Authors: Daryl Chicoine, Jennifer Sokal, Alli Knox

There are various financial risks associated with construction projects, particularly given that subcontractors and suppliers may never have contact with the project’s ultimate payor – the owner.

To address these risks and to protect subcontractors, suppliers and other service providers, lawmakers across Canada have implemented legislation that requires an owner to hold back some of the monies payable under a contract as an attempt to provide security for those involved in construction projects, as well as to limit the owner’s liability.

What is the Builders’ Liens Act Holdback?

In Manitoba, the requirement to hold back funds is established through the Builders’ Liens Act (the “Act”).

The Builders Liens’ Act holdback (the “Holdback”) is a set amount of money that is deducted from all payments made under a contract by the owner and held by the owner in a separate trust account.

In Manitoba, 7.5% of the contract price payable – or if there is no contract price, the value of the work completed or materials supplied – is held back to ensure that there are funds remaining to pay contractors and subcontractors for work completed or materials supplied should a lien be filed.

In other provinces, the required amount to be held back varies. For example, in Ontario, 10% of each payment must be held back.

In many circumstances, the Holdback can be used to obtain a discharge of a valid lien filed by a contractor or subcontractor for a project. It also helps to limit the owner’s liability. Parties to a construction contract cannot negotiate or contract out of the rate of statutory Holdback on the requirement to maintain the Holdback.

Who is required to have a Holdback and when?

Section 24(1) of the Act requires the “person primarily liable for payment under a contract” to hold back the funds. Owners are required to hold money back for the benefit of those below them in the construction pyramid. Owners are also required to retain Holdback funds on each contract they enter into and from every payment made.

The money being held in the Holdback constitutes a trust fund in favour of the workers, contractors, subcontractors or material suppliers in a construction project. The money is to be held in a separate account and is not be taken out of the account, or used for one’s own benefit, until the Holdback is released in accordance with the Act.

If the Holdback has not been properly maintained, or has been paid out improperly, the person responsible for payment may be forced to pay those amounts again. The person responsible for payment can also be held personally liable for the breach of trust when not holding back funds properly, or if the funds required to be held back are used for purposes other than the Holdback amounts.

When are Holdbacks released?

There are two instances where Holdbacks are released:

  • if no liens are registered, 40 days after substantial completion or completion of a contract or subcontract; and
  • if liens are registered, to obtain a discharge of a lien.

The Holdback funds cannot be used to remedy the default of the contractor from whom the funds were withheld.

Holdbacks may be released from their trust accounts 40 days or more after either substantial performance or completion of the project, provided no liens are registered against the land. Substantial performance occurs when a contract has been completed to a point where the structure to be constructed is ready for use or is being used for its intended purpose, any remaining work under the contract is able to be completed or corrected for an amount calculated in accordance with the Act, and a certificate of substantial performance for the work has been properly issued.

Portions of the Holdback can be paid before the entire project is completed to allow subcontractors, suppliers and other service providers to be paid their portion of the Holdback fund for the project once their portion of the work has been certified as substantially performed. Rather than waiting until the entire construction project has been completed, contractors and subcontractors will be paid out the amount owed to them in a similar manner as set out above (i.e. as long as they wait 40 days following substantial completion of their subcontracts, the work is certified as being substantially performed and no valid liens have been filed), thereby reducing the Holdback fund.

The Holdback can also be released when a valid lien has been registered against the land, as a way to obtain a discharge of this lien, unless an action under the Act has been started to enforce one or more of the registered liens. Once any lien claims have been satisfied, the owner can pay out what remains in the Holdback fund if the other requirements of the Act have been met.

Once all statutory Holdback obligations come to an end, the Holdback funds are to be paid out to by the contractors, and contract subcontractors. The release of Holdback funds does not mean that the owner is satisfied with the work completed.

Key takeaways for owners and contractors

Given the potentially severe consequences for not holding back funds, including personal liability, owners and contractors should be familiar with the importance of holding back funds, the amount of funds to be held back depending on the location of the project, separating Holdback funds from operating accounts, the timelines for releasing funds, and how to request that Holdback funds be released.

Please note that several jurisdictions in Canada – including Manitoba – are in the process of amending their statutes concerning construction holdbacks. As such, it is important to keep up to date with changes as the come into force. The above information is correct as of the date of the publication of this article.

If you have any questions about considerations specific to your construction project, contract or organization, please reach out to Daryl Chicoine, Jennifer Sokal or contact another member of the MLT Aikins construction litigation, construction projects or builders’ liens teams.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.

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