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PAY-WHEN-PAID CLAUSES
Mon, 2012-06-04 19:16 — David Mckenzie
In this series of articles, we examine various “onerous clauses” commonly found in construction subcontracts. Onerous clauses are unfair clauses that both shift the risk on a construction project to the party least able to bear it and conflict with the reasonable expectations of the same party. The purpose of these articles is to discuss the purpose and effect of onerous clauses and suggest some means of avoiding them. Nevertheless, the advice of a construction lawyer should be sought to identify and modify onerous clauses prior to signing any subcontract.
Few clauses, if any, are more important to a subcontractor than the payment clause in a subcontract. The payment clause typically sets out:
1. the processes and documents required to apply for payment for the work performed; and
2. the dates by which applications must be made and payments become due.
In a typical payment clause, payment will become due to the subcontractor some number of days after the later of:
1. the date the application is made (and all required documents are provided to the general contractor); and
2. the date the application is approved by a third party such as a consultant (usually evidenced by a certificate of payment or similar document).
In most cases, provided the subcontractor’s work has been completed and an application for payment has been made in accordance with the subcontract terms, the subcontractor will become entitled to payment at some point, with the only question being when. This is usually true even if an application never receives third-party approval. For example, under the standard form CCA 1 2008, the failure of a consultant to issue a certificate of payment does not disentitle a subcontractor to its right to payment; rather, it simply provides the general contractor with a right to delay payment to the subcontractor for a certain number of days.
One way in which a general contractor may attempt to delay or avoid future payment to a subcontractor is by inserting a clause into the subcontract, generally known as a “pay-when-paid” clause, that makes payment by the owner to the general contractor a condition precedent for payment to the subcontractor.
Courts in a number of Canadian jurisdictions, including Ontario, Nova Scotia, and British Columbia, have upheld “pay-when-paid” clauses where the wording is sufficiently clear and unambiguous. An example of the type of wording that has been upheld is:
The Contractor will pay to the Subcontractor those amounts invoiced by the Subcontractor which have been approved by the Contractor and the Owner in accordance with the terms and conditions of the Prime Contract, less applicable Lien holdbacks, seven (7) working days after the Contractor receives payment thereof from the Owner or thirty (30) days following the date of the Subcontracor’s submission of its invoice for progress payment, whichever is later. Amounts due to the Subcontractor shall not become payable by the Contractor to the Subcontractor unless and until the Contractor receives payment from the Owner on account of these amounts.
Subcontractors should be wary of “pay-when-paid” clauses, as even where a subcontractor has performed all its work in accordance with the subcontract terms, the subcontractor’s entitlement to any payment will depend on whether the owner has paid the general contractor. Further, a subcontractor who is not being paid in accordance with the subcontract will typically have a number of remedies available to it, such as the right to stop working on a project. Where there is a “pay-when-paid” clause, however, and the general contractor is withholding payment on the basis that it has not been paid by the owner, these types of remedies will not be available to a subcontractor, as payment will not be due and owing. A subcontractor facing such a scenario has few available options. As the subcontractor has no contract with the owner, there is usually no independent means of forcing the owner to pay the general contractor. As a result, the subcontractor who is not being paid will likely be contractually obligated to continue working on the project without pay, and could be held liable for breach of contract if it ceases to work.
David Mckenzie is a lawyer practicing construction and commercial litigation at Jenkins Marzban Logan LLP in Vancouver. He is called to the bar of British Columbia.
DISCLAIMER: The author does not intend to form a solicitor-client relationship with a reader of this article. This article is for information purposes only. It should not be relied upon for legal advice. If you require legal advice, you should seek counsel authorized to practice law in your jurisdiction.
