May 5, 2025
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Rethinking the Elimination of the “Notice of Non-Payment of Holdback”: Part III in a Series on Changes to Ontario’s Construction Act
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In our introductory article in this series on forthcoming changes to Ontario’s Construction Act, we advised that we would follow up with targeted articles to drill down into specific aspects of the revised legislation. In Part II of the series, we focused on the mandatory annual release of holdback, on the corresponding annual expiry of lien rights and on how the impact of those changes might be managed. In this article we will drill down on how, and why, the elimination of a payer’s ability to give a “Notice of Non-Payment of Holdback” under section 27.1 of the Act matters.
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The Context of the Change
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Understanding the significance of section 27.1’s repeal requires an understanding of how the “Notice of Non-Payment of Holdback” came to be in the first place. Construction payers have historically had common law and contractual rights to set-off against the holdback, for deficiencies, incomplete work or other claims (such as delay), at the end of the lien expiry period. As Bruce Reynolds and Sharon Vogel described this right in their Report, Striking the Balance: Expert Review of Ontario’s Construction Lien Act:
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“Once all liens that may be claimed against the holdback have expired, the funds lose their status as holdback and become merely funds owing to the contractor pursuant to the contract. When this occurs, the owner may set-off any debts or claims it has against the contractor, whether related to the project or not.” [1]
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Accordingly, at common law (and unless their contract said otherwise) owners could apply set-offs against the holdback once all subcontractor liens that might be preserved against it were expired, discharged or vacated. This changed, however, when the “prompt payment” provisions of the Construction Act were introduced in 2017. These changes limited the set-off rights further to recommendations made in Striking the Balance, after Reynolds and Vogel had discussed the issue with dozens of construction industry stakeholders. In this regard, the authors reported:
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“A significant concern raised by owner stakeholders, with respect to the mandatory release of holdback relates to an owner’s right to set-off legitimate claims against any amount owing to a contractor, which includes the amount of the holdback once it loses its character as such”; [2] and
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“…contractors and subcontractors are not opposed to the application of the owner’s right of set-off where appropriate and necessary, but they take issue with the potential for abuse of the permissive language. This concern relates to exaggerated amounts being retained, without prior notice, for extended periods of time.” [3]
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In sum, then, Reynolds and Vogel reported that owner, contractor and subcontractor stakeholders alike agreed that some right of set-off against the holdback should be maintained, so long as it was exercised with proper notice, and so long as set-off disputes were addressed in a timely fashion. Reynolds and Vogel accordingly recommended that the owner’s right of set-off only be allowed where it publishes a “Notice of Non-Payment of Holdback” in accordance with the Construction Act within 40 days of the publication of the Certificate of Substantial Performance.
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Reynolds and Vogel’s recommendation was accepted and passed into law through the introduction of the “Notice of Non-Payment of Holdback” requirements at section 27.1 of the Act, one of the many Reynolds and Vogel’s “prompt payment and adjudication” recommendations which became law when the Construction Lien Act was changed to the Construction Act in December of 2017. These changes would then become effective pursuant to complicated and problematic transition provisions which we have discussed elsewhere.
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As discussed in previous articles, Reynolds and Vogel also recommended that the changes be reviewed after 5-7 years. Duncan Glaholt, a very well-known and respected construction lawyer, arbitrator and author, was tasked with conducting this review. Mr. Glaholt’s Report in this regard, The 2024 Independent Review: Updating the Construction Act, was released on October 30, 2024. This was the same day that Bill 216, which implemented his recommendations, passed first reading in the legislature. Within a week, Bill 216 became law. Stakeholders were thus given no opportunity to review or comment on either Mr. Glaholt’s Report or the wording of the changes, before they were passed into law.
The Rationale for Deleting the Section 27.1 Right of Set-Off
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On Mr. Glaholt’s recommendation, section 27.1 was deleted from the Act. With it, the balance struck by Reynolds and Vogel was eliminated. The deletion goes starkly against what Reynolds and Vogel had said owner, contractor and subcontractor stakeholder groups agreed was appropriate.
