The Generals - Fall/Winter 2013 - (Page 31)

FEATURE Prompt Payment Legislation and the General Contractor By Geza Banfai C ash is the lifeblood of a construction project. When cash flow is impaired, the consequences are immediate and serious, including destruction of a sense of team, increased disputes, schedule disruption, loss of morale and productivity, and additional legal and administrative costs to everyone, including the innocent. Beyond that direct harm, there are other losses borne broadly by the community, in the form of excessive construction costs and diminished productivity generally, and the significant financial and human costs of insolvencies. If cash is a project’s lifeblood, the general contractor is its heart. With both contractual payment entitlements from the owner upstream and payment obligations to subs and suppliers downstream, the GC must receive timely payment. If prompt payment is not received, it will be faced with one of two unpleasant choices: abide those downstream payment obligations and finance payment, or breach those obligations and risk the legal and other consequences of that. Historically, it was the contracts that both recorded these entitlements and obligations and provided the mechanism that addressed failures of payment through breach of contract claims. But fair contractual entitlements depend upon equality of bargaining power, and is there any contract where that can truly be said to be present? The problems with enforcing contracts have long since become painfully evident, including the expense and uncertainty of litigation, as well as the delay. By the time the medicinal judgment comes to hand, the patient may be dead. Lien legislation helped the cause by giving construction creditors unique protections not generally available to others. But the problems inherent in enforcing contracts have carried over to the enforcement of liens. Furthermore, while lien legislation is effective to at least secure payment, it must be remembered that this legislation does not provide any positive obligations to pay, only security and trust rights if payment is not made. Prompt payment legislation was the next step towards correcting these problems. Starting with the U.S. federal government in the early 1980s, some form of legislation mandating the timely payment of construction accounts has now been implemented throughout virtually all of the United States, Australia, New Zealand, the U.K., Ireland and much of the European Union. Until recently, Canada has lagged behind this trend. Now pending before the Ontario Legislature, however, is Bill 69, short-titled the “Prompt Payment Act, 2013.” This proposed legislation is the direct result of an intensive collaborative effort undertaken between the National Trade Contractors Coalition of Canada (Ontario Branch) and the OGCA, which resulted in agreement between these two groups on the essential principles and significant details of what is considered a workable prompt payment regime in Ontario. That these two groups were able to engage in meaningful dialogue and reach consensus on an otherwise contentious subject is a significant credit to both of them. Bill 69 represents the first attempt in Canada to introduce prompt payment legislation, and its key principles both mirror those found elsewhere and incorporate concepts that reflect what might be said to be distinctly Canadian industry norms. Those key principles are as follows: • A mandatory obligation to make payment in accordance with the payment provisions contained in construction contracts, provided that such payment provisions contemplate payments at least once per month; • If the contract is silent about the timing of payment, or if payment is stipulated at intervals greater than monthly, such contracts are effectively amended to conform to the monthly payment requirement; • A mandatory obligation to pay lien holdbacks upon the expiry of the lien period; • An absolute right to suspend work or terminate the contract, upon prior written notice and subject to a short grace period, in the event of any failure to make timely payment; • A right by the GC (or by any other contractor with downstream payment obligations such as a major trade) to suspend payments downstream in the event payment is not received from the upstream payer, provided such GC or major trade takes steps to suspend performance, terminate its upstream contract, or enforce its lien rights; • The deemed approval of payment applications unless timely, detailed notice is given justifying any non-payment, and then only to the extent of the reasonable estimate of any direct loss or damage incurred by the payer which the withholding is intended to cover; • A positive obligation on the owner to provide information, before entering into a contract, demonstrating its financial ability to make payments under it, and to update that information upon request; • Upon request of the subcontractor, an obligation on the part of the GC to inform the sub of the due dates for payments under the prime contract; Fall/Winter 2013 31

Table of Contents for the Digital Edition of The Generals - Fall/Winter 2013

Chairman’s Message
President’s Message
Incoming Chairman’s Message
Upcoming Events - In Memoriam
Mitigating the Risk of Subcontractor and Supplier Default
Glen Murray Has Cause to Pause
Healthy Competition: Staying Onside the Competition Act through the OGCA’s New Compliance Program
Insurers and Contractors: Working Together to Support Investment in Critical Infrastructure
Thank You to Our 8th Construction Symposium Sponsors
Prompt Payment Legislation and the General Contractor
75th Annual General Meeting & Conference
Index to Advertisers

The Generals - Fall/Winter 2013