There should be no space between the XPS and any wall being built.

Once XPS is on the walls, whether or not there is a vapour barrier doesn't matter. (Though Dr. Lstiburek says better not to have it at all.)

AND they require fireblocking with gypsum board (or fiber board, batts or glass fiber) at 10 feet intervals horizontally and vertically within the wall space.

There must be some confusion here. First off, fiberglass is not a fireblock. Secondly, since you are proposing a sheetrock wall covering the XPS, I don't see why they would want another wall within a wall. And with ten foot gaps in it??

In light of all that potential for moisture, I would avoid galvanized material, which rusts once the sacrificial layer of zinc is gone.

The best thing on the interior walls is a crystalline waterproofing. However, there will be a lot of prep work removing the drylock. The walls may have to be acid washed, too, so you may prefer to use a co. specializing in this.

Be sure to place the plates on top of strips of XPS to help keep moisiture from wicking into the framing and wall.

A contractor first told me about the extra fire safety precaution of building walls within walls which I thought was crazy.

It is confirmed by a document that the township referred me to and it says "Fireblocking shall be provided in concealed spaces of stud walls and partitions, including furred spaces, at the ceiling and floor levels, and at 10 ft intervals both vertical and horizontal." It also lists "glass fiber" as an "acceptable fire block."

Why can't I have a space between XPS and the frame? I thought the spacing wasn't necessary, but is it potentially damaging?

Unfortunately, my cinder block walls are not flushed horizontally. In a couple of places, there's a cinder block column that extends out 1 ft. So, building a frame out 12 inches or more will allow me to have a straight sheetrocked wall.

The potential good news is that I talked to another contractor today who said that the township had accepted the seamed XPS boards as the vapour barrier which contradicted what the township told me on the phone, but I'll call and ask again.

By the way, you indicate that once XPS is on the wall, it doesn't matter if there's another barrier - I don't understand. I thought the double vapour barrier construction was to be avoided. I thought that XPS is a vapor retarder, so some vapor will come in and with the presence of faced insulation, won't that moisture build up in the cavity due to the double vapour barrier present?

If that's the "fireblocking" they insist on, that's what you'll have to provide. Since at least 1990 fiber glass has not been an acceptable fire stop material in Ontario. Other jurisdictions, such as Connecticut, have made the same decision. Also see here on the suitability of fiber glass as a fire stop.

Putting a vapour barrier on the interior of a basement wall is a proven mistake that still persists as Code. The only time I've been exempted is for a basement that has been spray foamed. However,Yost and Lstiburek note on page 9 of "Basement Insulation Systems" that walls built that way can still work efficiently as long as they are mechanically dehumidified in the summer.

Why can't I have a space between XPS and the frame

To hold the fiberglass in place on a freestanding wall you'll have to secure it on the foundation side using, say, galvanized mesh. Also, I don't like idea because of the likelihood of convection currents within the wall reducing the effectiveness of the batts and perhaps cooling that space enough to support mold growth on the back of the fiberglass.

I would prefer to just insulate the foundation wall with sufficient foam board or spray foam to at least meet Code, then build the gyprock wall. That's what I've done in the past. In that case, authorities will likely not insist on a poly vapour barrier.

Further to paragraph one, once you separate the insulating materials from each other--in this case up to 12"--you can't add the R values together. A wall of, say, R5 XPS, a 12 in. air gap and then R11 Fiberglass (3.5ins.) is not R16. (Leave aside the fact that "commonly installed" fiberglass batts lose 27% of their labelled R values.)

I am confused. I used some glue to hold the thick XPS pink boards to my block wall. I then used 2x4's layed FLAT as framing for my sheetrock. Is this OK? I did not want to turn the 2x4's the conventional way due to space restrictions. So do I need insulation in the space between the XPS and the void the 2x4 makes layed flat (I guess we are talking about an inch and a half)? I plan on sheetrock the framing.

It doesn't matter if the only insulation is the foam board. However, the framing should have been done conventionally to minimize the effect on the drywall if/when the wood warps. Or you could have just used furring strips laid flat against the insulation.

I was considering using furring strips, but that would not accomodate wiring and electric boxes. The extra thickness the 2x4 provide this room. Also, I did not find any fasterners (Tapcon) that would provide the length to get throught the wood, and the foam, and into the concrete block. Won't furring strips warp also?

If you've used sufficient concrete screws or powder charge fasteners you're fine!

I attached the 2x4's layed flat to piece of wood anchored to the floor and another at the top. Is this OK? Are you saying because it is layed flat it will warp and mess up the drywall? Do I really need to undo this and install the correct way?

Is this OK?

Guaranteed to warp.

Since you say you need space for electrical, I'd build a conventional 2x4 or 2x3 wood or steel wall. The 2" of depth of the 2x4 and drywall laid flat won't give you enough depth for electrical boxes anyway. Remember to put the baseplate on top of at least 1" of XPS.