The Ontario Construction Act: What Does It Mean, Especially Regarding Paid When Paid Clauses?

The Ontario Construction Lien Act, 2017 was given Royal Assent on December 12, 2017 as S.O. 2017 C.24. This statue changes the name of the Ontario Construction Lien Act to the Construction Act (which I will refer to as the new Act) and fundamentally changes the law relating to construction projects in Ontario.

Before further comment, it should be noted that different parts of the new Act will come into effect at different times. As the Explanatory Note to the new Act states: “The commencement section of the Bill (section 86) provides that, for the most part, the housekeeping and non-substantive amendments come into force on the day the Bill receives Royal Assent, and the substantive amendments come into force on proclamation of the Lieutenant Governor.”

The Prompt Payment provisions contained in section 6.1 to 6.9 of the new Act, which are referred to in this article, are enacted by section 7 of the Ontario Construction Lien Act, 2017. Under subsection 86(2) of that Act, section 7 (and therefore the Prompt Payment provisions of the new Act) and most of the substantive provisions of the new Act will come into effect on a day to be named by proclamation of the Lieutenant Governor.

The expected dates of proclamation are as follows: July 1, 2018 for the amendments to modernize the Act and the holdback rules; and October 1, 2019 for the amendments related to prompt payment, adjudication and liens against municipalities. With an Ontario election looming, there may be further adjustments to these proclamation dates, and for the necessary organization of the prescribed forms and the adjudication regime that will enable the Prompt Payment regime to function.

In three articles, I have reviewed the Report leading up to the new Act, and the draft legislation. Those articles were posted on this site on May 3, September 10 and 27, 2017. So my thoughts about the various provisions of the new Act are set out in those articles in some detail.

There is one aspect of the new Act that remains a puzzle to me. What will the new Act do, and in particular, what will the Prompt Payment regime in the new Act do, to Pay When Paid clauses?

As I discussed in those articles, it remains a puzzle to me because the Ontario law with respect to Pay When Paid clauses is itself a puzzle.

On the one hand, the majority of a divided Ontario Court of Appeal held, in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. 1988 CarswellOnt 773, that a Pay When Paid clause can be relied upon to preclude both interim and final payments to the subcontractor if the contractor has not been paid by the owner. On the other hand, in Arnoldin Construction & Forms Ltd. v. Alta Surety Co. 1995 CarswellNS 31 the Nova Scotia Court of Appeal held (basically following the logic of the dissenting Justice Finlayson in the Timbro case) that a Pay When Paid clause should be interpreted as only being a payment timing mechanism during the project, and does not entitle the contractor to refuse payment to the subcontractor at the end of the job unless that interpretation is very clear to that effect. The Nova Scotia Court of Appeal held that it was not clear in that case. Leave to appeal from both decisions was refused by the Supreme Court of Canada.

More recent cases in Ontario have applied the logic in the Arnoldin decision, not so much by expressly refusing to follow the Timbro decision as by applying a tough standard of interpretation before the clause will be held to negate the subcontractor’s ultimate right to be paid.

The Report leading to the new Act, and the legislature in the new Act, did not expressly address this puzzle. This is puzzling in itself since, under the U.K. legislation on which the Ontario legislation is based (the Housing Grants, Construction and Regeneration Act 1996 (U.K.)), Pay When Paid clauses were rendered ineffective unless the third party payor (such as the owner who has not paid the contractor) is insolvent. Many U.S. states have also banned Pay When Paid clauses. So it remains for practitioners to work on the puzzle.

On the one hand, practitioners may rely upon the effect of the legislative choice not to expressly deal with Pay When Paid clauses in the new Act. Those in favour of Pay When Paid clauses may say that by not doing anything expressly, the legislature intended to leave the law in Timbro alone and not import into Ontario law the prohibition against Pay When Paid clauses which was staring the legislature so clearly in the face by way of the U.K. legislation. On the other hand, those opposed to Pay When Paid clauses may say that by not doing anything expressly, the Ontario legislature intended to leave the case law in Ontario alone, thereby leaving a very high degree of contractual clarity before a Pay When Paid will entitle a contractor to withhold final payment to the subcontractor because it has not been paid by the owner.

Let’s then consider the ingredients of the new Act and see if they help us determine whether Pay When Paid clauses will be more enforceable after the Prompt Payment provisions of the new Act are brought into force than they were before. At first blush, it seems that the new Act will strengthen the arguments of those in favour of the enforceability of Pay When Paid clauses, but a further analysis seems to sway the argument the other way.

