"Pay-if-paid" vs. "pay-when-paid" clauses in subcontracts

October 27, 2015

Plomberie KRTB inc. v. Construction Citadelle inc., 2015 QCCS 3103,
Construction Citadelle inc. v. Plomberie KRTB inc., 2015 QCCA 1672.

The Superior Court recently slowed down the trend of considering payment clauses in subcontracts that are dependent upon payment by the owner as so-called "pay-if-paid" clauses within the meaning acknowledged by the Court of Appeal in Magil Construction ltée v. Vince-Iafa Construction, (C.A.) J.E. 2000-1317.

In Plomberie KRTB inc. v. Construction Citadelle inc., a general contractor defended himself against an action for payment filed by his subcontractor in respect of material he had supplied and construction work he had performed. Even though the general contractor acknowledged that the work had been carried out, he refused to pay his subcontractor on the grounds that the payment clause provided in the subcontract was a so-called "pay-if-paid" clause and that he himself had not been paid by the bankrupt owner.

The payment clause in dispute was worded as follows: "[TRANSLATION] (...) The general contractor shall pay the subcontractor within ten days, the day after he receives the progress payment from the owner, the amount that shall be approved and certified by the consultant, less 10% on each monthly payment (...)."

On his part, the subcontractor maintained that, unlike a "pay-if-paid" clause, which comprises a conditional obligation, the wording of the clause in dispute was such that it comprised only an obligation with a term. The distinction becomes particularly significant when we consider the following: if the condition (future and uncertain event) on which an obligation is conditional does not occur, the obligation is not enforceable; on the other hand, if the term (future and certain event) on which an obligation is conditional does not occur, the obligation becomes enforceable on the day on which the event normally should have occurred (Article 1510 of the Civil Code of Québec).

After reviewing the wording of the payment clause in dispute and the parties' intention, the Superior Court noted that, unlike "pay-if-paid" clauses, which contain expressions such as "as and when received," the payment clause in dispute did not suggest any uncertainty regarding the progress payments to be made by the owner ("[TRANSLATION] the day after he receives the payment"). The Superior Court therefore concluded that the clause in question was not a "pay-if-paid" clause, but rather a clause containing a payment obligation with a term. Since the future and certain event had not occurred, payment to the subcontractor became due.

The Court of Appeal dismissed the appeal in a preliminary proceeding, as it was of the view that it had no reasonable chance of success.

This decision of the Superior Court, the appeal from which was dismissed, is interesting because it fits within a context where the use of so-called "pay-if-paid" clauses in subcontracts has proliferated since the decision in Magil Construction ltée v. Vince-Iafa Construction, leaving subcontractors who have completed their work in full and without any defects with no remedy. The sometimes unfair nature of this situation may have influenced the decision of the Superior Court and the Court of Appeal.

That being said, and in light of these recent teachings, when a construction industry player is faced with payment clauses in a subcontract, we recommend focussing on the certainty of the payment by the owner, and insisting on a clause that includes phrases such as "if and when the owner pays" (for general contractors), or, conversely, "when the owner pays" (for subcontractors).

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