Not so long ago, the Court of Appeal upheld a trial judgment
that sanctioned a project owner for having retained "abusive
holdbacks" from a general contractor (Développement
Tanaka inc. v. Commission scolaire de
Montréal, 2007 QCCA 1122)). In this latest decision
however, the project owner was sanctioned for having released the
holdbacks too early, to the detriment of subcontractors and the
surety for wages and materials. The situations covered by this
recent decision are markedly different and the major takeaway is
that contract holdbacks must be carefully and thoughtfully managed.
They must neither be held overly long nor released too
Essentially, the June 10 decision holds that the subcontractors
and the subrogated surety have a direct right of action against the
project owner if the latter releases holdbacks other than as
provided in the master contract between it and the general
In this case the master civil engineering contract provided the
"Regardless of the type of security provided by the
contractor, where the Ministry of Transport receives written notice
from a person covered by a surety for wages, materials and services
to the effect that such person has not been fully paid for work
performed pursuant to that person's contract and for which part
payment has already been received, the general contractor must, in
order to obtain complete monthly payment for work performed,
deliver to the supervisor a release or other proof of payment
attesting that it has discharged its obligations for wages,
materials and services. Otherwise the Ministry shall withhold, from
the amount due to the general contractor, the amount required to
pay the person who gave the notice."
The Ministry, the project owner in this case, was notified
several times that certain subcontractors had not been paid. The
Ministry nevertheless paid the general contractor without retaining
any holdbacks and without requesting releases from the
subcontractors. The latter sued the general contractor and the
surety, and almost simultaneously the general contractor went
bankrupt. The surety then decided to sue the Ministry on the
grounds that it should not have released the contract holdbacks
without being in possession of the releases.
The Court of Appeal sided with the surety and overturned the
trial judgment, pointing out in its decision that the master
contract between the project owner and the general contractor
contained many "stipulations for
another"1 that were for the direct benefit of
the subcontractors and by virtue of which they could directly sue
the project owner.
To summarize, construction project owners and contract managers
should be extremely careful in managing contract holdbacks.
Otherwise, they risk paying for the same work twice or being
ordered to pay damages for abusive holdback practices.
1 Civil Code of Québec, Article 1444
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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