Ontario Construction Law — Construction Act, Liens, and Prompt Payment

The Construction Act — Overview and 2017 Amendments

Ontario's Construction Act RSO 1990 c C.30 (formerly the Construction Lien Act) was significantly amended by the Building Ontario Up for Everyone Act (Budget Measures) 2017 SO 2017 c 23, with the major amendments coming into force on October 1, 2019 (lien/holdback amendments) and July 1, 2018 (prompt payment and adjudication). These reforms represented the most significant overhaul of Ontario construction law in decades.

The Construction Act governs the right to register a construction lien against the interest of an owner, mortgagee, or other person in the premises, holdback obligations, prompt payment, adjudication, and trust provisions. The Act applies to improvements to land — defined broadly to include all construction, installation, alteration, repair, or demolition of any building or structure on land, as well as landscaping, planting, and similar operations.

Holdback Obligations

The holdback is one of the central mechanisms of the Construction Act. Under s.22, every owner, contractor, and subcontractor is required to retain a holdback equal to 10% of the price of the services or materials provided or placed as the work progresses. The holdback must be retained for the purpose of satisfying liens registered against the premises.

The holdback becomes payable to the contractor 45 days after the "date of publication" of a certificate of substantial performance, or 45 days after the last day of the period for preserving a lien, if no certificate is published (s.26). For subcontractors, the subholdback rules (ss.22-28) create similar obligations running down the construction pyramid.

The owner is entitled to make deductions from the holdback for liens registered against the premises. Lien claimants have a right against the holdback fund as security for their lien claims. The holdback mechanism means that unpaid trades and suppliers always have at least 10% of the contract price available as potential security for their claims.

Certificate of Substantial Performance

Substantial performance is defined in Construction Act s.2. A contract is substantially performed when: (a) the improvement to be made under that contract or subcontract is ready for use or is being used for the intended purpose; and (b) the improvement is capable of completion or, where there is a known defect, correction at a cost of not more than 3% of the first $500,000 of the contract price, 2% of the next $500,000, and 1% of the balance.

A certificate of substantial performance (CSP) must be published by the contractor in a construction trade newspaper (s.32(1)) within five days of the date of substantial performance being determined. The contractor must also give a copy to all subcontractors whose liens may be affected. The date of publication of the CSP triggers the 60-day period for preservation of liens by subcontractors.

Lien Preservation and Perfection

Construction liens in Ontario must be preserved by registration within the applicable period, and perfected within 90 days of preservation (or 90 days after the lien arose, whichever is earlier). The preservation periods under s.31 are:

• General rule: Within 60 days after the last date that the person supplied services or materials to the improvement.
• After substantial performance: Within 45 days after the date of publication of a certificate of substantial performance (for the prime contractor and all subcontractors).
• After contract completion/abandonment: Within 60 days after the date the contract or subcontract is completed, abandoned, or terminated.
• Lien on holdback: A lien on the holdback must be preserved within 45 days after publication of the CSP for amounts included in the CSP, or within 60 days after the date of completion of the contract for any remaining holdback.

The lien is registered under the Land Titles Act or Registry Act using a prescribed form (Form 1). Registration creates a charge on the estate or interest of the owner in the land described in the claim for lien.

Perfection requires commencement of an action in the Superior Court of Justice within 90 days after the lien is preserved, and registration of a certificate of action against the title to the land. An unperfected lien expires. A perfected lien cannot be vacated except by payment of the amount or by posting of substitute security.

Prompt Payment

The 2017 amendments introduced Ontario's prompt payment regime (Part I.1 of the Construction Act, in force July 1, 2018). The prompt payment rules require payment within prescribed timeframes running from the date of a "proper invoice":

• Owner to contractor: Within 28 days of receiving a proper invoice from the contractor.
• Contractor to subcontractor: Within 7 days of receiving payment from the owner (or within 35 days of the contractor submitting the proper invoice if the owner pays late).
• Subcontractor to sub-subcontractor: Within 7 days of receiving payment from the contractor (or within 42 days of the proper invoice submission date if payment is late).

A payer who intends to not pay all or part of a proper invoice must provide a "notice of non-payment" within 14 days of receiving the invoice (for owners) or within 7 days after the last day on which the owner was required to pay (for contractors/subcontractors). A non-payment notice must identify the amount not being paid and the reason.

Adjudication

The 2017 amendments also introduced mandatory adjudication for payment disputes under the Construction Act Part II.1. Adjudication is an expedited dispute resolution process administered by the Ontario Dispute Adjudication for Construction Contracts (ODACC). Any party to a construction contract may refer a dispute to adjudication at any time during the project or within 90 days after the certification of substantial performance.

Adjudicable disputes include amounts payable; non-payment notices; set-off and compensation claims; and progress payment disputes. An adjudicator must make a determination within 30 days (or longer if agreed). The adjudicator's determination is binding as an interim measure and must be complied with during the project. Final resolution of the underlying dispute proceeds through litigation or arbitration after project completion.

Trust Provisions

The Construction Act Part II (Trust Provisions) creates statutory trusts in the construction pyramid. Under s.8, all amounts received by an owner from a contractor on account of the contract price (less holdback) are held in trust for the benefit of subcontractors and others entitled to a lien. Under s.8.1, amounts received by a contractor from an owner are held in trust for subcontractors. The trust obligation means that contractors and subcontractors may not apply construction trust funds to their own general business purposes — doing so constitutes a breach of trust and can give rise to personal liability for directing minds.

The trust is impressed on specific funds and the law does not require a separate trust account. However, the practical effect of the trust obligation is that contractors and subcontractors must ensure that money received for a project is applied to pay the trades and suppliers on that project before being used for other purposes.