April 1, 2013

Managing construction debt collection at the negotiation stage


Many contractors, subcontractors and suppliers address debt collection only when amounts are long overdue and owing under a contract. Yet thinking about debt collection from the first stages of a project can better assist them to get paid in the event that issues arise down the line.

Contractors, subcontractors and suppliers should consider debt collection issues when they negotiate or bid for their contracts and subcontracts. As discussed in a prior article, you should first make sure you know with whom you are contracting. Is it a corporation, a partnership or an individual? If you are only provided with a business name (with no corporate identifier, such as Ltd., Limited, Corp. or Corporation) you might be dealing with any one of the above.

You should make sure you get the full name of the individual signing the contract, and his or her position with the corporation or partnership, if applicable. You might also make sure the person you are contracting with owns the land you will be working on. (If you are dealing with a husband and wife on a residential job, both should sign the contract. This is because, in many circumstances, only one member of the couple owns the land.)  In some circumstances you may also wish to make the agreement conditional upon a satisfactory credit investigation of your potential client(s).

In negotiating the contracts you should also ensure that payment schedules, dates and amounts are clear and acceptable. If you wish to charge interest on accounts owing, the rate of interest should be set out and fixed at an actual annual rate, as clauses that set out daily or monthly rates may be unenforceable. If you are going to employ subcontractors of your own, you should dovetail the payment schedules.

Create enforceable clauses
You should also, if possible, avoid “pay-when-paid” and “pay-if-paid” clauses when contracting to perform work for others. These clauses provide, for example, that the general contractor need not pay you for your work until he has been paid by the owner for the work you did. These clauses may also apply to the relationship between subcontractors. Depending on the circumstances, these clauses may, or may not, be enforceable. Regardless, where the person above you in the pyramid relies on such a clause, he will take the position that you cannot stop work or terminate the contract for non-payment. This, of course, can be very difficult. If you cannot avoid these clauses, you might try to limit their impact by requiring a term that allows you to at least stop work if you have not been paid.  Also, you might pass the same clause on to your own subcontractors, so you will only have to pay your subcontractors once you have been paid.

If you are a subcontractor, you may also want to require that, once you have completed your work, your subcontract be “certified complete” under the applicable construction lien legislation, if that option is available. This is because, where available, subcontract certification allows for the early release of holdback funds in relation to your work, so you do not have to wait to be paid in full until all the liens that might arise in relation to the holdback have either expired or been resolved. 

Where it is available under lien legislation, subcontract completion is not generally mandatory. Owners are also often reluctant to release funds unless they have to, given the leverage that contract funds provide in terms of deficiency rectification, etc. Accordingly, subcontract certification does not generally occur unless the contractor has required it as a term of the Prime Contract. Contractors do this, in turn, where they believe it will be difficult to retain subcontractors unless they can provide for the early release of holdback. As a subcontractor, you might consider requiring, if possible, subcontract completion certification under the applicable lien legislation (if available) as a term of the subcontract. 

Price according to risk
Where you are bidding a contract that has been put out to tender you will not, of course, have the luxury of negotiating its terms. (This is because you are putting a price on the terms and conditions that have been put out to tender. As discussed in previous articles, your bid may generally be rejected as ‘non-compliant’ where you make a counter-offer on the terms.) If you cannot negotiate the terms, you should at least understand the risks associated with the job, and price it accordingly. If you have concerns about the application or meaning of the contract’s terms, you should consider raising a question (as opposed to a counter-offer, qualification or clarification) with the consultant during the tender period. (We will address the difficulties associated with the problem consultant in a later article.)

Where it is a tender situation, subcontractors should be careful to understand all the terms they will be bound by. The terms of the Prime Contract may be incorporated into your subcontract such that, for example, pay-when-paid clauses and other provisions affecting payment will be relied on by the person who hires you, even if it is not expressly written in the subcontract document you have signed. Again, if the terms of the Prime Contract are incorporated into your subcontract, you should consider including them in the subcontracts you enter into with the subcontractors beneath you in the construction pyramid.

Robert Kennaley has a background in construction and now practises construction law in Toronto and Simcoe, Ont. He speaks and writes regularly on construction law issues, including in his blog: kennaley-on-construction.com. Rob can be reached for comment at 416-368-2522, at kennaley@mclauchlin.ca, or on LinkedIn. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.