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Be sure you know what you’re getting, and when

By James C. Wishart, Fillmore Riley LLP

For better or worse, the readers of Piling Canada are likely familiar with pay-when-paid clauses. Usually found in subcontracts between general contractors and subcontractors or suppliers, pay-when-paid clauses are intended to postpone the general contractor’s obligation to pay its subcontractors or suppliers until the general contractor has been paid by the owner for the relevant work. Even some industry standard contract documents, such as the CCA 1 – 2008 (Stipulated Price Subcontract), include pay-when-paid clauses.

The question that we most frequently get about pay-when-paid clauses is: what happens if the owner doesn’t pay the general contractor – does the subcontractor or supplier still have a right to be paid for its work or has it waived that right by accepting the pay-when-paid clause? In A&B Mechanical Ltd. v. Canotech Consultants Ltd. et al, 2013 MBQB 287, the Manitoba Court of Queen’s Bench considered a pay-when-paid clause and answered that question.

 

In that case, 5994731 Manitoba Ltd. (the “Owner”) had retained Canotech Consultants Ltd. (“Canotech”) to construct the water park known as Adrenaline Adventures (the “Project”) in Headingley, Man. which is located just to the west of the City of Winnipeg. Canotech had subcontracted part of its work on the Project to A&B Mechanical Ltd. (“A&B”). The Owner failed to pay Canotech for certain work on the Project, including work performed by A&B. Canotech, in turn, refused to pay A&B for the relevant work, even though A&B had performed the work in accordance with the subcontract. A&B sought summary judgment in the amount of its unpaid invoices for its work on the Project.

In response to the motion for summary judgment, Canotech took the position that it would honour its subcontract with A&B, but only after receiving payment from the Owner for the relevant work, and relied on the following pay-when-paid clause in the subcontract between Canotech and A&B:

The Contractor (Canotech) agrees to pay the Sub- Contractor (A&B) for the performance of the Sub-contract as follows:

Payments will be made monthly on progress estimates as approved by the Architect and/or Engineer and the Contractor’s Superintendent covering 92.5 per cent 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. (Emphasis added)

The court found that A&B had fulfilled the only condition precedent to its being paid by Canotech (being the provision of statutory declarations to Canotech for each progress billing) and, with that having been done, A&B was entitled to receive payment for its work. The court then held that the clause at issue was not sufficiently clear to result in a waiver by A&B of its right to be paid. The court held that, for a clause to be effective as a waiver of the subcontractor’s right to be paid, the clause would have to contain clear language that alerted the subcontractor to the potential waiver and that, absent such clear and alerting language, a pay-when-paid clause is only a timing provision which does not relieve the general contractor of its obligation to pay its subcontractor or supplier, regardless of the Owner’s failure to pay.

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Piling Canada is the premier national voice for the Canadian deep foundation construction industry. Each issue is dedicated to providing readers with current and informative editorial, including project updates, company profiles, technological advancements, safety news, environmental information, HR advice, pertinent legal issues and more.