What it Means to Subcontractors & Suppliers

A Whole New World.

For Subcontractors and Suppliers, the passage of Bill 142 – The Construction Act of Ontario in December 2017 was possibly the most significant legislative milestone in 35 years. By now, most construction industry stakeholders are have a general awareness of the objectives and approach of the new measure. Our goal here is to provide a more nuanced understanding of the various provisions; particularly as they relate to surety bonds

The Act will has been brought into force in two phases. The first phase kicked in on July 1, 2018 and implemented updates, improvements and clarifications to key provisions (e.g. construction liens, holdbacks and trust funds) of the Construction Lien Act of 1983.

But the cornerstone features of the new legislation, certainly from the perspective of stakeholders across the construction payment chain, came into force on October 1, 2019. This saw the introduction of Canada’s first prompt payment regime for the construction industry which is supported by a robust scheme for quick dispute resolution in the form of binding interim adjudication during the project.

It’s interesting, however, that with all the noise and bother surrounding these sweeping changes, little notice has been taken of another new feature of the Act which should be of central importance to trades and suppliers. Part XI.1; Section 85.1 of the Act requires general contractors to post 50% performance and labour and material payment bonds on all "public work" over $500,000 in the province of Ontario.

The bonds must be issued on prescribed forms which were developed by the Ministry of the Attorney General in consultation with the Surety Association of Canada and include new provisions that bring certainly, clarity and timeliness to the claim process. Copies of the template bond forms can be reviewed and downloaded from Ontario Government Court Forms website by CLICKING HERE (see forms 31 and 32).

The New Labour & Material Payment Bond:

Reviewing the template payment bond, which is now required on public work after July 1, 2018 (note: To review the transition rules, See Section 87.3 of the Act which can be found on the government website HERE), the first point of note will be its length. The new document bond fills a full 11 pages in comparison to its two page CCDC counterpart. Much of the extra content consists of template schedules, or forms which set out the standard responses and acknowledgements under the bond (more on that in a moment). More importantly however, it will provide unpaid Subcontractors and Suppliers (Claimants) with a number of new provisions to ensure more timely payment of unpaid monies due and more certainty as to the process.

A few highlights:

  • The new bond offers “broad form” protection which extends to 2nd tier Claimants (sub-subcontractors) in the same manner as provided for under the federal government payment bond.

    Note that the protection to these 2nd tier Claimants is “…limited to such amounts as the Contractor would have been obligated to pay to the Sub-subcontractor under the Construction Act (the “Act”)”. This would effectively limit the Contractor’s and Surety’s liability to Sub-subcontractors to that portion of the holdback that the Contractor would be liable to pay under the Act.

  • The instrument includes a number of “schedules” which are actually template forms that provide guidance to Claimants and Surety and bring a measure of standardization around the claim process. It’s hoped that providing for uniformity of various notifications and responses in this manner will minimize or even eliminate the frustrating and unnecessary delays that arise from incomplete or incorrectly completed notices.
    • Schedules A and B provide a template for Subcontractors and Sub-subcontractors respectively for the delivery of a Notice of Claim to the Surety.
    • Schedule C provides the standard template for the Surety’s acknowledgement to the Notice of Claim and request for Information.
    • Schedule D sets out the Surety’s position following its review of the Information provided. It’s a very simple document that confirms:
      a. The portion of the Claim that is being disputed and the reasons for disputing this amount; and,
      b. The amount that is not in dispute.

  • Paragraphs 6 and 7 set out the timelines for acknowledgement, response and paying undisputed amounts.
    • 3 business days to acknowledge and request information.
    • For a Subcontractor Claim, the Surety’s Position must be delivered within 10 business days from the receipt of the Information or 25 business days from the receipt of the Notice of Claim.
    • For a Sub-Subcontractor Claim, the Surety’s Position must be delivered within 15 business days from the receipt of the Information or 35 business days from the receipt of the Notice of Claim.

  • Paragraph 8 requires the Surety to pay any undisputed amounts within 10 business days of Surety’s Position being provided to the Claimant.

Claimants should keep in mind that there are time restrictions imposed on their ability to make a claim under the bond.

  • A Claimant must file their Notice of Claim (Schedule A or B):
    • For Holdback amounts; within 120 calendar days after the Claimant should have been paid in full under its Contract (Paragraph 5 (a)).
    • For amounts other than Holdback; 120 days from the last day that the Claimant supplied material or services to the project (Paragraph 5 (b)).

  • Under Paragraph 14, a Claimant has one year from the last work was performed (or materials supplied) in which to initiate a suit or an action under the bond.

It should be noted that as of October 1, 2019, the Regulations allow for disputes under a payment bond, unlike those under a performance bond, to be referred to adjudication as governed by Section 13 of the Act. Paragraph 9 of the bond states that the obligations of the Contractor and Surety under the bond are stayed until the adjudicator has issued a determination or the process has been terminated.

A few Tips for Subcontractors and Suppliers:

1. Protect Your Rights.

Ensure that key staff have read the bond thoroughly and understand its terms; particularly in regard to any requirements they impose on your organization. If necessary, consult with counsel or other knowledgeable resource people.

Make sure that any Notice of Claim is delivered to the Surety within the 120 day window as defined in Paragraph 5 of the bond and that any lawsuit is initiated before the one year deadline from the time your work was completed.

Finally, it’s important that your Notice of Claim be submitted in a format consistent with that set out in Schedule A or B; whichever applies. This will necessitate familiarizing yourself with these schedules and the information required. It would be well worth the effort to get a copy of the bond from the owner or general contractor and ensure that the people on the ground are familiar with the requirements.

2. Submit the Requested Information Promptly and Accurately.

When a Surety acknowledges your Notice of Claim under Schedule C, it will also provide a list of the information needed to confirm the validity of the amounts being claimed.

Remember that the Surety has a limited amount of time (between 10 and 35 business days) in which to provide you with a response setting out the portions of the Claim that are disputed and those that are undisputed. Promptly providing the Surety with the required information to evaluate your Claim will go a long way toward ensuring that you get your money as expeditiously as possible.

Put another way, the more complete and accurate the information you provide; the less likely that the disputed amount will be a large number!

3. Ensure that your Files are Documented.

While keeping well documented files is never bad practice, it becomes more important under the new regime. Generally speaking, the requirements imposed upon all parties to the bond make well documented files essential in the event of a challenge or dispute.

This becomes particularly pertinent in the case of payment bond claims where disputes can be referred to an adjudicator for a fast-tracked resolution. Experience in other jurisdictions suggests that the outcome of an adjudication can be determined by the quality of the documentation provided to the adjudicator, making proper and thorough documentation paramount.

This information is provided for information purposes only and is not intended to be exhaustive or authoritative. Nothing here should be construed as legal advice and readers are urged to read the Construction Act of Ontario and supporting documentation thoroughly and consult with counsel for advice as to specific issues.