Service Area: Collection Services

Unsecured Creditors in Retail Bankruptcy Lose Out

Posted on July 16, 2018 by - Credit Risk Management, Mechanic's Liens & Bond Claims, UCC Financing Statements

The Importance of Being a Secured Creditor in Today’s Retail Climate

In today’s highly credit-based economy, the looming threat of debtor bankruptcy is more prominent than ever.  A number of well-known retailers, such as Bon Ton, Toys R Us, Nine West and Winn Dixie, have recently succumbed to insolvency, leaving their creditors in a vulnerable position.

As a creditor, it is important to ask yourself “In what ways can our company mitigate risk in today’s volatile credit environment?” To answer this, let’s tackle two key questions:

  • What is the difference between a secured & an unsecured creditor?
  • Do secured creditors actually get paid more in the event of customer bankruptcy?

Secured vs Unsecured

It’s essential to start by understanding the fundamentals; specifically, the difference between a secured and unsecured creditor.

A secured creditor has a security interest over some or all the assets of its debtor. A security interest can be obtained through prominent credit tools such as Mechanic’s Liens, Bond Claims and UCCs (just to highlight a few). In the event of the debtor’s bankruptcy or default, secured creditors:

  • Have payment priority over their unsecured counterparts
  • Are in the best possible position for getting paid

An unsecured creditor is a party who extends credit without a collateral security. If the debtor files for bankruptcy, it’s only after the claims of secured creditors are satisfied that the unsecured creditor will receive payment.  Oftentimes, those who fall under the unsecured creditor group collect very little money, if any, from the distribution of assets.

While the bankruptcy code is fairly complex, and insolvencies vary case by case, here is payout priority in its simplest form:

Payout Priority in Chapter 11 Bankruptcy

  1. Secured Creditors (e. creditors who have a perfected security interest)
  2. Administrative Expenses (e. costs associated with filing & processing the bankruptcy)
  3. Unsecured Creditors (e. creditors without a security interest)

Secured Creditor Success Stories!

In recent bankruptcy news, Rue21, inc. ET AL., a specialty fashion retailer of girls’ and boys’ apparel, filed for protection under Chapter 11 of the U.S. Bankruptcy code.  This was largely attributed to a challenging commerce environment characterized by increased pressure from competitors, changing consumer tastes, and an under-performing online presence.

When Rue21 filed for bankruptcy protection on May 15, 2017, it had just over $300,000,000 in assets, and nearly $700,000,000 in liabilities.  Obviously, there were not enough funds to pay all creditors their owed amounts, however, in this case and many others, the secured creditors were first to get paid.  With this particular example, under the Rue21’s reorganization plan, secured creditors recovered 100 percent of the allowed claims while the unsecured creditors only recovered about 3 percent.

We see a similar scenario play out with Katy Industries, a leading manufacturer, importer, and distributor of commercial cleaning and consumer storage products, who filed for bankruptcy on May 14, 2017. The company was unable to meet the obligations of its creditors, with nearly $56 million of debt! In this case, secured creditors recovered the total amount of allowed claims (100 percent) while unsecured creditors faced a recovery rate of only 9.6 percent.

As with many other things in life, when it comes to debtor bankruptcy, not much is guaranteed. However, case after case we see secured creditors having payment priority and receiving greater funds than unsecured creditors.  Simply speaking, the bankruptcy laws require that secured creditors are paid first; take the steps needed to secure your rights!

Pennsylvania Strengthens Payment Act (CASPA)

Posted on July 13, 2018 by - In Other Commercial Credit News

Pennsylvania HB566: Strengthens Contractor and Subcontractor Payment Act (CASPA)

Early June, Pennsylvania enacted amendments to its Contractor and Subcontractor Payment Act (CASPA). The changes will become effective October 10, 2018. Read on to learn more about these amendments and the impacts they may have on you.

Timely Payment = Provisions of CASPA Can’t Be Waived in a Contract

These amendments include a specific clause prohibiting the waiver of CASPA provisions. In fact, the clause is “Prohibition on Waiver.”

