Prompt payment legislation: Panacea or false promise?
In a perfect world, everybody would be paid net 30 days. Unfortunately, we live in an imperfect world. In that imperfect world, businesses consistently face the competing pressures of employee salaries, supplier invoices and taxation on an accrual basis – all while accounts receivable gradually reach 60 days and then 90 days.
Payment delays are especially frustrating in the construction industry, as the construction pyramid (owners, contractors and subcontractors) relies on a flow-through model for parties to get paid. Yet payment morality in the construction industry is notoriously bad.
Private contracts are usually quite clear about payment obligations. In Manitoba, a large percentage of construction projects happen under standard CCDC agreements. The standard CCDC provision requires payment within 28 days after a payment application. There is more ambiguity in public sector contracts. For example, the standard terms and conditions used by Manitoba Infrastructure and Transportation do not stipulate a deadline for payment. Similarly, the City of Winnipeg’s general terms and conditions do not impose a payment deadline on the City.
The Introduction of Prompt Payment Legislation
To counteract the problem of payment delays, and to improve payment morality by legislative means, many jurisdictions have introduced so-called “prompt payment” legislation that mandates payment within a specific timeframe. Jurisdictions that have enacted such legislation include the United States, Australia and England.
In Canada, the Province of Ontario initiated a major review of its construction legislation in 2016, resulting in a report titled Striking the Balance: Expert Review of Ontario’s Construction Lien Act. Chapter 8 of that report discussed the issue of endemic payment delays and recommended that a prompt payment regime should be legislated in Ontario, and that it should apply to both the private and public sectors.
Ontario was the first jurisdiction in Canada to proclaim a prompt payment regime into force. Part I.1 of the Construction Act imposes a 28-day payment obligation that is quite similar to the obligation found in CCDC contract templates. It also establishes an interim adjudication regime under which an aggrieved party may force interim adjudication.
The responsibility for adjudication was assigned to an entity called Ontario Dispute Adjudication for Construction Contracts (ODACC). ODACC maintains a registry of private adjudicators operating at different price points.
Importantly, adjudication through ODACC does not override the ultimate jurisdiction of the courts. This is a potential “Achilles heel” of the prompt payment regime that risks neutering the legislation.
Manitoba has introduced prompt payment legislation on three separate occasions. The first two introductions, Bill 218 and Bill 245, were private member’s bills that were not passed into legislation. The third version of the bill is currently before the Manitoba Legislative Assembly.
The bill currently before the Assembly requires payment to a contractor within 20 days after an invoice is approved. Because an invoice is deemed to be approved 10 days after it has been submitted, it effectively imposes a 30-day deadline for payment. For subcontractors, the payment deadline is seven days after the contractor receives payment or 27 days after the subcontractor’s invoice is approved.
Similar to the Ontario approach, the bill before the Manitoba Legislative Assembly provides for an interim adjudication regime. The development of that regime is left to regulations, so it is currently unclear what the regime would look like.
The Problem with Interim Adjudication
This article uses the term “payment morality.” The issue of on-time payments is at heart, one of morality, and legislating morality is not easy. The former prohibition against the use and sale of cannabis, and the proliferation of low-level drug convictions under that regime, attest to that reality. For such legislation to achieve its purpose, it generally has to be coupled to a workable enforcement regime that is consistently applied.
Oftentimes, payment delays are the result of simmering disputes – this is the domain of the construction litigator. A construction litigators’ toolbox is complicated but not complex. Virtually every construction dispute involves a “trifecta” of issues — (1) deficiencies, (2) extras, and (3) delays. Traditionally, these get fought over (and eventually resolved) in court or through arbitration.
If an adjudicated result can always be re-litigated in court or before an arbitrator, adjudication may well increase legal costs rather than decrease them. The issue is amplified by adjudicators charging private hourly rates, while judges are paid a salary and do not need to be paid by the parties. Many lawyers would likely hesitate to recommend an interim process to their clients, since the end goal is to create certainty.
So Why Choose Interim Adjudication in the First Place?
Provincial legislators are, for lack of a better word, stuck. Under the division of powers between the federal government and provincial governments, provincial legislators cannot oust the jurisdiction of the courts. Manitoba attempted, in the 1940s, to refer lien claims to masters of the court rather than judges. The legislation was successfully challenged as unconstitutional in 1950. Ontario tried a similar approach. Its legislation was struck down in 1960. The Ontario case was appealed to the Supreme Court of Canada, which also concluded that the provincial government did not have the necessary jurisdiction to impose such a regime.
Interim adjudication is a process by which provincial governments can introduce the concept of adjudication without ousting the jurisdiction of the court.
The Non-Promising Results from Ontario
The Ontario experience so far suggests that concerns about interim adjudication are well-founded. ODACC’s 2021 Annual Report indicates that during the entire 2021 fiscal year, 50 adjudications were commenced, and 29 decisions were rendered, plus an additional five decisions resulting from adjudications commenced in 2020. The cumulative amount claimed in all adjudications filed in 2021 was approximately $8.7 million. In the same year, the total contribution of the construction industry to Ontario’s GDP was almost $51 billion. This suggests that only a very small portion of construction disputes are currently entering the adjudication regime.
It remains to be seen whether the volume of adjudications in Ontario will increase or whether parties will remain hesitant to engage the adjudication regime. In the absence of a workable and readily available enforcement mechanism, it is entirely possible that prompt payment legislation will turn out to be a false promise, no matter how many Canadian provinces enact such legislation.