Pay When Paid Clauses

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is a litigation lawyer practicing at Perley-Robertson, Hill & McDougall LLP in Ottawa, Ontario. He may be reached at 613.566.2823 or obourns@perlaw.ca.

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Pay when paid clauses are highly contentious provisions in the construction industry that all sub-contractors need to be aware of.  In the normal course, a contractor must continue to pay a sub-contractor whether or not the contractor has been paid.  A pay when paid clause (PWP clause) will alter the normal course and permit the contractor to withhold paying a sub-contractor until the contractor is paid by the party above it in the construction pyramid. Here is an example of such a clause:

The Contractor shall pay the Subcontractor, no later than (X) days after the Submission Date or (Y) working days after the Contractor receives payment from the Owner, whichever is the later.

The enforceability of PWP clauses has been inconsistent across Canada.  In Nova Scotia, Manitoba, Prince Edward Island, Saskatchewan and British Columbia the Courts have held that sub-contractors are entitled to be paid within a reasonable time, thus either overriding or amending any purported PWP clause.  Further, such clauses have, in fact, been banned in the United Kingdom and much of the United States.

In Ontario and Alberta the Courts have been more inclined to uphold the text in the parties’ contract, including a PWP clause.

The leading Ontario case approving of such clauses is the 1998 decision in Timbro Developments v. Grimsby Diesel Motors Inc. where the Court of Appeal determined that a PWP clause will be upheld where the clause is clear, unambiguous and enforceable and the subcontractor knew and accepted the risk.[1]

However, what’s clear in the Ontario cases is that a contractor cannot rely on a PWP clause where the cause of their own non-payment was their own default.  Postponing payment to a sub-contractor in such circumstances is unacceptable.[2]  The result is that, as stated by Hagarty, C.J., at best, the party seeking to rely on a PWP clause can say:[3]

If I [the general contractor] duly perform my contract with the company [the owners], and though I be entitled to the money from them, if from any cause, not arising from any act or default of mine [the general contractor], they [the owners] do not pay, you [the subcontractor] cannot call upon me [the general contractor] to pay.

Further, the contractor seeking to rely on the PWP clause must make “best efforts” to collect the amounts owing to them and may not simply sit back refusing to pay its sub-contractors.  In OEB International Inc. v. Leyden[4] the court held that “best efforts” means “more than reasonable efforts”. It means taking, in good faith, all reasonable steps to achieve the objective. The meaning of “best efforts” is however, not boundless. It must be approached in the light of the particular contract the parties to it and the contract’s overall purpose as reflected in its language.

The Superior Court also recently held, in Wallwin Electric Services Inc. v. Tasis Contractors Inc., a PWP clause did not apply if the contractor voluntarily reduces its account to the owner for reasons unrelated to the subcontractor’s work.[5]

There are two matters that requires clarification by the Courts:

First, is whether a PWP clause can be effective in completely quashing the requirement to pay where the contractor does not receive payment but has satisfied the “best efforts” collection requirement referenced above.  The question primarily concerns which party should bare the risk of non-payment, such as an owner’s bankruptcy, the contractor or the sub-contractor.

Second, what effect, if any, does the existence of a payment bond on the project make?  If a PWP clause was effective in such an instance then it would diminish or render meaningless the provision of the bond.

Bonus point:  Relatively recently case law has confirmed that PWP clauses do not override the Construction Lien Act and, therefore, a sub-contractor facing a contractor refusing to pay in reliance on PWP clause should proceed to lien in the normal course.[6]

[1] Timbro Developments v. Grimsby Diesel Motors Inc., (1998) CanLII 2289 (Ont. C.A.)

[2] Kor-Ban Inc. v. Pigott Construction Limited et al, (1993) CarswellOnt 825, 11 C.L.R. 160 (Ont. Ct. Gen. Div.)

[3] McBrien v. Shanly (1874) 24 U.C.C.P. (C.A.)

[4] OEB International Inc. v. Leyden, (1995) CanLII 7332 (Ont S.C.J.) <http://canlii.ca/t/1w7zv> at para 49

[5] Wallwin Electric Services Inc. v. Tasis Contractors Inc., (2015) ONSC 1612 (Ont. S.C.J.), <http://canlii.ca/t/ggmhz>

[6] Bradhill Masonry Inc. v. Simcoe County District School Board, (2013) ONSC 5705 (Ont. S.C.J.), <http://canlii.ca/t/g0jq6>

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