Substantial performance and holdback
Regarding the definition of substantial performance and completion, the act changes the thresholds at which a contract is considered to be substantially performed, as well as for when it is deemed to be completed. The increase from $500,000 to $1 million for substantial completion, and increase from $1000 to $5000 for deemed completion, is intended mainly to reflect inflation since 1983.

A further change in this section applies to non-contiguous lands. The act states improvements to non-contiguous lands under a single contract shall be deemed, for the purposes of calculating substantial performance and completion, to be separate contracts for each improvement.

Currently, the construction act permits, rather than requires, the release of holdback. The new act amends “may, without jeopardy,” to “shall” making the payment of both basic holdback and holdback for finishing work mandatory. Recognizing the necessity of a balance between a contractor’s right to be paid in full and the owner’s right to set-off, the owner may refuse to pay some or all of the holdback amount, in good faith, provided a notice of non-payment/set-off is published by the owner, who intends to assert a set-off in relation to the contract, specifying the amount of the holdback the owner refuses to pay.

There are also changes relating to annual, phased, and segmented release of holdback. The act will permit partial release of holdback on either a phased or annual basis if provided for in the construction contract entered into by the parties, subject to a monetary threshold, and provided there are no preserved or perfected liens in respect to the contract. The act will also allow for segmentation of holdback for projects involving clearly separable improvements. Finally, while there is no provision for mandatory early release of holdback for design consultants in respect of services supplied prior to start of the construction, the act permits designation of a design phase for the purposes of phased release of holdback.

Instead of holdback only being retained in the form of cash, the act states holdback can be maintained in the form of a letter of credit, demand repayment bond, or other prescribed form. This validates some of the commercial arrangements already being used in the industry.

Ontario courts have generally resisted finding separate contracts for one project involve separate holdbacks that could be released upon the substantial performance of each contract. Rather, courts have demonstrated a tendency to find multiple contracts for the same project each form part of one general contract requiring only one holdback. The market reality, however, is owners and contractors may have incentive to enter into agreements deferring the completion of part of the original contract and providing for the release of substantial performance holdback whether the improvement is ready for its intended use or not. The act will now allow for deferral agreements provided such agreements are for the purpose of allowing certification and publication of substantial performance. The “deferred” work in these cases will be added to the “finishing” work.

Construction trusts
The act has also amended the trust provisions with respect to trust fund bookkeeping. The trustee will be required to deposit trust funds into a bank account in the trustee’s name and the trustee must maintain written records detailing the trust funds (e.g. amounts received, paid out, and transfers). The act further provides that multiple trusts can be deposited into a single bank account, provided the trustee maintains separate records of each trust. So, a separate trust bank account for each project is not required.

If separate written records are maintained for each trust, there will be no breach of trust if the trust funds are deposited into the same bank account, as the funds are deemed to be traceable.

Surety bonds
All contractors performing work under a public contract (contract in respect of an improvement with the Ontario Crown, municipality, or broader public sector entity), in order to protect subcontractors and suppliers from risk of contractor insolvency, will be required to provide a labour and material payment bond and a performance bond, each for at least 50 per cent of the contract price. (This article was written with assistance from Stephanie Lina.)

Catherine E. Willson is counsel in Goldman Sloan Nash & Haber LLP, a full service law firm in Toronto.  Willson was founding partner of Willson Lewis LLP before joining GSNH LLP in 2014. She has established a successful practice in construction law, employment law, collections, and civil litigation. At the Toronto Construction Association (TCA), she is a board member and chair of the environmental committee, as well as a former member of the Build a Better Construction Business forum and industry practices committee. Willson is also a member of the Ontario Bar Association and the Advocates Society. She can be reached at willson@gsnh.com.