“(c) Prohibition on waiver. — Unless specifically authorized under this act, parties to a contract or other agreement may not waive a provision of this act by contract or other agreement.”

Short, sweet & straight to the point.

No Payment, it’s OK to Stop Work, with Proper Notification

Under CASPA, contractors and subcontractors now have statutory support to suspend their work on the project, if they haven’t received payment.

Prior to suspending working, contractors must notify the project owner or the owner’s agent:

“(II) … the contractor shall provide written notice to the owner or the owner’s authorized agent, via electronic mail or postal service, stating that payment has not been made and… (III) … the contractor shall provide at least 10 calendar days’ written notice, via certified mail, of the contractor’s intent to suspend performance to the owner or the owner’s authorized agent.”

The same time frame & requirements apply to subcontractors, however, instead of notifying the project owner, the subcontractor would notify the general contractor.

Withholding if in Good Faith

Project owners can withhold funds, if they have a good faith reason and if they provide “…a written explanation of its good faith reason within 14 calendar days of the date that the invoice is received.” If the owner does not provide the written notification explaining why it is withholding funds, the owner will need to pay the contractor for the full amount of the invoice.

Timely Payment, Kind of Like Prompt Payment?

Section 7 of the statute has been amended as well. If the subcontractor completes work under a contract, the general contractor is to remit payment to the subcontractor “14 days after receipt of each progress or final payment or 14 days after receive of the subcontractor’s invoice, whichever is later.” The same then applies for subcontractors paying sub-subcontractors etc.

Retainage Time Limit

If the contract calls for retainage, the retainage must be released within 30 days after final acceptance.

“(a) If payments under a construction contract are subject to retainage, any amounts which have been retained during the performance of the contract and which are due to be released to the contractor upon final completion shall be paid within 30 days after final acceptance of the work.”

If the project owner is not withholding retainage, the general contractor may withhold retainage from the subcontractor. If the general contractor withholds retainage, the retainage must be released within 30 days after final acceptance. However, if the owner is withholding retainage, the general contractor must release funds to the subcontractors within “14 days after receipt of the retainage.”

Want retainage released prior to final acceptance? OK, but a bond must be posted as security.

“…a contractor or subcontractor may facilitate the release of retainage on its contract before final completion of the project by posting a maintenance bond with approved surety for 120% of the amount of retainage being held.”

In Pennsylvania Strengthens Contractor and Subcontractor Rights and Remedies Relating to Nonpayment in Recent Amendments to CASPA, John Gazzloa warns contractors and subcontractors must comply with these new amendments, or they may forfeit rights.

“In order to perfect these new rights, however, contractors and subcontractors must satisfy the requirements set out in the amendments. To perfect suspension, contractors and subcontractors must follow closely the terms of their contracts and the notice timeline set out above. While the amendments remove much of the risk associated with suspending performance, contractors and subcontractors must follow the conditions of suspension closely and provide notice in the form and manner required. Failure to do so may prevent the contractor or subcontractor from exercising its suspension rights.”

Here’s the Recap

Pennsylvania–HB566–Timely Payment (Private Projects)

The amendments include:

  • if payment is not received, performance may be suspended after giving proper notification;
  • owner and contractor must make payment for successful completion of work under a contract, or provide notice to explain the reason for amounts being withheld;
  • a bond may be posted by the contractor or subcontractor to facilitate early release of retainage;
  • retainage must be paid within 30 days after final acceptance; and
  • the provisions of the Contractor and Subcontractor Payment Act cannot be waived in a contract.

Residential Construction Projects & Liens in New Jersey

Posted on June 29, 2018 by - In Other Commercial Credit News

Compare & Contrast | Commercial & Residential

New Jersey is one of 17 states with mechanic’s lien statute specific to residential projects. In New Jersey, a residential project is defined as one – two – or three-family residences or a residential unit within a real property development (i.e. condominiums). If you are furnishing to a residential project in New Jersey, read on!

How to Secure Rights on a Residential Project

To secure your lien rights on a New Jersey residential project, you must file a Notice of Unpaid Balance and Right to File Lien within 60 days from last furnishing materials or services.

