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The Construction Lien Act requires that any payer on a construction project must retain a holdback of 10% in order to protect those subtrades or suppliers who may be below the contracting parties in the construction pyramid. The owner must retain a 10% holdback out of all payments made to the general contractor. The general contractor, in turn, must retain a 10% holdback out of any payments it may make, for the benefit of the subtrades. Even the subtrades, in turn, must retain a 10% holdback on any money that they may be paying out to their subtrades and suppliers.

Should an owner or general contractor or subtrade fail to maintain the 10% holdback, then it may be forced to pay twice should a supplier of services or materials not receive proper payment and be able to prove a valid lien against the project. The purpose of the Construction Lien Act is to protect those suppliers and tradesmen that are the most vulnerable. The Construction Lien Act goes so far as to deem the holdbacks to be trust funds. Should an owner or contractor fail to maintain a proper holdback and should the owner or contractor become insolvent or otherwise unable to pay out the holdback, then the officers and directors of those corporations become personally liable for the payment of the holdback. The provisions in the Construction Lien Act making the officers and directors of the corporations that may be the owners or the general contractors, personally liable for the holdback has, in recent times, led to an increase of breach of trust claims against them.

One issue that has been recently decided by the Ontario Superior Court is the enforceability of a clause in a contract which provides that there is to be no holdback on the amount owed to the supplier of services or materials. In that particular case, the supplier’s purchase order, which was accepted by the owner, provided that there was to be “no holdback”. The business reason was that the supplier was the sole manufacturer and supplier of the rebar used in the project. It had no subcontractors and hence there was no one who could validly claim a lien against the supplier. Nonetheless the owner continually deducted a 10% holdback from the supplier’s invoices. Given that it was more than a two year project, the holdback owed to the supplier was substantial. The reason the supplier inserted a “no holdback” clause in its purchase order was to avoid the situation it now faced. It did not want to be required to finance the holdback, which was in excess of $1,000,000.00, over the 2-3 year duration of the project. The owner refused to pay out the holdback prior to the expiration of the 45 day period subsequent to the publication of the Certificate of Substantial Performance. Its argument was that the Construction Lien Act required a holdback to be kept and the Act provided that no one could waive their lien rights. Hence any provision in a contract specifying that there was to be no holdback, must be void. The conclusion of the Court was that the no holdback clause was enforceable. The reason being that no one was beneath the supplier in the construction pyramid and no one could claim a lien against the supplier or against the funds owed to it. The purpose of the Act was to protect those suppliers of services or materials who could prove valid liens. But because no other party would be able to claim a valid lien against the supplier of the rebar, it was able to enforce its “no holdback” contract. The moral of the story is that for those suppliers of services or materials against whom no lien is possible, then they should insert a “no holdback” provision in their contracts.

Garth D. Walkden is the head of the firm's litigation department. He practices in the area of commercial litigation and construction law. He can be reached by email at walkden@kmblaw.com or at 905-276- 0419.

The comments in this newsletter are of a general nature and are not designed to replace professional advice in specific situations. If you would like extra copies of this newsletter, or you know of anyone who would be interested in joining our mailing list, please contact Cheryl Woolcott at (905) 276-9111.