Cash flow is the lifeblood of Ontario’s construction industry that keeps projects moving and businesses afloat. Maintaining consistent payment cycles can make the difference between a project’s success and financial strain. Payment delays have the unfortunate consequence of rippling down the supply chain – affecting general contractors, subcontractors, and suppliers alike – creating challenges that can halt progress and increase risk. Understanding how construction payments work and the legal risks that can result from breaking the payment chain is key to ensuring that money keeps flowing.
Payment Flow and Prompt Payment
Construction payment hierarchy is structured as a “pyramid”, regulated by Ontario’s Construction Act, which establishes a mandatory prompt payment regime ensuring funds flow from the top (owner) down to the bottom (suppliers).
The prompt payment provisions create mandatory deadlines for payments down the contractual chain, triggered by a “proper invoice” from the general contractor to the owner:
- Owner to Contractor: The owner must pay the general contractor within 28 calendar days of receiving a proper invoice. The owner can only dispute payment by issuing a Notice of Non-Payment within 14 days of receiving the invoice.
- Contractor to Subcontractor: Once the contractor receives payment from the owner, they must pay their subcontractors within 7 calendar days.
- Subcontractor to Sub-subcontractor/Supplier: The subcontractor, in turn, must pay their own subcontractor or suppliers within another 7 calendar days of receiving their payment, and so on down the chain.
If a contractor or subcontractor does not receive full payment from the party above them due to a dispute, they must issue their own notice of non-payment and, in some cases, refer the matter to adjudication to continue the prompt payment process. For more information on the prompt payment regime, see: A Layperson’s Guide to the Construction Act (Bill 142)
Risks in Breaking the Chain
Since construction payments must be made flowing down from the top of the payment pyramid to the bottom, are there any circumstances where the payment chain can be broken, enabling an owner to skip over the contractor and pay a subcontractor directly? The short answer is “yes”, but only if certain pre-conditions are met.
Section 28 of the Construction Act provides:
Direct payment to person having lien
28 Where an owner, contractor or subcontractor makes a payment without obligation to do so to any person having a lien for or on account of any amount owing to that person for services or materials supplied to the improvement and gives written notice of the payment or the intention to pay to the proper payer of that person, the payment shall be deemed to be a payment by the owner, contractor or subcontractor to the proper payer of that person, but no such payment reduces the amount of the holdback required to be retained under this Part or reduces the amount that must be retained in response to a written notice of lien given by a person other than the person to whom payment is made.
In Demikon Construction Ltd. v. Oakleigh Holdings Inc., 2024 ONSC 6261, the Divisional Court interpreted section 28 to mean that a payor can only make direct payments further down the payment chain when:
- The payee is a “person having a lien”, meaning the payee has registered a lien; and
- The payor gives written notice of the payment to the “proper payer of that person”, being the party in the payment chain who was skipped over.
In other words, a direct payment from an owner to a subcontractor can only be made when that subcontractor has a lien on the project. If a payor makes a direct payment to a person further down the payment chain who is not a current lienholder, the payor can potentially end up paying twice for that work, at least prior to a final determination on the merits.
Moral of the story: follow the construction payment chain – because paying the wrong party can mean paying twice for the same work.
About the Author:
Ryan Stubbs is a litigator at Soloway Wright LLP with a focus on Civil Litigation and Construction Litigation.
He regularly represents contractors and subcontractors in navigating all manner of complex construction disputes. For construction related inquires, please contact one of our litigation lawyers.
DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