The argument that the new Act enhances the enforceability of Pay When Paid clauses may be supported by the whole structure of the new Prompt Payment regime. That regime will mandate a payment system based upon the contractor giving the owner a “proper invoice”. Once that proper invoice is given, then the owner will have to pay the invoice unless the owner gives the contractor a “notice of non-payment”.

Under subsections 6.5(5) and (6) of the new Act, the contractor will be then able to give the subcontractor a notice of non-payment in a form to be prescribed in the Regulations, for two reasons:

  1. Because the contractor has not been paid by the owner, in which case the notice of non-payment to the subcontractor must be made within 7 days of the notice of non-payment by the owner, or if no notice of non-payment has been given by the owner then within the 35 days that the contractor must otherwise pay the subcontractor. In these circumstances, the contractor must undertake to have the “matter” adjudicated; or
  1. Because it disputes the subcontractor’s claim in which case the notice of non-payment to the subcontractor must specify the amount not being paid and detail “all of the reasons for non-payment”, and must be given with the said 35 day period.

Those arguing in favour of Pay When Paid clauses will point to the first reason for non-payment, namely non-payment by the owner, and ask: why did the legislature insert that ground for non-payment to the subcontractor, and provide a prescribed form for it, unless that notice to the subcontractor was to have effect and entitle the contractor not to pay the subcontractor? The legislature did not stipulate that this provision would only operate if there was a Pay When Paid clause in the contract; the provision apparently applies even if there isn’t such a clause in the building contract.

Indeed, it may be argued that the legislation has inserted a statutory Pay When Paid clause into Ontario building contracts, even if there is no such clause in those contracts, and this may well be the practical effect of the new Act for payments made during the project for all building contracts and not just those with Pay When Paid clauses. But if the contract does contain a Pay When Paid clause, then it may be argued that the legislature has now stipulated that the Pay When Paid clause is a good and valid reason for the contractor not to pay the subcontractor.

On reflection, in my view that argument is not as strong as the opposing argument, for a number of reasons.

  1. The Prompt Payment regime creates a right to prompt payment, but it does not create a substantive right to Pay When Paid at the end of the project. On its face, it is a procedural regime applicable to payments during the ongoing project and does not create a substantive rights to withhold payment.

Thus, with respect to the second ground for giving a Notice of Non-Payment – disputing the subcontractor’s claim – the regime does not give the contractor substantive rights not to pay the subcontractor by reason of giving a notice of non-payment. The contractor may dispute the subcontractor’s claim to payment for all sorts of reasons – the work was badly done, the work was delivered late, the amount charged is wrong etc., etc. But these substantive rights or defences are not determined or affected by the contractor’s right to give a notice of non-payment. These rights or defences will be determined in adjudication, arbitration or litigation. The legislature obviously hopes that their resolution will be more expeditiously determined through the adjudication regime contained in the new Act. But whether the dispute arises out of the first or second type of notice of non-payment, it does not appear that the legislature intended that the contractor’s entitlement to give a notice of non-payment to a subcontractor affected the subcontractor’s final entitlement to payment, whatever that entitlement may be.

On balance, the fact that the legislature didn’t say that a notice of non-payment entitles the contractor not to pay the subcontractor at the end of the project (if not paid by the owner or if the contractor disputes the subcontractor’s right to payment) seems to weigh more heavily in favour of the view that the notice of non-payment has no substantive effect, and leaves the legal rights of the parties enforceable as they now are (or are not), governed by the new procedural rights in place which will hopefully assist the parties to resolve the dispute more quickly.

  1. The argument then may be that the Prompt Payment regime creates an enforceable Pay When Paid regime if the contract contains a Pay When Paid clause, but not otherwise. That argument seems to be a bridge too far.

The new Act does not expressly create such a statutory regime, and it seems unlikely that the legislature intended to create such a regime applicable to some building contracts (those with Pay When Paid clauses) and not to others (those without), especially when so many other legislatures have expressly abolished Pay When Paid clauses.

While the Prompt Payment regime may not formally legalize the non-payment by contractors of subcontractors due to non-payment by owners, it may condone that practice in the short run, and cause or permit contractors to “throw out the anchor” by serving a notice of non-payment when they might otherwise not do so. In an apparent effort to inhibit that practice, the legislature has required a contractor serving such a notice due to non-payment from the owner to undertake to refer the matter to adjudication, which will presumably speed up the resolution of the non-payment. Such an undertaking by the contractor is not required if the notice of non-payment is given by the contractor by reason of a dispute with the subcontractor. The requirement of such an undertaking may be good evidence that the regime wasn’t intended to legalize non-payment of subcontractors due to non-payment by owners. As a further inducement to prompt payment, interest on outstanding amounts will now be payable at the greater of the contract rate or the Courts of Justice Act rate.

