Recent Judgment – Managing Construction Contract Holdbacks: Knowing How Long to Hold Them and When Not to Release Them
A decision rendered by the Quebec Court of Appeal this past June 10 should serve as a caveat for construction project owners and contract managers regarding the management of contract holdbacks: Compagnie d’assurances Jevco v. Québec (Procureure générale), 2015 QCCA 1034.
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 soon.
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 contractor.
In this case the master civil engineering contract provided the following:
“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