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“Pay When Paid” Clauses Should Be Unambiguous

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Construction Bulletin

Canadian Pressure Testing Technologies Ltd. v. EllisDon Industrial Inc.,[1] a recent case from the Alberta Court of King’s Bench, addressed a question that remains contentious in Canadian law: When does a construction payment clause truly mean “pay when paid,” such that it controls the obligation to pay, and when does it merely affect the timing of payment? The answer to this question has varied across Canadian jurisdictions and over time, and continues to have significant implications for contracting parties.

Despite being an Alberta case, Canadian Pressure confirms two general best practices that apply in Ontario:

  1. A payment clause should clearly state the contracting parties’ intentions. If the intention of contracting parties is that the downstream payment obligation is contingent upon payment from an upstream payor, the payment clause should say so explicitly and unambiguously. Similarly, if the payment clause is intended to control only the timing of payment but not limit the ultimate obligation to pay, that should also be explicit.
  2. A contractor that wants to rely on a “pay when paid” clause must ensure that non-payment by the owner is not the contractor’s fault. Ontario cases have held that a contractor will not be able to rely on a “pay when paid” clause to avoid payment when the owner’s non-payment is due to the contractor’s own acts or omissions.

In Canadian Pressure, the Alberta Court of King’s Bench was interpreting a payment provision in a contract between a general contractor and subcontractor. The disputed provision provided that

[The general contractor] shall pay to [the subcontractor] monthly progress payments net of any applicable Holdback and such payments shall become due and payable no later than five (5) business days after the [general contractor] receives payment pursuant to the terms and conditions of the Prime Contract from the Owner […].

The general contractor in Canadian Pressure had paid its subcontractor for all work, except for certain final invoices. The general contractor had not received payment from the owner in respect of those invoices, as this amount was part of a larger dispute between the contractor and the owner that was being arbitrated. The Alberta court observed, based on the evidence before it, that the contractor had not obtained the prior approval of the owner in respect of the work at issue in the arbitration.

The key issue in Canadian Pressure was whether the payment provision between the general contractor and the subcontractor was a “pay when paid” clause or a “pay no later than” clause.

The distinction between these types of clauses is significant: Under a “pay when paid” clause, a contractor has no obligation to pay a subcontractor unless and until the contractor receives payment from the owner. If the contractor never receives payment from the owner, then the obligation to pay the subcontractor never arises. By contrast, a “pay no later than” clause addresses the timing of payment but does not affect the subcontractor’s right to be paid. In practice, where an owner hasn’t paid, courts have found that a “pay no later than” clause entitles the contractor to delay payment to a subcontractor only for a reasonable period, not indefinitely. 

In Canadian Pressure, the Alberta court found that the clause at issue was not a true “pay when paid” provision and ordered the general contractor to pay the unpaid invoices. The court found that the disputed clause “did not reach the point of clarity required by the law” to be a true “pay when paid” clause.[2] The court accepted the law on this point as stated by the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd. v. Alta Surety Company,[3] being that where a provision intends to “diminish or remove the subcontractor’s right to be paid,” it must be “clear” and “specific” to that effect.[4] The Alberta court also followed Ontario authorities holding that, for a contractor to rely on a “pay when paid” clause, its conduct must not have been the cause of the owner’s failure to pay.[5]

In Ontario, the leading case on “pay when paid” clauses is still Timbro Developments Ltd. v. Grimsby Diesel Motors Inc.,[6] a 1988 decision of the Court of Appeal. There, a majority of the court upheld as a “pay when paid” clause a provision reading “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after certification or when we have been paid by the owner, whichever is the later.”

However, contractors are cautioned against relying too heavily on Timbro, as it predates major developments in the law of contract interpretation and subsequent trial-level decisions have not given it a broad reading. Indeed, the Alberta court in Canadian Pressure expressly declined to follow Timbro, writing that it had been “minimized, distinguished and ignored to the point that it has little precedential value.”[7]

Further, although Ontario’s Construction Act does not explicitly address or preclude “pay when paid” clauses, no Ontario court has yet considered “pay when paid” clauses in the wake of the Construction Act’s new prompt payment and adjudication provisions.[8] The contract at issue in Canadian Pressure pre-dated Alberta’s new Prompt Payment and Construction Lien Act,[9] so it provides no guidance on “pay when paid” clauses under that legislation.

As a result, parties in the construction industry who are drafting, or who may be subject to, “pay when paid” clauses are accordingly advised to consult legal counsel for advice on this developing area of law.

[1] 2022 ABKB 649 [Canadian Pressure]

[2] Canadian Pressure at para. 22.

[3] 1995 NSCA 16 [Arnoldin].

[4] Arnoldin at para. 21.

[5] Canadian Pressure at para. 22 (citing Applied Insulation Co. v. Megatech Contracting Inc., 22 C.L.R. (2d) 251, 1994 CarswellOnt 1113 (Ontario Court of Justice – Gen. Div.).

[6] 32 C.L.R. 32, 1988 CarswellOnt 773 (ONCA).

[7] Canadian Pressure at para. 21.

[8] R.S.O. 1990, c. C.30.

[9] R.S.A. 2000, c. P-26.

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