Changes to Ontario’s Construction Act: Mandatory annual holdback release, expanded adjudication and more

November 25, 2024

On October 30, 2024, Mr. Duncan Glaholt (construction law expert and arbitrator) published "The 2024 Independent Review: Updating the Construction Act" (Report) for the Ministry of the Attorney General. The Report is the result of extensive consultation with 33 stakeholders (both institutional and individual) in the construction industry, including: construction worker representatives, engineers, lawyers, owners, contractors, trade organizations, government entities, and various organizations and councils.

On November 6, 2024, Bill 216, Building Ontario For You Act (the Bill), which amended amongst others, the Construction Act (the Act) received royal assent (after only being tabled on October 30). The Bill incorporates many of the recommendations in the Report.

The Report and changes to the Act come some five years after the changes to add prompt payment and adjudication into the Act came into force in 2019. What is clear from the changes is that prompt payment and adjudication are here to stay. The changes are significant for all parties in the construction pyramid. Among the more significant changes are the following:

• the introduction of mandatory annual release of holdback;
• new lien period for annual release of holdback;
• amending section 26 and repealing section 27.1 thereby removing the owner's ability to set off against holdback, effectively removing the right to set-off against the holdback;
• broadened access to adjudication (both with respect to timing and scope); and
• provisions deeming invoices to be "proper invoices" unless the owner notifies the contractor of the non-compliance within the prescribed time.

These are discussed in greater detail below.

Transition

While the Bill includes transition provisions, most of the amendments will take effect immediately upon proclamation by the Lieutenant Governor. Of significance, is that for contracts executed prior to these amendments coming into force, the new annual holdback regime will still apply. However, the "first anniversary" date for mandatory release of holdback will be the second anniversary of the date the contract was entered into that follows the date of enactment of the amendments. This transition provision will give parties some time to prepare for the changes.

As of the date of this article, the changes are not yet in force and the corresponding regulations are not yet available.

Holdback

The holdback regime is central to the Act and is meant to mitigate insolvency issues by keeping a certain retainage within the hands of the owner. As noted by Mr. Glaholt in the Report, a century ago, "the Act was a workers' statute and few projects took longer than one year to complete."¹ This is no longer the reality in Ontario. As many projects, including infrastructure projects, can take up to five or more years to complete, this can create significant financial stress for those least able to carry the burden of financing.

In 2017, changes to the Act included the addition of a consent-based scheme for the annual or phased release of holdback on a permissive basis. The changes in the Bill go one step further, mandating the release of holdback on an annual basis.

The amendments to the holdback regime

The Act now provides for a mandatory annual release of holdback by the "owner" for all contracts. The section dealing with "phased" holdback has been repealed. Amended section 26(4) provides that an owner shall make payment to a contractor of all the accrued holdback in respect of services or materials supplied by the contractor during the year immediately preceding the anniversary, unless a lien has been preserved or perfected and not discharged, vacated or satisfied. Section 26(5) provides that not later than 14 days after receiving payment of holdback under section 26(4), the contractor shall make payment to a subcontractor of all of the accrued holdback in respect of the services or materials supplied by the subcontractor during the year described in section 26(4), unless a lien has been preserved or perfected and not discharged, vacated or satisfied.

Under the new section 26, the owner is required to publish a "notice" of annual release of holdback (Annual Notice) in the prescribed form no later than 14 days after the anniversary date on which the contract was entered into. If there are no preserved or perfected liens after the lien period expires (60 days after the notice is published), the owner must release the holdback within 14 days after the expiry of the lien period.

Changes to section 14(4) of the Act will also address holdback retained by an owner for the supply of design services for an improvement that is not "commenced." Section 14(4) essentially confirms that, if the owner retains holdback in respect of the design services for a planned improvement that is not commenced, subsection 14(1) is deemed to apply (i.e., that the designer has a lienable supply) unless the owner proves that the value of the owner's interest in land has not been enhanced.

