Payment Holdback Required:

Question: If I’m the property owner in Ontario, is it illegal to pay the final construction invoice in full immediately after substantial performance without keeping a 10% statutory holdback?

Answer:

Vescio Legal Services helps Ontario property owners, contractors, and subcontractors understand statutory required holdbacks under the Construction Act, R.S.O. 1990, c. C.30, including the need to retain a basic 10% holdback and, when applicable, a separate 10% holdback for finishing work, even when the contract says payment on completion, and it can also expose the payer to personal liability for unpaid lien claims;   if you are unsure whether substantial performance has been certified and when the holdback can be released, call (416) 400-8255 to get practical next steps from a paralegal at Vescio Legal Services and avoid costly lien and breach-of-trust disputes.

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:

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.

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.