Holdback: a legal obligation that is not always followed in practice. As a refresher, holdback is the ten percent (10%) sum required to be withheld from each and every payment made by a payer to any payee as required by Part IV of the Construction Act, R.S.O. 1990, c. C.30, as amended (the “Act”).
In previous issues of the #ConcreteConcepts, we discussed the importance of retaining holdback and the consequences of what may follow to a payer if holdback is not retained.[1] Recently, the Fridmar Professional Corporation represented a subcontractor in a summary judgment motion against an owner for its payment obligations. Following the disposition of this Motion, the Superior Court of Justice re-affirmed the importance of retaining holdback and the consequences of non-retention.
This case also brought to light an interesting dispute as to whether holdback obligations stop following the completion of a contract, or whether change orders and extras flowing from the same improvement kept lien rights alive.
Facts of the Case
The following important facts were relevant at the return of this Motion:
- A franchisee/commercial tenant (“S”) sought assistance in outfitting a restaurant in accordance with its franchise requirements. To that end, it retained the services of a general contractor (“C”) to provide all necessary services and materials to outfit said restaurant (the “Contract” or “Project”). The Contract was entered into through an Estimate with no extensive paperwork other than an agreement on scope and the price.
- In order to complete the mechanical/HVAC portion of the Project, C hired our client –a mechanical subcontractor (“M”) through a purchase order.
- After completing its initial scope of work on the Project, C requested M to quote an extra to the HVAC work that was initially not contemplated by S or C when contemplating the scope of the Project. On that basis, M provided a quote to C for extra work on the HVAC that was ultimately accepted by S (the “Extra Work”).
- During the course of the Project, S paid C approximately $400,000.00. S never retained any holdback from the amounts invoiced by C.
- Despite completing its work, M did not receive a substantial part of the payment owing to it by C.
- As such, M preserved a lien against the Project within 60 days of its completion of the Extra Work but outside of the time for the completion of the initial scope of work on the Project.
- Despite receiving approximately $400,000.00 from S, C took the position that it had no monies, was otherwise impecunious, and could not pay M.
- M thereby looked to S for payment of $40,000.00 that would have formed S’s holdback obligations on the Contract.
Submissions at the Summary Judgment Motion
After a few months of exchanged materials, cross-examinations, and written argument, the Judge hearing the summary judgment motion had to consider the following issues and points:
- S admitted that it paid approximately $400,000.00 to C, and further admitted that it did not retain any holdback from the amounts invoiced by C as was required by the Act.
- S took the position that, as the Extra Work came about after the completion of the initial scope of the Project, M’s lien was out of time as it was preserved more than 60 days from the completion of said initial scope. S further tried to argue that the Extra Work formed an entirely new contract (which was not supported by the facts, but I digress).
- M took the position that, in spite of the preservation falling after 60 days from the initial completion of the Project, the Extra Work formed part of “improvement” and – therefore – its lien rights continued after the initial scope of work was completed. More importantly, it became clear that – in furtherance of S not retaining any holdback – S also made the final payment to C a few days before the initial scope of work on the Project was complete.
- M submitted that, as the Extra Work flowed from the same improvement, and as S never retained any holdback, its lien was valid and S was required to pay a further $40,000.00 to M despite already making this payment to C.
After two hours of submissions and replies by opposing counsel and myself, the presiding Judge (having taken a few hours to reserve) issued an Endorsement affirming that the Extra Work extended M’s lien rights. The presiding Judge also confirmed that, as S failed to retain statutory holdback, it had an obligation to pay this amount to M in satisfaction of M’s lien rights.
Takeaways
Despite not having a formal published decision, this case presents an important lesson to members of the construction industry. Firstly, it re-emphasized the importance of not only retaining holdback, but also monitoring that payments are being made between their payees and the subcontractors of said payees. In M’s case, S never followed up with C to confirm whether C was paying its subcontractors. S could have conducted diligence by simply asking for a statutory declaration from C before remitting any payment, which is a standard process for most commercial projects. It did not do so. This resulted in it having to pay an additional 10% of what it already paid.
A more important factor worth mentioning to everyone is the role of lawyers in such circumstances. Since the outset of M’s lien, I attempted to contact S’s lawyer to secure payment of holdback or facilitate other forms of settlement before engaging in extensive litigation. Neither S nor S’s lawyer was receptive to these attempts. Recall, the total amount sought by M from S was $40,000.00. At the hearing of the Motion, S’s lawyer submitted a costs outline indicating that S spent approximately $30,000.00 in defending the Motion. After the presiding Judge determined the Motion in favour of M, the Judge further Ordered that S pay to M costs in the sum of $15,000.00.
Instead of settling at an early juncture, S had to pay $40,000.00 for the holdback it did not retain as well as $45,000.00 in collective legal fees – more than double of the amount it could have paid from the get-go! This underlines the importance of not only managing client expectations (for S’s lawyer) but also giving practical advice as to the cost risks in litigating points the cost of which outweighs the actual amounts in dispute.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact me at dan@fridmar.com.
[1] Read more here: https://fridmar.com/2024/04/common-pitfalls-for-homeowners-in-residential-construction/
