Trades in construction projects expect to be paid when the work they have done is on-time and without defect.  However, construction trades are more and more running into problems in getting paid for work they have done even though there is no problem as to the quality or timeliness of the work.

“Pay-when-paid” clauses are often inserted by contractors into agreements with their subcontracting trades. These clauses allow contractors to avoid paying subcontracting trades when the contractors are not being paid by owners on construction projects.  Only when the contractor is paid by the owner does the obligation arise for the contractor to pay its subcontracting trade.

“Pay-when-paid” clauses in construction agreements are controversial and often are not understood by subcontracting trades when they enter into such agreements with contractors.  Contractors often insert these clauses into agreements with subcontracting trades so as to avoid effectively financing the construction of a project when dealing with difficult owners of projects who are slow or problematic in making payment to them.  However, subcontracting trades find such provisions unfair to them as they have completed their work without default but are not paid due to matters outside of their control.

In essence, “pay-when-paid” clauses are viewed by subcontractors as denying them the bargain of the agreement they entered into with contractors.  Subcontractors believe they bargained for cheese, but what they get is chalk despite doing what they are obligated to do under their agreement with the contractor.

Interestingly, some owners of projects do not like their contractors inserting into their agreements with subcontracting trades “pay-when-paid” clauses as the dispute over payment between the owner and contractor may have little to do with the quality or timelines of the work of subcontracting trades.  Further, owners sometimes see such clauses as being unfairly used by contractors to extract concessions from subcontracting trades for the benefit of the contractor that leads to poor quality or a slow-down in work.  “Pay-when-Paid” clauses can also lead to unmanageable financial pressures and burdens on subcontracting trades which result in financial collapse or subcontracting trades refusing to continue work until they are paid, regardless of the obligations under their agreement with the contractor.

Appellate authority in Ontario and Nova Scotia is divided over whether such clauses reflect the subcontractor’s entitlement to be paid, or whether they are construed merely as payment timing mechanisms.  The Ontario Court of Appeal in Timbro[1] considered the following clause:

Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.

The subcontractor’s claim was dismissed on the basis that the clause clearly shows the subcontractor assumes the risk of nonpayment by the owner. However, in Arnoldin[2], a similar impugned provision read:

The balance of the amount of the requisition as approved by the Contractor shall be due to the Subcontractor on or about one day after receipt by the Contractor of payment by the owners….Final payment shall be made on acceptance of the work by the Contractor, Architects and/or Engineers, and Owners, and within 30 days after payment has been received by the Contractor.

Despite substantially similar, although arguably less clear, wording, the Nova Scotia Court of Appeal held that such a term buried in a standard form contract could not affect the sub-contractor’s right to be paid. Instead, it interpreted the clause to mean the timing of payment could be delayed, but ultimately had to be made despite the owner’s refusal to pay.

Courts across Canada have shown a general disdain for the unfairness of “pay-when-paid” clauses as the subcontractor assumes the risk of non-payment where payment from the owner to the contractor is a condition precedent to payment to the subcontractor, and have generally followed the Arnoldin reasoning to construe them as strictly as possible. However, no court has gone so far as to say that they are unenforceable on policy grounds when the plain wording is clear.  A British Columbia court in Brookswood[3] accepted that the parties have the right to validly shift the risk of non-payment by the owner from the general contractor to the subcontractor with very express language. The clause in question in that case read:

It shall be a condition precedent to the payment by the Contractor to the Sub-Contractor of any monies due under the Sub-Contract that the Contractor shall first have received payment in full from the Owner … unless the non-payment by the Owner shall be due to the fault or neglect of the Contractor…. The Sub-Contractor acknowledges that it shall bear the risk of bankruptcy, insolvency or default in payment by the Owner pursuant to the terms of the Prime Contract.

As it stands, a Canadian court would likely be forced to uphold a clearly drafted “pay-when-paid” clause which has been brought to the attention of the subcontractor at the time that the agreement was entered into.  In recent years, the project delays caused by these clauses and lobbying efforts of certain contractors associations have spurred calls for legislative reform. Bill S-224, the Canada Prompt Payment Act, has been passed by the Senate and awaits consideration by the House.  Bill S-224 would provide a requirement for timely payments to contractors under construction contracts with government institutions.  In 2017, Ontario passed an amendment to its Construction Lien Act introducing a prompt payment system for private construction contracts, and Manitoba is also considering a similar system introduced as a private member’s bill earlier in 2018.

British Columbia has not yet introduced prompt payment legislation, but contractors associations are hopeful the Ontario model will serve as a framework for the rest of the provinces to adopt in the near future.  Prompt payment legislation has been implemented in some form in many other common law jurisdictions, including the US, UK, Ireland, Australia and New Zealand.  Until British Columbia adopts a similar approach, despite the generally unfavourable views of the courts on these clauses, a carefully worded “pay-when-paid” clause would likely be enforced.

[1] Timbro Developments Ltd. v Grimsby Diesel Motors Inc., [1988] OJ No 448.

[2] Arnoldin Construction & Forms Limited v. Alta Surety Co., (1995) 19 CLR (2d) 1

[3] Brookswood Ironworks Ltd. v. DGS Construction Co., 1993 CanLII 2374