Courts are generally reluctant to enforce pay-if-paid clauses, sometimes “interpreting” them as either unenforceable or as a pay-when-paid clause that still ultimately entitles trade contractors to be paid.
A pay-if-paid clause is the evil twin of the pay-when-paid clause. A pay-when-paid clause really only addresses timing of payments, it does not affect the underlying obligation to pay for work performed. A pay-if-paid clause on the other hand purports to restrict the obligation to pay to the receipt of payment by the payor. What do courts think of pay-if-paid clauses? Not much.
Courts are generally reluctant to enforce pay-if-paid clauses, sometimes “interpreting” them as either unenforceable or as a pay-when-paid clause that still ultimately entitles trade contractors to be paid.
The issue with pay-if-paid clauses is that they’re effectively a condition precedent. That is, a clause upon which the entire trade contract depends. But, unlike other conditions precedent that generally depend on the conduct of the trade contractor itself, pay-if-paid clauses are activated by a non-paying owner, a situation trade contractors have no control over. For this reason, courts have been hesitant to penalize trade contractors by enforcing this type of clause.
Take the Nova Scotia Court of Appeal case, Arnoldin Construction & Forms Ltd. v. Alta Surety Co. (1995), where the owner failed to pay the prime contractor. The surety in turn refused to pay the trade contractor under the labour and materials payment bond. The trade contractor sued.
At issue was a clause in the trade contract that stated that final payment to the trade contractor would be made within 30 days of the prime contractor being paid. The surety claimed the clause was a condition precedent, pay-if-paid clause. The trade contractor argued the clause was not a condition precedent, but a pay-when-paid clause that only affected when payment was to be made, not whether payment would be made. The trade contractor lost at trial and appealed.
The Nova Scotia Court of Appeal agreed with the trade contractor, stating the clause “did not negate the (prime) contractor’s obligation to pay for the work”. The court looked at the clause in the context of the whole contract and the obligations it imposed on the prime contractor.
In this light, the clause only outlined when payment was to be made, and did not constitute a condition precedent. The Court of Appeal reversed the trial decision and awarded the trade contractor the balance owing on the completed contract: $547,857.27.
The Court of Appeal also noted that pay-if-paid clauses require much clearer language than that used in this clause, stating that “an intention so important cannot be buried in obscure language that would not alert the subcontractor that payment for the subcontract work was conditional on the owner paying the (prime) contractor”.
In addition to clear language, a pay-if-paid clause might be enforced if it explicitly creates a condition precedent and includes an acknowledgement on the part of the trade contractor that it is assuming the risk the owner may not pay the prime contractor.
Some U.S. courts have found pay-if-paid clauses unenforceable due to conflicts with builders’ lien legislation. There is little Canadian case law on pay-if-paid clauses and, in particular, with respect to their interaction with the B.C. Builders Lien Act. Presumably however, any conflict between such a clause and the Act would be resolved in favour of the provisions of the Act. It is unlikely that a court would negate the rights of a lien claimant because of the owner’s non payment of the prime, something beyond the control of the lien claimant.
Christopher Hirst and Norman Streu are partners within the construction and engineering practice of the Vancouver law firm, Alexander Holburn Beaudin & Lang LLP. Norm Streu is also past chair of the Vancouver Regional Construction Association. This column was prepared with the assistance of Vito Scavetta, a co-op student with AHB&L LLP.
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