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.

This article, Insolvency During a Construction Project, is part of a series relating to issues of Construction Law in Saskatchewan, written by Regina Partner Jason M. Clayards. Follow us on LinkedIn and get notified when the next article in this series is published. This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances. Counsel should be consulted concerning your own situation and any specific legal questions you may have.

About the Author:

Jason M. Clayards is a civil litigator partner in the firm’s Regina office. He practices primarily in the areas of construction law, insurance defence, and commercial litigation.  

About McKercher LLP:

For nearly 100 years, McKercher LLP has grown deep roots across Saskatchewan, serving the community from offices in Saskatoon and Regina. Now, as one of the province’s largest and most established full-service law firms, we proudly carry on this legacy – following a client-first philosophy as we provide legal services and real solutions for the people who rely on us.