|5.1||What is a holdback?|
| Commentary: a holdback arises when a person who is obliged to pay money to another does not pay the full amount but retains a portion. That portion, the difference between the amount owing and the amount paid, is a holdback. A holdback may be retained either
Normally, the term “holdback” is not used to refer to circumstances where a balance remains owing simply because the debtor cannot afford to pay the total amount due.
Holdbacks of both kinds can arise in the course of a construction project. For example, by agreement, an owner, contractor or subcontractor may retain a holdback from those they engage to ensure proper performance of the contract or subcontract and to ensure that if there are any deficiencies to be remedied, funds will be available to do that.
In addition to any holdbacks that may be retained by agreement between the parties, the Builders Lien Act requires that holdbacks be retained in certain circumstances.
The Act uses the expression “required holdback” (defined in the Act) to refer to those holdbacks that must be retained as provided in the Act and distinguish them from holdbacks that arise by agreement between the parties.
[See the definition of “required holdback” in section 1(1)]
|5.2||In what circumstances must a holdback be retained?|
the general principle
|Commentary: the basic principle is set out in section 4(1):
Thus, holdbacks are required to be retained by various participants at various levels in the construction pyramid.
[See Figure 6 for an illustration of this]
|5.3||Why so many holdbacks?|
vs. single holdback
| Commentary: the holdback requirement embodied in the 1997 Builders Lien Act is known as a “multiple holdback scheme.” To understand why it was adopted, it is necessary to examine the “single holdback scheme” that was part of the former legislation.
Under the single holdback scheme, the Act required only that a holdback be retained by the owner from the contractor or contractors. It was part of that scheme that the liability of the owner to discharge all liens against the owner’s property should never exceed the amount actually held back from the contractor(s).
But the required holdback retained by the owner (essentially the contractor’s money) was vulnerable to satisfy lien claims asserted by claimants lower in the pyramid, even where the contractor was not in default or directly liable to any of the lien claimants. This led to a practice of contractors informally retaining holdbacks from their subcontractors. The purpose of these informal holdbacks was to ensure that the contractor had money to discharge any liens that might arise since the contractor is normally under an obligation to the owner to see that the project is kept free of liens.
[See paragraph 9.3]
Because the liability of the contractor is not limited in the same way of that of the owner, if contractors were to fully protect themselves, it was necessary to retain holdbacks that were a very large percentage of the amount actually owing — a much larger percentage than the holdback retained by the owner. They had the effect of slowing the flow of money from the top of the pyramid to the bottom and constituted a serious deficiency in the single holdback scheme.
Under the multiple holdback scheme, the requirement to retain a holdback imposed on persons at various levels of the pyramid is matched by a principle of limited recovery. This permits persons in the pyramid to discharge liens with reference to an amount they have retained from the persons whom they have engaged.
|5.4||Is a holdback a tangible fund or pool of money?|
Holdback is notional
|Commentary: for all holdbacks other than those retained by the owner, the answer is no. The holdback is truly notional in the sense that it is simply a debt owed by one person to another.
Holdbacks retained by the owner are a special case and are dealt with later.
[See chapter 6]
|5.5||How much is to held back?|
Amount of holdback
| Commentary: section 4(1) stipulates that the holdback must be:
Thus, the holdback must be at least equal to 10% of the amount of any progress payments made under the contract or subcontract. If the value of work or material provided is greater than the contract or subcontract price, then 10% of that value must be retained.
|5.6||How does this work when the contract or subcontract
only calls for payment on completion?
Holdback when no
| Commentary: the Act is clear that the requirement to retain a holdback continues to apply in this situation. Here, the amounts of the holdback would be determined with reference to the “value” of the work or material. This may have a practical effect in two different circumstances.
In the case of a holdback retained by a contractor or subcontractor, the holdback is notional so a portion of the debt accruing due between the two parties would be identified as being the holdback. It would accrue over the course of performance even though the person providing the work or material cannot assert a right to payment until completion. This notional holdback will be deemed to exist even where the subcontract is, or cannot be, completed. It will be relevant for the purposes of provisions that define rights with reference to the amount of a “required holdback.”
Holdbacks retained by the owner are not “notional.” They must be paid into an identifiable fund.
[See chapter 6]
Thus, where work and material is provided under an agreement between an owner and contractor, money must be paid into that fund periodically even where the contractor has no immediate right to demand any payment on account. Again, the amount to be retained and paid into that fund is determined with reference to value of work or material provided under the contract.
Guidance as to the calculation of value is set out in section 4(3).
|5.7||What is meant by “person primarily liable?”|
“Person primarily liable“
|Commentary: this means the person responsible to pay amounts owing under a contract or subcontract. It means the owner with reference to agreements with the contractor. It means a contractor with reference to amounts owed to its subcontractors. It means a subcontractor with reference to agreements with its sub-subcontractors and so on down the chain.|
|5.8||Are there any other persons who may retain holdbacks?|
| Commentary: sometimes the arrangements between the owner and the lender who finances a construction project will call for the holdback to be retained by the lender. The Act permits this and sections 4(4) and 4(5) spell out the consequences of such an arrangement.
Note that these provisions only apply where the lender is a “savings institution.” This term is defined in the Interpretation Act and includes chartered banks and a number of “near banks.”
[See Interpretation Act, section 29]
A holdback may also be retained by the purchaser of an improvement.
|5.9||When should a holdback not be retained?|
Contracts where no
holdback is required
|Commentary: section 4(1) requires a holdback only with reference to contract or subcontract “under which a lien may arise under this Act.” As noted earlier, [paragraph 4.3], no further liens can arise in favour of persons engaged by or under architects, engineers, material suppliers or workers. For this reason, no holdbacks should be retained from these persons. This is made explicit in section 4(6).
|5.10||How long must a holdback be retained?|
|Commentary: the holdback must be retained for the “holdback period.” This is defined as the period of time calculated under section 8. The holdback period expires 55 days after the earliest of any three different events which may be applicable in the circumstances:
These concepts, and the running of time under the Act are described in greater detail in chapter 11.