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Searching For The Point Of Clarity: The Narrowed But Potentially Continued Utility Of “Pay-When-Paid” Clauses In A Post-Prompt Payment World

Executive Summary

While much ink has been spilt regarding the application and effectiveness of pay-when-paid clauses in Canada, courts have yet to consider the applicability and validity of these payment terms for contracts that are subject to the statutory prompt payment regimes sweeping across the country. This post summarizes the current law regarding pay-when-paid clauses in Canada, specifically in Alberta, Ontario and Saskatchewan, and explores the application of these principles in the now increasingly common environment created by prompt payment statutes in these jurisdictions.

“Pay-when-paid” or similar clauses are commonly inserted into construction contracts by general contractors (or others who occupy the middle of the payment chain between owners and subcontractors or suppliers). Pay-when-paid clauses have obvious benefits for the payor while causing hardship for the payee (who has often outlaid its own capital to supply labour and material). Hardships for payees are exacerbated when payment is withheld for reasons unrelated to the payee's performance or when the determination of performance is delayed due to complex issues between the owner and contractor.

These clauses are designed to alleviate the “thorny question”[1] of potential cash flow crunches on parties who incur costs to subcontractors and suppliers for work that they themselves have not yet been paid for. Without such protections, parties may find themselves caught in the middle of payment disputes otherwise between those directly above and directly below them in the construction pyramid, effectively assuming the role of project financier.

Primary Takeaways

  • Current prompt payment regimes essentially codify the pay-when-paid system while precluding the inclusion of any such clause (in name or otherwise) that does not comply with the statutory timelines for both paying and disputing invoices.
  • Because these prompt payment regimes have received only limited judicial treatment, including specifically regarding the applicability and validity of pay-when-paid clauses, there is more to come on how courts will interpret them and whether such clauses are well and truly dead for the vast majority of projects in Canada.
  • Parties should remember that prompt payment statutes do not necessarily apply to all construction contracts. First, these new statutory regimes contain differing transition provisions which must always be considered. Second, specific contracts, such as those for public works, may remain governed by more specific statutes and/or the common law.
  • For contracts not involving public works or other specific projects, prompt payment regimes provide strict payment timelines under which contractors must pay subcontractors, unless they provide subcontractors with a notice of non-payment.
  • There may yet still be a future for these clauses in Canadian construction contracts. In all situations, contractors should continue to draft subcontracts that precisely outline the circumstances in which they are permitted to withhold payment from subcontractors upon non-payment by the owner, always subject to prompt payment regimes.
Pay-When Paid Clauses in Canada
Alberta

The Alberta Court of King’s Bench decision in Canadian Pressure Testing Technologies Ltd v EllisDon Industrial Inc, 2022 ABKB 649 (“Canadian Pressure Testing”)[2] provides a reminder that contractual payment terms that seek to impose a condition-precedent on payment (such as pay-when-paid clauses) will be construed narrowly and must contain clear and unambiguous language. Of note, the relevant subcontract pre-dated the coming into force of the Prompt Payment and Construction Lien Act, RSA 2000, c P-26.4 (the “PPCLA) and its attendant strict timelines for payment and adjudication of disputes.

In Canadian Pressure Testing, the Alberta Court of King’s Bench interpreted a clause in a subcontract that the defendant contractor asserted was a pay-when-paid clause. The Plaintiff subcontractor sought summary judgment from the Defendant contractor for unpaid invoices for pressure testing services provided under the parties’ subcontract. The project owner did not pay the contractor, which led the contractor to withhold payment from the Plaintiff subcontractor.

The relevant portion of the payment clause in the parties’ subcontract stated:

[the 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 [Defendant contractor] receives payment pursuant to the terms and conditions of the Prime Contract from the Owner in respect of such Services and as the amounts of such payments are certified by the Owner or the Consultant.[3] [Emphasis added]

(the “Disputed Clause”)

The contractor interpreted the Disputed Clause as a pay-when-paid clause, mandating payment to the subcontractor only after the owner paid the contractor.[4]

Conversely, the subcontractor argued that the Disputed Clause was a “pay no later than” clause that provided an “outside date” for the contractor to make payment but which otherwise did not alter the contractor’s payment obligations.[5]

Applications Judge Summers considered case law from several provinces and territories across Canada, ultimately agreeing with and adopting the reasoning of the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v Alta Surety Company, 1995 NSCA 16 (“Arnoldin”),[6] which strictly construed clauses purporting to restrict payment obligations, holding:

Any provision intended to diminish or remove the subcontractor's right to be paid should clearly state that and set out the circumstances in which the subcontractor will not be paid following the completion of his work. Such a provision should not only be clear but specific, that is to say, it will not be inferred as the intended effect of a clause which addresses some other less fundamental term or provision of the contract such as the timing of payments to the subcontractor in relation to the time when the owner pays the contractor.[7] [Emphasis added]

Applications Judge Summers found that the Disputed Clause did not reach “the point of clarity” required by the law in order to be considered a true pay-when-paid clause.[8] As a result, non-payment by the owner, on its own, did not relieve the Defendant contractor of the obligation to pay the Plaintiff subcontractor. 

