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Legal Desk, May 2020: “Essential” or “non-essential”, tips for getting paid

May 9, 2020 | By Mark Gallagher, Meghan Fougere, Dan Leduc

May 9, 2020* – Do not forget about your lien rights or assume deadlines do not apply.

In Ontario, and in some other jurisdictions, governments have suspended limitation periods and other statutory deadlines, generally. However, as a result of a recent clarification by the provincial government aimed primarily at facilitating cash flow and the release of holdback, this “tolling” of deadlines does not apply to lien periods (at least in Ontario).

This means they still very much apply and continue to run. Contractors are still able to register construction liens, and must do so to preserve their rights. It remains the case that registration of a lien can be effective leverage for a contractor or subcontractor to resolve a dispute.

The same goes for commencing court actions. Although the courts are physically closed, most lawyers are able to commence court actions online to preserve your liens or commence other actions such as delay claims. In essence, the normal strategic principals and advice continue to apply: registration of a lien and commencement of a court action is still a good tool in your tool belt to leverage payment.

The takeaway: Lien rights, and the leverage they may provide, continue to be available to contractors.

Labour and supply chain shortages

Whether “self-isolation”, “quarantine”, or “social distancing”, construction projects are not conducive to respecting the absolutely critical measures that are in place to help flatten the curve of the pandemic across Canada. Not only because some trades already employ buddy systems that violate the current social distancing norms of six feet (working at heights comes to mind), but also because some workers might be required to self-quarantine due to potential exposure, and others might, understandably, simply refuse to attend certain construction sites given the current pandemic conditions.

Mandatory self-isolation and quarantines will also affect supply chains by limiting the number of drivers, factory workers, and other key elements that keep construction projects running. Our clients are already experiencing supply chain issues and those disruptions are only likely to get worse as manufacturing companies shift resources to fight the coronavirus pandemic, and transportation companies shift resources to transport much needed medical supplies.

At this point, delays are inevitable on some projects. Further, with borders closing and the manufacturing industry shifting to support the healthcare industry, material costs are very likely to increase, if they have not already.

The takeaway: All parties will be experiencing these issues, not just your company. Anticipate them pro-actively, and work with clients and suppliers to be clear about expectations.

Steps you can and should take NOW

Taking the right precautions now will hopefully increase the likelihood of your business weathering this storm. However, you must begin to take certain steps and employ the right precautions with your team in order to preserve your company’s rights. While this article is not intended as legal advice or in any way a substitute for legal advice, below is a preliminary (un-comprehensive) list of steps you should consider taking.

1. Take stock and address immediate issues immediately

In the current climate, your business is almost certain to have immediate issues and challenges from both a practical and legal perspective.

As uncertain as the current situation is, you still have live jobs with contractual obligations continuing to apply in the absence of intervention. These jobs are almost certainly affected, in one way or another, by the pandemic and your company’s contractual obligations are likely becoming more difficult to satisfy and productivity is suffering.

What should you be considering?

a) Will productivity/scheduling be negatively impacted: GIVE NOTICE!

Many construction contracts contain very specific and somewhat onerous requirements to provide notice to the payor of any anticipated delay or increase in the contract price – note that all common standard forms of contract do (CCDC, CCA, etc.). If written and detailed notice is not provided, you will typically have no right to recover additional costs, or request a schedule extension. Courts enforce these requirements strictly and literally. In the present circumstances, it would be wise to inventory every live project, or project with an upcoming kick off, and assess the impact the pandemic is likely to have on it. In the likely event that pricing or scheduling will be impacted, any notice provision in the applicable contract should be immediately complied with.

b) Performance completely unmanageable? Review contract terms.

You may have projects where your company’s performance is simply untenable. Many construction contracts have force majeure, or ‘Act of God’, provisions that allow the contracts to be either suspended or terminated, but it can be a somewhat murky area. In the last few days, we’ve been seeing a lot of competing motives at play with our clients, the contracts as written, other stressed parties in the contractual chain, safety, and general common sense. It is important to understand your contractual rights now more than ever, so you should be carefully reviewing all of your contracts, including any additional or supplementary conditions which might be referenced but not necessarily excerpted in full (if you don’t have a copy, ask for one), having a view to your options for suspension of work and/or termination of the contract.

We are hopeful most parties will agree to reasonable accommodations to keep the industry running in a safe manner, but what we are seeing on the ground is (predictably) not consistent, and not conducive to parties that wish to preserve their contractual and statutory rights. Consider those rights now and act before it is too late.

2. Develop a strict adherence culture and protect your rights

The current and immediate future reality is that payment on your jobs is now contingent on a host of additional factors that you have no control over, but you can become more rigorous in shaping the factors you do have control over, or otherwise risk moving to the back of the payment line.

For right now, this means protecting your immediate rights on projects affected by government and health restrictions as set out above, and sending out the appropriate notices and taking appropriate positions as we have suggested above.

Moving forward, it means being less lenient with cash flow and payment issues. Without being overly cynical, there may be payors in the industry who will use any excuse, technical or otherwise, to avoid payment now more than ever. If you are left without the security of a lien or have not strictly complied with your contractual obligations, it may mean limited, if any, recovery. The only way to protect yourself is to be vigilant in protecting and preserving your rights.

As many will know, Ontario recently adopted a prompt payment and adjudication system that came into effect on October 1, 2019 which was met with a lot of promise in the construction industry. For any projects which entered the market after October 1, 2019, you are likely under the new prompt payment system. Legislatively, nothing has changed on that front. Familiarize yourself with these provisions if you haven’t already, and avail your company of the legislative mechanisms available to you to help get you paid in a timely manner.

3. Carefully consider payment behaviour and prioritize cash in-hand

Your business is not the only one facing financial uncertainty. If you are on a major project, it is likely the general contractor is facing even more issues than you. Schedules will be affected, keeping labour at a productive level will be problematic, and cash will become more tight. Carefully monitor any delays in payment. Understanding that we all need to continue to work and maintain business relationships, and while now is not the time to become more lax on payment, you may even consider adopting a “bird in hand” approach and accept slightly reduced draws to get money in the door immediately. While that might be prudent, you should be careful to ensure that you are not squandering any right you might have to seek full recovery at a later date, once things begin to return to what will undoubtedly be a new normal.

4. Increase cash reserves (if possible) or consider taking advantage of available financing

We are not financial advisors, but certainly know that cash flow is the life blood of the construction industry, and we are quite certain that you are already proactively anticipating a crunch, or already feeling it. Speak to your financial advisors and/or bank. If you are in the (rare) position to put aside cash reserves, you might consider putting some aside for the even rainier days that are surely ahead. Maybe take advantage of any credit that may be available to you on reasonably favourable terms from your bank.

While we would expect the credit of those below you in the construction chain to be drying up for the same reasons we are writing this article, your suppliers will need to continue to sell their services and products too. If you have been a good and loyal industry customer, you may be in a position to enjoy some leniency, whether in the form of early payment discount terms or just straight discounts from your subcontractors and suppliers.

Mark Gallagher, Meghan Fougere and Dan Leduc are all construction lawyers with Norton Rose Fulbright Canada LLP. Dan Leduc is regularly featured in Electrical Business Magazine as our Legal Desk columnist. He can be reached at dan.leduc@nortonrosefulbright.com.

This article—along with other great content—appears in the May 2020 edition of Electrical Business Magazine.

* NOTE: This article was updated by the authors May 13, 2020, to reflect the best, most up-to-date legal information.

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