Alberta Court of King's Bench expresses the importance of unambiguous "pay when paid" clauses in construction subcontracts

It is a common occurrence for general contractors to insert clauses into subcontracts in attempt to guard against any such obligation to pay a subcontractor for work performed in the absence of payment from the project owner.

In Canadian Pressure Testing Technologies Ltd. v EllisDon Industrial Inc., 2022 ABKB 649 (Canadian Pressure"), the Alberta Court of King's Bench recently addressed this common subcontract clause, known colloquially as a 'pay when paid' clause. In Canadian Pressure, the Court reinforced the critical importance of specificity and directness in contractual drafting. More specifically, the Court held that any clause that purports to diminish or remove a subcontractor's right to be paid must clearly state this restriction and that it must set out the circumstances wherein such a subcontractor will not be paid for work performed.

Background

EllisDon Industrial Inc. (the "General Contractor") and Canadian Pressure Testing Technologies Ltd. (the "Subcontractor") entered into a construction contract wherein the Subcontractor would provide pressure testing services for piping on a petrochemical plant construction project (the "Services Agreement").

The Services Agreement contained the following payment clause (the "Payment Clause"):

5.3 [General 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 [General 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 […].

The Subcontractor performed its obligations as required under the Services Agreement. All the work performed by the Subcontractor was requested and approved by the General Contractor. In turn, the General Contractor paid the Subcontractor for its works performed, except for final invoices totaling $98,301.00. The General Contractor argued that clause 5.3 was a 'pay when paid' clause and therefore payment to the Subcontractor was not due until it had been paid by the Owner of the project.

In response, the Subcontractor sought summary judgment against the General Contractor in the amount of the unpaid invoices.

The King's Bench decision

The Court granted the Subcontractor summary judgment in the full amount of the unpaid invoices at $98,301.00.

The main issue before the Court was whether the impugned clause, clause 5.3, was truly a 'pay when paid' clause or a 'pay no later than' clause. The distinct difference between these clauses being that the former relieves a contractor from payment until it has been paid whereas the latter merely specifies the timing of payment.

In reviewing the jurisprudence relied upon by the parties, the Court determined that clause 5.3 failed to reach a point of clarity required by the law to truly be considered a 'pay when paid' clause. Rather, the Court viewed clause 5.3 as a 'pay no later than' clause.

The Court definitively declined to follow the leading Ontario case on 'pay when paid' clauses, Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. (1988) 32 CLR 32 (Ont CA) ("Timbro"). The Court expressly stated that Timbro has been "minimized, distinguished and ignored to the point that it has little precedential value."^[1]

In distinguishing Timbro, the Court took as the correct statement of law being the decision rendered by the Supreme Court of Nova Scotia in Arnoldin Construction & Forms Ltd v. Alta Surety Company, 1995 NSCA 16 ("Arnoldin"). In Arnoldin, the Supreme Court of Nova Scotia held:

To impose on a subcontractor a term that payment was conditional on the contractor receiving payment from the owner would require the clear language of the nature I have identified. 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. [Emphasis Added]

Further, the Court also relied on Ontario jurisprudence holding that for a contractor to rely on a 'pay when paid' clause its own conduct must not be the cause of the owner's non-payment.^[2] In the case at bar, the Court found from the evidence that the General Contractor did not have the prior consent of the Owner for the work it performed under a Work Change Order—which was the Owner's reason for not paying the General Contractor.

In conclusion, the Court granted summary judgment to the Subcontractor as the Payment Clause as relied on by the General Contractor was overly ambiguous, and the General Contractor's own actions led to its own non-payment from the Owner.

Key takeaways

1. The Canadian Pressure case illustrates the importance of directness and clarity in drafting 'pay when paid' clauses regardless of jurisdiction—there is little to no room for interpretation. If a party wishes to make payments contingent upon payment from an upstream payor, it must ensure that this contingency is clearly expressed in the 'pay when paid' clause.
2. A party that wishes to rely upon a 'pay when paid' clause must ensure that its own conduct is not the reason for its reliance on the clause.
3. The Court did not consider the new prompt payment regime in Alberta, Prompt Payment and Construction Lien Act, RSA 200, c P-26, as the statute came into force after the underlying issues of the dispute arose.
4. Ontario courts have yet to consider 'pay when paid' clauses in the face of the new (Ontario) Construction Act prompt payment and adjudication provisions.^[3] We anticipate further judicial guidance as to the enforceability of 'pay when paid' clauses within the new statutory scheme.

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