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Executive Summaries Apr 7, 2020

COVID-19 and Construction: Impacts on Your Legal Hypothecs, RBQ Licences and Surety Bonds

By

Nicolas Gosselin, Maxime Savard, Sophie Boulanger

The health emergency due to the COVID-19 pandemic has some consequences for construction law.

For the purpose of this article, we will present a portrait of the situation by addressing the impacts on the following aspects in particular:

  • Construction legal hypothecs;
  • Régie du bâtiment du Québec (RBQ) licences;
  • Construction contract bonds.

Reminder of Measures Adopted by the Government

Given the serious threat that the COVID-19 pandemic poses to the health of the Québec population, the government passed Order in Council 177-2020 on March 13, 2020, declaring a health emergency pursuant to section 118 of the Public Health Act. The health emergency was then renewed until April 7, 2020, by various subsequent decrees[1].

On March 15, 2020, the Chief Justice of Québec and the Minister of Justice issued an Order in Council No. 2020-4251, providing, among other things, for the suspension of the extinctive prescription periods, forfeiture periods and civil procedure deadlines until the end of the declaration public health emergency, i.e., until April 7, 2020[2].

What Are the Impacts of these Measures on the Construction Legal Hypothecs?

The health emergency measures adopted by the Government of Québec have several impacts on the construction legal hypothec.

Retention Periods for Construction Legal Hypothec

Construction legal hypothecs are subject to strict requirements which are conditional for their existence and preservation. As such, article 2727 of the Civil Code of Québec (“C.C.Q.”) states that, in order to preserve the construction legal hypothec, the holder must register a notice within 30 days following the completion of the work.

This provision also provides that the hypothecary right holder must publish an action or register a prior notice of exercise of a hypothecary right within six months following the completion of the work in order to keep his hypothec.

Therefore, what is the impact of suspending periods in civil matters with respect to the periods set out in article 2727 C.C.Q.? The Honourable Denis Jacques, s.c.j. recently reiterated, in Immeubles Paul E. Richard inc. v. 9231-6892 Québec inc. that the periods set out in article 2727 of the C.C.Q. are forfeiture periods.

Consequently, the periods set out in article 2727 C.C.Q. could be qualified forfeiture periods that would be suspended by Order No. 2020-4251, supra, of the Chief Justice of Québec and the Department of Justice. For example, if the end of work on a construction site occurred on March 10, 2020, the 30-day period would be suspended as of March 15, 2020, so that the calculation of the deadline would resume only on the date of the end of the health emergency declared by the Government of Québec.

Nevertheless, since this is an exceptional and unprecedented situation in Québec law, we suggest to holders of a claim that could be the subject of a construction legal hypothec to precisely calculate deadlines and take steps to give notice and prior notice of the exercise of a hypothecary right despite the suspension of the forfeiture deadlines, in order to avoid any loss of rights. In this regard, the services offered by the Bureau de la publicité des droits are considered as “essentials”, so that it is always possible to complete the procedures to preserve the construction legal hypothec despite the health emergency.

As the Court of Appeal recently recalled, forfeiture deadlines differ from prescription deadlines in that they cannot in principle be suspended or interrupted. Since Order No. 2020-4251 is an exception to this principle and the courts have not yet had the opportunity to interpret the legal scope of this Order, caution remains necessary, especially if your right to the construction legal hypothec were to arise during the suspension period, in the event, for example, of a construction site considered a priority by the government.

Unlike the prescription deadline, the expiry of the forfeiture deadline does not only extinguish the right to legal action, but results in the loss of the right itself.

Caselaw confirms that failure to comply with the strict deadlines set out in article 2727 C.C.Q. results in the termination of the creditor's rights to the construction legal hypothec and allows any interested person to apply for its rejection and cancellation.

The Notion of Completion of the work

By Order in Council 223-2020 of March 24, 2020, the Québec government issued an order that all workplace operations must be suspended, except for essential services or for the minimum operations required to ensure that companies operating in non-essential services are able to resume their operations.

As for the construction industry, the only services considered as “essential” by the Québec government are the following:

  • construction work for repairs and emergency services or for safety purposes;
  • rental equipment; or
  • electricians.

