.13
The elimination of 'pay-when-paid' provisions means that a contractor must pay a subcontractor pursuant to a proper invoice, even if the owner has not paid the contractor.
(g) What is the significance of allowing for a progressive holdback release?
The Act currently requires 10% of the contract price to be set aside as a holdback to help satisfy any liens. These holdbacks have traditionally been released 45 days after the work is completed, but they are often held longer, imposing a fiscal burden on contractors. This is particularly problematic for large capital projects which take place over a period of years.
The new rules will allow for holdback money on large, multi-year projects to be released without risk at pre-set milestones. As with the other amendments, allowing for a progressive holdback release is intended to keep capital flowing down the construction pyramid.
(h) What do the amendments apply to?
The amendments do not change the scope of the Act generally, and will only apply to contracts entered after the proclamation date. This is important for the calculation of timelines to file liens.
These changes will not prevent parties from filing a civil claim or initiating a lien action in court.
(i) Based on the experience in other jurisdictions, what impacts should construction industry players be prepared for?
The UK's experience with a prompt payment regime has been overwhelmingly positive, with fewer than 2% of adjudicated outcomes resulting in litigation.14 In Ontario, after just one year operating under the new regime, construction lawyers have observed that the adjudication process allows for cost savings through a swift resolution, freeing up cash flow so projects can continue without lag and mitigating risk of loss.15 However, as with any new regime, issues will continue to be ironed out over the coming months and years.
Bill 37 appears to incorporate some of the learnings from other jurisdictions. For instance, in Ontario, the adjudicator's decision is only binding on an interim basis, whereas Bill 37 contemplates a final, binding adjudication. Also, the Ontario Act provides an additional seven days for each 'layer' in the construction pyramid to pay invoices, but Bill 37 will require all payments to be made within 28 days. Presumably, these departures from the Ontario regime are intended to increase certainty in the industry.
While it remains to be seen how these changes will play out in practice, the result will likely be a quicker, less costly form of dispute resolution. The legislature has recognized that in the construction industry, justice delayed is truly justice denied. Ensuring prompt payment and resolution is even more crucial given the current economic uncertainty arising from COVID-19.
With these significant changes on the horizon, it is more important than ever for industry players to have competent counsel with a deep understanding of construction law and the capacity to move quickly to present or respond to disputes under the new regime competently and effectively.
2. Press Release dated October 21, 2020: https://www.alberta.ca/release.cfm?xID=74519FEC5460B-DA01-9F9C-F0CD6BBF1B5F40E5.
3.Alberta Hansard, 30th Legislature, 2nd Session (October 28, 2020) at 2830: https://docs.assembly.ab.ca/LADDAR_files/docs/hansards/han/legislature_30/session_2/20201028_1330_01_han.pdf#page=16.
4. See Prism Economics and Analysis, "The Need for Prompt Payment Legislation in the Construction Industry", April 2013 at pg. 21.
5. Act Section 53(3)(f).
6. Act Section 49(6).
7. Alberta's Court of Appeal recently extensively evaluated the effectiveness of use of the summary procedures in Alberta in Hannam v Medicine Hat School District No. 76, 2020 ABCA 343 ["Hannam"], finding that in the context of summary procedures, "most courts have no appetite for resolving contests on disputed material facts" (Hannam at para 165) and that lower Courts hearing summary motions "grant summary judgment only if they have no doubt about the correct disposition" (Hannam at para 167). Despite the insistence from appellate authority in Canada and Alberta about the need for a "paradigm shift" and to more readily make determinations on a summary record, the Alberta Court of Appeal found that lower Courts in Alberta only granted summary judgment in 57% of motions brought before them, compared to 75% in Ontario (Hannam at para 171).
8.Construction Act s. 13.7
9.Construction Act s. 13.9(4)
10.Construction Act s. 13.11.
11.Construction Act s.13.13(1), (2).
12.Construction Act s.13.12(1).
13.Alberta Hansard, 30th Legislature, 2nd Session (October 27, 2020) at 2779: https://docs.assembly.ab.ca/LADDAR_files/docs/hansards/han/legislature_30/session_2/20201027_1330_01_han.pdf#page=18
14. Duncan W. Glaholt & Markus Rotterdam, "'Made in Ontario' Statutory Adjudication" in Construction Law: Recent Developments of Importance at B-41: https://www.glaholt.com/docs/default-source/publications/made-in-ontario-statutory-adjudication.pdf?sfvrsn=9cb78cab_2
15. Commentary from Ontario construction lawyers on their regime: https://www.glaholt.com/resources/publications/publication/episode-22-our-first-adjudication-under-the-new-construction-act
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