This is different from commercial projects, where a Notice of Unpaid Balance and Right to File Lien may be filed. For commercial projects, if the Notice of Unpaid Balance and Right to Lien is filed, the lien when later filed would have priority over conveyances after the filing of the notice.

Back to Residential: The Notice of Unpaid Balance and Right to File Lien should be served upon the owner or community association, prime contractor, and subcontractor, along with a demand for arbitration, within 10 days from filing the Notice of Unpaid Balance and Right to File Lien.

Wait, submit for arbitration? Yes! In his article, Filing a Residential Construction Lien in New Jersey, Paul W. Norris states the arbitrator will then determine whether a lien can be filed.

“At the arbitration hearing, which must be conducted within 30 days of the filing of the Demand, the arbitrator will decide whether the lien claim meets with the requirements of the New Jersey Lien Statute. If so, the arbitrator will grant the lien claimant the ability to file the lien claim with the county clerk.”

What is the Arbitrator Looking for?

As provided by New Jersey statute, the arbitrator will decide whether the Notice of Unpaid Balance and Right to File Lien was drafted and served in compliance with statute, the validity of the lien claim amount, the validity of liquidated/unliquidated setoffs or counterclaims and the arbitrator will decide the allocation of costs for arbitration. (See 2A:44A-21 (4) Legislative findings, additional requirements for lodging for record of lien on residential construction)

Did the Arbitrator Approve?

If the right to lien is granted by the arbitrator, you must file the lien within 10 days from the date of the arbitrator’s decision. Fail to file the lien within 10 days? According to Norris, “If the lien claim is not filed with the county clerk within 10 days of the arbitrator’s decision, the lien claim will be deemed invalid.”

Statute is quite clear:

  1. J. 2A:44A-21 (8)   Upon determination by the arbitrator that there is an amount which, pursuant to a valid lien shall attach to the improvement, the lien claimant shall, within 10 days of the lien claimant’s receipt of the determination, lodge for record such lien claim in accordance with section 8 of P.L.1993, c.318 (C.2A:44A-8) and furnish any bond, letter of credit or funds required by the arbitrator’s decision.  The failure to lodge for record such a lien claim, or furnish the bond, letter of credit or funds, within the 10-day period, shall cause any lien claim to be invalid.

Did the Arbitrator Determine the Notice is “Without Basis?”

It’s in your best interest to ensure all statutory requirements are met for the Notice of Unpaid Balance and Right to File Lien, otherwise, you will ‘pay the piper.’

According to N. J. 2A:44A-21 (12), claimants who fail to comply with the notice requirements and/or serve/file the notice without basis “…shall be liable for all damages suffered by the owner or any other party adversely affected by the Notice of Unpaid Balance and Right to File Lien, including all court costs, reasonable attorneys’ fees and legal expenses incurred.”

Just another reason to be careful and cautious when protecting lien rights!

Court Says It’s a Ripe Claim Under the Miller Act

Posted on June 25, 2018 by - Mechanic's Liens & Bond Claims

Court Says It’s a Ripe Claim Under the Miller Act

Two subcontractors pursued recovery of unpaid funds under the Miller Act, while simultaneously pursuing claims through administrative proceedings. The contractor and surety argued the Miller Act claims are void, because both subcontractors waived their rights to claim within their respective subcontracts. When that argument failed, the contractor and surety argued the Miller Act claims were premature, stating the subs should have to wait until the administrative proceedings have been resolved.

What does the court say? Read on to learn more.

The Case: Pinnacle Crushing and Construction LLC v. Hartford Fire Insurance Company, Dist. Court, WD Washington 2018

The United States Army Corp of Engineers (Corps) hired general contractor, Cherokee General Corporation (Cherokee) for the demolition and reconstruction of an existing airfield. Cherokee provided a payment bond, issued by surety Hartford Fire Insurance Company (Hartford).

Cherokee subcontracted with SCI Infrastructure, LLC (SCI) and SCI subcontracted with Pinnacle Crushing and Construction LLC (Pinnacle).

