On August 29, 2022, the Prompt Payment and Construction Lien Act, RSA 2000, c P-26.4 (the “PPCLA”) came into force. The PPCLA changed the law governing the construction industry in Alberta. One such change was the imposition of mandated timelines for payment of invoices. Whether or not these timelines render “pay-when-paid” clauses in contracts ineffective has been debated since the introduction of the PPCLA. “Pay-when-paid” clauses stipulate that a contractor will only pay a subcontractor’s invoice upon receipt of payment from the owner.
In the recent Alberta Court of King’s Bench decision in Canadian Pressure Testing Technologies Ltd v EllisDon Industrial Inc (“Canadian Pressure”), the Court dealt with a dispute where the services agreement between the parties was enacted prior to the PPCLA coming into force.[1]
Background
Canadian Pressure Testing Technologies Ltd. (the “Subcontractor”) entered into a subcontract with EllisDon Industrial Inc. (the “General Contractor”) to provide pressure testing services for piping on a petrochemical plant in Sturgeon County, Alberta (the “Services Agreement”). The General Contractor paid the Subcontractor monthly progress payments for the work completed, except for one final invoice totaling $98,301.00. The General Contractor took the position that there was no requirement to make the payment until it was paid by the project owner (the “Owner”).
The General Contractor relied on clause 5.3 of the Services Agreement to maintain this position:
5.3 [General Contractor] shall pay to the [Subcontractor] monthly progress payments net of any applicable Holdback and such payments shall become due and payable no later than five (5) business days after [General Contractor] receives payment pursuant to the terms and conditions of the Prime Contract from the Owner in respect of such Services…
(the “Clause”)
The Subcontractor initiated legal proceedings against the General Contractor seeking payment on the final invoice and applied for summary judgment before the Court.
The General Contractor maintained the position that the Clause constituted a valid pay-when-paid clause, meaning that payment to the Subcontractor was contingent on the General Contractor first being paid by the Owner. The General Contractor was at the same time involved in a much larger ongoing legal dispute with the Owner over payments owed, so the General Contractor argued there was no obligation to provide payment to the Subcontractor until the dispute was resolved and it received payment.
The Subcontractor argued that the Services Agreement established the overall obligation to pay, and the Clause therefore functioned only as a “pay no later than” clause rather than a pay-when-paid clause. The Subcontractor asserted that the Clause merely fixed an outside date for the General Contractor to make payment rather than create a condition on the payment obligation.
Interpretation of the Clause
The Court reviewed the precise language of the Clause to determine if it was enforceable as a pay-when-paid clause. After reviewing relevant case law across multiple jurisdictions, the Court concluded that the Clause failed to provide the required clear and unambiguous language necessary to constitute a pay-when-paid clause.
Quoting a decision from the Nova Scotia Court of Appeal, which dealt with the same contractual issue, the Court in Canadian Pressure highlighted that “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.”[2] When a contractor intends to include an enforceable pay-when-paid clause in a contract with a subcontractor, the clause must be both clear and specific. The clause must have the specific effect of mandating payment by the contractor when it itself is paid as a condition for subcontractor payment, as opposed to pay-when-paid being an inference in a clause dealing fundamentally with some other principle, such as timing of payments to the subcontractor in relation to the time when the owner pays the general contractor.
PPCLA likely to reduce uncertainty
The Court’s reception of competing interpretations of the alleged pay-when-paid clause in Canadian Pressure demonstrates how the previous legislative framework (or lack thereof) in respect of pay-when-paid clauses created uncertainty with respect to payment rights. The PPCLA is likely to reduce such uncertainty by removing the ability for contractors to withhold amounts payable under a subcontract via pay-when-paid clauses when full payment of a proper invoice has been received by a contractor for materials furnished and work done under such subcontract. Instead, contractors will be required to rely on section 32.3 of the PPCLA to issue a notice of non-payment to subcontractors in circumstances where the owner has not met their payment obligations.
Where an owner disputes an invoice from the contractor and refuses to pay any portion of the invoice within the time specified by the PPCLA, the owner must provide the contractor with a notice of dispute pursuant to section 32.2(2). Contractors may thereafter exercise the right to withhold payment to the subcontractors by following the requirements in section 32.3(5). The contractor must provide the subcontractor the following:
- A notice of non-payment (within 7 days of the contractor receiving a notice of dispute from the owner) stating that some or all of the amount payable to the subcontractor is not being paid due to non-payment by the owner and specifying the amount not being paid;
- An undertaking to refer the matter to adjudication under Part 5 of the PPCLA within 21 days after giving notice to the subcontractor; and
- A copy of any notice of dispute given by the owner.
The implementation of the PPCLA has made a large splash in construction contracts and the way in which they will be interpreted. Although pay-when-paid clauses such as the one in Canadian Pressure have not been rendered invalid explicitly, it remains to be seen whether parties to construction contracts will be able to rely on pay-when-paid clauses to deny payments to subcontractors when their project is governed by a contract subject to the PPCLA. As shown by Canadian Pressure, pay-when-paid clauses may not be as ironclad as contractors or subcontractors may expect. As such, a potential benefit of the PPCLA is providing clarity and structure as to when payments must be made and when they can be delayed.
Contact us
Miller Thomson is available to assist owners, contractors, and subcontractors to comply with the requirements in the PPCLA with respect to payment deadlines and the procedural requirements when dealing with notices of dispute or non-payment. If you have any questions, please reach out to a member of our Construction and Infrastructure Group.
[1] Canadian Pressure Testing Technologies Ltd v EllisDon Industrial Inc, 2022 ABKB 649.
[2] Arnoldin Construction & Forms Ltd. v. Alta Surety Co, 1995 NSCA 16 at para 33.
