One of the highlights of the changes are mandatory Performance Bonds and Labour and Material Payment Bonds (“L&M Bonds”) on all public projects using standardized bond forms which includes broad form L&M Bonds. Other changes include the timelines for filing liens, how substantial performance is achieved and the administration of construction trust funds. Changes that will be implemented at a later date are prompt payment provisions and an adjudication regime.
The Construction Act is coming fast and will force all stakeholders in the Ontario construction industry to conduct certain aspects of their business differently. There are many planned seminars and communications detailing the Construction Act and we encourage everyone to participate, understand the changes and be prepared. Trisura would like to take this opportunity to highlight some of the most important aspects regarding surety bonding within the Construction Act.
Introduction of the changes in the Construction Act will be staggered, what are the timelines?
- JULY 1, 2018 will introduce the modernization of the Construction Act, which includes mandatory bonding on all public projects.
- However, there will be a grandfathering for projects. If the procurement process (RFQ, RFP, tender, etc) began before July 1st, 2018, the existing provisions under the Construction Lien Act will apply throughout the entire contract. If the procurement process begins after July 1st, 2018, then the new provisions of the Construction Act will govern in its entirety. This means a contractor may potentially have several projects ongoing with completely separate statutory parameters to which they must comply.
- OCTOBER 2019 – Prompt Payment and Adjudication will take effect.
Will bonds be required on all public projects; Where can I get those forms?
- Yes – contractors entering into contracts with any public entity on projects with a contract price greater than $500,000 will be required to post at least 50% Performance and 50% L&M Bonds.
- The Construction Act applies to any project where an Improvement is made to the land, and is defined within the Construction Act.
- Historically, some government bodies such as the MTO did not require surety bonds. Under the Construction Act all contractors contracting with the MTO will be required to post 50% Performance and L&M bonds on all projects over $500,000.
What do I need to know about these new statutory Bond forms?
- The Act now standardizes the form of Performance and L&M Bonds to be used on all public projects in Ontario. While the bond forms are extensively longer than the current forms, they are meant to provide greater clarity and standardized forms for the surety claims process.
- Copies of these bond forms are posted on our website, or you can get a copy of the bonds here.
Mandatory response times of the Surety under the new bond forms:
- Acknowledgment of Performance Bond claims – The Surety will have 4 business days to acknowledge a Performance bond claim and request documents in the prescribed form.
- Surety’s position to a Performance Bond claim – The surety must provide its position to a Performance Bond claim within a very compressed time period of 20 business days from date of claim. In order for a surety to investigate and provide a written position within this time period, the surety will require a quick delivery of the contractor’s written position and supporting materials.
- Acknowledgment of L&M Bond Claims – the surety is required to acknowledge L&M Bond claims and request information within 3 business days.
- Surety’s position to a L&M Bond claim – the Surety must provide its written position to L&M Bond claims from the earlier of 10 business days after receiving information from the claimant (15 for second tier claimants) or 25 business days after the initial notice of the claim (35 for second tier claimants). The surety and claimant may mutually agree on a longer period.
- Payment – Under the L&M Bond, the Surety will have 10 days after providing its written position to pay any undisputed amounts.
Broad Form protection for second tier sub trades/suppliers:
- The new L&M Bond includes protection for “second tier” subcontractors (i.e. a subcontractor or supplier to a subcontractor of the prime contractor), much like the L&M Bonds required by the federal government.
- This will result in additional liability for the surety, as the prime contractor will now be responsible in a limited way for any non-payment of its subcontractors to their subcontractors and suppliers. A great strategy for a prime contractor to mitigate this risk will be to require Performance and L&M Bonds from their subcontractors in the same form as they have provided to the owner.
Pre-Notice Meeting and Post-Notice Conference
- The Performance Bond now prescribes that if the Owner requests a meeting or conference subject to the terms of the bond, the Surety must arrange this meeting with the Owner within 7 business days for a Pre-Notice Meeting and 5 business days for a Post-Notice Conference.
It is imperative that Brokers and Contractors are aware of these (and all) new timelines and have processes and protocols in place to deal with these requirements. For Brokers, it will be imperative that any correspondence received from a Surety with respect to a claim be immediately forwarded to the Contractor. For Contractors, strong project management documentation will become even more critical to respond to the requirements of potential surety bond claims and any requests for adjudication. Contractors must maintain one or more trust accounts and account for them on a per project basis. We strongly urge all contractors to reach out to their construction lawyers to ensure they are properly informed and advised.
The one question that frequently arises is “What happens if these deadlines are missed?”. At this time, the answer is unknown, as ultimately the courts will make that final determination and establish new precedents. However, it is certainly best for all parties not to be the test case in this unknown arena.
What are the timelines for liens under the Construction Act?
- There is a new formula for achieving Substantial Performance which will result in Substantial Performance being achieved earlier in the lifecycle of a project.
- For projects covered under the Construction Act, contractors will now have 60 days after Substantial Performance is published to preserve a lien. The time to perfect a lien by commencing an action will be extended from 45 days to 90 days from the last day the lien could have been preserved.
- Lien claims under $25,000 in value will now be referred to the Small Claims Court.
- The timelines apply to all contracts, public and private and for all levels of the construction pyramid.
- Under the Construction Act, holdback does not have to be retained as cash. If agreed to by all parties it can be retained via a Holdback Repayment Bond.
- For projects over $10,000,000 and an expected duration greater than 1 year, the parties have the option to release annually.
- If no lien claims exist, holdback is now required to be paid 60 days after publication of Substantial Performance unless a notice of non-payment of holdback is published.
Prompt Payment and Adjudication:
This will come into effect October 1, 2019. At this time, we only highlight these changes and will provide additional communication as time gets closer.
- Prompt Payment and Adjudication applies to all projects, public and private, and to all levels of the construction pyramid. Payment terms other than what is legislated will no longer be enforceable.
- Once a proper invoice is delivered, the Owner must pay the prime contractor within 28 days, unless they provide a written notice of non-payment within 14 days after receipt of the invoice outlining reasons why all or a portion of the invoice is not being paid.
- Once the prime contractor has been paid they must pay all subcontractors and suppliers within 7 days. This 7-day period to pay after receipt cascades down to all lower tier subtrades and suppliers within the construction pyramid.
As mentioned, there are many seminars being held and the following are several that are known at this time. We would be happy to discuss these changes further with you and please don’t hesitate to reach out to any of our underwriters for more support.
We are ready, and want to help ensure you and your clients are too!