Most building projects involve a “chain” of contracts entered into among the owner and contractor, and the contractor and its subcontractors, and so forth. There is no limit to the number of “links” in the chain of contracts and its size will usually vary based on the size of the project. The Builders Lien Act, S.B.C. 1997 c. 45 requires each party (link) on the chain retain 10% of the amount owed to the party below them on the chain, except for the last link. These holdback funds provide some security to parties lower down the chain if an intermediate link fails to pay them, as they may claim against the holdback funds retained from the defaulting link. This requirement exists whether the project is a $10,000 project or a multi-million dollar project.
Parties often ignore the requirement to retain a holdback. If a party fails to retain a holdback, it may be liable for up to the amount which they should have retained from the party below them on the chain. In other words, if a party fails to retain a holdback, it may end up paying twice: once to link below them on the chain, and again to that party’s subcontractors if they are unpaid. The consequences of failing to retain a holdback may be considerable where the defaulting party is responsible for a large part of the project. For example, if an owner hires a contractor to build a project valued at $500,000 but does not retain a $50,000 holdback over the course of the project, the owner may be liable to pay any unpaid subcontractors up to $50,000 above the $500,000 already paid to his contractor.
There are many nuances to the holdback scheme under the Act such as requirements for the establishment of dedicated holdback accounts for projects worth over $100,000, and the timing of the release of holdbacks upon completion of contracts. Certain government entities are also exempt from the holdback requirements of the Act. Those unfamiliar with their holdback obligations should obtain legal advice before embarking on a project, or if they have failed to retain a holdback and are now asked to pay the amount which should have been retained. There are several technical defences under the Act which may be limit a party’s liability in such circumstances.
