Be sure you know what you’re getting, and when
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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One question left unanswered by the court is: if a subcontract includes a pay-when-paid clause and the owner fails to pay its general contractor, how long is the general contractor entitled to wait before it must pay its subcontractor, regardless of the owner’s failure to pay? The answer would appear to be: a reasonable period of time within the context of the relevant prime contract, subcontract and the project, which could mean a period of weeks or months depending on the particular parties, the work and the larger project.
In the A&B decision, the court also found that Canotech’s interpretation of the payment clause was inconsistent with the 15-day payment requirement contained in the prime contract between Canotech and the Owner, which requirement had been incorporated into the subcontract between Canotech and A&B. It may also have been relevant to the court that Canotech, although it was owed approximately $450,000 by the Owner, had not taken steps to pursue its claim against the Owner for payment.
The A&B decision is helpful for both general contractors and subcontractors. General contractors wanting to include a true pay-when-paid clause in their subcontracts (i.e., a clause that results in a waiver by the subcontractor if the owner fails to pay) must include clear and obvious language to that end and be sure that such language has been brought to the attention of, and agreed upon, by the subcontractor. General contractors must also be careful about incorporating the payment terms of the prime contract into their subcontract and, thereby, interfering with the pay-when-paid clause.
Subcontractors, on the other hand, should be watchful for pay-when-paid clauses and, if found in a subcontract, understand whether they are being asked to take on the risk that the owner might fail to pay. Most subcontractors are, understandably, not willing to assume that risk, at least not without adjusting their pricing accordingly. Subcontractors not willing to take on that risk should confirm with the general contractor, preferably in writing by way of an amendment or addendum to the subcontract, that the pay-when-paid clause operates only as a timing provision and that the subcontractor is not waiving its right to be paid under the subcontract if the owner fails to pay.
Some jurisdictions in Canada have considered “prompt payment” legislation, which, if enacted, would make a true pay-when-paid clause unenforceable. The most recent example of such legislation was in Ontario: Private Member’s Bill 69 – An Act respecting payments made under contracts and subcontracts in the construction industry. That Bill was given second reading in the Ontario legislature and referred to committee in 2013. A recent search of the Ontario legislature’s website indicates that that Bill continues to languish at the committee stage. Such legislation, if ever enacted, would likely render the discussion of the interpretation of pay-when-paid clauses moot.
James Wishart is a lawyer at Fillmore Riley LLP in Winnipeg, Man. He has significant experience in the drafting and interpretation of construction contracts. In addition to his construction law practice, Wishart advises clients on the purchase and sale of businesses, the purchase, sale, development and financing of real estate and other corporate and commercial matters.
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