The recent decision in Canadian Pressure Testing Technologies Ltd v EllisDon Industrial Inc., 2022 ABKB 649 illustrates the importance of clear drafting when it comes to pay-when-paid clauses in construction contracts. Pay-when-paid clauses are often used by contractors in their subcontracts where the contractor intends to make the payment to a subcontractor conditional on their receiving payment from the owner first. But, as EllisDon makes clear, if the wording of a pay-when-paid clause is not clear, a court may interpret the clause against the contractor who wishes to rely on it. Pay-when-paid clauses will likely be particularly relevant and contentious in the wake of prompt payment legislation coming into effect across the provinces.
In EllisDon, the general contractor EllisDon Industrial Inc. (“EllisDon”) retained Canadian Pressure Testing Technologies Ltd. (“CPTT”) as its subcontractor in connection with the construction of a petrochemical plant (the “Subcontract”). The Subcontract contained a payment provision which stipulated “[EllisDon] shall pay to [CPTT] monthly progress payments net of any applicable Holdback and such payments shall become due and payable no later than five (5) business days after [EllisDon] 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 “Pay-When-Paid Clause”).
When CPTT invoiced EllisDon for completion of the Subcontract, EllisDon refused payment on the basis that the owner had not yet paid EllisDon in respect of such services. CPTT sued EllisDon for nonpayment. EllisDon relied on the Pay-When-Paid Clause as its basis for refusing payment. CPTT argued that the wording of the Pay-When-Paid Clause only made it a “pay no later than” clause because of the words “payable no later than five (5) business days after [EllisDon] receives payment”. In the course of the litigation, the evidence indicated that EllisDon had not received approval from the owner for the disputed services for which EllisDon was now refusing payment to CPTT.
In making its case, CPTT relied on prior cases in which the courts rejected an alleged pay-when-paid clause because either:
(1) the subcontract incorporated payment provisions from the prime contract which did not make payment conditional, but rather made payment due upon application for payment, meaning that the contractor was also bound by these payment obligations in the subcontract (A & B Mechanical Ltd v Canotech Consultants Ltd et al, 2013 MBQB 287); or
(2) the subcontract contained payment provisions that only stipulated the “pay-when-paid” clause as being a timing mechanism, but otherwise made payment upon completion mandatory (Arnoldin Construction & Forms Ltd v Alta Surety Company, 1995 NSCA 16).
Specifically, the Court in EllisDon considered the Nova Scotia Court of Appeal’s comment in Arnoldin that appropriate words to create a true pay-when-paid clause would be using the word “if”. For example: the contractor will pay the subcontract if the owner pays the contractor. In other words, the clause should avoid joining the receipt and timing of payment from the owner to avoid any confusion.
In support of its position, EllisDon relied on several different cases in which the courts upheld a pay-when-paid clause even when the clause seemingly joined the condition of receipt and timing of payment from the owner. Most notably, EllisDon relied on an Ontario Court of Appeal decision in Timbro Developments Ltd v Grimsby Diesel Motors Inc, (1988) 32 CLR 32 (Ont CA) which dealt with a payment provision that conditioned payment on the later of receipt of application for payment, certification for payment, or receipt of payment from the owner. A majority of the Court of Appeal upheld this clause as a pay-when-paid clause that required payment from the owner before payment was due to the subcontractor. Finlayson JA dissented and found that this clause dealt with the timing of payments and in no sense put the subcontractors at risk that they would not be paid. The Supreme Court of Canada refused leave to appeal in Timbro.
The Court ruled in favour of CPTT. In doing so the Court commented on the cases relied upon by both parties.
Notably, the Court observed that since Timbro, most Ontario lower court decisions which would have been bound by Timbro, either distinguished, minimized, or ignored Timbro altogether. The Court further relied on a decision in Applied Insulation Co Ltd v Megatech Contracting Ltd, (1994), 22 CLR (2d) 251 (Ont Gen Div) in which the Court relied on an obiter statement of Madam Justice Bell from the case Kor-Ban Inc. v. Pigott Construction Ltd. [reported (1993), 11 C.L.R. (2d) 160 (Ont. Gen. Div.)], observing that if the general contractor causes the owner’s failure to pay them, the general contractor cannot then rely on a pay-when-paid clause to refuse payment to the subcontractor.
The Court concluded that Timbro was not binding and is of little precedential value. Rather, Arnoldin is the correct law to apply. Pay-when-paid clauses must be clear and specific about receipt of payment from the owner as the sole condition to payment to the subcontractor. The Court found that the Pay-When-Paid Clause was ambiguous as it could be interpreted as a “pay no later than” clause or a “pay-when-paid” clause. Further, the evidence indicating it was EllisDon’s failure which caused the owner to refuse payment, weighed in favour of interpreting the Pay-When-Paid Clause against EllisDon. In the result, the Court granted summary judgment to CPTT for the full amount of its overdue account.
EllisDon is a reminder to construction stakeholders that certainty in contract wording is key. In particular, a pay-when-paid clause must be both clear and specific that payment will only be made if payment is received from the owner. The clause should not join other terms related to timing of payment. Such conjunction can inject ambiguity into the language of the clause, and increase the risk of a court interpreting the clause contrary to the intended effect from the standpoint of the contractor.
The decision in EllisDon follows the introduction of prompt payment legislation in Alberta, however, this legislation was not in effect at the relevant time and did not impact the decision in EllisDon. B.C. is also likely to follow through with proposed amendments to its builders lien legislation. Alberta’s Bill 37: The Builders’ Lien (Prompt Payment) Amendment Act, 2020, among other things, sets a 28-day timeline for owners to pay general contractors, and a 7-day timeline for contractors to pay subcontractors after receiving payment. Alberta’s legislation also has strict requirements that must be followed where restrictions or conditions are to be permissible within the framework of the prompt payment legislation. Alberta is one of the more recent provinces to introduce prompt payment legislation, however, it can be anticipated that disputes concerning pay-when-paid clauses will likely be brought before the courts again in relation to prompt payment legislation in Alberta (and elsewhere as prompt payment legislation is implemented). Construction stakeholders and the courts will need to consider the interaction between pay-when-paid clauses and the deadlines set under prompt payment legislation, including if and how any particular pay-when-paid clause can be applied. Undoubtedly though, clarity and specificity will be key.