This article was also written by Arielle Waserman, articling student at Galholt LLP
Construction law is changing in Ontario. Canada’s largest province, and commercial hub of the country, is undergoing an overhaul of its construction lien legislation, the Construction Lien Act. One of the most distinctive features of the reform is the introduction, for the first time in Canada, of statutory adjudication of construction disputes. Should this come to pass, the Ontario construction industry is looking at a major change in the way that—and the timeline in which—construction disputes are resolved.
HISTORY OF BILL 142, CONSTRUCTION LIEN AMENDMENT ACT, 2017
On September 26, 2016, the Ontario Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure published an expert Review by two pre-eminent Toronto construction lawyers, Bruce Reynolds and Sharon Vogel.1 The Review recommended a wholesale reform of the construction credit legislation in Ontario. Chief amongst its changes is the statutory adjudication scheme, a system that was first implemented in the UK in the late 90’s.
This Review was used as the basis for Bill 142, Construction Lien Amendment Act, 2017. Bill 142 was introduced to the Ontario legislature on May 31, 2017. It adds a new Part II.I-“Construction Dispute Interim Adjudication” to the Construction Lien Act, now renamed the Construction Act. The bill is expected to pass.
WHAT YOU NEED TO KNOW
Along with the necessary and welcome changes that it brings, the proposed Construction Act also brings with it uncertainty. This is a new legislative scheme for Ontario, and there are many questions from members of the construction industry, including its practitioners, as to what they need to know. This article provides a roadmap to the addition of statutory adjudication in the Construction Act.
With respect to the addition of adjudication, there are five fundamental points worth noting:
- The statutory adjudication scheme has its origins in the UK, which does not have any equivalent lien legislation;
- The Construction Act will have minimum requirements that one cannot contract out of;
- The Construction Act will allow for ”real time” dispute resolution;
- The appointment of Adjudicators will be controlled by an Authorized Nominating Authority;
- The court’s role will be mainly one of enforcement.
This list highlights the essentials of the proposed legislative scheme. A working knowledge of these points will equip a practitioner with the foundation necessary to navigate this new statutory adjudication scheme.
ORIGINS OF THE STATUTORY ADJUDICATION SCHEME
The idea behind “real time”’, interim binding dispute resolution comes to us originally from the private sector in the UK.
In 1996, the UK construction industry was in dire need of assistance. Construction credit in the United Kingdom is unregulated by any equivalent of our provincial lien and construction trust legislation. There is no precise equivalent in the United Kingdom of the North American surety bond industry. Letters of credit tend to be used to provide partial security for performance and payment obligations.
As a result of these circumstances, by the early 90s, construction industry litigation costs and cash flow delays were crushing the UK construction industry, and creating a detectable drag on the economy. This led to a full scale enquiry and report by a committee chaired by Sir Michael Latham, who issued two reports in 1993 and 1994, entitled Trust and Money and Constructing the Team, respectively. “Real time” interim binding dispute resolution was offered as a solution.
Subsequently, two reports by Sir John Egan followed the legislative reform through its formative years: Rethinking Construction (1998) and Accelerating Change (2002).
As a result of these reports, the UK government imposed a set of minimum standards for statutory adjudication in Britain. There was a lot of resistance at first, notably within the legal profession. But they were all proven wrong. The success of adjudication was undeniable. By 2003, less than 10 years after the statutory adjudication legislation came into force, there had been between 9,000 and 12,000 notices of adjudication filed, but only 172 judgments in proceedings connected with adjudication. This meant that less than two per cent of adjudicated outcomes ended up in litigation, a negligible amount. A full-scale reappraisal of statutory adjudication occurred in the UK in 2009, which lead to the statutory adjudication scheme being further strengthened.
This set of reforms served as a starting point for the work of Reynolds and Vogel on the Review here in Ontario, with the successful UK system serving as a blueprint for the statutory adjudication scheme in Ontario. Reynolds and Vogel identified eight fundamental components in the current UK scheme:
- The right to refer a dispute at “any time”: A party to a construction contract does not need to wait until the project is finished in order to have a dispute determined by an adjudicator.
- Notice requirements: A party to a construction contract must have the right to give a notice at any time of his or her intention to refer a particular dispute to the adjudicator.
- Seven days to brief an adjudicator: A method of securing the appointment of an adjudicator and furnishing him or her with details of the dispute within seven days of the notice is mandatory.
