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Pay Me – Now

Posted on September 1, 2001 | Posted in Construction

We have previously discussed pay if paid clauses (see newsletters of November 1995, March 1996, and May 1996). These clauses remain a fertile source of litigation. Most subs will live with some semblance of the clause if it relates to timing (i.e. I will wait for the general to get paid before I stick out my hand). Conversely, if the subs are told that they will never get paid because the owner will not pay the general, the subs are not likely to swallow this concept easily.

Owner in Distress

In Smith-Peat Roofing and Sheet Metal Ltd. v. Matassa Inc., a 2000 Ontario Superior Court of Justice decision, the general’s contract with the sub stated: “Payment will be forwarded to above-named subcontractor/supplier within 10 days of receipt of payment from owner.” The owner suffered financial reversals and could not pay the general. The general decided that it would pay the subs the balance due on their contracts at 59 cents on the dollar in order to pay all monies received on a pro-rata basis.

The trial judge noted that the general had to establish that the language of the pay if paid clause was clear and that the general had not received payment relating to the sub’s account. The judge held that the general failed on both counts in this case and allowed the sub’s action for the balance of its contract.

Extras 

In Environs Landscape Contracting Co. v. Kenaidan Contracting Ltd., a 2001 Ontario Superior Court of Justice decision, extras were in issue. The sub claimed that it should be paid for extras to its contract with the general. The general claimed that the owner had denied the claim for extras and had therefore not paid the general for the claimed extras. The general relied on the clause in its contract with the sub that stated: “as a condition precedent to the contractor’s obligation to make any payment to subcontractor under the subcontract agreement, including final payment, the contractor must receive the payment therefore (sic) from the owner.”

Most of the decision dealt with whether the work was an extra or not. In holding the general liable for the work, the judge dealt with the pay if paid clause as follows: “That clause is not applicable to a binding oral agreement. Timbro Development Ltd v. Grimsby Diesel Motors (see newsletter of November 1995) is a strong and authoritative statement on the efficacy of such a clause; however, it has no application in the circumstances here.”

This statement needs to be translated. The Ontario Court of Appeal in Timbro agreed that a properly worded pay if paid clause binds the parties and is effective. The trial judge stated that the clause in the Environs case would have been effective for the base contract between the general and the sub but was not applicable to the subsequent oral contract for extras.

Upshot 

The courts will interpret a pay if paid clause restrictively. It must be sufficiently wide to cover the situation at hand before it will be enforced. The general therefore has a balancing act to perform. Does it draft the clause widely enough to cover any future possibility and run the risk that the subcontractor refuses to do the job or does it draft the clause more narrowly, understanding that the clause will not cover every eventuality?

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