Late payment is a problem in every industry. However, the unique structure of the construction industry amplifies the consequences of late payment. The construction industry is distinct from other industries because of its complex system of contracting and sub-contracting. The system maximizes the benefits of specialization. However, to function, the system of contracting and sub-contracting requires that cash flows through many levels of a pyramid structure. An interruption in the payment flow anywhere in the construction pyramid has a cascading effect down the rest of the contracting and sub-contracting chain.
The heart of the problem is not outright default on payment, but late payment. Outright default is rare and can be addressed by the lien system. However, there is no effective remedy to late payments. As a result, late payment practices have increased and so also, as a consequence, has late payment risk.
Imbalances in bargaining have led to the widespread use of contingent payment clauses in contracts which allow a party to delay payment to another party when payment to the first party has been delayed.
In most circumstances there is no interest paid on the delayed payment. In many cases, a contractor is obliged to continue work even when payment has been delayed. Contingent payment clauses invite abuse. Often a contractor whose payment is delayed has no means to verify that a payment delay higher up the construction pyramid was the cause of the delay.
The new Ontario “Construction Act” and the new federal Prompt payment Legislation are designed to remedy the issue of late payment. The Act represents a complete overhaul of the former Construction Lein Act (1983). Prompt payment and adjudication are brand new and substantive introductions to the Act.