In the result, when the Prompt Payment regime of the new Act is proclaimed into force, it may stir up the debate about the effect of Pay When Paid clauses upon the ultimate right of the subcontractor to be paid by the contractor if the contractor is not paid by the owner. And the new Act may result in quicker adjudication of the disputes about those clauses. But it seems unlikely that the new Act will change the trend in the existing case law. That trend may only change if the Supreme Court grants leave to appeal to resolve the debate.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 6, part 2(d)(i), chapter 15, part 10(e), and chapter 16, part 3.

Ontario Construction Lien Act, 2017 , S.O. 2017 C.24

Pay When Paid Clauses – Construction Lien Amendment Act, 2017 and Construction Act

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb               March 11, 2018


Payment Clause Held Not To Be A “Pay-When-Paid” Clause

In Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51, the Yukon Supreme Court recently considered whether a payment clause in a construction contract was a pay-when-paid clause which entitled the contractor to only pay the subcontractor if and when it was paid by the owner.

The clause in question read as follows:

“Payments shall be made monthly on progress estimates as approved by the Contractor covering 90% of the value of the Work completed by the Subcontractor to the end of the previous month; such payments to be made 7 days after the Contractor receives payment for such Work from the Owner.” (underlining added)

The court considered the conflict in the law at the appellate level in Canada. In Timbro Developments Ltd. v. Grimsby Diesel Motors Inc., [1988] O.J. No. 448, the Ontario Court of Appeal held that the clause in question was a pay-when-paid clause, and that the contractor did not have to pay the subcontractor until paid by the owner. Justice Finlayson dissented, holding that the clause was a timing provision and “in no sense puts the subcontractors at risk that they will not be paid if the contractor is not paid. They are not co-adventurers or partners in this construction contract. Having done the work as found by the trial Judge, they are entitled to be paid.”

In Arnoldin Construction & Forms Ltd. v. Alta Surety Co., [1995] N.S.J. No. 43, the Nova Scotia Court of Appeal held that the clause in question was not a pay-when-paid clause which entirely protected the contractor from paying until paid by the owner. Rather, the clause was a payment timing clause which provided that payments by the contractor would generally be paid after payment from the owner but did not preclude the contractor form finally paying the subcontractor even if unpaid by the owner. In the Arnoldin case, the clause was being relied upon by the payment bonding company and that factor may have been important since it makes less sense to interpret the clause as entirely relieving the contractor from paying the subcontractor when the contractor has provided a payment bond to deal with that very situation.

In concluding that the clause was not a pay-when-paid clause, the Yukon Supreme Court said:

“I am in agreement with the interpretation in Arnoldin where the words in the contract before it which were not as clear and precise as the words in Timbro where the contractor clearly assumed the risk of non-payment by the owner to the contractor. In the case at bar, I am of the view that the payment clause is a timing clause rather than a “pay when paid” clause as in Timbro. There is no clear wording that the payment on the Subcontract was conditional on the owner paying the contractor. Therefore, I order that the balance outstanding shall be paid regardless of whether Martian has paid Seko, subject to amount only under the two remaining issues.”


This decision follows the trend of recent cases. Most of the recent court decisions have held that, unless the language of the contract makes it very clear that the contractor does not have to pay the subcontractor at all if not paid by the owner, then the provision will not preclude the ultimate obligation of the contractor to pay the subcontractor.

It is difficult to distinguish Timbro from Arnoldin based upon the wording of the respective contracts. In Timbro the relevant wording was “when we have been paid by the owner”. In Arnoldin, the words were “after payment has been received by the Contractor.” The recent cases, following the Arnoldin and not the Timbro decision, may reflect a judicial antipathy to a clause which, in the absence of very clear words, denies payment to the subcontractor when, as Justice Finlayson said, it has done the work.

This decision high-lights the importance of the Prompt Payment regime proposed to be introduced into Ontario law by the Construction Lien Amendment Act, 2017. Under that legislation, a contractor is entitled to deliver to a subcontractor a notice of non-payment, and may deliver such a notice if it has not been paid by the owner. The same regime applies down the payment pyramid.

This legislation may arguably introduce into Ontario a statutory pay-when paid regime. That would be a surprising result since the general trend is for legislatures to ban pay-when paid (as has occured in the U.K. and in several U.S. states) and for courts to strain against finding that a clause is a pay-when-paid clause unless that is very clear.

