Trickle-Down Economics: Some Clarity on the Effects of Posting Certificates of Substantial Performa
We’ve all heard (probably more often than we’d like) about economic hardships in Alberta in the last couple of years caused by the drop in the price of oil. Many pundits expected that the effects of that price drop would take several months or years to trickle down through the economy. I would argue that the trickle has strengthened to a stream. While reviewing recent court cases I was struck by the number of recent builders’ lien court cases that deal with insolvency situations.
In the cases before the courts, there’s been a noticeable shift in focus from disputes just among contractors, subcontractors, and owners, to disputes between lien claimants and receivers or bankruptcy trustees. Liens continue to be registered regularly, and largely for the same reasons they’ve always been registered: lack of formal written agreements; use of poorly-drafted agreements; undocumented or poorly-documented changes; time pressure to complete projects; and parties of varying negotiating strength using the tools available to them to try to improve their respective positions. We can now add a new item to this list of leading reasons for lien registrations: many contractors and owners are finding themselves with serious cash-flow issues and without any funds to pay, whether they want to pay or not.
Liens play an important role in the insolvency context. Although not dealing with insolvency directly, the case of Chandos Construction Ltd. v. Twin Peaks Construction Ltd., decided in May 2016, has important implications regarding insolvencies. In Chandos, the Court confirmed that the posting of a Certificate of Substantial Performance (CSP) creates a cut-off for claims for work done to that date. A subcontractor who works both before and after the CSP date cannot rely on its “total completion” date to claim against the minor lien fund for all work done on the project. To some observers, this conclusion seemed to be a matter of common sense but, as the Court pointed out in Chandos, it took over 30 years for that conclusion to be confirmed by a court.
While that clarification is nice to have and a long time coming, the important aspects of Chandos for insolvency cases are the following:
confirmation that the trust obligations created under the Builders' Lien Act are limited to situations where a CSP is posted and the owner pays the general contractor after the CSP date;
the trust, which gives important proprietary rights to claimants lower on the construction “totem pole” protects those claimants regardless of whether they’ve registered liens; and
the trust obligations “trickle down” the totem pole: unpaid claimants can assert trust rights against the next party up on the totem pole once that higher party receives payment on its account (even if that higher party is insolvent).
We’ll all hope that the stream of insolvencies again slows to a trickle, but in the meantime, given the number of owners and contractors struggling to pay their bills in the current economy, anybody who works on a construction project would be well-advised to consider posting a CSP when their work is substantially complete. Doing so can create important trust rights that might lead to payment that otherwise may never materialize. Chandos should also be a reminder to project owners to promptly pay their contractor on the 46th day after a CSP is posted (as long as no liens are registered), lest they unnecessarily become involved in litigation over the major lien fund.