Ontario

The still-recent amendments to the Construction Act, R.S.O. 1990, c. C.30 (the “Construction Act”) in Ontario established a prompt payment structure that mandates a contractor to either settle or dispute submitted invoices within a certain timeframe. While the Construction Act does not specifically address pay-when-paid clauses, Ontario courts have not yet examined these clauses in the context of the new provisions of the Construction Act. We expect further judicial guidance on the enforceability of pay-when-paid clauses under the Construction Act.

As such, the leading authority in Ontario for pay-when-paid clauses continues to be Timbro Developments Ltd. v. Grimsby Diesel Motors Inc, ((1988) 32 CLR 32) (“Timbro”),[9] where the court interpreted purchase orders which stated:

 “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.”[10]

The majority upheld clause 8(a) as a pay-when-paid clause[11] and found that the clause clearly specified that the subcontractor assumes the risk of non-payment by the owner to the contractor.[12]

Courts outside of Ontario have not followed Timbro, and have differentiated the decision such that its precedential value has been minimized.[13] For example, and as noted above, the court in Canadian Pressure Testing recently distinguished Timbro and held Arnoldin as the correct statement of law.[14] 

Saskatchewan

Saskatchewan’s Builders' Lien (Prompt Payment) Amendment Act, 2019, SS 2019[15] sets out a prompt payment framework that requires a contractor to either settle or dispute submitted invoices within a specified timeframe. Similar to other provinces, the courts in Saskatchewan have yet to evaluate pay-when-paid clauses in the context of prompt payment.

Before prompt payment legislation was introduced, the Saskatchewan Court of King’s Bench interpreted pay-when-paid clauses using the same reasoning found in Arnoldin. For example, in Anderson Rental & Paving Ltd. v. Pylatuke, 2004 SKQB 259,[16] the court interpreted a provision which stated that “Payment for aggregate hauled and stockpiled would not be required until material for this project is utilized. Once materials are utilized payment would be required in full.”[17] Citing Arnoldin, the court ruled in favour of the supplier and found that the payment terms were clear and unambiguous, with no indication of a pay-when-paid clause.

Other Provinces

As of the publication of this post, both Manitoba and Nova Scotia have been given Royal Assent for their prompt payment legislation.[18] Furthermore, discussions are currently underway in British Columbia to introduce similar legislation.

Nonetheless, outside of Ontario, other provinces and territories, including British Columbia, the Yukon, Manitoba, and Prince Edward Island, continue to follow the Arnoldin approach.[19] As discussed in the Canadian Pressure Testing analysis above, Arnoldin stipulates that a contractor can only rely on the condition that a subcontractor is not entitled to payment until the owner pays the contractor if the terms of the contract between the contractor and subcontractor clearly state such a condition.

“Pay-When-Paid” Clauses in a Post-Prompt Payment World

The importance of having well drafted contractual pay-when-paid clauses will continue for projects that are not subject to prompt payment statute. The number of such projects is ever decreasing however, as prompt payment legislation has been enacted in Ontario, Saskatchewan, Alberta, and (most recently as of the publication of this post), federally. While each of those statutes has their own carve-outs and exceptions, it is now exceedingly common for construction projects in Canada to be subject to a prompt payment statute.

Statutory Framework

While Alberta initially proposed an explicit statutory ban on pay-when-paid clauses altogether, it subsequently relented and enacted legislation in step with the payment timelines set out in Ontario and Saskatchewan that effectively preclude such clauses.

Generally speaking, prompt payment legislation provides a statutorily mandated form of pay-when-paid mechanism. Contractors are to submit proper invoices to owners on a monthly basis (subject to certain exceptions), [20] and owners are to pay proper invoices within 28 days. Where an owner disputes all or part of a proper invoice, it must issue a notice of dispute within a prescribed period (usually within 14 days of the proper invoice) specifying the disputed amount and the reasons for non-payment.[21] Where a contractor (or subcontractor) is not paid in full, it must either pay its subcontractors, or, issue its own notice of non-payment to its subcontractors within 7 days of having received a notice of non-payment, or 7 days from the expiry of the time when it was to have been paid.[22] Importantly, contractors and subcontractors who issue a notice of non-payment to their subcontractors must: (i) provide the notice of non-payment that they received; (ii) specify all reasons for non-payment; and (iii) undertake to refer a dispute with the party that did not pay them to adjudication within 21 days.

The statutory pay-when-paid mechanism seeks to balance the interests of the parties that supplied the labour and materials, with the interests of parties who may not have been paid by their contractual counter-party. The requirement for payors to specify the reasons for non-payment limits (or, more likely, prevents) abuse by payors failing to pay their subcontractors or suppliers due to non-payment caused by defaults unrelated to the payee’s performance. Additionally, the requirement to have to undertake to start an adjudication regarding the payment dispute ensures that issues regarding non-payment that impact subcontractors and suppliers are advanced in a timely manner.

