New legislation has been passed in Ontario which will have a significant effect on public-private partnerships, or in Ontario, Alternative Financing and Procurement (“P3”) projects, as well as traditional projects. The Construction Lien Act has been re-named the Construction Act and the first wave of changes took effect on July 1, 2018. These changes reflect the realities of modern construction contracting and financing arrangements, including the P3 model, which didn’t exist in Ontario the last time the Act was examined in a holistic way in the early 1980s. As of October 1, 2019, additional changes will come into effect introducing prompt payment and adjudication in Ontario, including on P3 projects. All eyes are on Ontario as this new legislation rolls out and other provinces consider introducing similar legislation. The federal government has already announced its intention to introduce prompt payment and adjudication legislation.
What Has Changed?
The modernization provisions in the Ontario Act which came into effect on July 1, 2018, included a series of modifications that sought to clarify the application of the Act to P3 projects.
The provisions under Section 1.1 of the Act clarify how the Act applies to P3 projects by providing that the special purpose entity (or “Project Co.”) that contracts with a public sector entity for a given project is deemed to be the owner of the premises and the contract between Project Co. and the contractor is deemed to be the contract for the purpose of specific provisions of the Construction Act, including:
- for the calculation of the lien period;
- for the determination and certification of substantial performance; and
- for information requests.
The Act also requires contractors on P3 projects to furnish Project Co with a labour and material payment bond and performance bond in the prescribed form. A coverage limit is set in relation to these bonds (i.e. 50 per cent of the contract price). In relation to P3 projects that limit is subject to adjustment, so long as it meets or exceeds the prescribed coverage limit under the regulations and, when taken together with other security on the project, reflects “an appropriate balance between the adequacy of the security required to ensure the payment of persons supplying services or materials under the public contract on the one hand and the cost of the security on the other”. In other words, the total package of security on the P3 must be appropriate to protect subcontractors and suppliers but not overly burdensome from a cost perspective. In this regard, the regulations prescribe a minimum coverage limit of:
(a) 50 per cent of the contract price, if the contract price is $100,000,000 or less; or
(b) $50,000,000, if the contract price is more than $100,000,000.
In addition to the clarification provisions directly related to P3 projects, the Act introduces other provisions which are relevant to these projects including:
- the revised definition of “improvement” and the introduction of the definition of “capital repair”, which is any repair will extend the “normal economic life” of the land, building, structure or works on the land, but does not include maintenance work;
- the modification of the definition of “price” to include “direct costs” which are reasonably incurred in performing the contract or subcontract during an extended period of time, including costs related to the additional supply of services or materials, insurance and surety bond premiums, and seasonal costs (but does not include indirect damages); and
- increased obligations in relation to trust funds on projects that contemplate compliance with prescribed bookkeeping methods and requirements to deposit trust funds in a bank account under the trustee’s name.
The second phase of the new Act comes into force on October 1, 2019, and the prompt payment and adjudication provisions contain modifications customized for P3 projects.
How Will It Impact Industry?
As with any legislative change, industry will need to familiarize itself with the new provisions and acclimate in short order. The modernization provisions discussed above largely serve to streamline existing processes and provide participants with further certainty in the exercise of rights under the Act. The future prompt payment and adjudication provisions will require further planning as the fall of 2019 approaches.
Even in relation to projects where the procurements commence after July 1, 2018, participants in the P3 market will need to account for the fact that surety bonds will be a mandatory part of the overall security package on these projects. This may affect who parties choose to partner with in relation to a P3 project.
As well, as a result of the implementation of the “capital repair” provisions, further consideration will also be needed in relation to the operation and maintenance phase of contracts to determine when elements of a project (say, under a 30 year O&M term) qualify as maintenance or a capital repair.
As the roles and responsibilities of participants are clarified under the new Act in the context of P3 projects, enforcing lien rights should become more straightforward.
Fortunately for those affected, the transition provisions of the Act provide that the new provisions will not apply to any contract entered into before July 1, 2018, or any procurement process commenced before July 1, 2018. This is intended to allow industry participants some time to address issues in their contract forms and consult with their respective stakeholders.
Over time, as the effects of the new legislation are felt, the P3 market will need to adapt and modify its practices to ensure that parties comply with their obligations under the Act as it is not possible to contract out of the Act.