The Federal Prompt Payment for Construction Work Act[1] (the “Act”) became effective on December 9, 2023. The purpose of the Act is to promote the orderly and timely carrying out of construction projects in respect of any federal real property or federal immovable by addressing the non-payment of contractors and subcontractors who perform construction work for the purposes of those projects.

Where, when and to what contracts does the Act apply?

The Act applies to contracts entered into between contractors (and their subcontractors) and the Government of Canada (“Canada”) or one of its service providers for the performance of work, including the rental of equipment, on a construction project in Canada involving federal real property or a federal immovable as defined in section 2 of the Federal Real Property and Federal Immovables Act,[2] that is, real property or an immovable that is owned by Canada and of which Canada has the power to dispose.

In addition to Canada, the term “service provider” is defined in subsection 2(1) of the Act as follows:

“A party to a contract with Her Majesty under which that party is to provide Her Majesty with services related to federal real property or a federal immovable and may, for the purposes of fulfilling its obligations under that contract, enter into a contract with a person for the carrying out of a construction project, but does not include a party to such a contract if they are the lessor or lessee of the federal real property or federal immovable.”

The term “contractor” is defined as follows:

“A party to a contract with Her Majesty or a service provider under which that party is to perform construction work, but does not include such a party if they are the lessor or lessee of the real property or immovable to which the construction work relates.”

A “construction project” means one or more of the following elements:

  • the addition, alteration or capital repair to, or restoration of, any federal real property or federal immovable;
  • the construction, erection or installation on any federal real property or federal immovable, including the installation of equipment that is essential to the normal or intended use of the federal real property or federal immovable; or
  • the complete or partial demolition or removal of any federal real property or federal immovable.

With respect to the term “capital repair,” the Act specifies that it means any repair intended to extend the normal useful life or to improve the value or productivity of any real property or immovable, but does not include maintenance or repair work performed to prevent the normal deterioration or to maintain the normal, functional state of the real property or immovable.

In summary, the Act applies to construction contracts between contractors and Canadian or Canadian-owned organizations, provided that the work relates to federal real property or a federal immovable and neither party is a lessor or lessee.

Exemptions from the application of the Act

The Act permits Canada, by order of the Governor in Council, to exempt provinces from the application of the Act’s prompt payment regime. Canada may grant such an exemption if a province has already implemented a “reasonably similar” prompt payment and adjudication regime.

On December 8, 2023, the Governor in Council designated Ontario, Saskatchewan and Alberta as exempt provinces.[3] The Regulatory Impact Analysis Statement issued following the Order also notes that Nova Scotia and Manitoba have taken steps to enact similar legislation in order to be exempt.

No exemption is contemplated for Quebec.

Finally, it should be noted that the Act contains a transitional provision stating that the Act will not apply to contracts entered into before December 9, 2023 for a period of one year after the date of its entry into force.

What are the payment deadlines under the Act?

The Act requires Canada to pay contractors no later than 28 calendar days after the date on which a proper invoice is received. The contractor then has seven days to pay its subcontractors, which have seven days to pay their subcontractors, and so on until all parties are paid.

However, an exception applies if a notice of non-payment is issued by a party involved in the subcontracting chain, as the Act then requires the parties to turn the matter over to adjudication. The notice of non-payment must include a description of the work in question, the amount that will not be paid and the reasons for the non-payment.

In addition, if the contractor is paid only in part, the Act provides that the amount received must first be distributed on a pro rata basis to the subcontractors whose work is not covered by the notice of non-payment. Then, from the remainder, the contractor must pay, on a pro rata basis, any of its subcontractors whose work is partly covered by the notice of non-payment. The same mechanism applies mutatis mutandis between subcontractors and sub-subcontractors.

What happens if a contractor or subcontractor isn’t paid?

The Act provides for the adjudication of disputes under the contracts to which it applies. Section 16 of the Act allows contractors and subcontractors that have not been paid within the prescribed time limit to refer the matter to adjudication, where an expert will make a determination on the dispute that led to the non-payment. The party wishing to avail itself of this option must send a notice of adjudication.

The notice of adjudication must be served on the other party “no later than the 21st day after the later of the following”:

  • contractor’s receipt of the certificate of completion issued by Canada or the service provider with respect to the construction project; and
  • if any of the contractor’s construction work is covered by the last proper invoice submitted with respect to the construction project, the expiry of the time limit provided under the Act for payment for that work.

The Act provides that the adjudicator’s determination is binding on the parties to the dispute unless they come to a written agreement or the determination is set aside by a court order or arbitral award. Note that nothing in the Act restricts the authority of a court or of an arbitrator to consider the merits of a matter determined by an adjudicator. Therefore, while the adjudicator’s decision is binding and subject to review under a subsequent agreement, it is not final.

If the adjudicator orders a party to make a payment, the party must make the payment no later than the 10th day after the date the party receives the adjudicator’s determination, or within any other time period specified in the determination. If payment is not made within the applicable time limit, the party to be paid may suspend further construction work without such suspension constituting default or breach of contract.

It may also, within two years of the date of receipt of the adjudicator’s determination, file a certified copy of the determination with the Federal Court or a superior court of a province. The determination will then be treated as an order of that court and may be enforced as such.

Conclusion

Contractors performing construction work for the benefit of Canada should ensure that they are familiar with the Act in order to be prepared to comply with it at the end of the transition period if the contract was entered into before December 9, 2023, or if there is a new contract.

Finally, before entering into a contract subject to the Act, Canada or the service provider must notify the contractor of the application of the Act to the project and provide the contractor with the prescribed information. The same obligation applies to a contractor with respect to its subcontractors and to subcontractors with respect to their own subcontractors.

Don’t hesitate to contact Miller Thomson’s Construction and Infrastructure Group if you have any questions regarding the changes brought about by this Act.

[1] S.C. 2019, c. 29, s. 387

[2] S.C. 1991, c. 50

[3] Link to the order: https://gazette.gc.ca/rp-pr/p2/2023/2023-12-20/html/sor-dors270-eng.html