- Twenty-eight days to an adjudicator’s decision: The adjudicator is then required to reach a decision with twenty eight days of this referral. It will not be possible to agree in advance of any dispute that additional time may be taken for adjudication. There are only two exceptions to this rule. First, the adjudicator may extend the period of 28 days by a further 14 days if the party refereeing the dispute consents. Second, a longer period can be agreed by consent of all parties. Such agreement can only be reached after the dispute has been referred.
- Elementary due process: The adjudicator is required to act impartially.
- Inquisitorial jurisdiction of the adjudicator: The UK Construction Act requires that the adjudicator “takes the initiative in ascertaining facts and the law”. This gives the adjudicator the power to investigate the issue in whatever manner he or she deems appropriate in light of the short time scale available.
- Interim binding decisions, enforceable in court if necessary: The decision of the adjudicator is binding until the dispute is finally determined by legal proceedings, by arbitration or by agreement. The UK Construction Act does, however, go on to say that the parties may agree to accept the decision of the adjudicator as finally determining the dispute.
- Adjudicator Immunity: The adjudicator cannot be held liable for anything done or omitted in the discharge of his or her function as an adjudicator, unless acting in bad faith. This protection is extended to any employee or agent of the adjudicator.
The spirit of these eight fundamental components have all made their way into the Ontario statutory adjudication scheme. It is clear that the goals of the UK statutory adjudication scheme are efficiency, effectiveness, and fairness, goals that are reflected in the Construction Act.
By looking outwards to solve an internal problem, Ontario has landed on the best possible outcome; an innovative, problem-solving system that has already been tested, courtesy of the UK. There is no reason to think that Ontario’s outcome will be any different, resulting in a steep decrease in litigated construction disputes, and a corresponding increase in projects being efficiently completed.
NO CONTRACTING OUT OF THE LEGISLATION’S MINIMUM REQUIREMENTS
Pursuant to subsection 13.23 of the Construction Act, the statutory adjudication scheme applies in respect to contracts and subcontracted entered into on or after the day subsection 11(1) of the Construction Act comes into force. Most importantly, one cannot contract out of adjudication.
Moreover, once the Construction Act comes into force, any contracts or subcontracts will have to comply with the statutory minimum standards. Should the parties choose to contract for a shorter timeline, that would be acceptable, but it will not be possible for parties to grossly inflate the timeline as they choose.
Statutory adjudication therefore cannot be avoided and the construction industry must learn how to work within it. One cannot expand the timeline so as to avoid complying with statutory adjudication should a dispute arise on the project. All members of the construction industry—contractors, owners, and practitioners alike—must therefore develop a comfort and familiarity with the process.
“REAL TIME” DISPUTE RESOLUTION
Real time dispute resolution is exactly what it sounds like; it allows for the dispute to be resolved as it happens or immediately thereafter, saving all parties involved time and money. The Construction Act proposes a condensed timetable for disputes, one that would allow for the aggrieved party to give notice, the parties to decide on an arbitrator or request one, the adjudication to commence, and an interim binding decision be rendered, all within an approximately 40-day period. This is a far cry from the current process, where the timing of dispute resolution is a question of years, not weeks.
As it currently stands, in absence of a contractual remedy, if a dispute arises on a construction project over the valuation of work or services, or a claim arises in relation to any security held by a party under the construction contract, it is possible for the aggrieved party to suspend the project if the dispute is not resolved. The possibility for either the contractor to stop providing work and services, or for the owner to stop providing payment in order to improve their respective bargaining positions, often does not lead to resolution. Rather, in attempting to force the other party’s hand, it often brings the project to a standstill.
Neither of those options are conducive to the timely completion of the project at hand. Without statutory adjudication, it is possible for the parties to wait until after substantial completion before attempting to resolve the is dispute. The obvious problem is that by that point, the damage has been done. Whatever dispute that arose now remains live throughout the duration of the project, gaining importance with each passing week.
The dispute resolution process then becomes a wasteful, quasi-forensic exercise, more or less divorced from the reality of the project. Weeks, months, or sometimes years have passed since the dispute arose, allowing what might have been a minor dispute to balloon out of proportion.
Enter statutory adjudication. Rather than allowing a dispute to fester until the project ends, this new scheme provides for the dispute to be resolved in real time, and ensures that the adjudicators interim decision remain binding for the duration of the project. Instead of waiting years for the dispute to be resolved, it can be solved in a matter of weeks.