As a result, most construction sites, construction work and material suppliers’ activities that could give rise to legal hypothecs are currently suspended.

The health emergency will thus affect the “completion of the work” date of construction projects. Such date is crucial, as it marks the starting point for calculating periods set out in article 2727 C.C.Q. to complete the requirement for the preservation of the construction’s legal hypothecs.

According to article 2110 C.C.Q., the work is completed when the project has been executed and is in a condition to be used for its intended purpose. There is only one completion of the work date for all the parties involved in a construction project. This date is established according to each construction site’s specific facts.

Although the health emergency has resulted in the suspension of most of the construction work, this should not be mistaken with the notion of completion of the work. The mere suspension of work should not set a date for the completion of the work. However, caselaw links an abandonment of work to completion of the work with respect, among other things, to the application of the rules relating to the preservation of the construction legal hypothec. Therefore, it is essential to clearly differentiate the notions of suspension and abandonment of work.

Under Québec law, work is suspended when the resumption of work is foreseeable. On the other hand, abandonment of work occurs when the resumption of work ceases to be foreseeable, when the suspension of work extends beyond a reasonable and normally acceptable period of time or when the owner expresses a clear intention of not resuming the work.

In this case, a suspension of work due to health emergency declared by the Government of Québec would not set a date for the completion of the work to be used in determining the periods provided for in article 2727 C.C.Q., since the resumption of work is foreseeable.

It should also be noted that the bankruptcy date has no impact on the completion of the work date; the trustee or surety for the performance of the work can assume the completion of the work. Given the precarious economic situation caused by the health emergency, an increase in the number of notices of proposals and bankruptcies is to be expected.

As for construction sites that are still in progress since they are considered as “essential services” as defined by Decree 223-2020 of March 24, 2020, it would appear that the retention periods for construction legal hypothec for these sites have also been suspended. Indeed, Order No. 2020-4251 does not create a distinction between suspended and continuing construction sites.

However, we wish to remind you that there is no need to wait until the completion of the work before publishing a legal hypothec, and so we recommend that the necessary actions be taken to preserve your rights. We also point out that it is not possible to encumber certain immovables with a legal hypothec, such as government’s property and that of legal persons governed by public law assigned to the public interest.

What About RBQ Licences Up for Renewal During the Suspension Period?

The current health emergency has an impact on most businesses, including government agencies. The RBQ is not exempt from government measures adopted to try to smooth the curve.

The RBQ is currently focusing its efforts on “essential services” as defined by Decree 223-2020 of March 24, 2020.

New licence applications are still being processed. Moreover, despite the current situation, licensed parties are still required to pay for their licence maintenance when it expires[3]. Pursuant to section 71 of the Building Act, if a licence holder, either a contractor or a builder-owner, fails to pay the fees and charges for the maintenance of its licence, the licence will cease to have effect. Licence holders can pay online.

Given the current circumstances, the RBQ explicitly provides that it will take the necessary measures to ensure that licence holders who have demonstrated diligence will not be penalized. Contractors and builder-owners must therefore be diligent and meet, as much as possible, the deadlines for payment of fees.

What Are the Impacts on the Deadlines Set Out in Guarantee Contracts?

Construction surety bonds are often used in the construction industry to guarantee that contractors and sub-contractors involved in a construction project will meet their obligations towards the client. The bonds most frequently used in the construction industry are bid bonds, performance bonds and labour and material payment bonds.

Generally speaking, a construction surety bond contract sets strict periods for the completion of certain requirements to allow a creditor to benefit from the surety bond issued in its favour. Given the measures put in place by the government, including those arising from Order in Council number 2020-4251 on the suspension of periods, it is interesting to wonder about the impact of these measures will have on the periods relating to surety bonds.

Notice of Default and Request for Payment to the Surety Period

A creditor seeking payment under a surety bond issued in his favour must notify the surety of the principal debtor’s default or send his claim to the surety within the stipulated period. Recently, the Honourable judge Dugré of the Superior Court, qualified such period for a notice of default or a demand for payment as a “contractual mandatory and forfeiture period” in 3476677 Canada inc. (Entreprise Pro Forme) v. CLP Construction inc..

