All businesses require cashflow to operate. The construction industry is a perfect example of that. The entire underpinning of The Builders' Lien Act is to provide some protection for those who provide services and materials on credit in a construction project. Some contractors go further and include "pay when paid" clauses in their contracts. This post will examine what happens when a party in the construction pyramid becomes insolvent.
From the Owner's Perspective: Insolvency of a General Contractor or Subtrade
As an owner, the insolvency of a general contractor ("GC") or subtrade can be an inconvenience. Where, for example, the electrical subtrade becomes insolvent and cannot complete the job, a replacement will need to be found. Inevitably, the cost for the replacement labour will be higher than the initial bid. Whether there is any recourse will depend largely on the terms of the prime contract.
It is important to remember, however, that the owner or GC cannot dip into the holdback to cover the cost of this increase. This may result in increased financing costs on the project (or a reduced profit margin), but it is always a risk on any construction project.
From the Trades Perspective: Insolvency of the Owner or General Contractor
For those further down the construction pyramid, the insolvency of the owner or GC can pose a significant problem. Generally speaking, the source of funds will dry up in this circumstance, meaning not only is future work likely to go unpaid, but there may also be no money to pay for completed work. In these circumstances, the likelihood of payment is found in two statutes – The Builders' Lien Act and the Bankruptcy and Insolvency Act.
What Happens Next?
There is a lengthy and detailed process under the Bankruptcy and Insolvency Act to deal with the assets of the bankrupt. A priority scheme exists to ensure orderly payment of liabilities, generally to secured creditors first. There is some disagreement among the courts of the various provinces as to whether the holdback on a project or a related builders' lien serves to provide protection to trades or not. Ultimately, it seems to depend on the wording of the specific statute.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