According to the legal decision, Cherokee allegedly owed Pinnacle $1,057,597.95 and SCI $2,595,116.96. SCI and Pinnacle submitted pass-through claims for non-payment via Cherokee, which Cherokee passed to Corps. (Within both subcontracts, there was language regarding pass-through claims.) In addition to the pass-through claims, SCI and Pinnacle filed suit under the Miller Act.

 “Claims are Unripe” … Like a Green Banana?

Cherokee and Hartford argued the federal court “lacks subject matter jurisdiction” and SCI and Pinnacle’s “claims are unripe.” Before we get to the green banana, let’s address subject matter jurisdiction.

Cherokee and Hartford argued that SCI and Pinnacle should not be permitted to pursue claims under the Miller Act, because SCI and Pinnacle were actively “…pursuing their claim[s] administratively using the subcontracts’ pass-through mechanisms.”

Which leads to the green banana, aka, the unripe claim. Because SCI and Pinnacle were actively pursuing administrative claims, Cherokee and Hartford argued that SCI and Pinnacle’s claims under the Miller Act were premature — SCI and Pinnacle should wait until the administrative claims were resolved before pursuing the Miller Act.

The court disagreed.

Ripeness – No Really, that’s a Subheading in the Legal Opinion

The court confirmed SCI and Pinnacle were permitted to pursue recovery of their claims under the Miller Act, because SCI and Pinnacle were unpaid for completed work.

“‘[A] subcontractor’s right of recovery on a Miller Act payment bond is conditioned on the passage of time from completion of work or provision of materials.’ The case therefore presents concrete legal issues that are ripe for review.”

The court further clarified that SCI and Pinnacle didn’t waive their right to claim under the Miller Act just because SCI and Pinnacle are actively seeking payment via administrative claims. In fact, according to the court decision “The Miller Act also provides that a waiver must be in writing, signed by the person whose right is waived, and executed after that person has furnished labor or material used in performing the contract.”

Did the Subcontracts Include a Waiver of Rights?

Nope. Well, SCI’s subcontract didn’t explicitly waive rights of a Miller Act bond claim. Pinnacle’s subcontract, on the other hand, did include language regarding the waiver of rights.

Fortunately for Pinnacle, the Miller Act permits the waiver of rights only AFTER the subcontractor has furnished to the project. In this case, the subcontract was signed prior to Pinnacle furnishing.

“Defendants are correct that the SCI-Pinnacle Subcontract explicitly purports to waive Pinnacle’s Miller Act claim during any dispute resolution between SCI and Cherokee… However, a subcontractor can waive its Miller Act rights only after furnishing labor or material used in performing the contract… Pinnacle executed the subcontract before it provided labor or materials, and the waiver is therefore invalid.”

“But, but, but… SCI and Pinnacle said they wouldn’t pursue the Miller Act while Cherokee and Corps resolved issues”

Cherokee and Hartford wanted the court to stay the Miller Act proceedings, because allegedly SCI and Pinnacle agreed to hold off on pursuing the Miller Act until Cherokee and Corps worked out the administrative claims.

Court denied Cherokee and Hartford’s request to the stay the Miller Act proceedings, due to language within the subcontracts.

Take Heed

Let this case serve as a reminder of the importance of understanding the terms of your contract. Watch for clauses waiving your rights to pursue a claim and be cautious with pass-through claims. Also, never underestimate the power of the Miller Act.

As always, if in doubt, seek legal guidance.

Adjudication and Ontario’s Construction Lien Act

Posted on June 22, 2018 by - In Other Commercial Credit News

Adjudication and Ontario’s Construction Lien Act

As you are likely aware, the first wave of amendments to Ontario’s Construction Lien Act go into effect in July 2018 and the second wave debut October 2019. We’ve released several blog posts and a whitepaper on the amendments, which can be read here, and in today’s post we are going to continue the discussion on adjudication.

What is Adjudication? Like Arbitration… Only Different

Alike, yet different. Adjudication and arbitration are similar, in that the disputing parties agree to seek resolution from an impartial third party. But, there are some differences.

One difference? Time. Arbitration can go on for quite some time, but adjudication has strict time provisions.

