What is the holdback anyway?
By Dirk LaudanConstruction Law
One of the basic elements in builders lien law in British Columbia is the 10 per cent mandatory holdback. Anyone making a payment on account of a construction contract or subcontract is entitled to retain, from those payments, 10 per cent of the amount of the payment. The other side of the coin is that the lien liability of the owner, to subcontractors of the payee (the person from whom the holdback was retained), is limited to the same 10 per cent amount (or more, if more is actually retained). This means the person retaining the holdback should have, in theory, enough money to pay all of the liens of subcontractors hired under the payee.
If you pay a subcontractor for work, you should not have to pay its suppliers again for the same work – you will have enough money in the holdback to pay them all. If necessary, the person retaining the holdback can get a court order that will remove the liens of subcontractors of the payee, and then all of those subcontractor liens are removed from title to the project property when the holdback is paid into court. The unpaid subcontractors can make claims against the holdback, but if there is a shortfall, they have to share among themselves. They cannot go after the land any longer.
There are exceptions to the holdback requirement. For instance, there is no right to retain a holdback from a material supplier (unless the supplier also provides work), a consultant, or a supplier not directly involved in construction. There is an unresolved question about whether a holdback is necessary on a project that is immune to lien claims.
There are other complications. One of them is that the holdback can be subject to claims by subcontractors who did not, in fact, file valid liens on title. This can makes life difficult for subcontractor lien claimants trying to access holdback funds in court, or to an owner considering whether the holdback can be released to the general contractor.
Another complication came up in a recent court decision by Mr. Justice Dev Dley of the BC Supreme Court. In that case, Iberdrola Energy Projects Canada Corp v. FSE Energy, the general contractor had hired a boiler installer for industrial projects in Merritt and Fort St. James. The boiler installer ran into financial problems and failed to pay some of its subcontractors. As a result, to keep the project going, the general contractor advanced money to the boiler supplier’s subcontractors directly, at an increased cost. Then, the boiler installer defaulted and left the site. At that point, the general contractor had paid $62 million to the boiler supplier. Adding the amounts paid directly to subcontractors, however, the general contractor had paid more than $74 million. Several of the boiler supplier’s unpaid subcontractors filed liens, in significant amounts. The central issue in the court decision was whether the holdback, which the general contractor had to pay into court to remove those liens from title was 10 per cent of $62 million, or 10% of $74 million. This made a difference of more than $1 million to the general contractor.
Judge Dley’s reasoning was that the general contractor and the boiler supplier had simply changed the manner in which the subcontractors were paid. The contract had remained the same, except that the general contractor had agreed to pay a higher price, and payments were made by agreement in a different manner. The general contractor had a right, all along, to retain the 10 per cent holdback from all of the payments, including the ones that it made directly to subcontractors. To remove the liens from title, the general contractor had to pay into court the full 10 per cent amount it had been entitled to hold back, not just the lesser amount that it had actually held back.
This decision is a logical application of the principles in the Builders Lien Act, harsh as it was for the general contractor. That said, it seems unfair for a general contractor taking additional steps to ensure subcontractors are paid to be punished by having to pay more into court.
It does, nevertheless, provide a useful lesson in the law of builders liens. Rights and procedures under the BC Builders Lien Act are governed by strict rules. Failure to follow those rules, to the letter, jeopardizes rights and protections under the Act. A lien filed a day late is expired, and no judge, however sympathetic to an unpaid lien claimant, can revive it. A certificate of completion that is not formally requested, properly issued, and properly posted on site has no effect, and an owner who relies on it to release the holdback to the contractor may be put in difficulty. The holdback must be calculated precisely, following the wording of the Act.
There are considerable benefits of builders lien rights to the construction industry. These include the luxury of entering into building contracts without having to provide, in contracts and related business arrangements, for security of payment. This reduction in transaction cost is enjoyed by both owners and builders. And builders and suppliers are more likely to obtain payment for the work they do. But these benefits come at a cost, which is the necessity of concerning oneself with the details and proper application of an intricate, unforgiving, and sometimes vexing law.