Alberta revamps builders' lien regime
In response to lengthening payment periods and an increasing number of disputes between owners and contractors, as well as to coordinate with revised acts in other provinces, Alberta has proposed significant changes to the Builders’ Lien Act.
The Prompt Payment and Construction Lien Act (the “Act”) is anticipated to come into force July 2021. The Act will only apply to contracts entered into after that date. Bill 37 received royal assent on December 9, 2020.
While the Builders’ Lien Act is most commonly associated with commercial, residential and industrial construction, it is very important to note that the Act will continue to apply to all work which results in an improvement to land. Most significantly, the Act will continue to apply to the upstream oil and gas industry, particularly as it regards the relationship between exploration and production (E&P) firms and their contractors and subcontractors doing drilling, completion, abandonment, reclamation and similar downhole work.
The four major changes to the existing regime contained in the Act are as follows:-
- ensuring timely payment;
- circumventing pay-when-paid clauses;
- extending the time period to register a lien; and
- providing a dispute resolution process.
Timely payment
The Act will require that an owner pay its contractors within 28 days of receipt of a “proper invoice”. Each contractor must in turn pay its subcontractors (and on down the chain) within 7 days of its receipt of payment from the party above it. Each contractor must submit an invoice to the owner at least once every 31 days. There is no corresponding requirement with respect to subcontractors further down the chain. A proper invoice must: -
- be written;
- identify the contractor’s name and business address;
- be dated and provide the period during which the work was done or the materials were supplied;
- identify the authority under which the work was done or the material was supplied, be it a verbal or written contract or otherwise;
- state the amount requested for payment and a corresponding breakdown for work completed or supplied materials;
- include the name, title, and contact information of the person expecting to collect the payment;
- expressly state that the invoice provided is intended to constitute a proper invoice; and
- any other information that may be prescribed by regulation.
A contractual provision requiring prior certification or prior approval before accepting a proper invoice is prohibited — unless payment is contingent on testing and commissioning. Revisions of a proper invoice must be agreed to by both parties and will not alter the date of the proper invoice.
What if the owner disputes the proper invoice? An owner has up to 14 days to submit a “notice of dispute” specifying that all or a portion of the proper invoice will not be paid. A notice of dispute must specify the amount the owner is withholding and detail the reasons for non-payment. The undisputed portion must be paid within the prescribed time period. A denial of payment or a partial payment then trickles down from the contractor to the responsible subcontractors. Interest on late payments begins to accrue at a rate prescribed by regulation from their due date.
Pay-when-paid clauses
Early versions of the Act specifically prohibited clauses in contracts which require the payor under a contract to pay amounts due to its contractors only once that party has itself been paid. Government press releases and other commentary, referring to early versions of the Act, make mention of these provisions. This prohibition has been removed in later versions of the Act, presumably on the basis that such provisions are not needed; in theory the requirement to pay subcontractors within 7 days of receiving payment make a prohibition on pay-when-paid clauses unnecessary.
Increased time period to register a lien
The Act increases the general time period for registering a lien from 45 to 60 days. An exception is made for liens related to concrete work, which must be registered within 90 days. The time period for registering a lien arising out of oil and gas work remains 90 days.
At least $700 must be owing in order to register a lien, increased from $300.
This change should prevent proactive filings of liens (e.g. filings of liens before payment is overdue) since a contractor may not take longer than 31 days to submit a proper invoice and, in the absence of a notice of dispute, payment is mandated by day 59 (31 days to submit a proper invoice that must be paid within 28 days of receipt). Subcontractors may still be vulnerable, although if the owner provides a notice of dispute, the contractor must communicate that to subcontractors “without delay”.
Dispute resolution
The Act provides for a dispute resolution process intended to settle disputes quickly and cost-effectively outside of the courts.
Under Part V of the Act, a party to a contract may elects to refer to adjudication a dispute with the other party respecting any prescribed matter. Under Section 33.6(4), the determination of the adjudicator will be final and binding on the parties with limited grounds for judicial review.
It is not yet known what matters will be prescribed for dispute resolution under the Act. Further, it is not clear whether the election of one party to the contract only will be sufficient to bind the parties to the dispute resolution provisions of the Act, or whether the election of both parties is required (on the plain language of the Act, it would seem to be the former). Further, it is not clear whether the parties to a contract may waive this provision in their contract (in favour of either private arbitration run by the parties, or determination of the matter in the courts).
The Act authorizes the Service Alberta Minister to designate one or more “nominating authorities” who will each in turn be authorized to appoint adjudicators under the Act and establish adjudication procedures (in addition to those set out in regulations under the Act).
More details on dispute resolution (including adjudication procedures) will be in the regulations that accompany the Act.
Other notable changes
For multi-year contracts exceeding a dollar amount to be prescribed in the regulations, owners will be required to proportionally release holdback amounts, provided that no liens have been filed.
Affected parties may demand to inspect the: (1) contracts, (2) agreements, (3) mortgage, (4) agreement for sale, (5) statement of the amount advanced, (6) statement of the amount due and owing, or (7) such other document as the court considers appropriate; and the requested document must be produced within six days.
Outstanding issues
One of the fundamental principles of the Builders’ Lien Act in Alberta and similar legislation in other Canadian provinces is that parties are not permitted to contract out of, or waive, its remedial provisions.
The provisions regarding the time for payments, dispute notices, de facto abolition of pay-when-paid clauses, and the imposition of a default interest rate, will result in a substantial change in the contracting and payment provisions applicable to any contract to which the Act applies. In the energy sector, where pay-when-paid provisions are common and payment terms are frequently as long as 90 days, and where punitive default interest rates are not unheard of, the ability of contractors and owners to select terms will be significantly reduced, especially if the provisions of the Act cannot be waived.
Further, it is not clear how the Act will apply to master agreements. The Act is stated to apply to contracts entered into after it comes into force; a significant amount of work in the energy sector is carried out under master service agreements or similar contracts that provide for the issue of work orders. These master agreements often stay in force for many years; it is not clear if the Act will apply to new work orders issued after the proclamation of the Act or if the Act will not apply between parties so long as an existing master agreement remains in force.
One issue that frequently arises in construction and in the energy sector is whether builders lien legislation applies at all. The question often arises after the fact, when a supplier or contractor is unpaid and must determine whether it can file a lien. Now, with the changes proposed in the Act, it will frequently be important to determine in advance whether the Act applies, as it will be necessary to determine at the contract drafting and contract administration stage whether the prompt payment provisions and prescribed interest rate provisions apply to a contract.
As mentioned above, the nature of the dispute resolution process (whether one party can mandate it, and whether it can be waived by contract) remains to be determined.
Finally, owners and contractors should carefully review their standard form contracts to ensure compliance with the new Act and ensure that where finance or project finance arrangements are closely tied with payment schedules under construction contracts, those arrangements are either sufficiently flexible to permit compliance with the new Act or are modified appropriately.
This article provides only general information about legal issues and developments, and is not intended to provide specific legal advice. Please see our disclaimer for more details.
