I am frequently asked by owners, contractors or construction
managers, which subcontracts or material supply contracts are
subject to lien holdback requirements? There is an easy answer to
this question, and a hard one.
The easy answer is that the Alberta
Builders' Lien Act only requires a lien holdback
by the owner. So, only those contracting directly with the
project owner are required by statute to submit to a 10%
holdback – and it is the owner, not the contractor, that has
the statutory obligation to hold back this amount.
It does not matter if the owner is dealing with a general
contractor, trade contractor, material supplier or other service
provider; if they have lien rights, and they are contracting
directly with the owner, then the owner should (indeed, must) take
a 10% holdback from them.
If the legislation does not require it, why is there usually a
10% holdback on subcontracts? The answer to this question is found
in the subcontract itself. In Alberta there is no statutory
requirement for holdback on subcontracts; but this requirement
is found in most subcontracts (including standard forms),
and arguably it is a standard industry practice in some sectors
even if there is no subcontract in writing. In other words,
subcontractors are not required by statute to allow for a 10%
holdback – but they are often required by contract to allow
for a 10% holdback.
There is good reason for the
contractor (the party contracting directly with the project owner)
to provide for a holdback in its' subcontracts. It is a
question of risk and cash flow. The contractor is at risk of
liability to the owner if liens are registered by subcontractors or
those further down the chain, so the holdback gives the contractor
a measure of protection. If the contractor will not receive
its' holdback until substantial completion, then in accordance
with the lien legislation, the contractor will want to protect
its' cash flow by taking a corresponding holdback from its'
This is one of those issues
that varies from province to province. For example, in
Saskatchewan, a holdback on subcontracts is required by statute,
unlike Alberta which leaves this issue to be dealt with by contract
Material Suppliers and Service Providers
What about material suppliers, or those who
supply only services? As far as the legislation goes,the same analysis applies.
However, in some sectors it is uncommon for material suppliers, or
those who supply only labour or services, to agree to a 10%
holdback by contract. Certain material suppliers have the clout to
refuse to allow holdbacks and for some reason lien holdbacks are
simply unusual for some service providers (particularly design
professionals). It is often overlooked that even these parties who
would purportedly refuse to allow lien holdbacks can't escape
the legislation; if they have lien rights, and they are in a direct
contract with the owner, the owner is not only permitted but
required to withhold 10% from them.
In short, it is a question of contract law as
to whether subcontractors, material suppliers and service providers
– those who are not in a direct contractual relationship with
the project owner – are subject to a holdback. In theory, the
contractor has to negotiate for this right when it is negotiating
payment terms with its' subcontractors, material suppliers and
service providers. In some sectors (i.e. the major trades), this is
no issue. In other sectors such holdbacks are not the norm. When a
party with lien rights refuses to agree to a holdback, the
contractor can negotiate the issue, incur the risk, or find another
party to contract with.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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