Real time dispute resolution would take place within a relatively short period, approximately forty days from start to finish. The following is a timeline of statutory adjudication under the Construction Act:
- The adjudication process would begin by one of the parties serving a notice of adjudication on the other party.2
- This notice would set out the particulars of the dispute, and specify the redress sought, whether it be cash allowances or an altered timetable.3
- The parties to the adjudication may agree to one of the adjudicators proscribed by the Authorized Nominating Authority (the “Authority”),4 and send notice of the adjudication to the desired adjudicator.5
- In the alternative, or in a situation where the requested adjudicator does not consent to the adjudication within four days after the notice of adjudication has been given, the party who gave notice will request that the Authority appoint an adjudicator 6.
- The Authority will then appoint an adjudicator to conduct an adjudication no later than seven days after receiving the request for the appointment.7
- No later than five days after an adjudicator agrees or is appointed, the party who gave the notice of adjudication must provide the necessary documents for adjudication.8
- No later than thirty days after receiving the above documentation, the adjudicator must make a determination,9 with written reasons.10
The entire process, from the beginning of notice being given to the end of the determination, would only take 46 days, at the most. Compared to lawsuits or arbitrations that take years to even commence, 46 days total is a staggeringly small number.
To fully appreciate the efficiency of this process, one only has to look at subsection 13.19(1). If a party is required to pay an amount to another person under the adjudicator’s determination, it must do so no later than 10 days after the determination of the adjudication has been communicated to the parties. Each party will be responsible for prompt payment when deemed necessary by the adjudicator, something that will create a new level of accountability in the construction industry.
The interim decisions of the adjudicator will be binding on the parties until there is a determination of the matter by a court, or by way of an arbitration conducted under the Arbitration Act, 1991.11 Essentially, these interim decisions would remain binding and enforceable until the conclusion of the project. The end result is clear: if money is due, money will change hands and cash flow will be restored when it matters most: during construction. If money is not due, performance will proceed, and there will be no opportunity for a contractor to withhold performance to improve its bargaining position. In short, it will be very hard to game the system.
It is stating the obvious to say how revolutionary statutory adjudication will be to the Ontario construction industry. There will no longer be the option to drag matters out long after they should have been resolved. Rather, there will be a clear determination for both parties to follow, allowing the construction project to continue as planned.
ONTARIO ADJUDICATORS WILL BE CONTROLLED BY AN AUTHORIZED NOMINATING AUTHORITY
One of the obvious questions that will be on the minds of contractors and owners alike is who will be serving as adjudicator. Once the Construction Act comes into force, it will provide a mechanism for who is allowed to adjudicate these matters.
According to subsection 13.2(1), the Lieutenant Governor in Council may, by regulation, designate an entity to act as the Authorized Nominating Authority (the “Authority”). The Authority will be responsible, as per subsection 13.3(1), for the following:
- Develop and oversee programs for the training of persons as adjudicators;
- Qualify persons who meet the prescribed requirements as adjudicators;
- Establish and maintain a publicly available registry of adjudicators;
- Appoint adjudicators for the purposes of subsection 13.9(5); and
- Perform any other duties of the Authority set out in this Part or that may be prescribed for the purposes of this Part.
Essentially, it will be the Authority who determines who can serve as an adjudicator under the Act. This is quite a change from the current methods of dispute resolution. Currently, should the parties agree to mediation or arbitration or some combination thereof, the parties are in complete control of the arbitrator or mediator. There are no basic requirements or certification that the adjudicator must have before they are able to serve. However, that will no longer be the case. While, as previously discussed, the parties will have the ability to choose an adjudicator, they must do so from the public registry created by the Authority.
Similar to the UK Construction Act, the Ontario adjudicators are given rather expansive powers, and may create the process as they see fit. Under subsection 13.12, the adjudicators may exercise any of the following powers, as well as any other power specified in the contract of subcontract, including:
- Issuing directions respecting the conduct of the adjudication.
- Taking the initiative in ascertaining the relevant facts and law.
- Drawing inferences based on the conduct of the parties to adjudication.
- Conducting an on-site inspection of the improvement that is the subject of the contract or subcontract, subject to the prior consent of the owner, if he or she is not a party to the adjudication; and any other person who has the legal authority to exclude others from the premises.