According to an article by Sahil Shoor and Neil S. Abbott of Gowling WLG, the adjudicator has 30 days from receipt of necessary documentation to render a decision. If, after 30 days, the adjudicator needs more time, an additional 14 days can be granted to the adjudicator by the Authority.

“Within five days of the selection of the adjudicator the party who started the adjudication must provide a copy of the contract in question, and any documents the party intends to rely on to the adjudicator. The adjudicator must release his/her written decision within 30 days of receiving the documents. The adjudicator can request up to 14 additional days, but the adjudicator’s request can be refused by either party.”

Not only are the timing provisions strict, the decision made through adjudication is enforceable by the courts. If adjudication has been requested, it will extend the lien deadline to whichever is later, the standard lien filing period or 45 days from the date the required documentation is provided to the adjudicator.

The Powers that Be

In an earlier post we reviewed who can be an adjudicator but didn’t go into much detail on the powers held by the adjudicator. In their article, Shoor and Abbott, provide a healthy list of powers, though last on the list pretty much sums it up:

  • Make directions respecting the conduct of the adjudication.
  • Take the initiative in ascertaining the relevant facts and law.
  • Draw inferences based on the conduct of the parties to adjudication.
  • Conduct an onsite inspection.
  • Obtain the assistance of a merchant accountant, actuary, building contractor, architect, engineer, or other person in such a way as the adjudicator considers fit to enable him or her to determine better any matter of fact in question. The adjudicator may fix the remuneration of the expert and who will pay it.
  • Make a determination of the adjudication.
  • Any other power that may be prescribed.

What Can be Adjudicated?

The legislation defines the matters that may be adjudicated as the valuation of services or materials provided under the contract, payment under the contract including proposed change order(s), disputes that are the subject of a notice of non-payment, retainage/holdback, and any other matter that the parties to the adjudication agree to or that may be prescribed.

It’s important to note, only one issue can be adjudicated at a time. However, if a party wishes to consolidate two or more issues under one adjudication, the party can submit the consolidation request via notification to all parties involved, including the adjudicator.

Commence Adjudication

Much like the mechanic’s lien process, there are steps to commencing adjudication. Shoor and Abbott advise adjudication can only take place between parties within direct contract of one another, adjudication must start prior to contract completion, and the party requesting adjudication must provide notice to other parties.

What should be included in the notice? According to Shoor and Abbott, the notice should include: “names and addresses of the parties; nature and a brief description of the dispute, including details respecting when and how it arose; nature of the redress sought; and name of a proposed adjudicator to conduct the adjudication.”

In addition to notifying other parties, the requesting party should also “provide a copy of the notice in electronic format to the Authority.” – Adjudications Under Part II.1 of the Act, O Reg 306/18

Can You Say Adjudication Three Times Fast?

Shew — I don’t know that I’ve used so many variations of “adjudicate” in one post! But, it’s necessary because adjudication is an important aspect of the amendments to Ontario’s Construction Lien Act. Adjudication will be an option for contracts entered on or after October 1, 2019.

If all goes to plan, adjudication should prove to be a quick, beneficial dispute resolution process!

Promises Won’t Bring Massachusetts Lien Back

Posted on June 15, 2018 by - Mechanic's Liens & Bond Claims

Promises Won’t Bring Massachusetts Mechanic’s Lien Rights Back

In Massachusetts, a project owner promised to pay its subcontractor, so the subcontractor allowed its suit deadline to expire. Unfortunately for the subcontractor, the owner’s promise to pay was void, much like the subcontractor’s ability to recover $196,500 under the Massachusetts mechanic’s lien laws.

Massachusetts Mechanic’s Lien Law

In Massachusetts, securing lien rights often begins with serving a Notice of Identification upon the prime contractor within 30 days from first furnishing. Serving the notice obligates the prime contractor to provide a copy of the Notice of Substantial Completion or Notice of Termination if one is filed.

The lien itself is a two step process: Notice of Contract and Statement of Account.

Notice of Contract:

File a Notice of Contract as early as possible after the execution of your written contract, but no later than the earliest of:

60 days from the recording of a Notice of Substantial Completion,

90 days from the recording of a Notice of Termination, or

90 days from the last furnishing of materials or services by the prime contractor or the subcontractor.

