Payment Holdback Required:

Question:Is it illegal in Ontario to pay a construction contractor the final invoice in full without holding back 10%?

Answer:DK Legal Practice can help you understand Ontario construction payment holdbacks so you avoid unlawful full-payment timing; under the Construction Act, R.S.O. 1990, c. C.30 (s. 22–23), payers must retain a 10% holdback on services or materials actually supplied, even if your contract says payment on completion, and owners can face personal liability to lien claimants if the holdback was not properly kept.  Once liens that may be claimed against the holdback have expired or been satisfied, discharged, or otherwise provided for, the holdback becomes due, so paying everything immediately can put you at risk.  If you want to confirm what applies to your project, call (416) 906-6663 and speak with a paralegal at DK Legal Practice about your Ontario holdback obligations.

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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 DK Legal Practice by phone at: (416) 906-6663 to discuss any specific questions that you may have.

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.