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It appears Mr. Glaholt did not consult with these stakeholders about the recommendation. It rather appears that he proposed the deletion only after discussing tweaks to s.27.1 which had been suggested by stakeholders as a way to make the section clearer: changing the word “if” to “only if” and changing the words “refuses to pay” to “has not paid”. [4] After summarizing the issue raised by stakeholders in that regard, Mr. Glaholt wrote:
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“It seems to me that a simpler way to address this point, as I have recommended, is to provide a province-wide scheme for the mandatory annual release of holdback throughout the construction pyramid”; and
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“If my recommendation to enact mandatory annual release of holdback is accepted, then I would recommend that s. 27.1 be repealed.”
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In support of the deletion, Mr. Glaholt further wrote as follows:
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“statutory holdbacks represent money that an owner has already acknowledged (or an adjudicator has determined) is earned, due, owing, and payable upon a ‘proper invoice’. By that time all contractual rights, to setoff for example, will have been resolved, one way or another. Thus, the owner should have no further claim upon statutory holdback at the time of release.”; and
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“The correct time under the Act to withhold payment for claims and deficiencies is at the time of receipt of a proper invoice, which triggers the parties’ rights to access adjudication and fair determination of any payment issues. Section 27.1 is not intended to allow an owner a second chance to raise payment issues”. [5]
The suggestion that holdback is “earned” when it is held back from an approved payment is not new. Indeed, Reynolds and Vogel referenced it in Striking the Balance, citing the 1980 Ministry of the Attorney General’s Discussion Paper (which preceded the move from the Mechanics Lien Act to the Construction Lien Act in 1983) in that regard. [6] It is also true that on many (if not most) sophisticated projects a consultant will have reviewed the contractor’s monthly progress application and approved it for payment, before the holdback is applied. This, in our view however, should not dictate that holdback amounts be immune from at least limited rights of set-off. We say this for four reasons.
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First, we can’t agree that the correct time to review for deficiencies is when a monthly invoice is presented for payment. Such an expectation, we suggest, runs contrary to what generally happens in construction, where deficiency (or “punch”) lists are most often prepared when the work in question nears completion. In this regard, monthly progress assessments for payment purposes on sophisticated projects are most often made using a schedule of values, based on quality and not quantity: the payment certifier reviews the percentage complete relative to the value on the agreed upon schedule, without reviewing for deficiencies. While qualitative reviews are sometimes conducted on a monthly basis, it is in our experience hardly the norm. We believe that imposing a burden on construction payers to perform such qualitative reviews will result in inefficiencies and costs not currently budgeted for. The administrative burden will, in our view, be most particularly hard on owners, who already face enhanced obligations and tight timelines in relation to contractor invoices: they must determine if such invoices are proper within 7 days, after which they must determine whether the invoice is payable within a further 7 days. It will be difficult for owners and their consultants to have to perform qualitive deficiency reviews, as well, during this timeframe.
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Second, it will often be virtually impossible for payers to review for deficiencies on a monthly basis. Consider, for example, systems which need to be commissioned upon startup (such as an HVAC or building automation system), work that must be resistant to freeze-thaw-cycles, or work which must be sized, plumbed, leveled or sloped to support subsequent work which is months away from commencement. In each case, it will be virtually impossible for a payer to determine whether or not the work is deficiency free.
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​​​​​​​​​​​​​​​​​​​​​​Third, we can’t agree that, prior to the holdback coming due, “contractual rights, to setoff for example, will have been resolved, one way or another”. This presumes that payers will engage adjudication to carry most of their backcharge claims through to resolution prior to the expiry of applicable lien period(s). Many disputes, however, will not be sufficiently ripe for adjudication to allow for such timely resolutions: such as where they arise only recently, where damages may not have yet crystalized, where the parties have been negotiating a resolution and where it might not make economic or business sense to adjudicate until it is absolutely necessary.
