This post was written prior to our January 2017 merger, under our previous firm name, Aikins, MacAulay & Thorvaldson LLP.
“Pay-when-paid” clauses attempt to limit the obligation of the general contractor to pay a subcontractor until the general contractor has been paid by the project owner. Whether such clauses are enforceable depends upon the specific wording of the clause and the terms of the subcontract as a whole.
A recent decision of the Manitoba Court in A&B Mechanical Ltd. v. Canotech Consultants Ltd. considered the effect of a pay-when-paid clause in a subcontract between the general contractor (Canotech) and the subcontractor (A&B). The Court decided that the clause in question did not preclude the subcontractor from obtaining a judgment for its unpaid account.
Canotech had been retained to construct an adventure water park outside of Winnipeg. A&B was retained to perform the mechanical subcontract work. The subcontract contained a clause that read:
Payments will be made monthly on progress estimates as approved by the Architect and/or Engineer and the Contractor’s Superintendent covering 92.5% of the value of the work completed by the Sub-Contractor to the end of the previous month, such payments to be made five days after the Contractor receives payment for such work from the Owner.
Payment of the balance of 7.5% owing under the Sub-Contract will be made within five days after final payment has been received by the Contractor.
The prime contract was also incorporated into the subcontract and contained a clause stating that the owner was to make payment to the contractor no later than 15 days following application for payment.
A dispute arose between the contractor and the owner relating to the construction such that the owner refused to pay two invoices which included the work performed by the subcontractor. The contractor filed a claim against the owner for breach of contract. The subcontractor commenced a separate action against the contractor for payment and brought a motion for summary judgment. The contractor did not dispute that the subcontractor had performed the work but defended solely on the basis that it was not required to pay until it had received payment from the owner, as per the “pay-when-paid” clause.
The Court considered a Nova Scotia Court of Appeal case involving pay-when-paid clauses.
That case considered a clause that any amount claimed by the subcontractor during construction “shall be due to the subcontractor on or about one day after receipt by the contractor of payment from the owners.” In that case the subcontract also provided that the final payments to the subcontractor would be made on acceptance of the subcontractor’s work “and within 30 days after payment has been received” by the contractor.
The contractor resisted payment on the basis that it had not been paid by the owner. The subcontractor argued that the clause was not a condition precedent to payment but was rather a timing mechanism. That court chose to follow a line of American cases which determined that in order for a contractor to impose a term on its subcontractor that payment would be conditional on the contractor itself being paid by the owner, clear language must be used.
If the language is not clear, the clause will merely fix the time for payment.
Conversely, in some circumstances courts have enforced pay-when-paid clauses to preclude subcontractors from obtaining payment.
For example, the Ontario Court of Appeal considered a clause which read: “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.” Based on the evidence in that case, the majority of the court found that the clause clearly specified the obligations for payment and the subcontractor had assumed the risk of the contractor not receiving payment from the owner.
In A&B v Canotech, the Court also considered the risk that would be accepted by a subcontractor if a true pay-when-paid clause were found in the subcontract. The Court commented that there was no indication based on the evidence before it that the general contractor and subcontractor were performing the project as “co-adventurers or partners” or that the subcontractor had intended to take on the risk of non-payment by the owner. Ultimately the Court found that the clause was not a true condition precedent to payment because the clause itself was not sufficiently clear. The subcontractor had completed the only conditions for payment (performing the work and providing a statutory declaration), so that summary judgment was granted. (But note that the case is currently under appeal)
This recent Manitoba case is a good reminder that the courts will generally require clear and express wording before they will allow a contractor to rely on a “pay-when-paid” clause to refuse payment to a subcontractor who is otherwise entitled to payment.
The application of the clause will depend on its specific wording, including a consideration of the whole subcontract. In some circumstances the court may also consider extrinsic evidence respecting the true nature of the business relationship between the parties to determine if the subcontractor intended to accept the risk of non-payment by the owner.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
John B. Martens is a senior associate in the construction law practice at Aikins Law. Reach him at email@example.com.