Material suppliers and subcontractors:

Serve a copy of the Notice of Contract upon the owner.

Statement of Account:

File a Statement of Account no later than the earliest of:

90 days from the recording of a Notice of Substantial Completion,

120 days from the recording of a Notice of Termination, or

120 days from the last furnishing of materials or services by the prime contractor or the subcontractor.

In the event a claimant isn’t paid, suit to enforce the mechanic’s lien should be filed within 90 days from the filing of the Statement of Account.

The Case of the Promise and the Unpaid Subcontractor

D5 Iron Works, Inc. vs. Danvers Fish & Game Club, Inc. was heard before a Massachusetts Appeals Court. According to the legal decision, D5 Iron Works, Inc. (D5) was hired by Patriot Range Technologies, Inc. (Patriot) to furnish materials and labor to a rifle range owned by Danvers Fish & Game Club, Inc. (Danvers).

D5 filed its Notice of Contract in accordance with statute, for its initial furnishing. D5 then amended the Notice of Contract to include an approved change order, which increased the contract amount. Danvers promised to pay D5, though D5 secured its mechanic’s lien “in case things didn’t pan out.”

D5 filed its initial Statement of Account timely but allowed its suit deadline to pass (90 days from the filing of Statement of Account), based on additional promises from Danvers.

D5 filed a second Statement of Account several months later. According to Stan Martin, author of A Promise to Pay Doesn’t Extend Lien Deadlines, D5 argued the second Statement of Account extended its deadlines.

“When no payment was made, the sub tried to resurrect its lien rights by taking steps 1 and 2 again, but by now the deadline for those steps had passed under the lien law. The sub argued that the lien law deadlines should be equitably extended, but the trial court, and then the Appeals Court, disagreed. The sub’s lien rights had lapsed when the deadlines passed, regardless of any promises of payment that may have been made.”

Parting Thought from The Court Decision

The court referenced a statement from BloomSouth Flooring Corp. v. Boys’ & Girls’ Club of Taunton, Inc., 440 Mass. 618, 624 (2003), within its decision, and it’s worth sharing: “[R]eluctance to ruffle anyone’s feathers by early notification, however understandable or common in the industry, does not change the plain meaning of the statute.”

Your right to secure payment is only your right if you adhere to statute. You should be paid for materials & services provided. If you aren’t paid, secure and enforce your mechanic’s lien. Promises don’t pay the bills.

Value of Salvaged Materials Increased Contract Amount

Posted on June 8, 2018 by - In Other Commercial Credit News

Project Contract Amount Increased, Based on the Value of Salvaged Materials

Can the resale value of salvaged materials from a demolition site be included in the total contract amount and subsequently be lienable? According to one legal decision, yes.

New Jersey Construction Liens & Salvaged Material

New Jersey is an unpaid balance lien state, which means the construction lien is generally limited to the unpaid portion of the general contract. Here’s a statute snippet:

N.J. 2A :44A-9 Amount of lien claim.

a. The amount of a lien claim shall not exceed the unpaid portion of the contract price of the claimant’s contract for the work, services, material or equipment provided.

And the lien fund shall not exceed:

(1) in the case of a first tier lien claimant or second tier lien claimant, the earned amount of the contract between the owner and the contractor minus any payments made prior to service of a copy of the lien claim;

For example, if the general contract is for $100,000 and the owner has paid the general contractor $25,000, the lienable balance is $75,000. Or, if the general contract is for $100,000 and the owner has paid the GC in full, there are no lienable funds.

But, what happens to potential lien claimants when the terms of the contract include the general contractor paying the owner for the opportunity to demolish a generating station? The GC paid the owner (I know, it seems a little backwards; generally it’s the owner paying the GC). Do lienable funds exist? If lienable funds exist, where do they come from?

In Salvaged Materials to Pay Lien Claimants, author Patrick Johnson reviewed a New Jersey Appellate Court case, where the general contractor agreed to pay the owner $250,000 to demolish a generating station and, in return, the general contractor would have rights to the salvaged materials, which it could resell for a profit.

