A Primer for Owners and Contractors
The Alberta Prompt Payment and Construction Lien Act (the "PPCLA") establishes a system of major and minor lien funds and holdbacks, designed to protect lien claimants while promoting project solvency, and the smooth flow of funds from the top to the bottom of the project construction pyramid. Whether you are determining your statutory holdback obligations at the start of the project or navigating the "amount payable holdback" provisions and potential set-off rights following the filing of a lien, compliance with and understanding of these requirements are crucial to avoiding costly mistakes. This long form blog post, which is a condensed summary adapted from our text Prompt Payment, Adjudication and Construction Liens in Alberta, breaks down the essentials of Alberta's lien and holdback fund system, including distinctions between statutory holdbacks and other forms of contract-governed project holdbacks. While there are some specifics and terminology differences between the Alberta lien fund and holdback systems in other provinces, most of the concepts discussed below exist in similar formats in all the other Canadian common-law provinces (i.e., except Quebec).
The Major and Minor Lien Funds
The PPCLA creates two "lien funds," a "major lien fund" which exists up to the issuance of a certificate of substantial performance, and a second "minor lien fund." applicable post-issuance of a certificate of substantial performance. The major and minor lien funds are composed of two parts: (i) Part A consists of 10% of the value of the work actually done and materials actually furnished under the prime contract (the "Statutory Holdback");1 and (ii) Part B consisting of any amount payable under the prime contract, from the owner to the primary contractor, that has not yet been paid at the time the lien is registered (the "Amount Payable Holdback" or the "Notice Holdback").
The Major Lien Fund: The major lien fund is available to lien claimants at or below the subcontractor priority level who work on an improvement before the issuance of a certificate of substantial performance. The major lien fund starts accruing from the first day of work under the prime contract. It must be held back for a minimum of 60 days from the date that a certificate of substantial performance is issued (90 days for contracts respecting oil or gas wells or sites or on a contract with respect to improvements primarily related to the furnishing of concrete), or where a certificate of substantial performance is not issued, 60 days from the date of completion of the prime contract (90 days for similar contracts as above).
The Minor Lien Fund: The minor lien fund is available to lien claimants at or below the subcontractor priority level who work on an improvement after the issuance of the certificate of substantial performance. The minor lien fund starts accruing on the day the certificate of substantial performance is issued, and it must be held back for a minimum of 60 days from the date the prime contract is completed (90 days for contracts respecting oil or gas wells or sites or on a contract with respect to improvements primarily related to the furnishing of concrete). If a certificate of substantial performance is not issued, a claimant will only have access to the major lien fund for their liens.
Mandatory Obligation: The owner is the party responsible for maintaining the lien funds, including the statutory and notice holdbacks. The obligations, rights, and responsibilities in the PPCLA, including holdback obligations are mandatory and may not be circumvented or contracted out of. If the owner fails to holdback 10% of each payment made to the contractor, the owner risks placing itself in jeopardy of lien claims that may be registered on the project.
Lien Fund Retainage Period: The major lien fund, including the statutory holdback, must be retained for 60 days after the issuance of the certificate of substantial performance or, if no certificate is issued, 60 days after the completion of the prime contract. However, specific types of work require different retention periods:
- For oil or gas wells and related site improvements, the statutory holdback must be retained for 90 days after the issuance of the certificate of substantial performance or, if no certificate is issued, 90 days after the completion of the prime contract.
- For projects including concrete work, the retention period is also 90 days, regardless of whether a certificate of substantial performance has been issued.
These extended retention periods help ensure that lien claimants for oil and gas or concrete work have sufficient time to register any claims.
Progressive Release of Lien Funds: The PPCLA permits progressive releases of the major and minor lien funds for projects where the contract price at the time the contract is entered into exceeds the prescribed amount, where the contract provides for a completion schedule that is longer than one year and for the payment of accrued amounts on an annual basis, or on a phased basis specified in the contract. Where an applicable project meets these criteria, an owner must make a payment on the amount retained in the lien fund on an annual basis or on a phased basis (milestone) specified in the contract. The PPCLA makes progressive releases of the holdback mandatory for projects where:
- the completion date is longer than one year, or the contract provides for payments of the holdback on a phased basis; and
- the contract price exceeds the prescribed amount which pursuant to the Regulations is $10,000,000.
As stipulated in the Regulations, where a contract does not specify a phased amount, the partial release of holdback payment must be made on an annual basis.
Part A - The Statutory Holdback
The term "holdback" is an often used and loosely defined term in the construction industry, referring to any amount of money owed by a payor to a payee on a project that is being withheld for some reason. Adding to the confusion, the term "holdback" is not a defined term under the PPCLA and only appears once in the statute in reference to "holdback by mortgagee" (section 26), rather than with direct reference to the retainage sections it is most associated with. Instead, it is an externally applied term used to describe the withholding provisions set out in the PPCLA (sections 18(1), (1.1) or (1.2) or 23(1), (1.1) or (1.2)), as discussed below.
