Prompt payment arrived for Ontario's construction industry October 1, 2019. The final stage of implementation of the changes introduced the Construction Lien Amendment Act, 2017, came into force on October 1, 2019. Subject to a grandfathering period for existing contracts and contracts for which the procurement process was begun prior to October 1, the new prompt payment regime set out in Part I.1 of the renamed Construction Act (Ontario), will apply to all construction contracts entered into after October 1, 2019. Both payors and payees must create the systems and procedures now in order to be in a position to comply with the tight time limits that will apply under the prompt payment regime.
Contractors must develop systems to produce "proper invoices". This is the critical first step in the prompt payment process. If contractors are unable to produce compliant invoices the benefits of the prompt payment process will be lost.
The requirements for a proper invoice are set out in Section 6.1 of the Construction Act (Ontario) and the requirements are mandatory. Contractors are required to produce a proper invoice monthly unless the contract stipulates otherwise. The proper invoice must meet all of the requirements of the contract and must set out the authority under which the services or materials were supplied and a description of the services or materials provided along with other details of the payment. A proper invoice cannot be conditional on any action by the owner or the payment certifier. On delivery of the proper invoice to the owner the prompt payment clock begins.
The owner must pay the contractor the amount of the proper invoice within 28 calendar days after receipt from the contractor unless within 14 calendar days after receipt the owner has issued a notice of non-payment to dispute all or any part of the invoice. The form of the notice of non-payment is prescribed and must contain a statement of the amount of the invoice to which the owner objects together with all of the reasons for non-payment. The owner is still obliged to pay the balance of the invoice amount before the expiry of the 28 calendar day period.
The owner will need to ensure that all of its and its lenders requirements for verification can be completed with the 14 calendar day period following delivery of the proper invoice in order to be in a position to deliver a notice of non-payment.
The prompt payment rules apply right down the construction pyramid. After receipt of any payment on account of a proper invoice the contractor must pay each of its subcontractors who provided services or materials included in the proper invoice within 7 calendar days of receipt of payment. Not later than 35 calendar days after the contractor delivered the proper invoice, whether or not the contractor has been paid, the contractor must pay each subcontractor who provided services or materials included in the proper invoice unless prior to the earlier of (i) 7 days after receiving notice of non-payment from the owner; or (ii) 35 calendar days after the contractor delivered the proper invoice the contractor provides a notice of non-payment. If the non-payment of the subcontractor is the result of non-payment by the owner, the contractor must provide a copy of the owner’s notice of non-payment and a statement of the amount not being paid together with an undertaking to refer the matter to adjudication within 21 days. If the non-payment of the subcontractor is the result of the contractor disputing the subcontractor’s entitlement the contractor must issue a notice of non-payment in the prescribed form containing a statement of the amount to which the contractor objects together with all of the reasons for non-payment. The contractor is still obliged to pay any uncontested balance before the expiry of the 7 calendar day period after receipt of payment from the owner.
Every project owner should examine their payment processes to ensure that they will be able to process payment of an invoice on the timetable required. Project owners must work with their consultants, their lenders and their lenders’ consultants to ensure that the necessary verification of the work included in each invoice can be completed well within the 14 calendar day period allowed. Any decision to withhold payment of any part of the invoiced amount must be made within the first 14 days after receipt of the invoice.
Every contractor must examine their contracts and the requirements of the Construction Act to ensure that they can prepare and deliver “proper invoices” to start the process and must be ready to respond to the notice requirements they must meet in the event any part of their invoice is challenged by the owner.