February 1, 2019

Managing construction debt collection: Part I


Rob Kennaley 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 help you get paid in the event problems arise down the line. In our next series of articles, we will discuss debt collection issues. 

Debt collection issues should be considered from the time you first negotiate or bid for a contract or subcontract. You should firstly make sure you know who you are contracting with. 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 of the above. Simply put, if you end up having to initiate proceedings to collect on a debt, you need to know who it is that owes you the money.

You should also make sure you get the full name of the individual signing the contract, along with his or her position with the corporation or partnership, if applicable. You might also (in the residential context in particular) 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, for example, both should sign the contract. This is because only one member of the happy couple might own the land. Similarly, if you are being retained by a company that does not own the land, your risk in the event of non-payment goes up. You may wish to price the job accordingly, or ask an individual to agree to guarantee the company’s payment obligations. 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 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 which 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, for obvious reasons.

You should also, if possible, avoid “pay-when-paid” and “pay-if-paid” clauses. These clauses provide, for example, that the general contractor need not pay you for your work until he has been paid for your work by the owner. They may also apply to the relationship between subcontractors. Depending on the circumstances, they may, or may not, be enforceable. Regardless, where the person above you in the pyramid relies on such a clause, he or she may 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 that you will only have to pay your subcontractors once you have been paid. 

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 which have been put out to tender. As discussed in other articles, your bid will 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. Often, such questions will lead to the owner, or consultant, amending the tender documents to address any issues raised. 

Subcontractors should be careful to understand all of the contractual terms they will be bound by, when pricing work for a contractor. This is because the terms of the prime contract (between the contractor and the owner) will often be incorporated into the subcontract, such that, for example, pay-when-paid clauses and other provisions effecting the scope of work, payment and risk allocation will apply to the subcontractor, even if they are not expressly written in the subcontract document signed itself. It is thus important to obtain a copy of, and read, the prime contract before pricing, and entering into a subcontract. 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.

Finally, it is important you ensure your contracts comply with all applicable laws. For example, consumer’s protection legislation (such as the Consumer’s Protection Act in Ontario) may place strict requirements on anyone who contracts with residential owners in landscape construction. Significantly, if a contract entered into does not comply with such legislation, residential clients may have a host of options available, including the termination of the contract and (in some circumstances) the demand that all amounts previously paid be returned. In addition, construction lien legislation should be considered at the outset. Contractors should understand their rights and obligations under such legislation so as to avoid problems and to ensure their contracts will comply with the legislation. This may be particularly important, for example, in Ontario where the new Construction Act’s prompt payment and adjudication provisions will have a significant impact as they come into force. 
Robert Kennaley practices construction law in Toronto and Simcoe, Ont. He speaks and writes on construction law issues and can be reached for comment at 416-700-4142 or at rjk@kennaley.ca. This material is for information purposes and is not intended to provide legal advice. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.