LEGAL
Payment Pecking Order
on Construction Projects
Protecting against the other “peckers”
By Derek Cullen, Partner, Meighen Haddad LLP
In the construction world, there is a
pecking order of the flow of cash and
claims to that cash. In a perfect world,
the money flows from an owner of the
project, to the general contractor (GC) and
down the chain to suppliers and sub-trades
in a timely manner and everyone is happy.
However, this observer has seen an ever-increasing
interruption to that cash flow
and questions arise as to how to protect
oneself against the other “peckers” from
bankruptcy, misuse of funds, delay or any
other risks that sometimes befall a project.
The following are some of the pitfalls
and protections to be mindful of in these
circumstances, broken down by owners,
GCs, sub-trades, lenders and others.
Owners
The owner of the land and project can be
legally exposed if they do not take adequate
protections to ensure that the money they
put out flows down the chain correctly. Just
about any unpaid person on a jobsite or
person who delivers materials has a right
of filing a builders' lien. A builders' lien is,
in part, a claim against an owner’s title for
work done or materials supplied to improve
a title. An owner’s exposure is limited by
The Builders’ Liens Act of Manitoba (the
BLA) to anything unpaid, but actually
owing under a contract, and the prescribed
amount of 7.5 per cent holdback. Provided
the owner has maintained the holdback,
they are usually protected. However, that
protection is lost if a lien is actually on the
title and the owner pays out anyway.
Therefore, it is imperative that an owner
maintain a 7.5 per cent holdback of all
progress draws to their GC to limit their
exposure, and do a lien search on their title
before advancing funds.
A method that owners can use to protect
themselves is to insist that their contractor
post a Labour and Materials Bond or
Performance Bond, or both, to complete
the work. This then engages a third-party
bonding company to back the contractor
to ensure that people are paid and the
work gets done. If the owner is faced with a
contractor who can’t get a bond, then that
hints that they are thinly capitalized and
PHOTO COURTESY OF MEIGHEN HADDAD LLP
perhaps can’t carry the project or perhaps
has breached a bond in the past; so they
should be wary.
Contractors
Contractors need to protect themselves
from subs down the chain, and from owners
who won’t pay. To protect themselves from
subs down the chain, they must maintain
7.5 per cent holdback from their own subs
when they pay them. To protect themselves
from an owner who can’t or won’t pay,
they can require that they be shown proof
of credit, leverage a walk-off or can file a
lien. Most don’t know this, but under the
BLA, a contractor in progress has a right
to ask an owner’s bank for information on
the owner’s construction mortgage, so if a
contractor is getting nervous, they have the
legislative right to see how much gas is left
in the tank.
Subcontractors and employees
Subcontractors and employees need to
protect themselves. They should never
undertake a project if they can’t afford
BUILDING RURAL MANITOBA | 53