Owner's Statutory Holdback Obligation: In Alberta, for each contract payment made, the owner must retain an amount equal to 10% as a holdback. This is included in the major lien fund to satisfy potential lien claims. This fund is what most people refer to when speaking of "the holdback" but for clarity and differentiation from other project holdbacks, it is referred to as the statutory holdback herein.
Methods for Maintaining the Statutory Holdback: However, an owner in Alberta "is not actually required to set aside funds to be available to lien claimants",2rather, the holdback "is a notional amount based on 10 percent of the value of the work performed under the contract between the owner and the contractor".3The PPCLA does not require the sequestering of funds into an actual separate account (as an owner must do in some other jurisdictions, such as British Columbia).
Given the foregoing, an owner may choose to cover its holdback obligations through, for example, keeping cash in retention of 10% from every payment made to the contractor or notionally on a balance sheet. Additionally, the owner can outsource its holdback obligation by, for example, using a contractor-supplied letter of credit, holdback bond, promissory note, or another readily available source of liquid funds. These alternative forms of holdback are specifically permitted under the Ontario statute whereas in Alberta they are implicitly permitted, and industry driven. When financing is involved, owners typically keep the holdback with the lender (i.e. they do not draw this portion of their credit line) so as to lower the borrower's overall exposure and interest obligations. This is common practice in Ontario, relatively common in Alberta, but non-permissible in BC due to the holdback account obligations unique to that jurisdiction.
Respecting the use of a letter of credit, usually by the request of the contractor, an owner may require the contractor to provide an irrevocable letter of credit in an amount sufficient to cover holdback obligations, and to act as a de facto holdback fund, to allow full payment (equivalent to the 10% accumulated holdback obligation) to be made on each payment, while managing the owner's risk and holdback liability obligations under the PPCLA.
A "holdback repayment surety bond" allows contractors to access 10% statutory retainage by directly substituting the holdback funds typically retained by the owner. These bonds are issued by an insurance company or a bank to guarantee the availability of holdback amounts in lieu of actual retained funds.
In Ontario, letters of credit or bonds are expressly permitted under the amendments made in 2018 to Section 22 of the Construction Act, which specifically states that "some or all of any holdback", instead of being retained in the form of funds, may be retained in the form of: "(a) a letter of credit; (b) a holdback repayment bond; or (c) any other form that is prescribed by the Construction Act or its regulations". While no such similar amendments have been made to the Alberta holdback provisions under the PPCLA, holdback repayment bonds are available to the Alberta market and do appear to satisfy the statutory holdback obligations of owners operating in this province. From a market perspective, while not completely novel, the holdback repayment bonds remain a rarely used instrument in Alberta and the rest of the country. However, given recent changes to market conditions (including rising interest rates and inflation) owners and contractors may be interested in the use of this secured instrument in lieu of cash or a letter of credit. Current market rates for obtaining a holdback repayment surety bond are in the range of 1% of contract or project value, as circumstances dictate.
Part B – The Amount Payable Holdback (aka. the Notice Holdback)
Much as it sounds, the "amount payable" is the amount currently owing but unpaid from the owner to the general contractor, pursuant to the terms of the prime contract at the time a lien is registered. This portion of the lien fund is sometimes referred to as the "notice holdback," which is the amount that is required to be held back when notice is provided that a lien has been filed.
The very moment that a lien is registered, the "hand of the paymaster is stayed"4 under the prime contract and the owner must halt all payments relevant to the contract until the lien is resolved, as these funds have now become part of the lien fund. Even if an amount greater than the 10% is retained, these funds cannot be released while there are liens filed against the project. If an owner fails to hold this amount back it may be forced to pay this amount twice (once to the contractor and once to the lien claimants).
The amount payable must be payable pursuant to the terms of the prime contract, if the amount is not owing under the prime contract then it does not form part of the lien fund.5 For example, if a payment under the prime contract requires a consultant's approval before it is due and owing to the contractor and the consultant has not made that approval, that payment does not form part of the lien fund.
The amount payable is typically calculated by reference to the general contractor's unpaid invoices, but may also be determined by using the following formula:
(Value of the work completed) ‑ (The statutory percentage holdback (10%)) ‑ (The total amount paid in good faith) = Amount payable.6
Non-Statutory Holdbacks and Withholdings
As noted above the term "holdback" can refer to contractual withholding as much as statutory retainage obligations. To determine the nature of a holdback, the first question to answer is whether the holdback is mandated by statute or governed by contract.
