Payment Holdback Required:

Question: Is it illegal in Ontario to pay a construction final invoice in full without a statutory 10% holdback?

Answer: Vescio Legal Services can help you understand Ontario’s required construction holdbacks and the risk of paying final invoices in full without retaining the money, which may be unlawful under the Construction Act. Under Construction Act, R.S.O. 1990, c. C.30, owners and other payers on a contract or subcontract under which a lien may arise generally must retain a basic 10% holdback from amounts due for services or materials as they are actually supplied, and a separate 10% holdback may apply after substantial performance; this obligation applies regardless of whether the contract provides for partial payments or payment on completion, and owners can be personally liable for required holdbacks to valid lien claimants. If you already paid in full, or you’re facing a dispute over missing holdback funds, call (416) 400-8255 to discuss your options with Vescio Legal Services, a paralegal-serving Ontario resource for construction payment and holdback issues. 

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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

As per the Construction Act, R.S.O. 1990, c. 30, which prior to July 1 2018 was known as the Construction Lien Act, the owner of a project involving improvements to property, thus being any type of property including residential, commercial, industrial, agricultural, among other types, is statutorily required to holdback ten (10%) percent until the time within which a lien may be preserved expires.  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).

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.