Chapter 16

Deficiencies and Holdbacks

 

16.1 What is a deficiency?

Deficiencies generally

Commentary: a deficiency arises when a contractor or subcontractor has failed to perform satisfactorily all the obligations imposed by the contract or subcontract. This may include a failing to complete the contract itself or purporting to complete it in a way that does not conform the requirements of the contract.

Correcting a deficiency can cost money. Where the person who engaged the defaulting contractor or subcontractor has retained part of the money owing under the contract, that person would normally wish to use the money retained to remedy the deficiency.

16.2 When may one look to money retained to remedy a deficiency?

Use of “required holdback”

Commentary: it is first necessary to distinguish between the holdback required to be retained under section 4 and any amounts retained in excess of that required holdback.

 

As to the required holdback, the Act clearly prohibits its use to remedy deficiencies while the filing of liens is possible. Section 6 provides:

6(1)  If a contractor or subcontractor defaults under a contract or subcontract, the required holdback must not be applied to the completion of the contract or subcontract, or for the payment of damages, or for any other purpose until the possibility of any lien arising under the person in default is exhausted.

(2) A payment applied contrary to this section does not reduce the liability under this Act of the person making the payment.

(3) This section does not apply to money held in excess of the required holdback.

The prohibition applies only “until the possibility of any lien arising under the person in default is exhausted.” This suggests that the intention of the legislature was to permit the use of the required holdback to remedy deficiencies once the holdback period had expired and no liens were filed. This is reinforced by a close reading of section 8(4) which states that payment of a holdback “may be made” after the expiry of the holdback period. This permissive language constitutes a recognition that there may be circumstances when the holdback should not be paid out to the person from whom it was retained, such as where there are other equities to be satisfied.

16.3 What if an amount larger than the required holdback is retained?

Additional money retained

Commentary: the policy of the Act is clear that the person who has retained a larger amount of money should be free to apply the excess to remedy the deficiency. This policy finds its strongest expression in section 6(3) which provides that the prohibition against using the required holdback to remedy deficiencies “does not apply to money held in excess of the required holdback.”

 

This confirms a decision of the Supreme Court of Canada.

See Noranda Exploration Co. v. Sigurdson, [1976] 1 S.C.R. 296]

The same policy is also reflected in two other provisions of the Builders Lien Act. Under section 23(1), the amount required to be paid into court to clear a lien is calculated with reference to “the amount owing by the payor” to the person through whom the lien is claimed. The expression “amount owing” is broad enough to embrace not only the required holdback, but any amounts retained in excess of the required holdback. Section 23(5), however, provides that the “amount owing” does not include any amount in excess of the required holdback that the payor is entitled to apply to remedy a default.

[See also paragraph 9.9]

A similar issue arises under section 34 which defines the maximum recovery of a class of lien holders. Under section 34(1), the maximum recovery is defined with reference to an “amount owing.” Section 34(2) states that “an amount claimed by way of counterclaim … does not reduce the amount owing …”

A claim on money retained to remedy a deficiency would be a species of counterclaim. However, the Act again carves out an exception. Section 34(3) provides that despite subsection 2, money held in excess of the required holdback may be applied to remedy a default.

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