December 2, 2013
Legislation changes for prompt payment plans
Legal Reinforcement | Norm Streu and Chris Hirst
Tired of waiting for your cash on construction projects? Help may be on its way.
Legislation is under review in Ontario, which would mandate timely payments to contractors. This proposed Ontario law is renewing interest in late payment legislation in jurisdictions across Canada.
This issue of late payments is not unique to Canada and we are not the first to deal with it. In fact, we are the late comer in addressing it.
Legislation is in place in the United States, the United Kingdom, the Republic of Ireland, Australia, New Zealand, and the European Union (EU), to name but a few.
In 1982, the U.S. adopted the Prompt Payment Act, which applied to the federal government.
The current version of the act requires payment within 30 days of receipt of a valid invoice. There is also similar legislation in place for public sector construction in all but one state, and in 31 states the act protects sub-contractors on private projects.
In the U.K., the Construction Act recognizes the inherent unfairness of the pay-when-paid clauses, and declares the clause void.
In Australia, the Building and Construction Industry Security of Payment Act 1999 similarly nullifies “pay-when-paid” clauses.
Where the void clauses are included, the act provides for payment within seven days.
In Australia, payments are due within 10 days of the submission of a valid invoice and provides for interest on late payments. Interestingly, the EU adopted a directive to require members to implement legislation consistent with its directive on Combating Late Payment in Commercial Transactions. That directive provides for payment in 30 days for the public sector and 60 days for the private sector, with high rates of interest, payable daily, on overdue accounts. The interest charges are currently set at the central bank rate plus eight per cent.
In Canada, the first province to take steps towards an act is Ontario, with the Prompt Payment Act, 2013.
Currently, the act has been through two readings at the Ontario Legislature, though it is unclear if it will be passed into law. The act, in its proposed form, will give cash flow security to contractors, but does not have the abbreviated payment periods required by the acts in the U.K. or Australia, or the financial penalties for late payment seen in the EU.
The proposed act would apply to every construction contract in Ontario, whether public or private. It would require that progress payments be made on a monthly basis with the final payment to be made in accordance with the contract or sub-contract, but no less than 30 days after the application for final payment has been made.
Also of significance in the proposed act is the requirement that the lien holdback is to be paid within one day after the day the payer is no longer required to retain the holdback.
With respect to enforcement, the act provides that a payee has the right to suspend work and enforce any applicable lien rights if a payer is more than seven days late.
Furthermore, a payee would have the right to know on the scheduled due dates what progress payments have been made to a payor.
Additionally, a general contractor and sub-contractor would have the right to financial information for the purpose of demonstrating the financial ability of the owner to make the payments provided for under the contract.
The act would not, however, give the contractor or sub-contractor an absolute right to payment.
For example, if work is defective, payment may be withheld if, within 10 days, the payor provides written notice of the reasons for disapproving of the payment application.
Only the part of the payment that is disapproved or amended may be withheld.
The proposed legislation would be a step forward in ensuring prompt, timely payment to contractors and subcontractors and, if passed, the Ontario legislation could serve as a template for B.C.
Norm Streu is president & COO of the LMS Reinforcing Steel Group. Christopher Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin + Lang LLP. This article was prepared with the assistance of Daniel Thompson, articled student. Send comment or questions to firstname.lastname@example.org
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