The general contractor hired a subcontractor & the subcontractor hired two sub-subcontractors. Unfortunately, the subcontractor failed to pay two of its sub-subcontractors and the sub-subcontractors filed liens for over $300,000 each.

The owner didn’t exactly “owe” the general contractor any money… which means, no lienable funds, right?

Enter the Value of Salvaged Material

The owner & general contractor argued the contract had been paid in full, leaving no lienable funds. Although, there was an allegedly unapproved change order for $52,000 outstanding.

Of course, the subcontractor argued the outstanding change order for $52,000 counted as lienable funds and should be used to satisfy the two $300,000+ liens filed by the sub-subcontractors.

Then, the sub-subcontractors argued the value of the material removed from the site should be considered as part of the overall contract.

What is the value of that removed material?

Apparently, the subcontractor removed material valued at over $2,000,000 from the demolition site. And, according to Johnson, the court held that the removal of this material increased the value of the property, thus becoming a part of the contract.

“The appellate court resolved the issue in the subcontractor’s favor holding that the salvage value did make up part of the contract price.  The transfer of title by NRG constituted a prepayment to Werner and was thus excluded from reducing the lien fund.  Instead of transferring title to the salvaged material upfront, the Court reasoned that NRG could have transferred title to Werner incrementally as the project progressed.  The court found the legislative intent was to prevent an owner from enjoying the benefit of labor and materials without paying for them.  The Court held the salvaged materials increased the value of the property and, therefore, they were an essential component of the “payment” under the NRG-Werner contract, even though it was non-monetary consideration.”

Essentially, the original contract amount of $250,000 + the value of the removed materials of $2,000,000 = the lienable funds.

What This Means for Contractors Involved in Site Demos

Johnson recommends “all parties involved in a demolition project should use caution when structuring payment terms under a contract to take into account non-monetary consideration that could be constructed to be part of the lien fund.”

Keep this in mind as we enter the unfortunate tropical storm season and demolition work becomes more prevalent.

New Regulations under Ontario’s Construction Lien Act

Posted on June 4, 2018 by - Legislative Updates & News Alerts, Mechanic's Liens & Bond Claims, Preliminary Notices & Construction Credit

New Regulations under Ontario’s Construction Lien Act

Ontario’s Construction Lien Act is set for its first wave of statutory changes which go into effect July 1, 2018. Ahead of these changes, Ontario’s legislature has released new regulations to help clarify the statutory changes.

Adjudication: Who? How?

Up first is Ontario Regulation 306/18, Adjudications under Part II.1 of The Act (O Reg 306/18). As we’ve previously discussed, adjudication is a “rapid construction dispute interim resolution process to avoid payment issues that may otherwise result in project delay.”

Adjudication may be an excellent solution for parties facing clashes over a change in contract valuation, payment issues including change orders, and holdback/retainage disputes. But, who will be the adjudicators? Will the adjudicators understand the construction industry?  Who will manage the adjudication process?

O Reg 306/18, states a person interested in adjudicating, must meet the following requirements:

  1. The individual has, in the Authority’s view, at least 10 years of relevant working experience in the construction industry.
  2. The individual has successfully completed the training programs provided under clause 8 (a), subject to subsection (4) of this section.
  3. The individual is not an undischarged bankrupt.
  4. The individual has not been convicted of an indictable offence in Canada or of a comparable offence outside Canada.
  5. The individual pays to the Authority any applicable fees for training and qualification as an adjudicator listed in the schedule of fees under section 9.
  6. The individual agrees in writing to abide by the requirements for holders of certificates set out in section 4.

According to New Regulations Add Detail to the Construction Lien Amendment Act from McMillan LLP, relevant work experience, may include “… accountants, architects, engineers, quantity surveyors, project managers, arbitrators and lawyers.” And, further adds it will be up to the Authority to determine that “…other types of construction industry experience would be sufficient to qualify as an adjudicator.”

There were concerns that adjudicators would not be ready to preside over disputes by the October 2019 release of the statute amendments, based on the training requirement outlined under O Reg 306/18. However, McMillan LLP, indicates the Authority may waive the training requirement for those with sufficient work experience, which would mean some folks can adjudicate right away.

