Prompt-payment adjudication systems for disputes in the construction industry have been rolling out steadily across Canada.
Ontario was the first. In July 2019, the province’s Ministry of the Attorney General named the Ontario Dispute Adjudication for Construction Contracts (ODACC) the authorized nominating authority of the system. The adjudication and prompt-payment provisions came into force that October.
Next was Saskatchewan. The Builders’ Lien (Prompt Payment) Amendment Act, 2019 came into force on March 1, 2022. In Alberta, the Prompt Payment and Construction Lien Act came into force on August 29, 2022. Similar legislation has also been considered or is in the works in Manitoba, British Columbia, Nova Scotia, New Brunswick, and Quebec. From Ottawa, the Federal Prompt Payment for Construction Work Act received Royal Assent in June 2019 but is not yet in force.
Prompt-payment adjudication produces an interim, binding decision, which can be set aside later through arbitration or a court proceeding.
“It is an expedited process to get an interim ruling in a dispute on a project to get cash flowing,” says Laura Cundari, a partner at Blake Cassels & Graydon LLP in Vancouver, who litigates and arbitrates disputes in the energy, mining, construction, and infrastructure sectors, among others. “Unlike the lien regimes, which are there to provide security for payments, these are there to ensure that cash continues to flow during the project.”
“The adjudication system works in a pretty straightforward way,” says Louis-Pierre Grégoire, a partner in Gowling WLG's Ottawa office, a certified specialist in construction law, and a former civil engineer. “It's referred to, oftentimes, as quick and dirty dispute resolution.”
Grégoire describes how the system works in Ontario. First, the party with the complaint commences the process by delivering a notice of adjudication and nominating an adjudicator. The adjudicator has four days to advise whether they can participate – they may be too busy or have a conflict of interest. If the respondent rejects the adjudicator or the adjudicator declines, an additional seven days is allowed to find another, and the claimant can call on the ODACC to appoint one. Once the adjudicator is determined, the party with the complaint has five days to deliver the backup documentation. Upon delivery of the documentation, the adjudicator has 30 days to decide the matter. That is between 39 and 46 days from initiating the adjudication and a written decision.
“That's quick compared to the civil system,” says Grégoire.
Then, the losing party has 10 days to pay. If they do not, the other side can go “tools down” and cease working on the project, even if there is a contractual provision that says work must continue in the event of a dispute, he says. And the decision is enforceable like an arbitration decision; the lawyer can take it to court and convert it into a garnishment order or work with the sheriff to force the sale of assets.
“So, adjudication’s got some teeth here,” says Grégoire.
Another plus is that the decision-maker comes from the construction industry, whose expertise is more wide-ranging than a judge, he says. In Ontario, the certified adjudicators are engineers (26), project managers (27), architects (3), lawyers (19), quantity surveyors (10), arbitrators (10), mediators (3), and one is an accountant, according to ODACC’s report on the 2022 fiscal year.
“There are folks who are probably really knowledgeable about the issues that they're going to decide upon,” says Grégoire. “In most cases, they'll have a bit of an advantage on the subject matter over judges.”
The reception has been “a mixed bag,” he says. While some love the process, others – typically on the receiving end of an unfavourable decision – do not. Some critics say it moves too quickly and that they cannot fully develop their position.
“Overall, at least from my team and my perspective, the adjudication system works well provided that people take it seriously and provide the proper documents to the adjudicator.”
“If you're a claimant, the advantage is the speed. If you're a defendant, the disadvantage is the speed,” says Andrew Konopelny, a construction lawyer at MLT Aikins LLP in Regina.
Once the notice of adjudication is delivered, if the defendant does not have a lawyer familiar with the file, they are at a “massive disadvantage.” Clients opt for “preventative involvement of counsel,” getting them involved once disputes start brewing. Konopelny tells clients that if they refuse to pay an invoice or approve a change order, for whatever reason, they should be ready for a dispute, and earlier involvement of legal counsel can mean significant cost savings, he says.
“It creates leverage,” says David Outerbridge, a Torys LLP partner whose practice is focused on litigation and arbitration in the energy, infrastructure, and construction and procurement sectors. He says that there are roughly twice as many claims initiated than determined, which indicates a significant portion are settling.
“There aren't a lot of pros for a respondent,” says Outerbridge. They have a limited amount of time to put their case together. They rush to assemble the relevant material if there is a technical component or a complicated factual component. They may lack sufficient time to retain an expert because it takes a while for experts to execute their analysis and do inspections. The respondent also does not have “full procedural rights” – for example, they cannot examine the other side for discovery. Also, though they can re-litigate any result, they will be working against a decision already rendered.
“The whole system is designed for claimants – for the little guys, for the subcontractors, suppliers, and unrepresented parties who don't have a lot of money and sophistication and want to be able to get a result quickly,” he says. “For that purpose, it's well designed. But for complicated projects, or for respondents, it's not particularly optimal.”
The new adjudication systems drive owners to pay closer attention to their construction contracts, says Scott Masson, a partner at MLT Aikins in Saskatoon with a broad corporate practice, including project planning and development, infrastructure, construction procurement, and real estate. He says losing the tool of withholding payment means contracts may matter more than before, and owners and contractors must be proactive.
The adjudication option has flipped the relationship between owners and contractors, adds Konopelny. Traditionally, the owner has controlled the funds, and the contractors have had to seek payment upon project completion if they believe they have been underpaid. But if a contractor wins an adjudication mid-project, it may be the owner attempting to recover funds post-project.
“Historically, owners have been able to use control over the purse strings as a way of getting what they want with contractors and withholding payment in the event of a dispute,” says Masson. He says the routine has been to get the job done now and fight about the money and other disputes later.
“These prompt payment regimes basically flip that on its head,” says Masson. “It's pay now based on quick justice through the interim adjudication systems. Then, if there's a run-on dispute through arbitration or through the court system, fight about that later.”
So far, parties to construction projects are still dipping their toes to test the waters. The data available from Ontario shows that they have primarily been used for small-dollar disputes and residential construction.
In Ontario, s. 14(1) of the prompt-payment regulations requires ODACC to publicize an annual report up to 90 days after the end of the fiscal year.
According to ODACC’s 2022 annual report, 122 adjudications commenced in the province in the 2022 fiscal year, with 67 resulting in a determination. Thirty-one of the disputes dealt with the pricing of services or materials under contract; 29 dealt with “payment under the contract, including in respect of a change order;” three concerned disputes arising out of a notice of non-payment; and the other four were related to other matters agreed to or prescribed. The residential construction industry accounted for 52 adjudications, commercial construction comprised 23, and 30 involved the transportation and infrastructure sector.
The determinations totalled $3,449,619 in pay-out, for an average of $51,486 per dispute.
“So far, in Canada, it's been fairly slow in terms of uptake,” says Cundari. She says there are around 2,000 of these adjudications annually in the UK. “Proportionately, we're not quite there yet, but it may grow over time as people become more comfortable with this idea.”
“Pretty low uptake in the grand scheme of construction projects in the province,” says Outerbridge. “Just to put it in perspective, there are roughly 60,000 new homes built every year.”
Outerbridge adds that he has yet to see the system used in any infrastructure projects he has worked on. He says that a “fast-track, rough-justice-type” system does not provide much value for projects with nine- or ten-digit dollar values.
Grégoire expects that the system will become “more of a staple” across Canada in allowing construction industry stakeholders to resolve disputes in a few years.