COCA Finds Flaw in Federal Prompt Payment Act

Bill C97 is the federal government’s budget Bill.  Like the Ontario government’s budget Bill, Bill 100, C97 is a large omnibus Bill that amends many statutes and introduces a number of new ones.  Division 26 of Bill C97 introduces the Federal Prompt Payment for Construction Work Act.  Careful review of Division 26 by COCA’s Prompt Payment Task Force Chair, Ted Dreyer, exposed a flaw.  COCA stated the following in its submission to the Standing Committee on Finance, which is reviewing C97:

“COCA supports the pay when paid principle.  The problem with the contractual pay when paid clauses that are now commonplace is that they tend to delay the resolution of the disputes that disrupt the flow of funds.  Since a contractor with a pay when paid clause in its subcontract has no obligation to pay its subcontractors, the contractor is not particularly motivated to resolve its underlying dispute with the owner that is delaying payment.  Since the subcontractor does not have privity of contract with the owner, it is powerless to bring the dispute between the contractor and owner that is delaying payment to a head.  Contractual pay when paid clauses are one of the main reasons for the industry wide trend of slow payment. 

Prompt payment as it appears in Ontario’s Construction Act adopts the pay when paid principle but makes it conditional upon the prompt resolution of disputes.  The key to prompt payment in the Construction Act is section 6.5(5)(a)(iii) which requires a general contractor serving a notice of non-payment upon a subcontractor to give an undertaking to refer its dispute with the owner to adjudication within 21 days.  Subsection 6.6(6)(a)(iii) imposes the same obligation upon subcontractors who deliver notices of non-payment to their sub-subcontractors.  The Construction Act effectively combines the pay when paid principle with a mechanism to ensure that disputes that disrupt the flow of funds are promptly resolved. 

The flaw in the proposed Act is that it adopts the pay when paid principle without making it conditional upon the timely resolution of disputes.  There is no equivalent to subsections 6.5(5)(a)(iii) and 6.6(6)(a)(iii) in the proposed Act.  A general contractor who serves a notice of non-payment to its subcontractor has no obligation to refer its dispute with the Federal government to adjudication.  Although the subcontractor has the right to refer its dispute with the general contractor to adjudication, it is hard to see what good it will do them.  A general contractor served with a notice of adjudication by a subcontractor will simply point to subsection 10(3) and say that it has no obligation to pay the subcontractor because it was not paid by the government and it delivered a notice of non-payment as required by section 10(3).  Unlike the Construction Act, the proposed Act does not make pay when paid conditional upon prompt resolution of disputes that disrupt the flow of funds.  Instead, the proposed Act leaves subcontractors and sub-subcontractors twisting in the wind.

 Prompt payment legislation is needed to make sure that contractors and subcontractors are paid on time for their work.  So we applaud the Federal government to taking up the issue.  However, unless the proposed Act is amended, it will make the problem that the government is trying to solve even worse.”