Construction Subcontractor Agreements: Key Legal Points in Ontario, Canada

The construction industry in Ontario, Canada, is highly regulated, and contracts are central to the smooth operation of construction projects. One of the most critical types of contracts in this sector is the subcontractor agreement. A subcontractor agreement is a legally binding contract between a general contractor (GC) and a subcontractor (SC), outlining the terms and conditions of the work the subcontractor will perform on a specific project.
For subcontractors and general contractors in Ontario, understanding the key legal points in subcontractor agreements is crucial for ensuring both parties meet their obligations and avoid disputes. This blog will explore the key legal considerations when drafting, negotiating, or entering into a subcontractor agreement in Ontario.

What is a Subcontractor Agreement?

A subcontractor agreement is a written contract that formalizes the relationship between the general contractor and the subcontractor. In this agreement, the subcontractor agrees to provide specific services, such as electrical work, plumbing, or excavation, to support the overall construction project. Subcontractor agreements specify the scope of work, timelines, payments, and other important terms.
While subcontractors are generally not involved in the primary agreement between the property owner and the general contractor, they play an essential role in the successful execution of the construction project. Ensuring the legal integrity of subcontractor agreements is vital to the health of the entire project.

Key Legal Points in Subcontractor Agreements in Ontario

1. Scope of Work

The scope of work is one of the most crucial aspects of any subcontractor agreement. This section defines the tasks the subcontractor will perform, including detailed specifications about materials, labor, and any other requirements. The more detailed this section, the less room there is for disputes.

Legal Considerations:

• Ambiguous or vague descriptions of work may lead to misunderstandings between the general contractor and subcontractor.

• It is essential to ensure that the scope of work reflects the expectations of both parties and complies with the overall construction contract.

• The subcontract should specify what is included and excluded in the scope of work to avoid “scope creep” (when additional tasks are added without proper compensation or agreement).

2. Payment Terms

Payment terms outline how and when the subcontractor will be compensated for their services. This includes details such as the payment schedule, how invoices will be submitted, and the conditions for payment release.
Legal Considerations:

• Ensure that the payment schedule aligns with the general contractor's agreement with the property owner to avoid cash flow issues.

• It is common in Ontario to use the prompt payment provisions of the Construction Act to ensure timely payments. The Construction Act mandates that subcontractors must be paid within 7 days of receipt by the General Contractor of payment from the owner. This law applies to construction contracts, including subcontractor agreements, and helps prevent delayed payments.

• Payment hold back clauses (where a portion of the payment is held back until project completion) must be clearly defined and comply with the

  Construction Act

  , which governs retention payments in Ontario.

3. Timeline and Deadlines

Construction projects are highly time-sensitive, and any delays can lead to significant financial consequences. The subcontractor agreement should establish clear timelines for the work to be completed.

Legal Considerations:

• The timeline should align with the overall project schedule and any deadlines established in the main contract between the general contractor and the property owner.

• Deadlines for each milestone should be realistic and achievable, taking into account potential delays, weather conditions, or material shortages.

• Failure to meet deadlines may result in penalties, liquidated damages, or the termination of the agreement. The contract should specify the consequences of late performance.

4. Insurance and Liability

Liability and insurance requirements are critical components of a subcontractor agreement. Ontario’s construction industry involves substantial risks, and proper insurance helps protect all parties involved in a project.

Legal Considerations:

• Subcontractors are often required to carry general liability insurance and workers' compensation insurance

  administered by the work-place safety and insurance board (WSIB) to protect both themselves and the general contractor.

• The agreement should clearly specify the types of insurance the subcontractor must maintain and the minimum coverage limits.

• Subcontractors should also have the contractor's liability insurance and tools and equipment insurance if necessary.

In addition, a subcontractor should be aware of their indemnity obligations, where they may be required to hold the general contractor harmless for claims related to their work.

5. Dispute Resolution Mechanisms

Disputes can arise in any construction project, and it is important to address how disputes will be resolved before they occur.

Legal Considerations:

• Ontario’s Construction Act encourages alternative dispute resolution (ADR) mechanisms, such as mediation and arbitration, before resorting to litigation.

• A well-drafted subcontractor agreement should clearly outline the process for resolving disputes, including whether the parties will use negotiation, mediation, or arbitration as the primary methods.

• In some cases, the agreement may include provisions for legal costs and who will bear those costs in the event of a dispute.

6. Termination Clauses

Termination clauses specify the conditions under which either party can end the agreement. In construction projects, these clauses are important to protect both the general contractor and subcontractor if things go wrong.

Legal Considerations:

• The agreement should specify the conditions under which the general contractor can terminate the subcontract for cause (e.g., poor performance, failure to meet deadlines, or breach of contract).

• It should also include provisions for termination without cause, allowing either party to end the contract with proper notice.

• The subcontractor agreement should establish the consequences of termination, such as compensation for work completed up until the point of termination and the return of materials or equipment.

7. Lien Rights and Claims

The Construction Act is important legislation in Ontario, providing legal protection to subcontractors and suppliers in construction projects. Under this Act contractors and subcontractors have the right to file a lien against the property if they are not paid for their work.

Legal Considerations:

• Subcontractors should be aware of their right to file a lien in case of non-payment. The lien process has strict deadlines, and the subcontractor must generally file within 60 days from the last date on which the work was completed or materials supplied.

• The subcontractor agreement should address how lien rights are handled, including any requirements for giving notice of non-payment to the general contractor and property owner.

8. Subcontractor’s Workers and Sub-subcontractors

Many subcontractor agreements include provisions concerning whether the subcontractor can hire other subcontractors (sub-subcontractors) to complete parts of the work.

Legal Considerations:

• The general contractor may want to approve or vet any sub-subcontractors to ensure they meet the same standards as the original subcontractor.

• A subcontractor should ensure that any sub-subcontractor agreement complies with the same terms as the primary subcontractor agreement, including indemnity, payment terms, and deadlines.

9. Compliance with Ontario Building Code and other Regulations

Ontario has strict building codes and regulatory requirements that all contractors, including subcontractors, must follow residential projects may require compliance with regulations relating to the Ontario new have warranties Plan Act, Tarion Warranty Corporation and the Home Construction Regulatory Authority. The subcontractor agreement should include clauses that require the subcontractor to comply with these rules.

Legal Considerations:

• The

  Ontario Building Code (OBC)

  and other provincial regulations govern the construction standards for safety, quality, and environmental compliance.

• Subcontractors must ensure that their work adheres to these codes and laws. Failure to do so may result in penalties, rework, and legal liability.

Conclusion

In Ontario, the construction industry operates in a highly regulated environment, and subcontractor agreements are crucial for ensuring that all parties involved are clear on their responsibilities. By addressing key legal points such as scope of work, payment terms, timelines, insurance, and dispute resolution, contractors and subcontractors can avoid many common pitfalls and ensure smoother project execution.
Subcontractors and general contractors alike should seek legal advice when drafting or reviewing subcontractor agreements to ensure they are compliant with the Construction Act and other relevant legislation. A well-drafted contract can help mitigate risk, prevent disputes, and ensure a successful construction project for all parties involved.