The top legal challenges contractors will face this year include insolvencies, push for cost certainty and contract risk allocation, said a panel of lawyers at a recent symposium.
The discussion took place as part of the Ontario General Contractors Association Symposium, held in The Blue Mountains, Ont.
For the year ending in 2023, business insolvencies were up about 41.4 per cent compared with 2022 and this was led by businesses in the accommodation sector, food services sector and construction sector, said Gemma Healy-Murphy, a partner at McMillan LLP.
“Volume of bankruptcies in the construction industry across Canada has increased dramatically over the past five years, most dramatically since 2022,” she noted.
“Key drivers for what we’re seeing…there’s no real surprises: rising material costs, squeezing profit margins, cash flow, exacerbated by increased cost of transportation…which is significantly impacting suppliers and leading to challenges in fulfilling their project commitments.”
That, coupled with additional regulations and health and safety requirements, rising interest rates, skilled labour shortages and labour rate increases, is causing financial instability on projects.
“What we’re seeing in our litigation practice, our clients coming to us on the back of payments being delayed from the top down, disputes over what unforeseen costs are recoverable under the contract,” said Healy-Murphy. “Some of our clients feel like they’re at the point where they’re financing projects and paying out their subcontractors because they’re afraid of what would happen if they don’t and the penalties they would be subject to under the contract if they don’t keep the project going. Eventually that can become all too much when that is happening on multiple projects.”
No relief for contractors under contracts
The challenge, said Annik Forristal, another partner at McMillan LLP, is contractors can’t get the relief for these events under their contracts.
“One of the things that is a common thread on the drivers is that in most of your contracts those of your subs, there is no cost relief, ability to increase your stipulated price, your fixed price when these things happen,” she explained to the audience of general contractors.
“You locked in a price to do the work, so has your sub. When any of these things happen, let alone all of them, you are not entitled to an increase in what you get paid for that same work even though the cost of doing it has now gone up exponentially. So that is a part of the problem. The trades are looking at I can either walk away and face lawsuits or breach or I can perform and go under.”
Tips for subcontractor insolvency
The team also provided some tips on what to do if a trade subcontractor insolvency occurs. The first is to secure any products you were expecting to receive.
“Some might be onsites, some might be in storage, some might be with suppliers. You need to find out where they are and how to get possession of them,” Healy-Murphy said. “Start with your contract. What does your contract tell you? Does your contract give you any right to access or take possession of supplies, products or equipment? And if not approach the person whose possession they are in.”
Other recommendations included securing the equipment and seeing if you can keep it until the job is finished and retain a new subcontractor to complete the work. If possible, hire insolvent subcontractors’ suppliers and subs directly, she pointed out.
Another tip was to keep lines of communication open with the owner and follow notice provisions in the contracts. Make sure you know what’s going on in the insolvency. Communicate with whoever is managing it, she added.
It all happens very quickly, said Forristal.
“The trade becomes insolvent, you get news of it and almost on the exact same day, if not that morning, they’ll be showing up on the site starting to take their things,” she said. “Have a sense of, ‘do I need that stuff to finish the work?’ ‘Is it going to have a ripple effect on the rest of my progress?’ See if you can exercise any contractual rights that you may have to prevent them from taking what you need. That means thinking ahead in your contracts now.”
Another challenge anticipated to continue in 2024 is the owner’s push for cost certainty.
“In procurement we anticipate continuing to see requests for holding a bid price for extended periods of time,” said Forristal.
She said the contractor’s ability to push back on extended timing and pricing for the risks they face can be challenging but it’s still important to do.
“You spend all these resources bidding and then the owner doesn’t get what they were hoping for in terms of what they receive and so they withdraw the RFP and go back to the drawing board,” said Forristal. “Clever lawyers draft the procurement documents in such a way that your ability to seek any kind of compensation or get any relief from that is really not an option.”
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Excellent and very timely article. Thank you very much.