Introduction
The Alberta Court of King’s Bench recent decision in Canadian Pressure Testing Technologies Ltd. v EllisDon Industrial Inc, 2022 ABKB 649 serves as a reminder that when a general contractor attempts to implement a pay when paid clause on a project, such a clause must contain clear and specific contractual language in order to be effective.
As the name suggests, a “pay when paid” clause is designed to prevent a general contractor from having to pay a subcontractor until such time as the general contractor has been paid by the owner. These clauses transfer risk of non-payment by the owner from a contractor to the subcontractor. A pay when paid clause is often a contentious contractual provision in a construction contract and the clarity and specificity of such clauses is critical.
The Background
Canadian Pressure Testing Technologies Ltd. (the “Subcontractor”) and EllisDon Industrial Inc. (the “General Contractor”) had entered into a subcontract for the Subcontractor to provide pressure testing services for piping on a petrochemical plant (the “Agreement”).
The Agreement contained the following payment provision, amongst others:
Section 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 [General Contractor] receives payment pursuant to the terms and conditions of the Prime Contract from the Owner in respect of such Services
(the “Payment Clause”)
The Subcontractor completed its work under the Agreement and issued invoices for progress payments, and the General Contractor paid the Subcontractor for all of its work. The Subcontractor then issued its final invoices. However, the General Contractor refused to pay these final invoices on the basis that it had not yet been paid by the owner. A dispute arose between the parties and the Subcontractor brought a summary judgment application for the outstanding amounts and other related relief.
Analysis
In refusing to pay the Subcontractor, the General Contractor relied on the Payment Clause and adopted the position that the Payment Clause was a “pay when paid” clause, which meant that payment would not be due until the General Contractor received payment from the owner.
In turn, the Subcontractor argued that the Payment Clause should instead be interpreted as a “pay no later than” clause which required payment no later than 5 business days after the General Contractor received payment, but which otherwise did nothing to alter the General Contractor’s obligation to pay the Subcontractor even where the owner had not made payment.
The Court was required to determine whether the Payment Clause was a timing device, or whether the Subcontractor’s legal entitlement to payment arose only after the General Contractor received payment from the owner.
In reviewing the Canadian law, the Court reaffirmed that any provision intended to diminish or remove a subcontractor’s right to be paid must clearly state that and set out the circumstances in which the subcontractor will not be paid following the completion of its work. Such a provision should not only be clear but specific, removing the subcontractor’s right to be paid 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.
The Court held that the Payment Clause failed to reach the point of clarity required by the law in order to be considered a true pay when paid clause. Instead, the Court found that the Payment Clause was, at a minimum, ambiguous as it could have been interpreted as a pay no later than clause.
The Court also considered the General Contractor’s failure to obtain prior approval of the owner for work, and found that this constituted an act or default of the General Contractor which caused the owner’s failure to pay the General Contractor. This was said to contribute to the Court’s decision not to interpret and enforce the Payment Clause as a pay when paid clause and refuse payment to the Subcontractor.
As a result, the Court granted summary judgment in favour of the Subcontractor.
Take aways
The intention for a subcontractor to assume the risk of non-payment by the owner to the contractor must be stated in clear language in order for a clause to be interpreted as a pay when paid clause. When there is ambiguity about whether a clause may be a timing mechanism for payment of a subcontractor, rather than acting as a condition for payment, the courts may refuse to interpret such a clause as a pay when paid clause.
Even when a pay when paid is expressly and sufficiently drafted into a subcontract, contractors will not always be able to use it to avoid paying subcontractors. When seeking to rely on a pay when paid clause, the contractor should ensure that the reason for the owner’s non-payment is not due to an act or default of the contractor, otherwise it may be unable to avail itself of a properly drafted clause.
Finally, Canadian Pressure Testing Technologies Ltd. v EllisDon Industrial Inc. did not consider Alberta’s Prompt Payment and Construction Lien Act, RSA 200, c P-26 (the “PPCLA”), given that the PPCLA came into force after the underlying project at issue. However, it is important that pay when paid clauses be drafted to comply with prompt payment and adjudication legislation in the jurisdictions where such legislation has been introduced.
If you have any questions about pay when paid clauses, please contact Chase Salembier, Associate, at Rose LLP for further information.
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