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Lastly, while we agree that the holdback is not intended to be used as security for backcharge claims, it has nonetheless been used for that purpose for decades. Eliminating any right to use the holdback in this fashion therefore significantly changes the risk allocation profile between parties to most construction contracts and subcontracts in Ontario. Under the new regime, for example, where the payee abandons the job without cause prior to completion, it will be entitled to its holdback anyway, without deduction, regardless of how substantial the completion costs will be, and regardless of the extent to which the payee will be able to repay the amount if judgment for completion costs is later obtained against it. Similar problems arise, of course, where the payee has caused significant physical damage to the work of others, where it’s work is so deficient that it must be removed and replaced at significant cost or where it is responsible for delays which have caused significant financial impacts. In each case, the defaulting contractor or subcontractor is entitled to the immediate payment of its holdback, even if a certain and substantial backcharge against it is looming. Simply put, payees have to pay anyway and then chase the payee to recover the money, even if that person is likely insolvent.
The Likely Impacts of the Deletion
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We believe construction industry participants will respond to the deletion of s.27.1 in a number of different ways. First, many who retain holdback will see the need to conduct, or pay for, qualitative deficiency reviews on an invoice-by-invoice basis. Contractors who do so will need to include for these additional reviews in their contract prices, and construction costs may increase as a result.
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Owners might require their contractors to provide additional quality control documentation (such as site surveys or third-party sign-offs) as backup to their proper invoices. They might also require proper invoices to be submitted less-than-monthly, to lower the frequency with which they will have to conduct the deficiency reviews, etc. (The Act allows parties to the contract to add proper invoice requirements and allow for less than monthly invoicing). Contractors and subcontractors will need to be aware of any such requirements and accommodate for them in their pricing as appropriate.
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More significantly, those who previously relied on the holdback as security against deficiencies will no doubt replace that security, through the imposition of a so-called “deficiency”, “warranty”, “maintenance” or “contract retention” holdback in their contracts or subcontracts. Where this occurs, of course, the deletion of s.27.1 may not have the desired effect: contractors and subcontractors will still have monies withheld as security for deficiencies, but the amounts will be greater (with the deficiency retention now being held on top of the Construction Act holdback). This may put more, and not less, financial stress on those the deletion is intended to protect.
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It is also, in our view, likely that the deletion of s.27.1 will lead to increased performance bond requirements, particularly in relation to subtrade bonding, as both contractors and their bonding companies look for ways to better guard against potential defaults by the subcontractors below.
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Those looking “up” the construction ladder will, of course, have to take care to review tender packages and proposed contract documents to determine how those above intend to manage the risks associated with the deletion of the s.27.1 rights of set-off. There is no question that contracts will be changed to address these risks. We are, for example, already seeing an increase in requests for deficiency holdbacks and subtrade bonding.
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Closing Thoughts
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In the end, and for what it might be worth, we don’t believe the deletion of s.27.1 is necessary or beneficial over-all. We believe that Reynolds and Vogel struck a proper balance in recommending the “Notice of Non-Payment of Holdback” requirement as a way to preserve, in a limited way, the rights of set-off which had been available for decades. We also believe that stakeholders should have been consulted about the change before it was implemented. We believe the deletion unreasonably changes risk allocation norms, particularly in the way it presumes that owners and contractors can, and will, conduct monthly reviews to determine whether or not work, which is still in progress, is deficient. We also believe the change will lead to increased construction costs where parties attempt to conduct such monthly reviews and where additional bonding requirements are imposed. We finally believe the deletion will in many circumstances lead to the imposition of contract deficiency holdbacks, to be held in addition to the Construction Act holdback, such that more (and not less) financial stress will be put on those the deletion is intended to help. In the end, we believe the existing balance struck by Reynolds and Vogel should be retained and that, if possible, the deletion of s.27.1 should be reconsidered.
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Rob Kennaley and Rachel Prestayko
Kennaley Construction Law
[1] Bruce Reynolds and Sharon Vogel, “Striking the Balance: Expert Review of Ontario’s Construction Lien Act”, Report Prepared for the Ministry of the Attorney General and the Ministry of Economic Development, Employment and Infrastructure, Delivered April 30, 2016), section 5.1
[2] at section 5.2
[3] at section 5.3
[4] at p. 21 of his Review
[5] at P 22 of the Review
[6] Striking the Balance, section 5.1
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