The COVID-19 virus has created uncertainty in the financing for many construction projects. The virus’s impact has caused some lenders to reassess project viability and, in some instances, withdraw financing before or after construction has commenced. Such interruptions create uncertainty for everyone involved in the project. Below, we have set out some considerations for those involved in construction projects affected by financing issues.
From the Owner’s Perspective
- The owner’s facility agreement may require the owner to provide information about the impact of the pandemic on the project. Owners should review their agreements to confirm the extent of those obligations and ensure compliance to avoid problems.
- Most construction contracts contain clauses addressing delay, suspension or termination upon the occurrence of prescribed events. The owner should review these provisions and give all notices required. The extent to which the owner may be responsible to compensate the contractor may change depending upon whether work is delayed, suspended or terminated, so the owner should review these clauses and take advantage of the issuance of the most favourable notice or combination of notices possible.
- Owners should be transparent about the reason for the delay or suspension of work. Under the Builders Lien Act, S.B.C. 1997, 45, “abandonment” of a project is deemed to occur when there has been no “work” done in connection with the project for 30 days. The presumption of abandonment may be rebutted by proof of an intention not to abandon. Assuming the owner wishes to proceed, it should communicate clearly to those involved in the project, in writing, about the reason for the suspension of work and confirm it has no intention to abandon the project. Otherwise, those involved in the project may become skittish and lien the project prematurely and further complicate financing efforts.
- The owner’s contract may require the owner to notify the contractor of any material changes in the owner’s financial arrangements to fulfill the owner’s obligations under the contract. This requirement appears in many commonly used “CCDC” construction contracts. The owner’s failure to communicate such changes may constitute events of default under the contract and justify termination by the contractor.
From the contractor’s perspective:
- The contract between owner and contractor may authorize the contractor to request financial information from the owner. The contractor should consider asking for such information and assess its ability to require this information from the owner under the contract. The failure of an owner to respond within an appropriate time frame may in and of itself constitute a breach of the agreement entitling the contractor to damages. For example, GC 7.2.5 of the commonly used CCDC 2 2008 Stipulated Price Subcontract entitles a contractor to be paid for all work performed including reasonable profit and other consequential damages if the contractor terminates its contract with the owner due to the owner’s failure to provide financial information.
- Section 41 of the Builders Lien Act gives a lien holder (meaning someone entitled to lien the Project) or beneficiary of a trust under the Builders Lien Act a right to demand information from the owner regarding the particulars of:
- the head contract and state of accounts between the owner and the head contractor;
- the holdback account; and
- the particulars of any labour and material payment bond posted with the owner by a contractor above the demanding party in the contractual hierarchy.
The owner’s failure to provide such information within 10 days of receipt of the demand entitles the demanding party to apply to court for production of the requested documents and seek costs of such an application against the owner.
- The contractor’s entitlement to compensation is distinct from its ability to recover compensation. The pandemic is broadly affecting the construction industry and the economy, generally. It’s unlikely that most owners would make voluntary, timely payments in response to contractors’ claims for pandemic-related compensation. While contractors should do everything required by the contract to maximize their entitlement to compensation, they should also not have unrealistic expectations about obtaining immediate financial relief.
