Ontario’s prompt payment scheme is a way for contractors to deliver timely invoices and ensure payment on an ongoing basis throughout the completion of a contract. I have many cases where my client contractors wait until the end of contracts to address payment, or let invoices go unpaid or pile up. The prompt payment regime was put in place to ensure cash flow and resolve minor disputes in a construction project before they become big disputes that threaten the relationship of the parties.
1. Application of the Prompt Payment Regime
Ontario’s prompt payment regime under the Construction Act is now mandatory on all parties (owners, contractors, and sub-contractors) working on construction projects in Ontario, except for in narrow circumstances.[1] The Act and the prompt payment regime apply to all contracts entered into after October 1, 2019.
2. Triggering the Prompt Payment Regime
The prompt payment regime is triggered when the general contractor delivers a proper invoice[2] to the owner, which establishes a payment timetable from the owner to the contractor and down through the subcontractors along the construction pyramid. The contractor must deliver a proper invoice to the owner monthly, unless the contract provides otherwise.
Payment of an invoiced amount is subject to holdbacks and the payer can set off amounts of outstanding debts, claims or damages in relation to the contract at issue.
3.The General Rule of Prompt Payment
The general rule describes the payment timetable along the pyramid when each party pays the full invoiced amount to the party below it on the pyramid. The general rule scenario unfolds as follows:[3]
1. The owner must pay the contractor within 28 days of receiving the proper invoice;
2. The contractor must pay the subcontractors within seven days of receiving payment from the owner;
3. The subcontractors must pay sub-subcontractors within seven days of receiving payment from the contractor; and
4. The process continues down the construction pyramid at seven-day intervals.
4. Notice of Non-Payment
Each party along the pyramid retains discretion to not pay all or part of an invoice to the party below it by delivering a notice of non-payment (an “NNP”) in the prescribed form.[4] If the party’s NNP disputes only part of an invoiced amount, it must pay the remaining portion in the timelines under the general rule. Disputes regarding non-payment are adjudicated by a third-party adjudicator, which is a form of arbitration that supplants the more resource-intensive and lengthier court process.
The timeline for delivery of an NNP depends on the party’s position on the pyramid:[5]
1. Owner to contractor – an owner must deliver an NNP to the contractor within 14 days of the proper invoice;
2. Contractor to subcontractor – there are two timelines for a contractor to deliver an NNP to subcontractors:
a. Within seven days of receiving the owner’s NPP; or
b. If the owner did not deliver an NPP, no later than 35 days after delivery of the proper invoice.
3. Sub-contractor to sub sub-contractor – there are two timelines for a contractor to deliver an NNP to subcontractors:
a. Within seven days of receiving the contractor’s notice of non-payment; or
b. If the contractor did not deliver a notice of non-payment, no later than 42 days after delivery of the proper invoice.
5. Effect of Partial Payments
There are two potential scenarios where partial payment is made:
1. The sub-party receives partial-payment but no corresponding NPP delivered:
a. If the sub-party is the contractor, then it must pay its subcontractors in full (if possible) from the amount received within 35 days of the proper invoice.
b. If the sub-party is a sub-contractor, then it must pay its subcontractors in full (if possible) from the amount received within 42 days of the proper invoice.
2. If the party receives partial payment pursuant to an NNP that identifies specific issues regarding services or materials supplied by a particular sub-party, the party must pay the remaining sub-parties in full and then pay the sub-party implicated in the dispute on a rateable basis.[6]
If it is not possible to pay sub-parties in full because of insufficient funds from the payment above, the party must pay each sub-party on a rateable basis[7] and deliver to each partially paid sub-party an NNP with an undertaking to refer the non-payment to adjudication.
6. The Adjudication Process
The prompt payment regime is buttressed by a mandatory statutory adjudication process. Statutory adjudication in Ontario is administered by a single provincially authorized nominating authority, called Ontario Dispute Adjudication for Construction, or “ODACC”. ODACC registered adjudicators provide parties with interim binding decisions within compressed timeframes based on a single payment cycle.
If a duly appointed adjudicator issues a determination that an amount should be paid to a party, that payment must be made promptly, failing which the party entitled to payment may suspend work and receive reasonable costs incurred as a result of the resumption of work in addition to the amount of the determination.
[1] The prompt payment regime does not apply to: (1) operation and maintenance portions of alternative financing projects with the Crown or a municipality; (2) projects on land used in connection with nuclear facility; and (3) contract for a federal project in Ontario.
[2] Unless otherwise agreed between the parties, a “proper invoice” must contain: (1) Name and address of contractor; (2) Invoice date; (3) Contract No. or other authorization for materials delivered and/or services performed; (4) Shipping and payment terms; (5) Name, title, telephone # and complete mailing address of the responsible person to whom payment is to be sent; and (6) Any other substantiating documentation/information required by the contract (statutory declaration, WSIB clearance certificate, etc.).
[3] See Appendix ‘A’ for a flow chart of the general rule scenario.
[4] See Appendix ‘B’ to this memo for all forms under the PPR. Using the proper form is mandatory.
[5] See Appendix ‘C’ for a flow chart of the NPP timelines.
[6] See Appendix “D” for Effect of Partial Payment flowchart.
[7] “Rateable” has different meanings in different contexts, but generally represents the sub-contractor’s invoiced amount divided by the total amount of all sub-contractors’ invoices.