No right of set-off against the holdback

The other significant change relates to the repeal of section 27.1, which provides a means for the owner to refuse to pay some or all of the amount the owner is required to pay to a contractor under section 26 or 27 if the owner publishes a notice of non-payment of holdback in the prescribed form. Also of significance are the provisions that pertain to the mandatory release of holdback in section 26, including subsection 26(8), which provides that a payer shall make payment of all holdback that is not paid or payable under sections 26(4) to (7) after all liens that may be claimed against the holdback required to be retained under subsection 22(1) have expired or been satisfied, discharged or otherwise provided for under the Act, with the owner being required to pay the holdback to the contractor within 14 days after the liens have expired or been satisfied, discharged or otherwise provided for under the Act and the contractor being required to pay the holdback to the subcontractor within 14 days after receiving payment of the holdback from the owner, with the same obligation imposed on the subcontractor to release the holdback to its sub-subcontractor within 14 days of receiving payment of the holdback from the contractor or from another subcontractor as the case may be.

Lien periods

To address the mandatory annual release of holdback, subsections 31(2) to 31(7) are repealed and replaced with new provisions dealing with lien periods. Liens related to the supply of services or materials that are included in an Annual Notice expire 60 days after the Annual Notice is published. This does not effect a lien that a person may have with respect to work performed or services provided after that date. Effectively this separates out two different sets of lien periods - one related to the annual release of holdback regime and the other related to ongoing supply.

In addition to the above-noted change, the Bill also addresses several other matters related to liens, including the joinder of lien and breach of trust claims (as part of the Regulations, which have not yet been circulated).

The amendments to the adjudication regime

The Report recommended expanding the current adjudication scheme ─ both with respect to the types of disputes that can be adjudicated and extending the time for adjudication. The Report noted that many stakeholders were frustrated with the fact that adjudication was not available after the contract has been completed. With the new amendments to the Act, both the timing and scope of adjudication has expanded.

Firstly, adjudication will no longer be limited to the "types" of disputes, rather, adjudication is now available for "any prescribed matter or any matter agreed to by the parties to the adjudication."²

Secondly, the timeframe for bringing adjudications has been expanded. Under the new adjudication regime, a dispute may be referred to adjudication within 90 days following the earlier of: (i) the date the contract is completed terminated or abandoned, unless the parties to the adjudication agree otherwise or where it is a subcontract, (ii) the date that is within 90 days after the date the subcontract is certified as completed under section 33 or the date the services or materials are last supplied to the improvement. This means that adjudication is now available even after the contract or subcontract has been completed.

In addition, the Act will now allow for adjudications to be conducted by private adjudicators qualified by the Authorized Nominating Authority. Practically, this will expand significantly the roster of adjudicators available to address disputes.

Proper invoice

As part of the amendments, the Bill also amends section 6.1 of the Act to refine the criteria for a "proper invoice." To be a proper invoice under the Act, the invoice must include the following:

1. The contractor's name and address;
2. The date of the invoice and the period, milestone or other contractual payment entitlement to which the invoice relates;
3. Information identifying the contract or other authorization under which the services or materials were supplied, such as a contract number, contract line item number or purchase order number;
4. A description, including quantity where appropriate, of the services or materials that were supplied;
5. The amount payable for the services or materials that were supplied and the payment terms;
6. The name, title, mailing address and telephone number of the person to whom payment is to be sent or if payment is to be sent to an office or department, its name, mailing address and telephone number;
7. Any other information that may be prescribed.

A significant amendment to this provision, is the addition of subsection 6.1(2) which deems a non-compliant invoice, namely, an invoice that does not meet the requirements referred to in subsection 6.1(1) to be a "proper invoice" unless the owner notifies the contractor in writing of the non-compliance within seven days of receiving the invoice and specifies the deficiency and what is required to address it. This change helps to address the anomaly of the situation where the contractor has failed to comply with the requirements for delivery of a proper invoice, the delivery of which triggers the prompt payment obligations and notice of non-payment obligations set out in the Act, which has a direct impact on the ability of subcontractors and suppliers to enforce the prompt payment provisions.

Key takeaways

Five years after the sweeping 2019 changes to the Act, it appears that the government is paying attention to stakeholder challenges with the prompt payment and adjudication regime. Some growing pains were certainly expected, but Ontario is leading the charge to address these changes.

These changes will certainly bring challenges to those administering contracts, as well as to contractors and subcontractors who will now be subject to multiple lien expiry dates, but it appears that there may be some time before the changes will be in force. Parties to construction contracts should begin to consider how these changes will impact their project and internal contract management and administration practices and how best to address these changes.

Dentons is continuing to monitor the changes. If you are concerned about how these changes may impact your project or business, please do not hesitate to reach out to the authors, Karen Groulx or Dragana Cerovina, or any member of our Construction group.

1. Report, p. 12.↩
2. s. 13.5.↩