Canada: Pay-When-Paid Clauses: Tips And Trends

Pay-when-paid clauses may be found in agreements between general contractors and subcontractors. These clauses allow general contractors to pass on to the subcontractor the risk of the owner not paying. If the owner fails to pay the general contractor, a pay-when-paid clause relinquishes the general contractor from its obligation to pay the subcontractor.

While pay-when-paid clauses appear to be good solutions for prudent general contractors and operate as risky provisions for subcontractors, all of the parties ought to be aware of the following issues.

#1: Courts are not consistent in their treatment of pay-when-paid clauses

Canadian Courts have historically been divided on the enforceability of pay-when-paid clauses. Generally, Courts will follow one of two lines of reasoning:

• Pro General Contractor: An unambiguous pay-when-paid clause means that a subcontractor clearly assumes the risk of non-payment by the owner to the contractor,¹ or
• Pro Subcontractor: If a general contractor wishes to impose a pay-when-paid clause in a standard form contract, it must use very clear language in order to displace its primary obligation to pay the subcontractor.²

Alberta Courts have had little to no opportunity to consider and interpret pay-when-paid clauses. As such, general contractors wishing to impose pay-when-paid clauses into subcontracts should do so using only with the most clear and unequivocal language. Conversely, subcontractors who have accepted the risk of pay-when-paid clauses may have wiggle-room to be released from them.

Overall, both parties should be aware that the law is somewhat uncertain.

#2: Subcontractors facing pay-when-paid clauses may still lien the owner's land

While one might assume that a pay-when-paid clause excludes reliance by a sub-contractor on Builders' Lien legislation, this is not the case. The Alberta Builders' Lien Act³ prevents parties from "contracting out" of the legislation by the following provision:

Therefore, subcontractors who are faced with an effective and enforceable pay-when-paid clause are still able to enforce their rights directly against the owner through the use of a builders' lien.

#3: A general contractor's conduct resulting in owner's non-payment makes the pay-when-paid clause ineffective

If the general contractor's bad conduct or defaults cause the owner to withhold payment, the general contractor cannot rely on the pay-when-paid clause and withhold payment from the subcontractor.⁴

#4: There may be conflicts between head agreements and subcontracts

As a precondition to payment, owners may require that general contractors present statutory declarations stating that subcontractors have been paid. Such conditions may not only conflict with a pay-when-paid clause in a subcontract, but may expose general contractors to liability for falsely swearing a statutory declaration.

Footnotes

1 Timbro Developments Ltd v Grimsby Diesel Motors Inc (1988), 32 CLR 32 (ONCA)

2 Arnoldin Construction & Forms Ltd v Alta Surety Co (1995), 137 NSR (2d) 281 (CA)

3 RSA 2000, c B-7 at s.5.

4 Metal-Air Mechanical Systems Ltd v Ledcor Construction Ltd (2008), 76 CLR (3d) 284 (ONSC)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.