Payment Holdback Required:

Question: Is it illegal to pay a construction final invoice in full in Ontario without retaining the required holdback?

Answer: In Ontario, paying the final invoice in full without retaining the statutorily required holdback can be unlawful on construction and renovation projects because the Construction Act requires each payer to retain a 10% holdback until all lien claims that can be made against it have expired or been satisfied, discharged, or otherwise provided for; this applies even if the contract says payment on completion, and owners may face liability to unpaid lien claimants. For guidance on your specific project and payment steps across the contractor and subcontractor chain, Forseti Legal Services can help, call (705) 806-7577.

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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.

Note: Please contact Forseti Legal Services by phone at: (705) 806-7577 to discuss any specific questions that you may have.

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

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.