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Payment Holdback Required: Construction or Renovation Relations
Question: Why is it illegal to pay the final invoice in full upon project completion?
Answer: According to the Construction Act, R.S.O. 1990, c. C.30, retaining a 10% holdback from the final payment of a construction or renovation project is legally required in Ontario. This holdback protects suppliers and subcontractors by ensuring funds are available if liens arise. By not retaining this holdback, property owners risk being held liable for unpaid claims within the supply chain, potentially breaching statutory trust obligations. For peace of mind and compliance, consult Olson Craig Legal for guidance.
Statutory Required Payment Holdbacks
Why It Is That Paying the Final Invoice In Full Upon Project Completion Is Actually Illegal
There are likely few times when paying an invoice in full is against the law. Indeed, failing to pay an invoice in full is usually against the law by constituting as a breach of contract; however, in the realm of construction or renovation, meaning projects to improve a property, paying in full without retaining a holdback may be, and likely is, unlawful.
The Law
The Construction Act, R.S.O. 1990, c. 30, formerly known as the Construction Lien Act, statutorily requires the owner of a construction project or renovation project involving improvements to property, whether residential, commercial, industrial, agricultural, or other type, to holdback ten (10%) percent from payments due until the expiry of the time in which a lien may be preserved. Furthermore, where a project owner fails to properly holdback payment as statutorily required, the project owner may be held liable for payment to any and all subcontractors, subtrades, suppliers, among others, who were unpaid by the contractor or subcontractors along the chain of supply. Specifically, the Construction Act states:
Holdbacks
Basic holdback
22 (1) Each payer upon a contract or subcontract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of the services or materials as they are actually supplied under the contract or subcontract until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.
Separate holdback for finishing work
(2) Where the contract has been certified or declared to be substantially performed but services or materials remain to be supplied to complete the contract, the payer upon the contract, or a subcontract, under which a lien may arise shall retain, from the date certified or declared to be the date of substantial performance of the contract, a separate holdback equal to 10 per cent of the price of the remaining services or materials as they are actually supplied under the contract or subcontract, until all liens that may be claimed against the holdback have expired or been satisfied, discharged or otherwise provided for under this Act.
When obligation to retain applies
(3) The obligation to retain the holdbacks under subsections (1) and (2) applies irrespective of whether the contract or subcontract provides for partial payments or payment on completion.
Permissible forms of holdback
(4) Some or all of any holdbacks may, instead of being retained in the form of funds, be retained in one or more of the following forms:
1. A letter of credit in the prescribed form.
2. A demand-worded holdback repayment bond in the prescribed form.
3. Any other form that may be prescribed.
Personal liability
23 (1) Subject to subsections (2), (3) and (4), an owner is personally liable for holdbacks that the owner is required to retain under this Part to those lien claimants who have valid liens against the owner’s interest in the premises.
Limitation
(2) Where the defaulting payer is the contractor, the owner’s personal liability to a lien claimant or to a class of lien claimants as defined by section 79 does not exceed the holdbacks the owner is required to retain.
Same
(3) Where the defaulting payer is a subcontractor, the owner’s personal liability to a lien claimant or to a class of lien claimants as defined by section 79 does not exceed the lesser of,
(a) the holdbacks the owner is required to retain; and
(b) the holdbacks required to be retained by the contractor or a subcontractor from the lien claimant’s defaulting payer.
How determined
(4) The personal liability of an owner under this section may only be determined by an action under this Act.
As per the Construction Act, a ten (10%) percent holdback is required from each party involved within a property improvement project whether such is a construction project or a renovation project. This means that the property owner must withhold ten (10%) percent when paying the general contractor, who must then withhold ten (10%) percent when paying subcontractors, and so on throughout the various layers of payors within the labour and material supply chain of the project. The holdback requirement ends when the risk of a lien being filed against the improved property expires, which is usually sixty (60) days after the project is completed or a Certificate of Substantial Performance is issued.
Interestingly, and most contractors will know this; however, small project owners, such as homeowners as laypeople will unknowing, the homeowner that pays the invoice from a contractor in full upon completion of a renovation contract, whether roofing, landscaping, building an addition, replacing kitchen cabinetry, or other household improvements, is required to holdback ten (10%) percent. Failing to do so is a breach of trust whereas the Construction Act, statutorily, creates a trusteeship and by failing to act in accordance to the trusteeship, the homeowner, among others, could be found liable for breach of trust.
Conclusion
Upon completion of a project to improve property or upon issuance of a Certificate of Substantial Completion, owners of projects, contractors, subcontractors, and anyone else involved in the supply chain, are required to holdback ten (10%) percent of the payment due for a period of sixty (60) days. After the sixty (60) days, presuming an absence of any liens registered against the property, the holdback provision expires and the holdback funds become payable.