Pay When Paid Clauses in Construction Contracts

The Alberta Court of King’s Bench clarifies the requirements for valid “pay when paid” clauses in Canadian Pressure Testing Technologies Ltd. v EllisDon Industrial Inc., 2022 ABKB 649.

Pay when paid clauses are common in construction contracts, but what is required to ensure a clause like this is enforceable? Recently, the Alberta Court commented on a pay when paid clause in a construction contract.

Background

Canadian Pressure Testing Technologies Ltd. (the “Plaintiff”) performed services for EllisDon Industrial Inc. (the “Defendant”) under a Services Agreement. All work was requested and approved by the Defendant. The Defendant paid the Plaintiff for all its work, except for final invoices totaling $98,301.00. The Defendant did not pay the final invoices because the Owner of the project had not paid them. The unpaid invoices were part of a Change Order Request in the amount of $766,534.20 that the Defendant had submitted to the Owner. The Change Order Request was part of a much larger dispute between the Defendant and the Owner.

Payment Provisions Under the Services Agreement

The relevant provisions in the Services Agreement were as follows:

5.1 In consideration of the provision of Services by Service Provider (Plaintiff), ED (Defendant) agrees to pay Service Provider the following (the “Fees”): See attached Schedule “A”

5.3 ED shall pay to the Service Provider monthly progress payments net of any applicable Holdback and such payments shall become due and payable no later than five (5) business days after the ED 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. Any change in the fees payable hereunder must be approved in advance by ED in writing.

Positions of the Parties

The Defendant argued it was not required to pay the Plaintiff until it got paid by the Owner. They argued this based on the phrase within clause 5.3 of the Services Agreement: “…and such payments shall become due and payable no later than five (5) business days after the ED receives payment pursuant to the terms and conditions of the Prime Contract from the Owner in respect of such services…” This was known as the “Critical Term”. The Defendant asserted that the Critical Term was a so-called “pay when paid clause”.

The Plaintiff argued that clause 5.1 of the Services Agreement established the Defendant’s obligation to pay them, and the Critical Term (in 5.3) was a “pay no later than” clause.

Decision

The Applications Judge of the Alberta Court of King’s Bench followed Arnoldin Construction & Forms Ltd. v Alta Surety Company, a 1995 Nova Scotia Court of Appeal decision (“Arnoldin”). In Arnoldin, the Court of Appeal stated that a term where payment to the subcontractor was conditional on the contractor receiving payment from the owner requires clear language:

Any provision intended to diminish or remove the subcontractor's right to be paid should clearly state that and set out the circumstances in which the subcontractor will not be paid following the completion of his work.

In following Arnoldin, the Applications Judge held that the Critical Term did not reach the point of clarity required by law to be considered a “pay when paid” clause. The clause was ambiguous as it could be interpreted as a “pay no later than” clause. The Plaintiff was granted summary judgment in the amount of $98,301.00 for the unpaid invoices.

Takeaways

Overall, the takeaway from Canadian Pressure Testing Technologies Ltd. v EllisDon Industrial Inc. is that “pay when paid” clauses can likely be found valid if they:

(a)  Clearly state that the subcontractor's rights to be paid are diminished or removed;

(b)  Set out the circumstances in which the subcontractor will not be paid following the completion of work; and

(c)   Clearly state that the subcontractor will, in no event, be paid, unless and until the contractor is paid by the owner.

It should be noted that the contract in question was entered into and performed prior to the Prompt Payment and Construction Lien Act (“PPCLA”) coming into force in Alberta. The impact of the PPCLA on construction contracts, including pay when paid clauses, is yet to be determined by the adjudicators and courts.

For any questions you may have about the validity of “pay when paid” clauses, or any contract questions, any member of our Construction Law team would be happy to help.