In a recent decision from the Alberta Court of King’s Bench, parties to contracts are reminded of the impact clear, concise and express contractual language can have, particularly with respect to construction contracts and “pay when paid” clauses.
In the case of Canadian Pressure Testing Technologies Ltd. v. EllisDon Industrial Inc., the plaintiff applied, by way of desk application, for a summary judgment against the defendant in the amount of $98,301, in addition to other related relief.
Defendant Subcontracted Work to Plaintiff
The defendant, in this case, was a general contractor for Early Site Works who was working on a project for a petrochemical plant in Sturgeon County (the “Project”). The defendant entered into a services agreement (the “Agreement”) with the plaintiff as a subcontractor. Under the Agreement, the plaintiff was to provide pressure testing services for piping on the project.
Concerning payment for these services, the Agreement set out that the defendant was to pay the plaintiff:
“… 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….”
All work completed by the plaintiff under the agreement was requested and approved by the defendant. The defendant paid the plaintiff for all of its work except for the final invoices because the project owner had not yet paid the defendant. The outstanding invoices form part of a Change Order Request which the defendant submitted to the project owner in a separate dispute.
“Pay No Later Than” versus “Pay When Paid”
The plaintiff relied on the case of A & B Mechanical Ltd v Canotech Consultants Ltd et al, in which the Manitoba Court of Queen’s Bench found that the plaintiff had established a prima facie case by proving that they satisfied the only condition precedent required.
The plaintiff also relied on a decision from the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v Alta Surety Company. Here, the bonding company for the contractor denied liability for amounts owing to a subcontractor based on the contractor only being required to pay once the owners had paid it. The subcontract provided that the subcontractor’s payment which was claimed during construction, “shall be due to the subcontractor on or about one day after receipt by the Contractor of payment from the Owners”, with the final payment being made “within thirty days after payment has been received from the owner.” Here, the Court found in favour of the subcontractor.
On the other hand, the defendant argued that the case in Timbro Developments Ltd v Grimsby Diesel Motors Inc, applied. This case dealt with a contract which stated that “[p]ayments 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.” The Ontario Court of Appeal found that the aforementioned clause was a “pay when paid” clause; therefore, the defendant was not yet obliged to pay the subcontractor.
Timing System of Condition Precedent?
To determine whether the defendant’s obligation to pay the plaintiff arose “no later than” a specific date or only after the defendant “receives payment” from the project owner, the application judge carefully reviewed the wording in the agreement clauses relating to payment.
The findings came down to whether the payment clause was simply a timing mechanism or a true condition precedent to the plaintiff’s legal entitlement to payment.
The Court contrasted the case of 61557734 Canada Inc. v. Bluelime Enterprises Inc., which clearly stated that the subcontractor “in no event” would be paid “unless and until” the contractor received payment from the owner, with Timbro Developments Ltd v Grimsby Diesel Motors Inc., which contained a less clear clause. The Court noted that the clause in question in the current dispute was not as clear as 61557734 Canada Inc. v. Bluelime Enterprises Inc.
Payment Clause Insufficiently Clear
Considering the evidence before the Court, the Honourable Judge Summers followed the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v Alta Surety Company, noting the following as a correct statement of the law:
“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. Such a provision should not only be clear but specific … it will not be inferred as the intended effect of a clause which addresses some other less fundamental term or provision of the contract such as the timing of payments to the subcontractor in relation to the time when the owner pays the contractor.”
While the Court stated that the clause in question did not reach the point of clarity of a “pay when paid” clause, the term was still ambiguous enough to be interpreted as a “pay no later than” clause. The judge held that the defendant could not rely on the strict interpretation of a “pay when paid” clause, and it was deemed insufficiently clear to displace the plaintiff’s entitlement to payment, despite the project owner not yet having paid the defendant for the plaintiff’s work. The Court granted summary judgment for $98,301 in favour of the plaintiff.
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