A contract’s terms and conditions must be respected. The legislature has established a non-extension rule for obligations set out in a contract of suretyship in article 2343 C.C.Q. which reads as follows : “Suretyship may not be extended beyond the limits for which it was contracted.” The Court of Appeal reiterated this principle in Cie d’assurance London garantie v. Cie de l'assurance de l'assurance de l'Outaouais, which was decided by the Court of Appeal in Cie d'assurance London garantie v. Girard & Girard Inc.

As previously mentioned, the periods referred to in Order in Council number 2020-4251 apply to extinctive prescription periods, forfeiture periods and civil procedure deadlines.

Although the periods provided for in the contract of guarantee with respect to the transmission of a notice of default or a demand for payment to the surety are qualified as “forfeiture periods”, they are contractual periods subject to the law of the parties. Therefore, while the information is not specified by the Chief Justice or the Minister of Justice, we doubt that Order in Council number 2020-4251 is so broad in scope that it also suspends contractual periods or deadlines set out by the parties and that are not statutory or civil procedure periods or deadlines.

In light of the foregoing, we suggest to creditors to be careful and to send the necessary notices of default and demands for payment to the surety within the required periods as set out in the surety contracts to ensure the preservation of their rights.

Contractual deadline for instituting proceedings against the guarantor

Most surety bonds have a clause allowing the creditor to sue the guarantor. The maximum period for instituting such proceedings has long varied and has been the topic of several caselaw and doctrinal debates.

However, since January 1, 1994, it seems that any contractual provision in a suretyship with a period for suing the surety that is less than the three-year prescription period set out in article 2925 C.C.Q. would be without effect. Article 2884 C.C.Q. is of public order and stipulates that “no prescriptive period other than that provided by law may be agreed upon”. The Superior Court has confirmed this notion on several occasions by stating that contractual prescriptive periods set by the parties for instituting proceedings against the surety are illegal when they are less than the three-year period provided for by the legislator.

Therefore, we believe that the period for instituting legal proceedings against the surety under a construction contract bond is in fact a prescriptive period, which would be suspended pursuant to Order in Council number 2020-4251. Nonetheless, we suggest, once again, that caution be exercised and that any legal action against a surety be instituted within the contract’s prescribed period to avoid any contestation or loss of rights.

Force Majeure 

Some creditors may seek to rely on the concept of force majeure to override the periods set out in a contract of suretyship. Since the concept of force majeure is not one of public order, the parties may vary its application in their contract. It is therefore essential to first refer to the force majeure clauses contained in the contract to verify their application.

Where no contractual provision governs the concept of force majeure, the parties must turn to the provisions of general law. Although article 1470 C.C.Q. constitutes a means of exoneration, the creditor must still be able to demonstrate the existence of a situation of force majeure.

To qualify as force majeure, an event must meet three cumulative criteria, namely : unpredictability, irresistibility and exteriority. For more information on the various criteria, please refer to our article “Will the pandemic really have an impact on your contracts?

As for a surety’s rights, it is difficult to imagine that COVID-19 would meet the irresistibility criterion for creditors. Indeed, since a large number of notices of default can be sent electronically, a creditor’s failure to comply with the period for sending a notice becomes extremely difficult to invoke. In his book on obligations, Vincent Karim stated that : “the irresistibility referred to here implies an absolute impossibility”, which would probably not be the case here.

Therefore, we believe that it would be very difficult for a creditor to invoke force majeure to justify its failure to meet the periods set out in the contract of guarantee. We thus recommend that creditors remain vigilant and carefully calculate their deadlines to avoid any dispute or loss of rights.

For 25 years, BCF's mission has been to support Canadian businesses. We know the issues you face and our Construction Law team is available to help you use the resources at your disposal. Do not hesitate to contact one of the members of our construction law team if you need advice and support regarding the applicability of these new measures to your activities.

[1] Decree no. 222-2020 of March 20, 2020, and Decree no. 388-2020 of March 29, 2020; [2] This state of emergency period could be extended by the government; [3] As of March 31, 2020. Subject to future government action, the situation may change.

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