A recent decision out of the Alberta Court of King’s Bench reminds us of the importance of clear and express contractual language, particularly when seeking to implement a pay when paid clause.
Issue and decision
In Canadian Pressure Testing Technologies Ltd. v. EllisDon Industrial Inc., 2022 ABKB 649, the Applications Judge reviewed a payment clause in a subcontract specifying that “payments shall become due and payable no later than five (5) business days after the [Contractor] receives payment pursuant to the terms and conditions of the Prime contract from the Owner.”
This clause was ultimately found to be insufficiently clear to displace the Subcontractor’s entitlement to payment despite the fact that the Contractor had itself not yet been paid for the Subcontractor’s work by the Owner. The Applications Judge also considered the surrounding circumstances and noted that the Contractor’s failure to obtain the Owner’s prior approval for the work had contributed to the non-payment, which precluded the Contractor from relying on the clause.
Analysis
Fundamentally, the matter to be determined was whether the obligation to pay arose “no later than” a set date, or only after the Contractor “receives payment” from the Owner. The crux of the decision turned on whether the clause in question was a timing device or a true condition precedent to the Subcontractor’s legal entitlement to payment.
Referring to previous decisions from, among others, the Nova Scotia Court of Appeal, the Applications Judge reaffirmed that a clause in a contract that intends to diminish or remove a subcontractor’s right to be paid must say so directly and unequivocally. The clause must not only be clear, but specific. Where an inference must be drawn to achieve the desired effect, it will not likely be interpreted to set aside the subcontractor’s fundamental right to be paid for the work it performs. Effectively, the subcontractor must be put on notice that it will not be paid at all if the owner fails to pay the contractor.
The Applications Judge in this instance determined that the clause in question was, at a minimum, “ambiguous as it can clearly be interpreted as a ‘pay no later than’ clause.” The Applications Judge also held that the Contractor should not be entitled to rely on an interpretation of the clause as a true pay when paid clause, given that it had contributed to the non-payment.
Takeaways
- When it comes to pay when paid clauses, it is important to be direct and specific.
- If you intend to rely on a pay when paid clause, avoid contributing to the reason for the non-payment.
- If located in a jurisdiction where prompt payment legislation has been introduced, or soon will be, drafters must also ensure their pay when paid clauses comply with all legislated requirements.
If you have any further questions about pay when paid clauses or contract drafting generally, please contact the authors or one of our construction lawyers below.
