On April 13, 2016, Senator Donald Plett sponsored Bill S-224, the Canada Prompt Payment Act, to enact a prompt payment regime for federal construction projects. The was introduced to address two major issues affecting federal construction projects: delays by federal authorities in processing valid invoices, and delays by general contractors in remitting payments down the subcontractor chain. According to Senator Plett, these payment delays had become systemic in federal projects and were only increasing. In 2007 the duration of a receivable in the construction industry was nearly 9 weeks, with an average duration of 62.8 days. By 2012, the delay for payment of receivables had increased to almost 10 weeks, with an average duration of 71.1 days (Debates of the Senate, 42nd Parl, 1st Session, No. 150 (19 April 2016) at 1700 (Hon. Donald Neil Plett).
With small and medium sized contractors and subcontractors required to pay substantial construction costs such as employee wages, Canada Revenue Agency Fees and Workers' Compensation fees up front, delayed payments can put them in a liquidity squeeze that has the potential to derail federal construction projects. With the federal government announcing its plan on November 1, 2016, to invest $80 billion in infrastructure over the next 12 years, the Canada Prompt Payment Act is meant to eliminate payment delays that could jeopardize upcoming federal projects.
Features of the Proposed Act
While Bill S-224 is yet to proceed through the House of Commons, after passing its third reading before the Senate on May 4, 2017, the Canada Prompt Payment Act includes, amongst others, the below features meant to reduce payment delays:
- Application: The Act applies to all construction contracts made between a federal government ministry or department, any body or office listed in Schedule I to the Access to Information Act, or any Crown corporation within section 83 of the Financial Administration Act, and a general contractor. Likewise, it applies to all subcontractors and suppliers in the construction pyramid on federal projects. The Canada Prompt Payment Act is mandatory and cannot be contracted out of by the parties.
- Owner Payment: The Act establishes a timeframe for delivery of monthly payment applications by a general contractor and for monthly payment by the federal government of the payment applications. Unless a shorter period is provided for under the contract, the general contractor must submit a monthly payment application on the last day of the month, and the federal owner is required to pay the contractor within 20 days after receipt of the payment application.
- Subcontractor Payment: Payment from the general contractor to the subcontractor, and as between the subcontractor and its sub-subcontractors/suppliers mirrors that of the payment regime established between the federal owner and the contractor. The subcontractor must submit a payment application on the 25th day of the month, with the contractor required to pay the subcontractor on its payment application within 30 days of receipt of the payment application.
- Deemed Approval: A payment application is deemed approved on the 10th day after its receipt unless the payer or the payment certifier provides written notice disputing the amount of the payment application.
- Dispute Resolution: A dispute arising under the Act may be referred to adjudication by any party. The decision of an adjudicator is binding on the parties and is enforceable as a judgment of a court.
- Right to Suspend Work: Where a payer fails to make payment as required under the Act, the contractor or subcontractor my provide notice that it intends to suspend its work, and then cease all work seven days after providing written notice. If the unpaid payee is a contractor or subcontractor with parties below it in the construction pyramid, it may suspend payment to its respective subcontractors below it.
Concerns with the Proposed Legislation
On November 9, 2017, the Canadian Bar Association delivered an open letter to the Honourable Carla Qualtrough, Minister of Public Services and Procurement, setting out the Canadian Bar Association's concerns with Bill S-244 as currently drafted (https://www.cba.org). Amongst other concerns, the Canadian Bar Association criticized Bill S-244 for being drafted prior to adequate consultation, and for the potential for the prompt payment regime to unduly impact parties' freedom of contract on construction projects.
In response, on January 30, 2018, Toronto lawyers Bruce Reynolds and Sharon Vogel were retained to review the federal prompt payment procedures set out in Bill S-244 and engage in consultation meetings with industry stakeholders to determine whether, and to what extent, Bill S-244 should be amended to address industry concerns. Bruce Reynolds and Sharon Vogel are uniquely qualified to conduct this consultation process and prepare a report on Bill S-244, having already prepared and delivered their 2016 report, Striking the Balance, on the proposed changes to the Ontario Construction Lien Act, which included a new provincial prompt payment regime.
On April 10, 2018, Public Services and Procurement Canada announced that it would be extending the delivery date of the Reynolds and Vogel report on Bill S-244 to May 31, 2018, to allow for additional time for industry stakeholders to provide feedback. Stakeholders will have until April 30, 2018 to provide written comments on the draft of Bill S-244.
What's next for the Canada Prompt Payment Act?
Once Reynolds and Vogel deliver their report on May 31, 2018, including any recommendations arising out of their consultation meetings with industry stakeholders, Bill S-244 must then proceed through the House of Commons before becoming law. The Canada Prompt Payment Act will come into force six months after it receives royal assent.