Commonly-held Builders Lien misconceptions By Tim M. Sportschuetz Misconception 1: There are multiple separate holdbacks Contractors, subcontractors, and consultants often enquire which holdback to pursue if their accounts go unpaid. Many take literally the reference established by the British Columbia Builders Lien Act (BLA) “multiple holdback system”. In fact, the only actual retention of holdback funds takes place at the top of the construction contract pyramid. The “holdback” occurring at each lower contractual level is not the actual retention of further funds, but recognition that a party who has received payment net of holdback should be relieved of any obligation to pay amounts which have not been paid to it. The single actual holdback arrangement is reflected in Section 5 of the BLA, which requires that only the owner of a construction project establish a holdback account into which the minimum holdback monies are to be deposited: Section 5 does not mean that head contractors or subcontractors must establish holdback accounts for money held back from parties below them in the contractual pyramid. In summary, there is only one actual holdback of funds, holdback which should be retained by the owner with respect to a head contract. There exists one important caveat. If the owner entered into more than one head contract, the owner must establish separate holdback accounts and retain holdback funds on account of each head contract. General contractors, subcontractors, or other down-the-ladder participants are not required to establish holdback accounts or otherwise set aside additional funds to account for the holdback deducted 30
on payments. This reflects the intention that holdbacks secure, but not cumulatively choke off, payment.
Misconception 2: An owner must pay out the holdback money after the expiry of the holdback period Subsection 8(4) of the BLA uses discretionary language with respect to the payment out of holdback money: The drafters of the BLA were not concerned with what happens to holdback money after the expiry of the holdback period in the absence of lien claims. The
BLA only concerns itself with the retention of holdback money. Subsection 6(1) of the BLA specifically addresses how and when holdback funds may be applied with respect to the completion of a contract or subcontract: Once the 55-day holdback period has expired, the holdback money reverts to being contract funds and subject to the contractual equities affecting payment. In such circumstances, and subject to potential Subsection 6(1) considerations, an owner or other person holding back money pursuant to the BLA has a
Holdback Account 5 (1) Subject to subsection (8), and owner must a. Establish at a savings institution a holdback account for each contract under which a lien may arise. b. Pay into the holdback account the amount the owner is required to retain under section 4, and c. Administer the holdback account together with the contractor from whom the holdback was retained.
Holdback period 8 […] (4) Payment of a holdback required to be retained under section 4 may be made after expiry of the holdback period, and all liens of the person to whom the holdback is paid, and of any person engaged by or under the person to whom the holdback is paid, are then discharged unless in the meantime a claim of lien is filed by one of those persons or proceedings are commenced to enforce a lien against the holdback.
Prohibited application of holdback 6 (1) If a contractor or subcontractor defaults under a contract or subcontract, the required holdback must not be applied to the completion of the contract or subcontract, or for the payment of damages, or for any other purpose until the possibility of any lien arising under the person in default is exhausted.
Southern Interior Construction Association • Spring 2019
