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Payment Holdback Required: Construction or Renovation Relations
Question: Why is it illegal to pay a contractor's final invoice in full after project completion?
Answer: Paying a contractor's final invoice in full upon project completion without a statutory holdback is often illegal under the Construction Act, R.S.O. 1990, c. C.30. This Ontario legislation mandates a 10% holdback on payments to protect against potential liens by subcontractors or suppliers. Failure to retain this holdback can result in personal liability for unpaid claims. Compliance ensures financial security and legal peace of mind for all parties involved in construction projects. Contact Paladin LLP to ensure your project adheres to legal requirements.
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 prescribed by the Construction Act, a ten (10%) percent holdback is statutorily required of each party involved in any property improvement project such as construction projects or renovation projects. Accordingly, the project owner must holdback ten (10%) percent from the full payment when paying the general contractor; and subsequently, the general contractor must then do the same when paying subcontractors, and so on throughout all levels within the labour and material supply chain involved with the project. Once the project is finished or once a Certificate of Substantial Performance is issued and the risk of a lien being placed upon the improved property expires, which is typically sixty (60) days afterward, the holdback requirement ends and payment of the holdback money becomes due.
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
Owners of projects, along with everyone throughout the supply chain, from contractors to subcontractors, and so on, are required to holdback ten (10%) percent of payment upon the completion or issuance of a Certificate of Substantial Completion. Generally, the holdback provision expires after sixty (60) days.