When obligated by statute, the reason for the statutory holdback is straightforward – it is to provide a pool of funds capable of responding to lien claimants at or below the subcontractor priority level. It is an amount that is carved out of the contractor's payments on the project and thus constitutes an asset of the contractor. The purpose and function of the statutory holdback is the same on every project.
When a holdback is created by contract, the purpose and function of that holdback is governed by that contract. Contractual holdbacks or withholdings are used either as security to ensure a payee completes some obligation for the payor, or as security from which to protect the payor from vicarious liability for the payee's failures to third parties. Common types of contractual holdbacks and payment withholdings include:
- deficiency, finishing or commissioning holdbacks/withholdings: payments retained to ensure that the payee completes any remaining work or rectifies deficiencies identified in the project, providing the payor with leverage to ensure that all aspects of the contract are fulfilled to satisfaction before final payment is made.
- performance holdbacks/withholdings: payments retained to ensure that the payee meets performance standards or milestones outlined in the contract. It acts as a financial incentive for the payee to adhere to agreed-upon performance metrics and project timelines.
- warranty holdbacks/withholdings: payments held to cover potential costs related to warranty claims, this holdback is designed to provide financial security for the payor against any defects or issues that arise during the warranty period. It ensures that the payee remains responsible for correcting issues that occur post-completion.
- liquidated damages holdbacks/withholdings: payments retained to cover potential liquidated damages that may be incurred due to delays or other breaches of contract by the payee. It provides the payor with a financial cushion to address any agreed-upon penalties.
- insurance or bonding holdbacks/withholdings: payments held to ensure that the payee maintains required insurance coverage or bonding throughout the project. This type of holdback protects the payor against risks associated with inadequate insurance or bonding.
- retainage for subcontractor claims: in cases where the contractor is responsible for managing multiple subcontractors, payments may be held to ensure that funds are available to address claims (usually reasonably anticipated claims) made by subcontractors who may not have been paid directly by contractor, or who may lien the project for reasons related to contractor breaches or failures on the project.
- compliance holdbacks or withholdings: this form of holdback is used to ensure that the payee complies with all regulatory, safety, or legal requirements related to the project. It provides a financial incentive for adherence to these standards throughout the project's duration.
- final account reconciliation holdbacks or withholdings: this form of holdback is retained until all final accounts are reconciled, including any adjustments for changes in scope, additional work, or unforeseen costs. It ensures that all financial matters are settled before final payment is made.
Set-Off Against the Major or Minor Lien Funds / Statutory or Amount Payable Holdbacks
In setting the lien fund, the 10% Part A statutory holdback is sacrosanct, meaning that an owner is typically not permitted to set-off or contractually withhold against this portion of the lien fund.[7] However, the second, Part B portion of the lien fund (the amount payable) is subject to the owners' claims of set‑off for deficiencies and/or the cost of completion.8 The owner is entitled, often by the terms of the prime contract and always by common law, to offset any cost overruns incurred by the owner as a result of defaults by the general contractor against the second part of the lien fund. However, the owner may not offset against the first part of the lien fund (the 10% of the value of the work arising under that prime contract) even if the cost overruns are incurred because of the default of the general contractor.
In situations where there are no subordinate liens to the contractor's lien claim, owner set-off claims or other contractual withholding rights may be permitted against the 10% Part A statutory holdback, given that the public policy initiative for protecting valid subcontractor claims is not engaged.9
Footnotes
1 Functionally, this takes the form of 10% of every progress payment made by the owner to the contractor being withheld by the owner to form the holdback.
2 Royal Bank of Canada v 1679775 Alberta Ltd, 2019 ABQB 139, at para 55.
3 Royal Bank of Canada v 1679775 Alberta Ltd, 2019 ABQB 139, at paras 55 and 57.
4 Craig v. Cromwell (1900), 27 O.A.R. 585 (C.A.) at 587.
5 See for example Revelstoke Companies v. Simper, 1978 CanLII 678 (AB KB) at para 34, 6 Alta LR (2d) 252.
6 Lloydminster Roman Catholic Separate School District No. 34 v. Border City Transit Mix (1980) Ltd., 1988 CanLII 3427 (AB KB) at para 27, 57 Alta LR (2d) 146.
7 Engineered Homes Co. and North West Commercial Sales (1973) Ltd., Re, 1981 CarswellAlta 828 (Q.B.), at para 18.
8 Lloydminster Roman Catholic Separate School District No. 34 v. Border City Transit Mix (1980) Ltd., 1988 CanLII 3427 (AB KB) at para 54, 57 Alta LR (2d) 146.
9 Superior Steel Erectors Ltd v Edmonton (City), 2021 ABQB 410, at para 14.
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