Introduction
On July 3, 2024, the Québec government published the draft Regulation respecting prompt payments and the prompt settlement of disputes with regard to construction work (the “Regulation”), which supplements the provisions of Chapter V.2 of the Act respecting contracting by public bodies[1] (the “ACPB”), enacted by the Act mainly to promote Québec-sourced and responsible procurement by public bodies, to reinforce the integrity regime of enterprises and to increase the powers of the Autorité des marchés publics,[2] which was assented to in 2022 (the “Act”).[3] These new provisions will only apply to public construction contracts, not to service or procurement contracts. Moreover, they will not apply to public contracts under way on the date on which this Regulation comes into force (section 69 of the Regulation).
Currently, and until the new rules come into force, mechanisms regarding payment requests, deductions, contract holdbacks (“withholdings”) and dispute settlements are essentially those set out in the Regulation respecting construction contracts of public bodies,[4] in contract documents or, on a suppletive basis, in the Civil Code of Québec. It should be noted that the new rules set out in the Act and the Regulation will be mandatory. In fact, any clause that has the effect of excluding the application of the new provisions of chapter V.2 of the ACPB or the Regulation will be deemed invalid.[5]
Public bodies and other stakeholders in the construction industry will therefore need to fully grasp the scope of these new provisions if they are to meet the various deadlines and benefit from the new mechanism for dispute settlement by a third-person decider provided for in the Regulation.
Prompt Payment Mechanisms
Request for Payment: All payment requests must be made in accordance with the conditions set out in the Regulation (section 21.48.21 ACPB). The Regulation provides specific time limits (“deadlines”) for sending and processing payment requests. For example, contractors must submit their request for payment to the debtor concerned no later than the first day of the month, whereas subcontractors have until the 25th day of the month to do so.
Required Documentation: Requests for payment are deemed valid insofar as contractors provide the supporting documents listed in the contract. A clause requiring the presentation of documents that are not essential for an assessment of the request for payment may be declared invalid (see section 2 of the Regulation).
Refusal to Pay: Any debtor that considers that it is not liable to pay the sum claimed must give notice of its refusal to pay within the time limit set out in the Regulation (section 21.48.23 ACPB). Public bodies have 21 days from receipt of a request for payment to issue a notice of refusal—contractors have seven days. This notice must include the reasons for the refusal to pay and, if applicable, refer to the relevant contractual or legal provisions (sections 5 and 6 of the Regulation).
Deadline for Payment: Debtors must pay any sum claimed by means of a valid request for payment within the time limit (“deadline”) set out in the Regulation (section 8 of the Regulation; section 21.48.24 ACPB).
Deductions: A contractor may deduct from a payment owed to one of its subcontractors an amount representing the sum claimed by the subcontractor for work that is identified in a notice of refusal to pay issued by another debtor in the contracting chain (section 10 of the Regulation). However, such a deduction may only be made if the contractor has sent the subcontractor, at least 7 days before the deadline for payment, a copy of the notice of refusal to pay on which the deduction is based and a written notice setting out the amount of the deduction.
A main contractor making such a deduction must begin an amicable dispute settlement process with the public body concerning the notice of refusal to pay issued by such public body. If, at the end of a 90-day period, no agreement has been reached with the public body, the sum deducted becomes payable to the subcontractor unless the contractor has begun a process during that period to allow the dispute to be decided by a third-person decider, an arbitrator or a court (section 10 of the Regulation).
Withholdings: Under section 13 of the Regulation, a public body may, to ensure performance by a main contractor that is a party to a public contract, withhold part of a sum of money owed to such contractor under that contract.The withholding may not exceed 10% of the sum owed. A main contractor subject to a withholding may, in turn, withhold part of a sum it is required to pay to a subcontractor. In all cases, the terms and conditions of the withholding must be set out in the written agreement(s) between the parties (section 13 of the Regulation).
Under section 14 of the Regulation, a public body may withhold an amount sufficient to cover reservations it may have due to any apparent defects or apparent poor workmanship in the work. Such withholdings must be reasonable. However, if sums have already been withheld pursuant to section 13 of the Regulation and have yet to be paid to the contractor on the date of acceptance of the work, those sums will be deemed, from that date, to have been withheld pursuant to section 14 of the Regulation. A main contractor from which payment is withheld may, in turn, withhold payment owed to any subcontractor whose work is involved. Once the work has been completed in a satisfactory manner, the sums withheld must be released within 30 days (section 15 of the Regulation).The contractor must then remit payment to the subcontractor(s) within 5 days of receipt of payment (section 16 of the Regulation).
Subcontractors and Legal Hypothecs: A public body may withhold a certain amount to pay the sum owed to a subcontractor. It may also withhold a certain amount to pay the sums owed to persons who hold a legal hypothec (construction lien) and who have given notice of their contract to the contractor for work completed or materials or services supplied after the notice was given (section 17 of the Regulation).
