Holdback – The Case of Materials Suppliers
After a lengthy hiatus, we are pleased to resume the Building Blocks and continue our discussion of holdback. In our last post, we discussed the obligation for payer contractors and subcontractors to retain an amount from their respective payee subcontractors and sub-subcontractors that is equal to ten percent (10%) of the price of the services or materials as they are actually supplied under the contract and/or subcontract. 1
One of the policy-reasons behind Section 22 of the Construction Act/Construction Lien Act (the “CLA”) is to ensure that, in the event that a payee’s subcontractor/sub-subcontractor/etc. is not paid in full by the payee, there are monies available to compensate said sub-payees from the monies retained by the payer.
This requirement, however, raises the question—what is the proper conduct regarding holdback when there are no sub-payees? Take for example materials suppliers—very rarely do materials suppliers, such as gypsum suppliers, aggregate suppliers, etc. have their own sub-subcontractors. Rather, these materials suppliers tend to be the final level of the Construction Pyramid. In cases, namely where there are contracts between a contractor/subcontractor and materials suppliers who have no subparties, there is a general consensus in the Ontario Construction Industry not to hold back the 10% of monies owing from said materials suppliers.
In Salit Steele v. Mondiale2 , the Honourable Master Albert, as she was then, re-iterated that, since Section 22 of the CLA is designed to protect sub-subcontractors below the payees, a lack of sub-subcontractors results in no parties that are in need of protection through lien rights. Master Albert further indicated that the key words in Section 22 of the CLA are “…under which a lien may arise…”, hinting at the fact that a lack of subparties would mean no further lien rights would occur. As such, in situations where there are no further subparties under the materials supplier, the Courts have held that the holdback requirement need not be strictly applied.
Another way of understanding this principle is by re-examining who a “Claimant” can be under the CLA. For example, a non-unionized, salaried employee would not be entitled to a lien. Neither would a general store selling construction equipment. Although we don’t think about it, these are perfect examples of “subparties” from whom holdback is not retained when providing payment.
On the flip side, there have been instances where retaining holdback from a materials supplier has been necessary, such as when, in the subcontract with a materials supplier, the materials supplier is required to supply a custom component material that they themselves do not produce. If the materials supplier outsources the supply and/or production of that custom component, they create a further payer-payee relationship, requiring the party above the materials supplier to retain the holdback monies from the original materials supplier.3
Practically speaking, while there is an Industry-wide understanding that you would not retain holdback from a materials supplier, there is no obligation for payers to abide by this standard. Unless a payer has concrete evidence that there are no further subparties under materials suppliers, said payers will still be liable to the subparties to the extent of the holdback required under Section 22.
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 Construction Lawyers by email or telephone.
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1 Construction Act, formerly known as Construction Lien Act, R.S.O. 1990, c. C. 30, as amended, s. 22.
2 2009 ONSC 9746.
3 CED (online), Construction Liens (Ont.) (III.1).