Payment Holdback Required:

Question: What are the legal implications of failing to withhold payment on a construction project?

Answer:   Failing to retain a ten (10%) percent holdback from payments on a construction or renovation project may expose you to legal liabilities under the Construction Act, R.S.O. 1990, c. 30.  W.J. Roy Paralegal Services can guide you through these regulations, ensuring compliance while protecting your interests throughout the project.

Statutory Required Payment Holdbacks

Why It Is That Paying the Final Invoice In Full Upon Project Completion Is Actually Illegal

In the realm of construction work or renovation projects, paying an invoice in full without retaining a holdback may be against the law. While it is generally perceived that failing to pay an invoice in full is considered a breach of contract, for business within the contracting trades paying an invoice in full is likely unlawful. A holdback from full payment is required for the protection of suppliers who may go unpaid by the party above within the supply chain.

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:

Per the Construction Act as shown above, a ten (10%) percent holdback is required by each party within the hierarchy of a project to improve property, which includes construction or renovation projects.  Accordingly, the property owner is required to holdback ten (10%) percent from the general contractor who in turn is required to holdback ten (10%) percent from subcontractors and so on throughout the various layers of payors to suppliers of the project.  This holdback requirement expires when the risk of a lien being filed against the improved property expires which is, generally, sixty (60) days following completion of the project or completion of substantial performance (which is established by the issuance of a Certificate of Substantial Performance).

Infrequent project owners as laypeople, such as homeowners, may be unaware that upon completion of a the project work, whether the project involves a pool installation, roofing shingle replacement, landscape upgrades, replacing kitchen cabinetry, basement wall waterproofing, or other improvements and renovations, that the ten (10%) percent holdback requirement is mandated by law. Failure to perform the statutory holdback constitutes as a breach of trust whereas the Construction Act creates a trusteeship and the failure to act in accordance with the trusteeship, the homeowner, among others, may 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.