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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.

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Whether an event is a Force Majeure Event depends on: (1) the nature of the event; and (2) the wording of the force majeure clause. It is therefore possible for an event, in this case the lockdowns, to be a Force Majeure Event in one contract but not another, or for one party to a contract and not the other.

Litigators should therefore be cautious in relying on one case to establish the existence of a Force Majeure Event in their case because the contractual terms likely differ between cases. Similarly, they should not argue that a particular outcome in one case should apply to their case if the remedies prescribed in the clause differ between cases.

Solicitors should pay particular attention to the type of remedy that flows from the existence of a Force Majeure Event in crafting commercial leases for their clients. The ability of the client to sustain interrupted cash flow will be paramount in drafting the clause.

Analysis

In Niagara Falls Shopping Centre Inc. v. LAF Canada Company, 2023 ONCA 159 (“Niagara”), the tenant fitness facility experienced financial hardship during the lockdowns because it did not require its members to pay fees during such times. It stopped paying rent as a result, relying on the force majeure clause in the lease. However, a Force Majeure Event, as defined in the lease, specifically excluded financial inability from the definition of the Force Majeure Event. Therefore, while the landlord’s inability to provide the premises was excused as a Force Majeure Event, the tenant was still obliged to pay rent during that period.

A similar situation occurred in Windsor-Essex Catholic District School Board v. 2313846 Ontario Limited o/a Central Park Athletics, 2022 ONCA 235 (“Windsor”). The landlord sports facility shutdown due to the lockdowns, depriving the tenant school board use of the facility. Here the parties agreed there was a Force Majeure Event, and the tenant continued to pay rent throughout. However, unlike in Niagara, here the lease required the landlord to provide an abatement of rent during the Force Majeure Event (ie the lockdown) periods.

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In advocacy, it takes courage to be brief. Generally, lawyers like to play it safe: include everything, miss nothing. The goal, however, is to be persuasive, not safe.

Brevity can be highly persuasive. When done right, it signals confidence in the case, the issues, and one’s self. The corollary is the judge learns to have confidence in you, and then your case.

Here are some resources on the subject from much more accomplished jurists than me:

Justice Louise Charron, “The Governing Principle in Writing a Factum: Write for Your Reader“ https://lnkd.in/gJqBahUa

Justice John Laskin, “Forget the Windup and Make the Pitch: Some Suggestions for Writing More Persuasive Factums“ https://lnkd.in/gvBGJUkM

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Takeaway: Improper conduct by way of value-stripping (removing cash from a corporation) in a way that defeats creditors (here, rent to a landlord) will usually ground a claim for oppression against a director personally rather than one for piercing the corporate veil. The latter entails a more stringent test that requires a clear factual nexus between the improper conduct and the value stripped (ie fraud).

In this case, a sole shareholder, director and officer directed the corporation to breach its commercial lease by relocating the business and withholding one year’s rent to the plaintiff landlords.

The plaintiffs sued the director personally for: (1) inducing breach of contract; (2) liability from breach of lease by way of piercing the corporate veil; and (3) oppression under the OBCA. The ONCA decided that only the third cause of action had a reasonable prospect of success and upheld the motion judge’s decision to strike the first two under Rule 21.01(b).

At the motion, the plaintiffs argued two examples of fraud or improper conduct in support of piercing the corporate veil: (1) inducing breach of contract; and (2) value-stripping.

The plaintiffs did not appeal the motion judge’s decision to strike the inducing breach of contract claim, which was properly construed from the century’s old defence in Said v Butt. The court next found that value-stripping only amounts to improper or fraudulent conduct sufficient to warrant piercing the corporate veil when there is a clear nexus between the value stripped and the avoided liability; for example, knowingly draining a specific account earmarked for utility bills (see Shoppers Drug Mart Inc. v. 6470360 Canada Inc. 2014 ONCA 85). Here, taking value out of the company while also knowing that it has unpaid liabilities does not trigger the required nexus. The corporate veil claim failed.

Oppression remedy relief should be granted against an individual director personally, rather than simply against the corporation, when: (1) the director has the requisite degree of involvement in the oppressive conduct so that it is attributable to them; and (2) personal liability is fit in the circumstances (see Wilson v. Alharayeri, 2017 SCC 39 at para 24). Value stripping, as defined above, can attract ‘fit’ personal liability for the director when a dividend is declared in a way that gives shareholders priority over creditors (illegal per OBCA, s. 38(3)), which is what happened here. The oppression remedy claim therefore survived.

Contact Us: For expert guidance on oppression claims and navigating complex corporate disputes, contact leigh.law.

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