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Construction - Holdbacks. Sayers Foods Ltd. v. Gay Company Ltd.
In Sayers Foods Ltd. v. Gay Company Ltd. (Ont Div Ct, 2026) the Ontario Divisional Court dismissed a statutory JR, this brought against an adjudicator's order for "the Applicant to pay $685,574.91, plus interest .... pursuant to the prompt payment regime in the Construction Act" [under Part II.1 - Construction Dispute Interim Adjudication].
Here the court considered Construction Act 'holdbacks':(a) Notice Holdback
[49] Gay Co’s applications for payment did take account of Sayers’ obligation to maintain a “basic” holdback of 10% of the value of services and materials provided to the improvement. Sayers argues that, in addition to the “basic” 10% holdback, it was required to maintain a “notice” holdback in respect to the amount of any claims for lien registered against the project.
[50] Sayers is correct that “[a] requirement to pay an amount in accordance with this section [the prompt payment adjudication regime] is subject to any requirement to retain a holdback in accordance with Part IV [of the Act]” (Construction Act, s. 13.19). “Any” requirement to maintain a holdback includes the requirement to retain the “basic” holdback and “notice” holdback (Construction Act, ss. 22 and 24)).
[51] As noted above, the Adjudicator found that “notice” holdback obligations do not arise for an owner unless “written notice” of the lien is given to the owner by the claimant.
[52] Gay Co. argues that this finding is wrong in principle and unreasonable because it “[disregards] the legal constraints in the Act with respect to how additional holdback works when a party has “actual notice” of a registered construction lien” (Factum, para. 67). Gay Co. cites authority from the Superior Court and from this court in support of this position: Urbacon Building Groups Corp. v. Guelph (City), 2009 CanLII 72065 (SCJ); Basic Drywall Inc. v. 1539304 Ontario Inc., 2012 ONSC 6391 (Div. Ct.).
[53] This analysis is problematic for two reasons. First, it overstates the authorities upon which it is based. Urbacon was a decision focused on finding the “undisputed basic holdback” and then ordering payments to subcontractors from this amount – against which a set-off claim could not be asserted by the owner. “Notice” holdbacks were not included in the calculation, and no findings were made respecting what kind of “notice” to an owner was required to give rise to a notice holdback obligation. In Basic Drywall, the court did find that “any notice [of a construction lien] before actual payment” would be sufficient to give rise to notice holdback obligations (at para. 24). However:(a) The court, in Basic Drywall, was not concerned with the form of notice given, but rather with the timing of that notice; and
(b) The Construction Act and its regulations were amended when the prompt payment provisions were added, including amendments related to the form of notice to be given to an owner of registration of a construction lien [SO 2017, c. 24, s. 2].[7] [54] The applicable definition of “written notice of lien” in s. 1(1) of the Act means “a written notice of a lien in the prescribed form, given by a person having a lien.”[8] This definition precludes mere “actual notice” obtained by an owner doing a title search and discovering that a lien has been registered. In this way, the Legislature has permitted a lien claimant to register a claim for lien without triggering notice holdback obligations, so that the claimant may protect its right to pursue a lien and may also cooperate with the efforts of its contractor to pursue the same funds, faster, through a prompt payment adjudication. The notice must be given “to” the owner “by” the person having a lien, in the “prescribed form”.[9] If these conditions have not been met, then notice has not been given and notice holdback obligations do not arise. See Ziebarth Electrical Contactors Ltd. v. 2461476 Ontario Inc., 2021 ONSC 3360, paras. 45-51, per Master Kauffman (as he then was). Ziebarth states the law correctly on this point. Further, prior to Ziebarth, mere registration of the claim for lien was held not to be sufficient to constitute the requisite notice to give rise to notice holdback: Belmar Sheet Metal Co. v. 849539 Ontario Inc. (1995) 24 CLR (2d) 28 (Ont. SCJ Master); Hal Mann Tiles Inc. v. Palmer (1995), 1995 CanLII 7093 (ON SC), 24 OR (3d) 93 (Master).
