Getting paid is a constant concern in the construction industry, one that is heightened in tough economic times. However, even in a tough economy, you can manage your credit risk by knowing details about the party who is responsible to pay you, the payment terms of your contract, the status of each project and your legal rights.
Who pays?
Contractors, subcontractors and material suppliers must understand that they are granting credit when they provide work and materials prior to payment. Even though you may know the individuals who have asked you to provide work or material for a specific project, you must know which of their companies you are granting credit to, since these companies may have little or no assets should a payment issue arise.
There are a number of different searches that can provide significant information about a particular contracting company, including: (i) whether they are a party to outstanding legal proceedings; (ii) if a court judgment has been entered against them; (iii) if they have a poor credit rating; (iv) whether there are secured debts owed by them; (v) whether liens or other charges already exist against the project lands; and (vi) the names of directors and officers.
Payment terms
It is also of fundamental importance that you know the payment terms in your contract. Some contracts provide detailed conditions precedent to payment. For example, contracts between a contractor and a subcontractor may contain a “paid-when-paid” clause, whereby a contractor is only required to pay its subcontractor when it receives payment from the owner for the subcontractor’s work.
Prior to agreement, you should closely consider all terms in the contract that may affect payment. These terms commonly include: paid-when-paid clauses, requirements to provide an application for payment or invoice, interest provisions for late payment, requirements for total completion prior to a final payment being made, and provisions with respect to retention of deficiency and other holdbacks.
Project Status
Contractors, subcontractors and material suppliers should closely monitor each project in order to determine whether any steps need to be taken to enforce payment. One should consider the following:
– Has a certificate of completion been issued or is the project substantially
complete and, if so, when?
– Has work stopped on the project and, if so, when?
– Are there rumours of the project having difficulty?
– Can you obtain information about the project through the applicable Builders Lien Act?
Legal rights
It’s extremely important to know the legal remedies for obtaining payment, including filing a claim of builders’ lien, claiming against a labour and material payment bond and commencing legal proceedings. Each of these remedies have specific rules and time limits by which they must be advanced, and are only available to particular parties.
The time limits for filing a claim of builders’ lien set out in Builders Lien Acts across Canada are strictly construed by the courts. Even if the limitation period is missed by one day, the claim of lien can be treated as out of time and will not be allowed. As a result, those in the construction industry need to know what the time limits are for filing a claim, and when those time limits start.
With a labour and material payment bond, a third party surety “guarantees” payment to major participants on a project. A party must have a direct contract with the principal (contractor) to advance a claim under a bond, and a claimant must notify the surety within 120 days after performing or furnishing the last of the work or materials. Legal proceedings to enforce a claim must be commenced within one year after the general contractor ceased work on the contract.
Parties may also have a right to stop work or terminate their contract if they’re not being paid, but specific legal advice should be obtained before taking this step.
In a tough economy, contractors, subcontractors and material suppliers may be concerned about not getting enough work. While this is always a pressing issue, you must also ensure you will be paid for the work you are performing, and particular attention must be paid to the credit risk on every project on which you become involved.
This article is provided for general information only and may not be relied upon as legal advice.
Blair Rebane is a partner with Borden Ladner Gervais LLP (BLG). Matthew G. Swanson is an associate at the firm.
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