Uncharted Territory: Limited Judicial Consideration

As of the publication of this post, there has been no reported judicial consideration of the prompt payment provisions of the PPCLA, and little judicial commentary on the prompt payment provisions of the Ontario and Saskatchewan statutes. In foreign prompt payment jurisdictions such as the United Kingdom and Australia, such clauses are expressly precluded by the relevant statues, resulting in clear statements of the law.[23]

At minimum, for contracts which do not include pay-when-paid language, the prompt payment provisions seen in Canada so far appear to grant the contractor slightlymore latitude to delay payment to a subcontractor, providing that the contractor submits a timely notice of non-payment. However, there are many ways in which the contractor’s rights are circumscribed; for example, it has to specify the basis for any non-payment, provide a copy of the requisite notice of non-payment from the owner, and undertake to commence an adjudication. In short, prompt payment removes the need for parties to exert the time and effort negotiating a pay-when-paid clause that threads the needle of existing Canadian jurisprudence on the topic, but also provides a narrower world of possibilities to withhold payment than previously existed under Canadian law.

Some have asserted that pay-when-paid clauses may still be valid for contracts and projects that are subject to prompt payment statutes like the PPCLA and can be used by contractors to limit their obligation to pay subcontractors in the event of an owner's insolvency, or to rely on a determination or settlement of a dispute between an owner and the contractor to limit payments to a subcontractor.

Contractors and subcontractors are already protected under other provisions of the PPCLA, including for example by the required issuance of timely invoices and access to labour and material payment bonds, and section 32.1(3) of the PPCLA likely precludes the use of pay-when-paid clauses to rely entirely on the results of a determination or settlement under the prime contract to affect the rights of a subcontractor or supplier.[24] Further, given that the PPCLA explicitly shortens the time contemplated time between the issuance of a proper invoice and the payment or non-payment and dispute of same, the amount that is potentially owed to a contractor (and therefore “at risk” for subcontractors below them) should be reduced and more manageable.

[1] A. Heal, “Pay when Paid” Clauses Revisited”, Journal of the Canadian College of Construction Lawyers, 2021 J. Can. C. Construction Law, 27.

[2]Canadian Pressure Testing Technologies Ltd v EllisDon Industrial Inc, 2022 ABKB 649 [“Canadian Pressure Testing”].

[3]Canadian Pressure Testing at para. 3.

[4]Canadian Pressure Testing at paras. 13-17.

[5]Canadian Pressure Testing at para. 6.

[6]Arnoldin Construction & Forms Ltd v Alta Surety Company, 1995 NSCA 16.

[7] Cited in Canadian Pressure Testing at para. 21.

[8]Canadian Pressure Testing at para. 22.

[9]Timbro Developments Ltd v Grimsby Diesel Motors Inc, (1988) 32 CLR 32.

[10]Timbro at para. 2.

[11]Timbro at para. 3.

[12]Timbro at para. 3.

[13]Canadian Pressure Testing at para. 21.

[14]Canadian Pressure Testing at para. 21

[15]The Builders' Lien (Prompt Payment) Amendment Act, 2019, SS 2019, c 2.

[16]Anderson Rental & Paving Ltd. v. Pylatuke, 2004 SKQB 259.

[17]Anderson at para. 14.

[18]The Builders' Liens Amendment Act (Prompt Payment), SM 2023, c 30; Builders' Lien Act (amended), SNS 2022, c 43.

[19] See Viking Fire Suppression Ltd. v. Sertex Plumbing B.C. Ltd. [1996] B.C.J. No. 1986; Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd. 2017 YKSC 51, 2017; A&B Mechanical Ltd. v. Canotech; and APM Construction Services Inc. v. Caribou Island Electric Ltd. 2013 NSCA 62.

[20]PPCLA, section 32.1(6). Within this 31-day limitation, the Regulations stipulate that the owner and contractor may agree to specific terms as to when a proper invoice may be delivered.

[21]PPCLA, section 32.3(2); PPCLA, sections 32.3(6) and 32.3(7).

[22]Builders’ Liens Act (Sask), SS 1984-85-86, c B-7.1, s.5.5(7)

[23] For example, widespread use of pay-when-paid clauses in the United Kingdom during the 1980’s and 1990’s resulted in section 113 of the Housing Grants, Construction and Regeneration Act 1996 c.53, prohibits pay-when-paid clauses unless there is an insolvency further up in the construction chain, and the Local Democracy Economic Development and Construction Act 2009, c.20, s.142, prohibits making payment contingent upon completion of work under a separate contract or a decision by a third party regarding whether obligations under that separate contract have been performed. Similarly, in Australia, most states have a Security of Payment Act, see for example in Queensland, the Building Industry Fairness (Security of Payment) Act 2017, which protects contractors rights in certain industries and explicitly precludes the use of pay-when-paid clauses, and Australian courts have held that the relevant test is whether a provision of a contract makes liability to pay the money contingent or dependent on the operation of another contract.

[24] Section 32.1(3) of the PPCLA provides: “Subject to subsection (4), a provision in a contract that makes the giving of a proper invoice conditional on the prior certification of a person or prior approval of the owner to give the invoice is of no force or effect.” While not explicit, payment following a “determination” or “settlement of a dispute” would likely be found to be a de facto “prior certification” or “prior approval”, which contravenes section 32.1(3) of the PPCLA specifically, and the overarching goals of the statute more generally.

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