Exclusions: The new rules regarding the prompt payment mechanisms introduced by the Act and the Regulation do not apply to requests for the payment of sums of money that contractors consider they are owed because of the “harm”[6] they claim to have suffered following a change in the obligations set out in a contract or in the conditions for the performance of such contract (section 22 of the Regulation). They also do not apply to public contracts entered into in emergency situations for safety purposes (section 21 of the Regulation).
Mechanisms for Dispute Settlement by a Third-person Decider
Any party to a dispute related to a public contract or a subcontract related thereto that has not been settled amicably may, in accordance with the conditions and process set out in the Regulation, require that the dispute be submitted to a third-person decider (section 21.48.26, ACPB).
Exclusions: Monetary claims of more than $500,000 and claims for harm related to changes in contractual obligations may not be submitted to a third-person decider (section 23 of the Regulation).
Time Limits for Initiating the Process: A party seeking to avail itself of this right must notify the other contracting party within 90 days of the dispute arising or the acceptance of the work by the public body or, in the case of a dispute arising from a public subcontract, the completion of the subcontracted work (section 24 of the Regulation).
Request for Intervention and Designation of a Third-person Decider: A party intending to submit a dispute to a third-person decider must notify to the other contracting party a request for intervention with respect to a single disputed matter. The party may, however, request that the third-person decider combine several disputed matters in the same intervention (section 26 of the Regulation). In such a case, the other party to the contract will have 5 days following such notification to respond to that request (section 27 of the Regulation). Both parties must propose the names of three third-person deciders (sections 29 to 31 of the Regulation). Should the other contracting party fail to cooperate in appointing a third-person decider, such appointment will be made in accordance with the procedure set out in the Regulation.
Written Position of Initiating Party: The party that requested an intervention has 5 days from the date on which the third-person decider is appointed or, if a request to combine several disputed matters has been submitted, from the date on which the third-person decider rules on the request, to forward an outline of its claims and the supporting documents to the third-person decider and, unless this has already been done, the other party.
Response of Other Party: The other contracting party will have 15 days to respond in writing to the claims of the party requesting the intervention and to produce supporting documents (section 35 of the Regulation).
No Legal Representation: A party may be advised by a lawyer, but such lawyer cannot make representations to the third-person decider on behalf of the client (section 37 of the Regulation).
Testimony by Written Affidavits: Testimony is given by way of written affidavits. The third-person decider may, however, allow oral testimony at the request of a party (section 39 of the Regulation).
Decision of Third-person Decider: The third-person decider must render a decision and notify it to the parties within 50 days of being designated. This time limit may be extended by 15 days, or more upon the parties’ consent (sections 44 to 46 of the Regulation). A party required to pay a sum of money has 20 days from the date of receipt of the decision to pay that amount.
Confidentiality: The parties to a dispute and the third-person decider must ensure that the content of the intervention remains confidential, except if the parties agree otherwise. The decisions rendered may be used in subsequent disputes or to contest the right to appeal if they concern the same parties and the same matter (sections 47 to 49 of the Regulation).
Effect of Third-person Decider’s Decision: The decision rendered will be binding on the parties until, if applicable, a judicial decision or an arbitration award on the same matter (section 21.48.27, ACPB). Should a debtor fail to comply with a decision rendered within the established time limit, the creditor may request the forced execution of a decision by filing a copy of the decision with the competent court (section 21.48.28, ACPB)
Costs: The costs and fees of the third-person decider are normally shared equally between the parties, unless such decider determines otherwise as a result of the abusive conduct of one of the parties. Each party to the dispute will bear all of its own costs incurred during the process (sections 50 and 51 of the Regulation). The fees payable to a third-person decider are billed at the hourly rate set by such decider but are capped at the maximum amounts specified in the Regulation, which range from $2,500 to $33,000 (sections 62 and 63 of the Regulation).
Conclusion
The draft Regulation should be adopted within 45 days of its publication, although certain amendments may be made based on comments that the Québec government may receive during this period. The Regulation and the new provisions of the ACPB concerning payment and dispute settlement mechanisms for public contracts, including those set out in the Regulation, will come into force 15 days after the Regulation is published in the Gazette officielle du Québec.
We will be keeping a close eye on how these new provisions are introduced, how they will be interpreted and whether they prove effective.
Don’t hesitate to contact the authors if you have any questions or require assistance in this regard.[1] CQLR c C-65.1.
[2] SQ 2022 c 18.
[3] For more information on this topic, please read our previous articles: https://www.fasken.com/en/knowledge/2022/03/projet-de-loi-12 and https://www.fasken.com/en/knowledge/2023/05/acpb-and-amp-effective-date-of-amendments-to-the-act.
[4] CQLR c C-65.1, r 5, ss 44–54. These sections set out certain rules relating to change orders and dispute settlement.
[5] See section 21.48.20 of the ACPB, introduced by the Act.
[6] Section 22 of the Regulation defines “harm” as a loss of profit, productivity or business opportunity and any expenditure borne by the enterprise for items other than those referred to in Schedule 6 of the Regulation respecting construction contracts of public bodies.
