Receiving full payment for work and services rendered is critical throughout the construction pyramid.
That’s why Ontario, Alberta, Nova Scotia and Saskatchewan have enacted prompt payment legislation as amendments to their respective construction acts. Other provinces are either in the exploratory stage or have tabled similar legislation.
The objective of prompt payment legislation is straightforward.
Edward Lynde, a partner with Fasken Martineau DuMoulin LLP, explained to the Daily Commercial News Ontario’s Construction Act, “attempts to balance the freedom of contract and the ability of the parties to agree to certain payment structures and arrangements while also requiring conformance with the requirements stipulated under the Construction Act.”
How might that affect the use of other payment terms?
Two clauses, often found in contracts, are “pay when paid” and “pay no later than.” The first concerns the specific act of paying, described in detail in a recent Legal Notes column.
As Lynde and fellow Fasken partner, Adam Lewinberg, explain, “Under a ‘pay when paid’ clause, a contractor has no obligation to pay a subcontractor unless and until the contractor receives payment from the owner. If the contractor never receives payment from the owner, then the obligation to pay the subcontractor never arises.”
Distinctly different is a “pay no later than” clause.
“It addresses the timing of payment but does not affect the subcontractor’s right to be paid,” say Lynde and Lewinberg. “In practice, where an owner hasn’t paid, courts have found that a ‘pay no later than’ clause entitles the contractor to delay payment to a subcontractor only for a reasonable period, not indefinitely.”
Sahil Shoor, partner with Gowling WLG, told the Daily Commercial News that pay when paid clauses are still valid and enforceable in Ontario and Alberta, adding there are likely hundreds of construction contracts that predate the amended Construction Acts.
Drafting such payment clauses is an onerous task, made even more difficult since they must now also comply with new prompt payment provisions, he said.
Parties cannot agree to terms that would otherwise contravene the prompt payment regime under the Construction Act, said Lynde. “Implementing such terms, either as a pay when paid or a pay no later than clause, would defeat the intentions of the Construction Act and the timely flow of funds.”
If used, it is critical that any contracted payment provisions be explicit and unambiguous, say Lynde and Lewinberg, whether they concern downstream payment obligations contingent upon payment from an upstream payor or only control the timing of payments.
The 2022 dispute between EllisDon Industrial Inc. and its subcontractor Canadian Pressure Testing Technologies Ltd., recently heard before the Alberta Court of King’s Bench, illustrates this importance.
As Shoor and articling student Michael Piaseczny write, Canadian Pressure had performed its obligations under the services agreement and as requested by EllisDon. All work was approved by EllisDon and paid for, except for final invoices totalling $98,301.
They write EllisDon, “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.”
It was learned in court, however, that EllisDon, “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.”
The court granted a summary judgment in favour of Canadian Pressure for the full invoiced amounts on the basis that payment clause 5.3 was “overly ambiguous,” and EllisDon’s own actions led to the non-payment from the project owner.
The contract between EllisDon and Canadian Pressure predated the enactment of prompt payment in Alberta. As noted above, Alberta removed any prohibitions to the use of payment clause provisions prior to its prompt payment enactment.
Any potential use of either clause should be considered under legal advisement. For provinces without such amendments, Shoor suggested existing case law provides the best interpretive guide.
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to email@example.com