Holdback - Introduction

Consider the following scenario: you are an owner of a residential property entering into a contractual agreement with a general contractor (“GC”) for the renovation of your home. At the outset of negotiations, the GC requests that it be paid by stages of completion, meaning that you pay at the 25%-mark, 50%-mark, 75%-mark, and finally upon full completion of all work.

As a lay owner with no experience in construction, this might appear to be a good deal to you. Unless, of course, you are familiar with the requirements under the Construction Act (“CLA”)!

Section 22(1) of the CLA sets out the requirements for “Basic Holdback” – an amount to be retained from the total amounts due to contractors and/or subcontractors that is equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract and/or subcontract. This amount is to be retained by the payor until all liens that may be claimed against the holdback have expired, or have been satisfied, discharge, or provided by way of payment of security into Court. [1]

Returning to our scenario, this would mean that, even if the GC requests payment of 25% upon of the contract price at the 25% completion point, as a prudent owner/payer, you must only provide 22.5% of payment (plus HST) and hold back 2.5% of payment representing 10% of the price of work provided. Further, even if the GC insists that payment be made in accordance with completion, Section 22(3) comes to rescue –irrespective of whether any contract or subcontract provides for partial payments or payment upon completion, the statutorily-binding obligation to retain holdback continues to exist.[2]

It is also important to note that basic holdback does not only affect an owner – as made clear by the wording of Section 22(1), it applies to any payers. This means that GCs have holdback obligations with respect to payments being made to subcontractors, and subcontractors have obligations to hold back payment from materials suppliers. In theory (and often in practice), the total amounts held back from the bottom-tier members of the Construction Pyramid should total the amount owed by the Owner to the GC.

Another point worth mentioning is that specifically an owner’s failure to retain holdback as required by the CLA bears significant consequences – an owner may be personally liable for holdback that the owner was required to hold back pursuant to section 22(1).[3] However, this personal liability extends only with respect to holdback that the owner has to pay out as an owner. Accordingly, if a GC or other member of the Construction Pyramid’s bottom-tier fails to pay their subcontractors/material suppliers, the owner is only liable for the amount that the owner was required to hold back.[4] Even then, this liability may only be determined in a Lien Action and not by a claim brought by way of ordinary civil proceedings.[5]

Next week we will take a look at when holdback becomes payable and the acceptable forms of holdback.Until then!

The foregoing is for informational purposes only and should in no way be relied upon as legal advice. For legal advice tailored to your circumstances and business, please contact any of Sutherland Law's lawyers by email or telephone.

[1] Construction Act, R.S.O. 1990, c. C.30, as amended, s. 22(1).
[2] Ibid, s. 22(3).
[3] Ibid, s. 23(1).[
4] Ibid, s. 23(2) and 23(3).
[5] Ibid, s. 23(4).