[55] The applicable definition provides that a subcontractor may register a construction lien so as to preserve its rights within the time periods stipulated by the Act but may also choose not to give “written notice” of the claim for lien so as to trigger notice holdback obligations and thereby frustrate an application for prompt payment. In this way, a subcontractor lien claimant may maintain its lien rights while also delaying asserting those rights against the notice holdback, in the hopes that an order for prompt payment will result in faster payment than would litigation of lien claims before the courts. These provisions are in accordance with the recommendations in Striking the Balance, the Report that led to the prompt payment amendments to the Act: “there is a need not only to preserve rights under the current Act, but also to attempt to ensure that the preservation of those rights does not defuse the potential usefulness of the adjudication regime.”[10]
[56] In its factum, Sayers argues as follows:The Adjudicator… simply interpreted section 24(2) as only being triggered if an actual “written notice” is provided, notwithstanding an Owner already has actual notice of registered construction liens. He misunderstood notice holdback in this scenario, and then stepped beyond his statutory authority limited by s. 13.19, as well as ss. 21 and 24(2) of the Act, and ordered payment in breach of holdback obligations. The logic is arbitrary, as it suggests that a subcontractor would attain greater rights by simply serving a letter indicating it was going to register a lien, but obtain lesser rights by actually registering that lien and the owner receives notice of it. (Factum, para. 74) [57] With respect, the Adjudicator did not “step beyond his statutory authority”. The Adjudicator has jurisdiction to determine “basic” and “notice” holdback obligations and to apply those findings in the course of the adjudication. And that is what the Adjudicator did in this case. There is no evidence in the record establishing that Sayers received written notices from subcontractors giving rise to notice holdback obligations: Sayers’ argument that its discovery of liens registered on title constituted such notice is wrong in law, and the Adjudicator made no error in rejecting that argument on the merits.
[58] As noted above, the Adjudicator found that Sayers had conceded this point during argument. Before us, Sayers denies that this point was conceded. There is no transcript or recording of the hearing before the Adjudicator filed in this application, and so we have no way to assess whether the point was actually conceded. However, we would not rest our decision on the Adjudicator’s finding that the point was conceded. The record discloses no basis for finding that written notice was given by subcontractors to Sayers, and thus the Adjudicator was correct, in law, in finding that notice holdback obligations did not arise. Inquiry into the “concession issue” would not change the bottom-line conclusion on this issue.
[59] The court appreciates that payment of a prompt payment determination – and resulting payments by a contractor to subcontractors and suppliers – may have an impact on the quantum of subsisting liens and security required for those liens. Those are matters to be addressed in the lien proceedings, after the determination has been paid – adjudication and prompt payment are not to be delayed while those issues are sorted out. See: Okkin Construction v. Apostopoulos, 2022 ONSC 6367 (SCJ), per S.E. Fraser J.; Pasqualino v. MGW Homes Design Ltd., 2022 ONSC 5632 (Div. Ct.), per Ricchetti RSJ. . Sayers Foods Ltd. v. Gay Company Limited
In Sayers Foods Ltd. v. Gay Company Limited (Div Court, 2024) the Divisional Court grants a consent stay action against Construction Act (CA) adjudicator's decision, here in the course of a CA 'prompt payment' JR.
Here the court considers CA 'holdback' treatment:[6] As was confirmed during oral argument, the improvement has been completed and the contract price for the improvement was about $7.2 million. Basic holdback is thus about $720,000. Subcontractor claims, enforceable against basic holdback, are largely uncontested to a value of about $500,000, with additional subcontractor claims of about $150,000 not being contested by the Responding Party, but which the Moving Party submits are out of time.
[7] The amount of the Adjudicator’s determination is less than the amount of Basic Holdback.
[8] The Construction Act provides that any funds paid to the Responding Party pursuant to an Adjudicator’s determination are to be used to pay down amounts owed to subcontractors.
[9] The Moving Party is not entitled to assert set-off claims it has against the Responding Party against basic holdback available to satisfy subcontractor lien claims.
[10] On one theory of the facts, the Moving Party will be required to pay about $500,000 in basic holdback to subcontractors. On another, the Moving Party will be required to pay the entirety of the Adjudicator’s determination, and more, in basic holdback to subcontractors.
[11] I understand the Moving Party’s concern that, if it pays the determination to the Responding Party now, if those funds are not applied to subcontractor claims to reduce the claims against basic holdback, the Moving Party could be called upon to pay more later. I also understand the Moving Party’s concern that payment of the Adjudicator’s determination will leave the currently registered claims for lien on title. These are issues that may be raised before the application panel.
[12] In my view it is beyond dispute that the Moving Party will be required to pay most, perhaps all, of the Adjudicator’s determination to the Responding Party’s subcontractors. I see no reason why this payment should have to await the extended litigation that may be required to decide the lien claims between the Moving Party and the Responding Party. Any issue about the proper application of the funds, reduction in lien security upon payment of those funds, and related issues, may be addressed by the application panel or as that panel may direct.
[13] Finally, I note that this court has endorsed early payment of established subcontractor claims from minimum holdback, and consequent reduction in lien security: Homes by DeSantis (Lake) Inc. v. Sutton Forming Inc., 2023 ONSC 2628 (Div. Ct.), applying Urbacon Building Groups Corps. V. Guelph (City), 2009 CanLII 72065 (ON SC). This court has not addressed how the process of retiring subcontractor claims in lien proceedings may be affected by a prompt payment determination. However, the parties need not await a decision from this court on these issues to order their affairs appropriately: if the parties consent to payment out of some or all of the funds paid into court to retire subcontractor claims against basic holdback, they may request an appropriate consent order from the court. . 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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