Release of holdbacks

An awful lot of cash sits every day in holdback accounts. That cash waits there, ever so patiently, until such time as somebody says or does the right things to have it released.

If you are an owner, this situation suits you just fine. The cash in the account provides an owner with some security – if a last minute problem arises with your contractor you know you have this money in reserve.

If you are a contractor, you want that cash paid to you as soon as possible. Not only is that money imperative for your cash flow, your payment risk vanishes as soon as that final payment comes in.

An understanding of the rules governing holdback releases is therefore worth your time.

In BC, the Builders Lien Act allows for progressive release of holdback. That means as soon as a contract or a subcontract is substantially performed, the contractor or a subcontractor can apply for a release for the holdback under its contract.

The mechanism for doing so is a simple one. All that is required is a written request to the payment certifier for a determination as to whether the contract or the subcontract has been substantially performed.

The payment certifier can be different entities on the project – often the architect but, sometimes the general contractor for trades. If it is unclear who is to certify payment under your contract, either ask the party you contracted with, or send your request to all the potential payment certifiers.

Once your request has been made, the payment certifier is legally obligated to determine within ten days whether the contract has been substantially performed. The determination must be done properly, using the tests for completion set out in the Act (in most cases that will be the 3-2-1 substantial performance formula).

Unfortunately, payment certification requests are often ignored for substantial periods of time. Unless some friendly pressure is applied, it typically is not a high priority in accounting departments to expedite a contractor’s or subcontractor’s holdback release.

Fortunately for those requesting a holdback release, the Act provides a mechanism with which to apply some pressure. Section 7(8) of the Act states that a payment certifier that receives a request and who fails or refuses to issue the certificate without good reason is liable to anyone who suffers loss or damage as a result.

Accordingly, if you are a contractor or subcontractor and you want your holdback, remind your payment certifier of their legal obligations. A friendly reminder of their legal liability under section 7(8) will usually get their attention.

If you are a payment certifier, be aware that a request for a determination that a contract is complete is not a mere administrative request, it is a formal legal request that comes with a legally mandated requirement to respond, and legal liability for failure to respond within the required time.

Norm Streu is the President & Chief Operating Officer of the LMS Reinforcing Steel Group. Christopher Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin + Lang LLP.