A contract provision that permits an owner to withhold payment
from a contractor is not a "penalty" clause.
Penalty Provisions
The courts do not like, and typically do not enforce,
"penalty" clauses. For this reason, liquidated damages
clauses in favour of the construction owner generally have to be
based on a "genuine pre-estimate of damages" in order to
avoid the court striking the liquidated damages clause down.
No Further Payment Provisions
In a recent Ontario case,
Ottawa Community Housing Corp. V. Foustanellas, the
contractor argued that a clause providing that (in certain
instances of default) "the obligation of the Owner to make
payments will cease" was a penalty clause, and therefore not
legally enforceable. The contractor was overbilling the owner, and
consequently the owner acted on a clause in the contract that
permitted the owner to "take work out of the hands of the
Contractor." The owner then hired someone else to complete the
work, but the
