CONSTRUCTION COLLECTION REMEDIES
The construction sector has, in addition to the traditional remedy of a legal action in the appropriate court against the debtor, a number of additional remedies that are wholly or partially unique to the construction sector. These additional remedies should be considered in assessing a problem receivable.
At the outset, it may be appropriate to point out that if your owner, contractor or subcontractor customer is fully solvent, these additional remedies may be redundant. A simple traditional lawsuit with the traditional remedies arising from a judgment may be adequate to resolve the dispute and see your account paid.
The additional remedies extend rights of claim to third parties (persons other than the direct customer) and, in certain instances, the right to trace and recover project funds.
Lawyer Frederick J. Matthews of Christie Saccucci Matthews can provide you with guidance and advice about the remedies available. This includes the construction lien remedy, construction lien trust claims, and Labour and Material Payment Bond claims.
The Construction Lien Remedy
The assertion of a construction lien claim under the Construction Lien Act establishes rights against the project, project funds and holdback funds. The assertion of the claim generally requires timely registration (usually 45 days after last work or material delivery) of a claim for lien against the legal title to the project to which your work or material has been supplied in order to preserve the claim. Timely commencement of an action (usually 90 days from the last work or material delivery) is also subsequently required in order to perfect the lien and keep it alive.
The practical result is that even if the customer is insolvent, there will be access to a pool of funds, including construction lien holdbacks or a right to enforce the lien by sale of the owner's interest in the project.
Any access to remedial funds derived from enforcement of the lien will have to be shared with other lien claimants and, therefore, may not result in full recovery. Procedural and substantive rules governing construction liens are too detailed to be covered in this brief summary.
The Construction Lien Trust Claim
In addition to the right to assert a construction lien claim, the trust provisions (Part 2 of the Construction Lien Act) impose trust obligations on owners, contractors and subcontractors with respect to project funds.
Even though a right to assert a lien may have expired by failure to register a claim in a timely fashion, trust fund rights may still subsist. The same time limit rules to preserve and perfect the claim are not applicable.
Very briefly stated, all amounts received by an owner (including project financing), received or receivable by a contractor or subcontractor referable to the project, are impressed with a trust for the benefit of persons who supplied work or materials to the owner, contractor or subcontractor.
The owner, contractor or subcontractor is prohibited from appropriating or converting any such project proceeds to his own use or any use inconsistent with the trust until all persons who supplied work or materials to the owner, contractor or subcontractor have been paid in full.
Significantly, all Directors and Officers and other persons in control of relevant activities of a corporate owner, contractor or subcontractor who agree to conduct what he or she knows or ought to know to be a breach of this trust become personally liable for the breach of trust in addition to the corporation. This may provide a significant remedy of personal liability against any Officer, Director or person in control who is unable to account for the proper application of all project funds received.
A simple example arises when funds from Project B are used to fund obligations on Project A. This is a breach of trust that would render the persons involved to be personally liable, and it may give rights to trace the improperly used funds and recover them. In certain situations, there may, for example, be rights against, the contractor's bank that may have appropriated receivables under circumstances where the bank knew or ought to have known that the particular receivables were trust funds for the benefit of unpaid trades. Again, the full implications of trust fund obligations and protections under Part 2 of the Construction Lien Act are too detailed to be fully covered in this summary.
The Labour and Material Payment Bond Claim
Many projects today require the general contractor and sometimes major subcontractors to post Labour and Material Payment Bonds. This is particularly the case in government or large institutional projects. The principal of the bond is the contractor or subcontractor who purchased the bond usually to protect the owner against possible claims. The sub-trades or suppliers who dealt directly with the bonded general contractor or subcontractor are beneficiaries under the bond.
As beneficiaries, these parties are entitled to be paid by the bonding company (insurance company) as well as the bonded general contractor or subcontractor. Subject to an obligation to give timely notice and particulars of their claim, (usually longer than the required 45-day period to assert a lien) the beneficiaries have the right to sue, subject to notice and time limits, the bonding company in addition to their customer for the full amount of their claim. This is often the easiest route to payment and is more likely to result in payment in full than a lien right or a trust claim. For this reason, it is always useful to check to see if your customer is bonded.
In conclusion, before writing off a receivable or assessing its collect ability, it is useful to consider the remedies that are available in the construction setting.