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Construction - Holdbacks. Homes by DeSantis (Lake) Inc. v Sutton Forming Inc.
In Homes by DeSantis (Lake) Inc. v Sutton Forming Inc. (Div Court, 2023) the Divisional Court considered the law of Construction Act holdbacks:[17] The motion below was based on the approach taken to payment of subcontractor liens taken in Urbacon Building Groups Corp. v. Guelph (City), 2009 CanLII 72065 (Ont. SCJ). The structure of holdback obligations under the Act was correctly summarized in Urbacon as follows (at paras. 20-26):The Act creates two holdback obligations. The first, sometimes called the “Basic Holdback”, is defined as “10 per cent of the value of the services or materials supplied under a contract or subcontract required to be withheld from payment by Part IV”.
Holdback obligations are owed by any “payer”. A “payer” is defined as an owner, contractor, or subcontractor who is liable to pay for the materials or services supplied to an improvement under a contract or subcontract. Section 22(1) of the Act provides that each payer upon a contract under which a lien may arise shall retain a holdback equal to 10 per cent of the price of services or materials as they are actually supplied under the contract until all liens that may be claimed against the holdback have expired (as provided in Part V of the Act), or have been satisfied, discharged, or provided for under section 44 (payment into court).
In this case, Guelph is a “payer” and was obliged to withhold payment of 10 per cent of the value of goods and services provided under its contract with Urbacon. Urbacon is a “payer” and was obliged to withhold 10 per cent of the value of the goods and services provided under its contracts with its subcontractors and suppliers.
Section 21 of the Act provides that the lien of a person is a charge upon the holdbacks required to be retained under Part IV of the Act, and, subject to subsection 17(3) of the Act, any additional amount owed by the payor to the contractor on the contract which was performed, in whole or in part, by the supply of services or materials giving rise to the lien. The holdbacks required to be retained under Part IV of the Act is the Basic Holdback, already described. The lien is a charge against the Basic Holdback, and also against “any additional amount owed” on the contract. This second aspect of the charge is sometimes referred to as the “Additional Holdback”.
There are important distinctions between the “Basic Holdback” created under Part IV, and the “Additional Holdback” described in s.21. Most notably for this motion, the charge created by s.21 is “subject to s.17(3)” in respect to the Additional Holdback. It is not “subject to s.17(3)” in respect to the Basic Holdback.
Subsection 17(3) of the Act permits a payer to set off outstanding debts, claims and damages claimed from a contractor against the amount owed to that contractor for work done on the project.
The combined effect of ss.21 and 17(3) is this. Subcontractor liens are a charge against the whole of the amount owed by the owner to the contractor under the contract. However, the owner is entitled to set off claims against the contractor in calculating the overall obligation, provided, however, that set-off claims cannot be applied to reduce the owner’s obligation below the amount of the Basic Holdback created in s. 22(1).[1] Thus Guelph’s minimum liability to the subcontractors is the lesser of the Basic Holdback and the aggregate of all valid and subsisting subcontractor lien claims. The statements of principle apply to the case at bar. DeSantis is the owner and is in the same position as Guelph was in the Urbacon case. Halton Forming is the Contractor and is in the same position as Urbacon. Sutton is a “Subcontractor” and is in the same position as the subcontractors in the Urbacon case. Pelosio is a sub-subcontractor, which makes it a “subcontractor” of Sutton.
[18] As stated in principle in Urbacon, DeSantis, as the owner, was required to withhold payment of 10 per cent of the value of materials and services provided to the improvement under the Contract. This is the “basic holdback” under the Act and is a fund for the benefit of Halton Forming’s subcontractors, in this case, Sutton. Halton Forming, in turn, was required to withhold payment of 10 per cent of the value of materials and services provided under the Sutton Subcontract. This, too, is a “basic holdback” under the Act and is a fund for the benefit of Sutton’s subcontractors – in this case the sub-subcontractors, including Pilosio.
[19] The motion judge correctly cited and followed Urbacon (Decision, para. 14b). The motion judge calculated DeSantis’ minimum basic holdback obligation relying on MLM’s payment certificate as applied to the Contract price to arrive at a basic holdback figure of $638,603. This was the correct way in which to proceed.
[20] DeSantis argues that the motion judge erred in calculating the minimum basic holdback as he did. The motion judge considered DeSantis’ objections and found as follows on this point:The certificate was given by DeSantis’ own agent under the contract. The contract gives it [DeSantis] a time in which to issue an amending certificate, which it has not done. Its objections to the certificate are not particularized or documented. It has not discharged its onus to disprove the contract price and level of completion. DeSantis is not in any event entitled to set deficiency claims off against the holdback. See s. 30 of the Act. I agree with this analysis, and the factual findings within it disclose no palpable and overriding error and were available to the motion judge. The certificate was evidence of the value of goods and services provided under the Contract. The motion judge was entitled to reject bald assertions by DeSantis respecting calculation of the basic holdback, and the motion judge was entitled to rely on DeSantis’ failure to correct the payment certificate. Alleged deficiencies may not be set off against basic holdback, a fundamental point stated in Urbacon and applied by the motion judge.
[21] DeSantis argues that the motion judge effectively granted summary judgment on contested subcontractor claims. It argues that he was not entitled to do this without a motion for summary judgment and without a proper record meeting the test for summary judgment. The motion judge reasoned as follows in respect to this objection:Section 67 of the Act gives me the power to follow a procedure that is “as far as possible of a summary character.” I interpret “as far as possible” to mean that I can make an order provided the record is sufficient to let me decide the question fairly and efficiently without the need for further procedure, something like summary judgment. The interlocutory proceeding is permitted by s. 67(2), as it will expedite the resolution of the issues in the dispute. The holdback provision, along with the rest of the Act, is designed to protect the subcontractors at the lower end of the pyramid from the hardship of litigation delay. There is no reason for subcontractors with clear entitlement to wait until the issues between the major parties are completely disposed of: Urbacon v. Guelph (City), [2009] O.J. No. 5531 (SCJ). Sutton is not at the lower end of the pyramid, but it, too, is entitled to protection. I would also note as follows in the context of this case. Sutton and Halton Forming agreed to the payments to Sutton’s subcontractors. Those payments are a credit to the balance owed to Sutton by Halton Forming, and a credit to the balance owed to Halton Forming by DeSantis. Halton Forming agreed to the payment to Sutton. The Contract is a stipulated price contract. DeSantis has no interest in the accounting between Sutton and its subcontractors, or between Halton Forming and Sutton.
[22] I appreciate that deficiency claims – and consequent set-off claims – may be asserted at each rung of the construction ladder. To the extent that such claims are asserted at each rung of the ladder, this may impact on the availability for an early order for payment from holdback. That is not this case. A deficiency claim by owner against contractor does not impede payments from basic holdback to subcontractors and their suppliers in the absence of parallel deficiency claims at each applicable rung of the construction ladder.
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