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You Bet Your Glass – Prompt Payment proposals promote pessimism

In the last edition I told you that the drafting of the new Ontario Construction Lien Act was well underway and that all but three of the recommendations contained in the Expert Review were being written into law. We also looked at how manipulation of the invoice submission schedule by owners will essentially make a farce of the prompt payment provisions and the underwhelming response by PPO. The unhappiness does not end there.

The Review recommends that non-negotiable interest be payable on late payments at the “pre-judgment interest rate in the Court of Justice Act.” Sounds fair, right? Wrong! The reality is this provides a real incentive for owners and general contractors to drag out their payments to the trades for as long as possible. You see, the “pre-judgment interest rate in the Court of Justice Act stands at a puny 0.8 per cent. The current lending rate for construction projects is approximately 5.5 per cent. Given the option of financing their project with a bank at 5.5 per cent or financing their project by extending their payments to their trade contractors at 0.8 per cent, they will choose the latter, thereby transferring the burden of expensive financing on to the trade contractor. When combined with the proposed extended invoicing schedule, it is certain that the trade contractor’s receivable will extend beyond the 90-day limit to secure bank financing. The trade contractor will be forced to finance their business using secondary sources at greatly inflated interest rates.

The Review recommends that “pay when paid” clauses for general contractors be permitted in Ontario construction contracts, but sub-contractors must pay their material suppliers or have their supply stopped and/or be sued. For a glazing subcontractor, the “pay when paid” condition of a contract is very onerous and exposes him and him alone to the risk of failures in the payment pyramid.

The Review recommends that adjudication be implemented as a targeted interim binding dispute resolution method available as a right to parties to a construction contract in both the public and private sectors in Ontario. This sounds great. Now when a general contractor cuts back my payment requisition, I can have an arbitrator review and dismiss his fabricated deficiencies and get paid. Except that “freedom of contract” gives owners and general contractors the right to determine the process of adjudication, thereby ensuring the process will be steeply tilted in their favour and of marginal or no benefit to the subcontractor.

The Review recommends that a subcontractor should have the right to suspend work following adjudication. If the adjudicator rules that the sub should be paid and the owner and/or contractor do not comply, the sub can suspend work. Under our current law, this is not permissible and sounds like a win for the trades. However, there is no provision stopping the general contractor from hiring another subcontractor to complete the work, if he can find someone stupid enough to do it (and you know he will), leaving the stiffed sub to go through the courts to try to collect his due.

When you put all these factors together, you end up in a situation where an owner can drag out payments taking advantage of the cheap interest penalty. If you go to arbitration with a “pay when paid” clause, you’ll be directed to to honour your contract and complete your work whether you are paid or not. Under any “pay when paid” contract, the glazing contractor will have minimal rights under the law and will find himself in the same situation as today. His only option is to complete the work and sue for payment.

The Review recommends that subcontractors should not have the right to remove materials they have not been paid for from a project. It is just absolutely unfair that an owner can use and profit from materials he has not paid for. This is just another example of how the trades have been duped in this CLA process.