“What’s worth doing is worth doing for money.”
Gordon Gekko, CEO, Gekko & Co. (Wallstreet, 1987)
Everyone is keen on getting paid; doing the paying is exponentially less fun. Thus, payment terms are essential clauses for commercial contracts. It is common in commercial contracts – especially construction contracts – for payment by one party to the other to be dependent on the occurrence of an event. Often the triggering event will be when (or possibly if) the payor itself gets paid by a third party, usually the payor’s customer. In construction contracts, the dynamic is usually the general contractor not being obliged to pay its subcontractor until the owner of the project pays the general contractor. Similar terms are sometimes also seen in the wild as contained in more general commercial contracts. Clauses providing that payment to one party (the payee) is contingent the other (the payor) getting paid are notionally referred to as ‘pay-when-paid’ or ‘paid-when-paid’ clauses. Historically, courts in Ontario have tended to uphold these clauses. Defendant payors try to rely on them when defending lawsuits from payees looking to get paid.
The leading Ontario case on pay-when-paid clauses is Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. (ONCA; 1988 CarswellOnt 773; “Timbro”). In Timbro, the owner of a construction project refused to pay the defendant general contractor. In turn, the general contractor refused to pay the plaintiff subcontractor, relying on a pay-when-paid clause. The payment clause read (in part): […] Payments will be made not more than thirty (30) days after the submission date or ten (10) days after certification or when we have been paid by the owner, whichever is the later. (Emphasis added). A divided Ontario Court of Appeal (“ONCA”) found this clause clearly governed not only the timing of payment, but also the plaintiff subcontractor’s entitlement to payment. The Court interpreted the clause as the subcontractor having assumed the risk of non-payment by the owner of the subject project to the general contractor. So the subcontractor didn’t even experience late payment, it didn’t get paid at all. This is a tough (read: unfair) decision by the ONCA majority. It essentially converted the pay-when-paid clause to a pay-if-paid clause. The dissenting minority judge rejected the majority’s ruling, writing that the subcontractor: was not a co-adventurer or partner in the project; had done the work; and, ought to be paid.
Timbro is the Ontario appellate court authority on pay-when-paid clauses. Clearly and simply drafted pay-when-paid clauses remain enforceable in Ontario. Depending on the wording of the clauses, they will likely be interpreted to have pay-if-paid impacts. Ontario courts are required to follow Timbro. But courts in other provinces? Not so much. Typically, they don’t. For example, a Nova Scotia Court of Appeal case, Arnoldin Construction & Forms Ltd. v. Alta Surety Company (1995 NSCA 16; “Arnoldin”) takes a much different approach than Timbro. The Court in Arnoldin held that any clause intended to remove a subcontractor’s right to be paid should clearly and specifically state that intention and must detail the circumstances in which the subcontractor won’t be paid. The Court in Arnoldin held that pay-when-paid clauses only entitled the payor general contractor a reasonable time to be paid by the owner. The clause is not a carte blanche for the payor to avoid payment otherwise owed to the subcontractor.
Courts across Canada (at least outside Ontario), have been much warmer to Arnoldin than Timbro. For example, in a recent Alberta decision (Canadian Pressure Testing Technologies Ltd. v. EllisDon Industrial Inc. 2022 ABKB 649 (CanLII); “Canadian Pressure”), the Court wrote that Timbro “appears to have been minimized, distinguished and ignored to the point that it had little precedential value.” Even in Ontario, there is a sense that courts have tried to confine Timbro to turning on the specific wording of the clause in that case (e.g., Harris Steel Ltd. v. Seaboard Surety Company of Canada, 2003 CanLII 49313). In later Ontario court decisions, there are wrinkles in the facts, findings, and application of Timbro, suggesting an effort to ‘soften’ the impact of Timbro. For example, in 6157734 Canada Inc. v. Blueline Enterprises Inc. (2016 ONSC 1794 (CanLII); “Blueline”), the Ontario Divisional Court appears to confirm the duty and obligation of a general contractor to pursue the monies owed on behalf of its subcontractor when relying on a pay-when-paid clause. Courts in Ontario have also held that where there has been an act or default on the part of the payor general contractor which is the cause of the owner’s failure or refusal to pay that general contractor, then the general contractor would not be entitled to rely on a pay-when-paid clause to avoid paying its subcontractor (e.g., Kor-Ban Inc. v. Pigott Construction Ltd. (1993), 11 C.L.R. (2d) 160 (Ont. Gen. Div.) and Applied Insulation Co. v. Megatech Contracting Ltd., 1994 CarswellOnt 1113). This makes sense. The party looking to lean on a pay-when-paid clause to dodge payment shouldn’t be permitted to be the cause of the non-payment situation. This reasoning out of Ontario case law was applied in Canadian Pressure, the 2022 Alberta case discussed above.
Dan Leduc, senior partner at Soloway Wright LLP (and pan-Canadian construction law geek) notes that in the construction context, the above case law review requires consideration of the 2019 changes in Ontario’s Construction Act. Those changes included ‘prompt payment’ provisions. Under that regime, if there is non-payment by the owner to the general contractor, then a notice must be provided to the general contractor within 14 days of their proper invoice. Plus, a similar must be provided, in turn, to the subcontractor, along with an undertaking from the general contractor to start an adjudication process (possibly other proceedings too) to chase the monies owing. This is a best efforts duty that echoes the duty observed in Blueline discussed above.
The forgoing discussion suggests that the time might be ripe for a new Ontario Court of Appeal case to curb, refine, or indeed oust Timbro. But for now, strictly speaking, Timbro is the leading Ontario case on pay-when-paid clauses. These clauses – if clear – are more likely than not to be upheld in Ontario and construed as pay-if-paid clauses. Still, parties on either side of such a clause should treat them with caution given the fluidity in the jurisprudence. In the interim:
- pay-when-paid clauses must be clear and specific to be enforceable; and,
- a party relying on a pay-when-paid clause better not have caused or contributed to the non-payment circumstances.
About the Author:
Kris Dixon is a litigator at Soloway Wright LLP with a focus on Construction Litigation, Commercial Litigation, and Insurance Law. He regularly represents contractors and subcontractors in navigating all manner of complex construction disputes.
DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.
