Payment Holdback Required: Construction or Renovation Relations

Question: Why is it illegal to pay the final invoice in full upon project completion in Ontario?

Answer: In Ontario, it's illegal to pay the final invoice in full for construction or renovation projects due to a statutory requirement under the Construction Act, R.S.O. 1990, c. C.30. This law mandates a 10% holdback on payments to protect suppliers and contractors from unpaid dues, effectively safeguarding the project's financial integrity. Failing to adhere to this holdback requirement not only violates the statute but could also render the project owner liable for unpaid claims elsewhere in the supply chain. To navigate these complexities, consulting with professionals like Vagans Legal can ensure compliance and protect your interests.

Statutory Required Payment Holdbacks

Why It Is That Paying the Final Invoice In Full Upon Project Completion Is Actually Illegal

There are likely few times when paying an invoice in full is against the law.  Indeed, failing to pay an invoice in full is usually against the law by constituting as a breach of contract; however, in the realm of construction or renovation, meaning projects to improve a property, paying in full without retaining a holdback may be, and likely is, unlawful.

The Law

The Construction Act, R.S.O. 1990, c. 30, formerly known as the Construction Lien Act, statutorily requires the owner of a construction project or renovation project involving improvements to property, whether residential, commercial, industrial, agricultural, or other type, to holdback ten (10%) percent from payments due until the expiry of the time in which a lien may be preserved.  Furthermore, where a project owner fails to properly holdback payment as statutorily required, the project owner may be held liable for payment to any and all subcontractors, subtrades, suppliers, among others, who were unpaid by the contractor or subcontractors along the chain of supply.  Specifically, the Construction Act states:

Per the Construction Act as shown above, a ten (10%) percent holdback is required by each party within the hierarchy of a project to improve property, which includes construction or renovation projects.  Accordingly, the property owner is required to holdback ten (10%) percent from the general contractor who in turn is required to holdback ten (10%) percent from subcontractors and so on throughout the various layers of payors to suppliers of the project.  This holdback requirement expires when the risk of a lien being filed against the improved property expires which is, generally, sixty (60) days following completion of the project or completion of substantial performance (which is established by the issuance of a Certificate of Substantial Performance).

Interestingly, and most contractors will know this; however, small project owners, such as homeowners as laypeople will unknowing, the homeowner that pays the invoice from a contractor in full upon completion of a renovation contract, whether roofing, landscaping, building an addition, replacing kitchen cabinetry, or other household improvements, is required to holdback ten (10%) percent.  Failing to do so is a breach of trust whereas the Construction Act, statutorily, creates a trusteeship and by failing to act in accordance to the trusteeship, the homeowner, among others, could be found liable for breach of trust.

Conclusion

Owners of projects, along with everyone throughout the supply chain, from contractors to subcontractors, and so on, are required to holdback ten (10%) percent of payment upon the completion or issuance of a Certificate of Substantial Completion.  Generally, the holdback provision expires after sixty (60) days.