In general, the Authority (the “Authorized Nominating Authority,” which has yet to be determined), will have seemingly broad control over adjudicators. O Reg 306/18 indicates the Authority will be able to issue and revoke a person’s certificate to adjudicate, create & maintain an adjudicator registry and create/maintain training programs, amongst several other responsibilities.

Forms: Which is Which?

Ontario Regulation 303/18 is fairly straightforward. It is simply a cross reference of the various forms and the corresponding statute. For example, “A notice to a contractor under section 18 of the Act may be in Form 2.” You can view the list of respective forms here.

Who Does What When?

Ontario Regulation 302/18 Procedures for Actions provides further detail on the procedure for lien claims. Details cover the statement of claim, joinder actions, third party claims as well as the process for consolidating legal actions and trial or settlement meetings.

Surety Bonds, Prompt Payment and Holdbacks

Ontario Regulation 304/18 General (O Reg 304/18) offers additional clarity on bonds, prompt payment and retention. O Reg 304/18 states the minimum surety bond coverage is 50% of the contract price, if the contract is under $100,000,000 and $50,000,000 if the contract is over $100,000,000. O Reg 304/18 also clarifies that  public contracts under $500,000 are exempt from the bonding requirements.

Holdback is defined as 10% of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment.  The new legislation calls for a mandatory holdback release (subject to specific set-off notices) and provides for annual, phased or segmented releases of holdback on lengthy projects.  O Reg 304/18 clarifies that a contract must be $10,000,000 or more to qualify for the annual or phased holdbacks.

Additionally, O Reg 304/18 states the owner must publish a notice of non-payment of the holdback and within three days of that notice publication, the owner must notify the contractor. The same requirements would apply to a general contractor if it is withholding funds from its subcontractors/suppliers.

From McMillan LP –

“CLAA section 27.1 provides that an owner may refuse to pay some or all of the holdback owing to a contractor in certain circumstances. The owner must, among other things, publish a notice of non-payment in a manner set out in the regulations and notify the contractor in accordance with the regulations. The General Regulation provides that the notice of non-payment must be published in a trade newspaper and that the contractor must be notified of the publication within three days of the publication.”

Publishing this information via a “trade newspaper” doesn’t apply solely to non-payment of holdback. This will also apply to the notice of contract termination, the certificate of substantial performance or declaration of substantial performance, and the notice of intention to register condominium. What is a trade newspaper?

O Reg 304/18 defines a construction trade newspaper as a newspaper:

(a) that is published either in paper format with circulation generally throughout Ontario or in electronic format in Ontario,

(b) that is published at least daily on all days other than Saturdays and holidays,

(c) in which calls for tender on construction contracts are customarily published, and

(d) that is primarily devoted to the publication of matters of concern to the construction industry.

Perhaps a future enhancement will be a registry like Utah & Pennsylvania? Time will tell!

When Will Amendments & Regulations Go into Effect?

While some housekeeping changes took place on December 12, 2017, the substantive amendments will become effective as follows:

  • July 1, 2018*:
    • Modernization of the Statute
    • Updates to the Holdback Rules
  • October 1, 2019:
    • Prompt Payment
    • Adjudication, Regulations and Forms
    • Liens Against Municipalities

According to Final Construction Act Regulations Issued, published by Gowling WLG, the effective dates will coincide with the implementation of the statute changes.

“…existing rules under the existing legislation (i.e. prior to the amendments) will apply to an improvement if:

    • a contract for the improvement is entered into before the date the amendments come into effect (regardless of when any subcontract under the contract is entered into);
    • a procurement process for the improvement (including a request for qualifications, a request for proposals, or a call for tenders) is commenced by the owner of the premises before the date the amendments come into effect; or
    • the premises is subject to a leasehold interest, and the lease is first entered into before the date the amendments come into effect.

The amended legislation will apply to contracts entered into and procurement processes commenced on, or after, the date the applicable amendments come into effects.”

Still, It’s Just the Beginning

As you may have guessed, implementing changes is rarely easy. We will see further clarification and slight changes as this process moves along. Stay tuned!