- Obtaining the assistance of a merchant, accountant, actuary, building contractor, architect, engineer or other person in such a way as the adjudicator considers fit, to enable him or her to determine better any matter of fact in question. The adjudicator may fix a fee for any such assistance and direct payment thereof by the parties.
- Making a determination in the adjudication.
- Any other power that may be prescribed.
Looking at the broad and un-exhaustive list of factors, it is appears that the Construction Act will allow the adjudicator to do whatever needs to be done in order to craft whatever process the adjudicator deems necessary to resolve the dispute. It should be noted that the purpose of statutory adjudication is not to rush the parties into an unfair result; due process is a necessity. By granting the adjudicators broad statutory powers that enable the adjudicators to tailor the process to the facts at hand, the Construction Act is allowing the adjudicators to craft a process that can be both expeditious and just.
THE COURT’S ROLE
With statutory adjudication changing how and when construction project disputes are being resolved, it is clear that the role of the court will have to evolve. The goal with statutory adjudication is that, similar to the UK, the vast majority of disputes will never make it the court system.
Pursuant to the Construction Act, the court now has two roles to play within statutory adjudication: determining if an adjudicator’s determination should be put aside, and enforcement of an adjudicator’s determination.
According to subsection 13.18, there are very limited grounds on which a court may set aside an adjudicator’s determination. The grounds mirror those grounds on which arbitral awards may be set aside:
- A party participated in the adjudication while under a legal incapacity.
- The contract or subcontract is invalid or has ceased to exist.
- The determination dealt, in whole or in part, with a matter that may not be the subject of adjudication under this Part, or with a matter entirely unrelated to the subject of the adjudication.
- The adjudication was conducted by someone other than an adjudicator.
- The procedures followed in the adjudication did not comply with the procedures to which the adjudication was subject under this Part.
- There is a reasonable apprehension of bias on the part of the adjudicator.
- The determination was made as a result of fraud.
Any application to set aside must be made no later than 30 days after the determination is communicated to the parties. Such application does not operate as a stay of the operation of the determination unless a court orders otherwise.
According to subsection 13.20, a party may apply to the court for enforcement of the resulting determination. Such application must be made no later than two years of the communication of the determination to the parties; or two years of the final determination of an unsuccessful application to set aside. The court must make an order enforcing the determination.
Looking at these subsections, it is clear that one of the by-products, if not goals, of the statutory adjudication scheme is limiting the role that the court plays in resolving construction disputes. Rather than heading to court after a project has been completed, or once a project has ground to a halt, the parties will only have to head to court if they are attempting to set aside an adjudicator’s determination, or trying to enforce one. If the Ontario statistics end up being similar to the UK statistics, with only two percent of construction disputes actually ending up in court, then the construction industry and construction practitioners are looking at a drastic change in the role of the courts in construction disputes, moving the courts away from the position of adjudicator, towards the position of enforcer. This will undoubtedly help lighten the court’s workload, an effect that has already been enjoyed in the UK.
Ontario’s construction industry is headed for a sea change. Statutory adjudication is going to radically change the way and time in which construction disputes are resolved. When a dispute arises on a project, whether it be an issue of cash flow or delay, it will no longer hang over the project for the duration, or have the power to stop the project in its tracks. Instead, the dispute will be resolved within approximately 40 days of it being raised, allowing for a swift resolution and resumption of the project.
As Ontario moves forward with the Construction Act coming into force, it will herald a new chapter for the Ontario construction industry. Like the UK before it, Ontario seems poised for success with its statutory adjudication scheme. Perhaps after the Ontario system has too become tried-and-tested, other Canadian jurisdictions will begin to follow suit.
The authors thank Markus Rotterdam, Director of Research at Glaholt LLP, for his assistance with this article.
- Bruce Reynolds, Sharon Vogel, Striking the Balance: Expert Review of Ontario’s Construction Lien Act, April 30, 2016.
- Construction Act, s. 13.7(1)
- The Authorized Nominating Authority (the “Authority”) is an entity appointed by the Lieutenant Governor in Council, and is responsible for training, qualifying, and publicly registering adjudicators. The Authority will be discussed in more detail further on.
- Construction Act, s. 13.9(2)
- Construction Act, s. 13.9(4)
- Construction Act, s. 13.9(5)
- Construction Act, s. 13.11
- Construction Act, s. 13.13(1)
- Construction Act, s. 13.13(4)
- Construction Act, s. 13.15