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Legal Notes: COVID cash flow crunch has shifted the payment dispute landscape

John Bleasby
Legal Notes: COVID cash flow crunch has shifted the payment dispute landscape

Slowdowns, stoppages and supply chain issues have wreaked havoc on construction projects across North America this spring. The result has been interruptions in the flow of funds from owners to contractors and subcontractors.

Some jurisdictions across Canada, notably Ontario, have legislated payment and adjudication processes to aid the flow of funds. Others continue to rely on long-standing court litigation remedies.

No matter, COVID-19 is forcing dispute strategies to change for both plaintiffs seeking payment and defendants owing money.

“The pandemic has substantially reduced economic activity and liquidity,” said Canadian-based international law firm Torys LLP.

In a paper published earlier this month, authors David Outerbridge, Sylvie Rodrigue and David Wawro suggest parties revisit the expense of litigation when cash for such purposes may be in short supply. “COVID-19 is influencing litigation leverage and litigation risk. The cost/benefit analysis of litigating, and the strategies and tactics needed to arrive at an optimal outcome, must be assessed anew by all litigants,” the paper reads.

“Cash flow in construction is a critical factor,” said Sandra Skivsky, chair of the National Trade Contractors Council of Canada.

Skivsky was a member of a Canadian construction panel recently convened online by McMillan LLP to discuss the pandemic’s financial impact on the industry. She explained how cash flow normally starts slowly in January, ramps up in the early spring and then hits a peak in the summer and fall before dropping off again late in the year.

“What happened this year is that there was a normal January and February. But once March arrived, cash flow patterns diverged from the norm. In April, a lot of shutdowns happened. Even in provinces where shutdowns weren’t mandated, contractors reported that projects were being put on hold,” she said.

Skivsky said although some projects will be remobilized by June, she worries about an impending cash crunch.

“There are a lot of variables. Unless stimulus projects hit the ground in July, we’re not going to see a big bump up come September.”

The consequence would be that cash-strapped contractors will not be able to bid on new projects later in the year.

“New projects don’t help contractors facing bankruptcy, they can’t afford to bid on them,” she said. “You need a healthy cash flow to hire more people, to take on apprentices. Banks start looking at you a little funny at that point too.”

The cash flow domino effect being experienced by contractors is identified by Torys as a serious issue throughout the funding ladder. Some creditors seeking payment from a potentially insolvent debtor might have the resources to absorb losses or the ability to pass them down to shareholders if they fail to collect. However, many others cannot.

One possible outcome could see quick insolvency-related actions by secured creditors seeking to ensure that losses are left with others, ie. unsecured creditors.

“If you are a secured creditor and you have a mortgage or some security over equipment on a site, then you could commence litigation proceedings to realize on your security,” Outerbridge told the Daily Commercial News.

However, creditors must also consider the time and expense of any litigation. This could encourage early dispute settlements via arbitration or negotiation, perhaps on terms less desirable than in the past due to the uncertainty of their adversary’s financial position. Or, a deferral of court action might be decided. “A situation might arise when a party simply needs cash because of the pandemic and they’ll settle earlier because it will increase their cash flow,” said Outerbridge. “Likewise, if they are having solvency issues themselves, they might be pressured to settle.”

Overall, it creates what Torys calls “a defendant-friendly environment.”

“If you decide to pursue litigation instead of settling right now, you may not get a judgement for a year or two, depending how long the process takes,” continued Outerbridge. “Even then, you have to enforce your judgment. The risk that the party might not be solvent at that time down the road is the bigger issue.”

 

John Bleasby is a Coldwater, Ont. based freelance writer. Send comments and Legal Notes column ideas to editor@dailycommercialnews.com.

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