Non-Payment of Holdback under the Construction Act
Under the previous Construction Lien Act, contractors and subcontractors were often concerned that they would not receive payment 45 days after substantial completion. There was a concern that they would not get paid and they would lose their lien rights. Quite often, liens were filed unnecessarily and costs would be incurred.
The Construction Act (the “Act”) looked to create a system whereby the owner would have to give notice to the contractor and the contractor would have to give notice to the subcontractor, prior to the 45-day deadline (i.e. when the lien rights would expire). Pursuant to section 27.1(1),an owner may refuse to pay some or all of the amount the owner is required to pay to a contractor under section 26 or 27, as the case may be, if,
- the owner publishes a notice in the prescribed form specifying the amount of the holdback that the owner refuses to pay, and the notice is published in the manner set out in the regulations no later than 40 days after the date on which,
- the applicable certification or declaration of substantial performance is published under section 32, or
- if no certification or declaration of substantial performance is published, the date on which the contract is completed, abandoned or terminated; and
- the owner notifies in accordance with the regulations, if any, the contractor of the publication of the notice.
(2) A contractor may refuse to pay some or all of the amount if the contractor is required to pay to a subcontractor under section 26 and 27, as the case may be, if,
- the owner refuses to pay some or all of the amount the owner is required to pay to the contractor under that section;
At present, there is no requirement by the contractor to give notice to any subcontractors, but it appears that if the contractor is paid by the owner then he has no ability to not pay a subcontractor. The obvious question that arises from this section is whether or not an owner or a contractor is permitted to holdback or refuse to pay any money if they do not comply with section 27.1 of the Act. One would assume that failure to comply with section 27.1 of the Act would require the owner or contractor to make payments to the contractor or subcontractors respectively. There is nothing within section 27 that sets out what the penalty is for failing to comply, nor whether a defence is available to a non-compliant owner or contractor. This section is now in force.
Section7 of Regulation 304/18 provides further guidance to owners and contractors:
Non-payment of holdback
7.(1) An owner shall publish a notice of non-payment of a holdback under subsection 27.1 (1) of the Act (Form 6) in a construction trade newspaper. O. Reg. 112/19, s. 1.
(2) For the purposes of subsection 27.1 (1) of the Act, the owner shall, no later than three days after publication of the notice of non-payment, notify the contractor of its publication. O. Reg. 112/19, s. 1.
(3) If the owner provides notice to the contractor in accordance with subsection (2), then notice for the purposes of subsection 27.1 (2) of the Act shall be provided no later than three days after receipt of the notice from the owner, and shall be accompanied by a copy of the notice from the owner. O. Reg. 112/19, s. 1.
(4) If the contractor provides notice to a subcontractor in accordance with subsection (3), then notice for the purposes of subsection 27.1 (3) of the Act shall be provided no later than three days after receipts of the notice from the contractor, and shall be accompanied by a copy of the notice from the contractor. O. Reg. 112/19, s. 1.
(5) Subsection (4) applies with necessary modifications if a subcontractor provides notice to another subcontractor in accordance with that subsection. O. Reg. 112/19, s. 1.
(6) Notice to a contractor or subcontractor under section 27.1 of the Act shall be provided in writing, and may be provided in electronic or paper format. O. Reg. 112/19, s. 1.
Originally, these regulations were supposed to take effect at the time of prompt payment and adjudication on October 1, 2019. Now these regulations apply to all contracts entered into after July 1, 2018. So, what is the effect of these changes? If you are an owner and you believe that there are reasons why you should not make full payment, then you should make sure that you give notice in accordance with the regulations. If you are an owner that has failed to give notice, and a contractor or subcontractor does not receive their holdback in accordance with the Act, you are likely banned from witholding payment. There are no penalty provisions provided in the Act for failing to provide notice. However, an argument can be made that if an owner does not give notice in accordance with the Act, it must make full payment. There would be no defence available to an owner if it failed to give notice and/or failed to make full payment. If you are a contractor or subcontractor and you have not received notice and/or payment, please contact us immediately to protect your interests.
A cautionary note
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.[ssba]