Almost One Year of Prompt Payment in Alberta, but still no Judicial Guidance!
By Thomas Nguyen, Summer Student at HMC Lawyers LLP and Dana Hagg, Associate at HMC Lawyers LLP
Last summer, for the first time in over twenty years, Alberta construction law underwent major renovations with the coming into force of the Prompt Payment and Construction Lien Act, RSA 2000, c P-26 (the PPCLA). Alberta is a relative late comer to “prompt payment” legislation, which requires invoices to be issued frequently and paid or disputed quickly, according to fixed timelines. Payment disputes may now be arbitrated under a new fast-track process, and in April 2023, ARCANA (AB) – a partnership of alternative dispute resolution bodies – was designated as the “Nominating Authority” responsible for nominating industry professional adjudicators for these disputes. All new construction contracts in Alberta that would have fallen under the former Builders’ Lien Act have been bound by the new rules since August 29, 2022. Due to the slow pace of litigation, the court decisions being released now still pertain to the old legislation.
These (relatively) new timelines affect “pay when paid” clauses. Pay when paid clauses allow contractors to withhold payments to subcontractors until the contractor receives payment in full. This arrangement transfers risk down the construction pyramid to subcontractors, who are generally the most financially vulnerable member of the construction pyramid because they are often smaller businesses, and they have often already spent money on materials.
Under the new rules, once the prime contractor issues an undisputed “proper invoice,” project owners must pay the amount payable to contractors within 28 calendar days. When a contractor receives payment from the owner and does not want to dispute it, it must pay each subcontractor the amount owed within 7 days. Before the bill was amended, the original draft of Alberta’s prompt payment legislation had the same 28-day timeline for owners, contractors and subcontractors, and it would have expressly prohibited “pay when paid” clauses:
Any provision of a contract that provides that a contractor or subcontractor will only be obligated to pay a subcontractor with whom they have a contract after they have received payment for work done or materials furnished is of no force or effect.
At first glance, this seems like it would have protected subcontractors by removing a common contractual justification for delaying payment. However, with the original bill imposing the same 28-day payment deadline for all invoices, there would be different 28-day timelines running at different levels of the construction pyramid. It would have become an unacceptably frequent occurrence for contractors to owe payment to subcontractors before being paid by the owner. You cannot get blood from a stone – and even an express prohibition against “pay when paid” clauses cannot put money into the pockets of an insolvent contractor. Thus, the bill was amended to fix this issue, and in the final version, only the general contractor’s invoice can start the “clock,” which then sets a cascading series of timelines into motion that, hopefully, keeps money moving down the construction pyramid in a timely fashion by paying contractors before they have to pay their subcontractors. Essentially, the final version of the bill requires “pay when paid.”
In theory, the final version of the bill took away the subcontractor’s ability to start timelines running. However, if the prime contractor fulfils its obligation to invoice the owner at least every 31 days, the subcontractor should not be left waiting too long for its next payment. The prime contractor’s invoice only starts the clock running if it contains all of the information required under section 32.1 of the PPCLA, so if they have not already done so, contractors should carefully review their invoices, template contracts, and service agreements to ensure that they meet the new statutory requirements.
The PPCLA still contains largely the same builders’ lien regime as under the former Builders’ Lien Act, RSA 2000, c P-26.4. It is expected that builders’ liens will become less common, as more payment disputes are avoided through prompt payment or arbitrated under the new fast-track process. Despite the extensive amendments to the former Builders’ Lien Act, one thing that remains unchanged is that builders’ liens can only be litigated in Alberta’s “superior” trial court, the Court of King’s Bench, where delays have reached a state of crisis in recent years. Hopefully, these legislative reforms will reduce the burden on that Court – and taxpayers – while keeping construction on track and not gridlocked by builders’ lien litigation.
The PPCLA came into force on August 29, 2022, but there are still no court decisions to illustrate how the construction industry might challenge or fail to respond to their new obligations. Given the recent designation of ARCANA (AB) as the inaugural “Nominating Authority” for payment dispute adjudicators, we can hope to soon see judicial decisions begin to trickle in that interpret the PPCLA payment obligations.