Common Legal Misconceptions Held by Construction Industry Participants

Misconception 1: there are multiple separate holdbacks

Contractors, subcontractors, and consultants often enquire which holdback to pursue if their accounts go unpaid. Many take literally the reference established by the British Columbia Builders Lien Act (“BLA”) “multiple holdback system”.

In fact, the only actual retention of holdback funds takes place at the top of the construction contract pyramid. The “holdback” occurring at each lower contractual level is not the actual retention of further funds, but recognition that a party who has received payment net of holdback should be relieved of any obligation to pay amounts which have not been paid to it.

The single actual holdback arrangement is reflected in Section 5 of the BLA, which requires that only the owner of a construction project establish a holdback account into which the minimum holdback monies are to be deposited:

Holdback account

5(1) Subject to subsection (8), an owner must

(a) establish at a savings institution a holdback account for each contract under which a lien may arise,

(b) pay into the holdback account the amount the owner is required to retain under section 4, and

(c) administer the holdback account together with the contractor from whom the holdback was retained.

Section 5 does not mean that a separate holdback account must be established for money held back from a subcontractor by a general contractor or from a sub-subcontractor by a subcontractor.

In summary, there is only one actual holdback of funds, holdback which should be retained by the owner with respect to a head contract. There exists one important caveat. If the owner entered into more than one head contract, the owner must retain holdback funds on account of each head contract and establish a separate holdback account for each head contract. General contractors, subcontractors, or other down-the-ladder participants are not required to establish holdback accounts or otherwise set aside additional funds to account for the holdback deducted on payments. This reflects the intention that holdbacks secure, but not cumulatively choke off, payment.

Misconception 2: an owner must pay out the holdback money after the expiry of the holdback period

Subsection 8(4) of the BLA uses discretionary language with respect to the payment out of holdback money:

Holdback period

8 […]

(4) Payment of a holdback required to be retained under section 4 may be made after expiry of the holdback period, and all liens of the person to whom the holdback is paid, and of any person engaged by or under the person to whom the holdback is paid, are then discharged unless in the meantime a claim of lien is filed by one of those persons or proceedings are commenced to enforce a lien against the holdback.

The drafters of the BLA were not concerned with what happens to holdback money after the expiry of the holdback period in the absence of lien claims. The BLA only concerns itself with the retention of holdback money. Of course, Subsection 6(1) of the BLA specifically addresses how and when holdback funds may be applied with respect to the completion of a contract or subcontract:

Prohibited application of holdback

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.

Once the 55-day holdback period has expired, the holdback money simply reverts to being contract funds and subject to the contractual equities affecting payment.

In such circumstances, and subject to potential section 6 considerations, an owner or other person holding back money pursuant to the BLA has a general common law right to set off against the holdback owed to a party below them in the contractual chain. While common industry practice is to hold back twice the estimated value of deficiencies, in the absence of contractual provisions dealing with set-off valuation, it remains unclear whether a party enjoys a legal entitlement to do so.

Parties to a construction agreement are therefore well advised to review whether express provisions in their respective contracting agreements deal with the payout procedure for holdback money after the expiry of the holdback period.  Should no such provision exist, then the party retaining the holdback is required to pay out the holdback money, subject only to its common law right to set off on account of deficiencies or incomplete work, since it is money due and owing to the party who it engaged under the construction agreement.

Misconception 3: the owner unilaterally issues a certificate of completion

Contractors and subcontractors are often under the mistaken impression that an owner must issue a certificate of completion without being requested to do so. This is not the law in British Columbia. The BLA expressly requires that a certificate of completion be requested, otherwise the owner is under no obligation to issue a certificate of completion. Subsection 7(3) of the BLA states as follows:

Certificate of completion

7(1) In this section, “payment certifier” means […]

(3) On the request of a contractor or subcontractor, the payment certifier must, within 10 days after the date of the request, determine whether the contract or subcontract has been completed and, if the payment certifier determines that it has been completed, the payment certifier must issue a certificate of completion.

The BLA language is clear. If a party to a construction contract wishes to have a certificate of completion issued with respect to its contract, then it must request a certificate of completion from the owner or the party with whom it contracted. An owner or contractor is under no obligation to issue a certificate of completion if no request is made for one.

A more nuanced issue may arise thanks to our progressive holdback release system. Under this system, a subcontractor or sub-subcontractor may apply to the payment certifier to have its holdback released prior to the head contract or improvement being certified or in fact complete. Section 9(1) of the BLA sets out the procedure for the progressive release of holdback:

Rights on payment of holdback

9(1) A contractor is entitled to receive, from the holdback retained by the owner from the contractor, an amount equal to the holdback amount applicable to a subcontract if

(a) a certificate of completion has been issued in respect of the subcontract to which the contractor was a party, and

(b) the holdback period established under section 8 (1) has expired without any claims of lien being filed that arose under the subcontract.

Assuming that the construction contract does not nominate a “payment certifier”, a sub-subcontractor may request a certificate of completion from the owner and/or the contractor:

Certificate of completion

7(1) In this section, “payment certifier” means

(a) an architect, engineer or other person identified in the contract or subcontract as the person responsible for payment certification, or

(b) if there is no person as described in paragraph (a),

(i) the owner acting alone in respect of amounts due to the contractor, or

(ii) the owner and the contractor acting together in respect of amounts due to any subcontractor.

In practice however, sub-subcontractors often request certificates of completion from the party who engaged them, namely the respective subcontractor. In light of the inherent risk of having its certificate of completion request not passed up the contractual chain, it is well-advised for a sub-subcontractor to make its certificate of completion request directly to the owner and the head contractor, and not to the party who engaged it (the subcontractor).

We encourage construction industry participants to seek timely advice from legal counsel with respect to builders liens issues, especially if you are looking to improve your company’s accounts receivables turnover ratio or suspect that you may not receive timely payment.