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Trust Paid

Posted on March 1, 2005 | Posted in Construction

We finally discovered a case in which a pay-if-paid clause meets the trust fund provisions. It is not quite as exciting as Godzilla meeting King Kong, but it will have to do. Pre-Con Inc. v. Carosi Construction Ltd., a 2004 Ontario Superior Court of Justice decision, discusses all of the blended issues.

Contracts 

Carosi is the general; Pre-Con the sub. The contract states that the price is $54,000 plus GST with payments to be made monthly “or 15 days after we receive payment from the Owner, whichever is later.” It is a classic pay-if-paid clause.

In September 2000, the general applied for payment from the owner for $984,000. The payment included the sub’s work for $50,000 plus GST. The owner paid the requested amount, less a 12.5% holdback (we assume that there was a 2.5% maintenance holdback). However, the owner deducted an additional $50,500. Of that amount, the owner deducted $16,000 because another sub of the general had registered a lien and $34,500 for liquidated damages for delay.

The sub had completed all of its work. The general requested payment from the owner for only $50,000, rather than the full $54,000, because the general and sub had negotiated the subcontract for $4,000 more than the general had originally estimated the work would cost. However, the negotiations took place after the general had submitted its statement of values to the owner. The general was, therefore, stuck with its original breakdown of the prime contract price.

By November 2000, the general had either left or been kicked off the job and the owner made no further payments. The owner never paid any holdbacks to the general.

In order to simplify matters, the principal of the general agreed that if the general was liable to the sub, then not only would the general be in breach of trust, the principal would also be in breach of trust.  

Issues 

1.   Does the pay-if-paid clause govern as between the general and the sub?

2.   For purposes of both the trust fund provisions and the pay-if-paid clause, did the owner pay anything towards the sub’s contract?

3.   If the pay-if-paid clause governs, does it apply:

a)   to the difference (the “Excess Amount”) between the contract price and the price of $50,000 submitted in the application for payment; and

b)   to the holdback that the general never received?

The general had also claimed that there were deficiencies in the sub’s work, but the general was unable to prove those allegations and the judge dealt with them so perfunctorily that we will not bore you with the details. One of the reasons why the general failed to prove any deficiencies was that the general did not call any witnesses; its lawyer cross-examined the sub’s witnesses and made oral submissions in argument, but the general never presented its own evidence. It is rather difficult to demonstrate deficiencies without evidence.

Pay-if-paid 

The judge reviewed the pay-if-paid clause and determined that the clause was clear and unambiguous. Payment became due only after the owner paid the general. The sub’s counsel had attempted to distinguish the decision in Timbro Developments Ltd. v. Grimsby, a 1988 Ontario Court of Appeal decision, to no avail. In that case, the court upheld the pay-if-paid clause, but the contract had also specifically referred to holdback. The contract in the Carosi case never specifically mentioned holdback; just payments in general. The judge stated that since all payments were tied to the owner’s payment to the general, this included holdback payments.

Deductions

The general argued that the owner deducted over $50,000 from the payment application towards the lien and the liquidated damages and that, accordingly, the general never received the sub’s $50,000.

The judge did not accept this argument. The deductions from the payment certificate had nothing to do with the sub’s work. Accordingly, the judge deemed that the owner had paid the general the full amount and that the general had then repaid the owner for the two amounts that the owner had deducted.

This analysis makes sense. There is no reason why a sub should be prejudiced because the general and owner become embroiled in a dispute over matters unrelated to the sub’s work.

Excess Amount 

The general argued that the owner had never paid the Excess Amount to it. The judge disagreed. In prior applications, the general included and was paid substantial amounts towards mobilization and general requirements. These amounts far exceeded the Excess Amount. As far as the judge was concerned, as soon as the sub completed all of its work, the whole amount of $54,000 became due, not just the amount of $50,000 included in the payment application. As soon as the general billed and was paid the $50,000, the judge deemed it to have billed the extra $4,000. Accordingly, the payment the general had originally received for mobilization was applied retroactively to the Excess Amount deemed to have been billed.

Holdback 

The judge stated that the holdback was different from the Excess Amount. The sub never knew or agreed to the under-billing of its work for the Excess Amount. The sub had agreed that the general would deduct holdback in the normal course and knew that the owner would be deducting holdback from the general. Indeed, in its invoice, the sub did not bill for the holdback amount.

Of course, if the general did not receive the holdback, then it was not liable to the sub under the pay-if-paid clause. Similarly, its principal was not liable for breach of trust for payments the general did not receive.

We can understand how the holdback issue is different from the Excess Amount issue. We cannot understand why the holdback aspect differs from the deductions issue. What is the difference in the owner deducting $34,000 for liquidated damages and the owner refusing to pay holdback because of the owner’s allegations that the general breached its contract with the owner? In either situation, the sub is caught in a dispute that has nothing to do with its work. Why can the holdback not be retroactively deemed to have been paid and returned, just as the liquidated damages were deemed to have been paid and returned and the Excess Amount was deemed to have been paid retroactively? 

Result 

The judge held that the general owed the sub the amount of $54,000 less the 12.5% holdback plus applicable GST. He then held that the general’s principal also owed that amount for breach of trust.

The sub also tried to obtain an award for punitive damages, but that went nowhere. A simple breach of trust without some other major wrongdoing on behalf of the general or its principal will not attract punitive damages.

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