Over the past year much of the focus of the Saskatchewan construction industry has been on the impact that new prompt payment legislation will have on the timeliness of payment on construction projects. Cash flow is never far from the mind of any prudent business owner. However, a focus and concern with cash flow is perhaps never more evident than now, given the global, and increasingly local, rescheduling and shutdown of various construction projects.
In considering your ability to collect on outstanding invoices, it is critical that the payment terms of your contract be reviewed. Although contract terms, like force majeure, may justify a suspension of work or an adjustment to schedule, they do not necessarily suspend or modify a party’s payment obligations. Rather, the exact contract language needs to be reviewed. Absent specific contractual language excusing a party’s payment obligations, payments are still required to be made.
However, what is legally required, and what will, in practice, actually happen are, of course, two different things. A contractual right to be paid, though important, may not change the fact that certain companies will either not be able to pay or will, in an act of self-preservation, simply choose not to pay. In these types of circumstances, a few different collection options should be considered:
- Register a lien. Although a lien may not result in immediate payment, it provides security, in the event the project fails or is not completed, for future payment. It also ensures, in the event a future progress draw is made, that enough funds are withheld to satisfy the lien claim in the future. Although it is best practice to ensure a lien is registered in Saskatchewan within 40 days of substantial completion, liens can still be registered after this date and, in many circumstances, will remain enforceable.
- Determine whether or not a project is secured by a labour and material bond. Labour and material bonds are secured by insurance companies. As companies cease meeting their obligations, the ability to receive payment from an insurance company under a bond may, in certain cases, represent the best option available to collect payment. As labour and material bonds have predetermined pay-out amounts, it is important to submit your claim for payment as soon as possible. All L&M bonds have cap limits, and after the insurance company has paid out the amount of the bond, additional claims cannot be processed.
- Determine whether or not the project is secured by a performance bond. Although a performance bond is often put in place for the benefit of the owner, in the event a general contractor defaults, the ability of an owner to rely upon insurance to complete a project may be beneficial, given the possibility of the insurer using existing subcontractors to complete the work.
- File a lawsuit. Although lawsuits typically do not lead to quick payment, if your claim for payment is not defended, you may have the ability to register and then enforce a judgment. As judgments, once registered, exist for 10 years, this also may give your company a long-term option to satisfy a debt.
- Be mindful of trust obligations in the lien legislation. Saskatchewan’s lien legislation imposes trust obligations on project financing, and on funds paid between the owner, contractor and subcontractors. During times of cash flow crisis, it may be tempting for parties to pay money out of the project chain. This may result in a breach of trust obligations under the lien legislation, and could lead to personal liability for directors and officers as well. The lien legislation provides lien claimants a right to certain information from the owner, so use these tools to find out what’s happening in the project payment chain.
Like any situation, the best approach depends on your particular circumstance. However, all options should be explored given the uncertainty that is COVID-19.