The Ontario Construction Act, formerly known as the Construction Lien Act, sets out various legal duties and obligations designed to address issues specific to the pyramid of players in the construction industry. Two core components of this legislative regime are the remedy of construction liens and the holdback obligations imposed upon industry players with respect to those below them in the pyramid. Players who are not paid can claim against the owner and the property itself, but the claim is usually limited to the holdback retained by the owner. There is a lack of clarity for many in the industry regarding how construction liens and holdbacks intersect.
The Construction Act’s holdback scheme is specific to Ontario. In several other provinces, only the owner of the property under construction is required to retain holdbacks. In Ontario, the Construction Act requires that each level of the construction pyramid retain a 10% percent basic holdback when paying those below them in the pyramid. As such, the owner is only required to pay the next level down in the pyramid, the general contractor 90% of its invoice and that general contractor is only supposed to pay its subcontractors 90% of their invoices. This pattern repeats down the pyramid with sub-subcontractors and so on. The money held back is supposed to function as a communal pot - a safety net for those in the construction pyramid who do not get paid, such as when someone becomes insolvent or bankrupt.
Under the Construction Act, the registration of a construction lien is a charge on the holdback funds. The construction lien attaches to the holdback with the holdback funds required to be used to pay out it and any other construction liens which have attached. However, the availability of holdback funds to pay a construction lien works in the same pyramid structure. The entire holdback held by the owner is not normally available to satisfy any one construction lien claim. Only the amount of holdback to be retained by the party above the level that should have paid the lien claimant is available to satisfy the lien claim. For example, where the lien claimant is a sub-subcontractor, the lien claimant has a claim against the amount of holdback to be retained by the contractor from the subcontractor (as the subcontractor was the level that should have paid the liening sub-subcontractor).
If the lien claim is considerably greater than the holdback amount, then the lien claimant may only be able to look to its ordinary payer for satisfaction. However, if the party above the payer in the construction pyramid receives written notice of a lien against the payer, that party must hold back the full amount of the lien before paying anything further to the payer (i.e. if any invoices have not yet been paid, those amounts owed should not be paid up to 90%, but rather the full amount of any lien claims held in addition to the basic 10% holdback). Consequently, all players in the construction industry should be aware of the holdback rights and obligations under the Construction Act as they not only affect the amounts available to satisfy lien claims, but lien claimants can take steps to increase the holdback obligations of other parties.