Cardinal Contracting Ltd. v. Seko Construction (Vancouver) Ltd., 2017 CarswellYukon 107, 2017 YKSC 51

Building Contracts – pay-when-paid clauses – Prompt Payment legislation

Thomas G. Heintzman O.C., Q.C., LL.D. (Hon.), FCIArb                         October 27, 2017



Does A “Pay When Paid” Clause Prevail Over The Construction Lien Act?

A pay when paid clause is one of the more contentious contractual provisions in the construction industry. That clause typically says that the subcontractor is not entitled to be paid until the contractor receives payment from the owner. Because of its perceived unfairness, the clause has been outlawed, or its effect has been substantially limited, in the United Kingdom and in many states of the United States.

In Canada, there is conflicting appellate authority about the effect of a “pay when paid” clause.  Aside from that controversy, another important issue is: What effect does a “pay when paid” clause have on construction or builders liens? Can the clause eliminate the subcontractor’s entitlement to a construction or builders lien on the ground that, since the owner owes nothing to the contractor, then the contractor owes nothing to the subcontractor and so the subcontractor has no lien?  That was the issue in the recent decision of the Ontario Superior Court in Bradhill Masonry Inc. v. Simcoe County District School Board.


B.W.K was the general contractor on a project to renovate the Bradford District High School and Bradhill was the brick work subcontractor.  A claim for lien was registered by Bradhill and was vacated on the provision of security by B.W.K. The subcontract between B.W.K. and Bradhill appears to have been largely prepared or approved by the owner with little or no input from Bradhill. In the payment portion of the subcontract, that contract stated as follows:

“and the balance of the amount of said requisition, as approved by BWK and the Architects and Engineers, shall be due to the subcontractor  on or about the thirtieth day of the following month, and upon receipt by BWK of monthly payment by the owners.” (emphasis in the original)

The owner asserted that, based on this clause and the decision of the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. [1988] O.J. No. 448, there were no monies due to the subcontractor when the subcontractor’s lien was registered because the owner had not paid B.W.K. for any work which was the subject of the lien. For this reason B.W.K. asked for the lien claim to be dismissed.

The Decision

The court rejected B.W.K.’s argument in rather forceful language, calling it “antithetical to the law in the Construction Lien Act” and “a clever shell game.” The court noted that, while the owner had not paid B.W.K. when the subcontractor’s lien was filed, the owner later made full payment to B.W.K. when, as the court said, “BWK finally decided to put in its final invoice which it delayed.”

The court noted that, if accepted, B.W.K.’s argument would be devastating for lien claimants:

“The defendant’s argument would mean that if the general contractor’s lawyer is sharp enough in drafting the contract, the Act’s remedy for subcontractors who have not been paid for the fair value of their work would be rendered worthless as the owner and/or general contractor would become entitled to the costs of the lien action and could cut off all future payments to the plaintiff to reimburse itself when a lien claim was made. And if a sub-trade filed a claim for lien at the wrong time, its lien is worthless because money was not due and payable at that particular time even though the tradesperson has not been fully paid for their work and materials supplied to the job.”

The court held that the subcontract could not eliminate the subcontractor’s lien because section 5 of the Construction Lien Act states that the Act is incorporated into every contract in a project covered by the Act and every such contract is deemed to be amended to be in conformity with the Act.

Moreover, the court noted that section 14(1) of the Act provides that a person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials, and that under section 15(1) a lien arises when the person first supplies those services or materials.

The court concluded on this issue as follows:

“…as to the argument of the defendant that there was no lienable amount owing unless and until an amount became due and payable under the contract’s accounting terms in the contract, I reject it. Contrary to the defendant’s submission, this contract, like all building contracts, is subject to The Construction Lien Act.  It is not the reverse, . . . . . . , that the Act be subject to the contract between the general contractor and the masonry sub-contractor Bradhill. When a sub-trade is owed money due to work that has improved the site, its claim is for the “price of those services or materials”, the value of the work and material supplied, not what is due and payable at any given time according to the contract. And money owed the contractor or received by BWK was trust money held for the sub-trades until they are paid. It is not for BWK to fail to pay money due the sub-trade just because that sub-trade filed a lien claim. This is a reading of the contract and the Act which would make the contract the superior instrument whereas, as I have shown, it is the law in Ontario that the contract is to conform to the Act. I reject the argument on behalf of BWK that would hold otherwise.


The controversy about “pay when paid” clauses is heightened in Canada not just by the public policy debate about whether these clauses should be allowed. As mentioned above, in other countries these clauses have been eliminated by statute or severely restricted in their application. In Canada, there is further controversy about these clauses because there are contrary appellate decisions concerning the effect of a “pay when paid” clause.

On one approach, the clause bars any claim, even at the end of the job, if the contractor has not been paid by the owner. That was the conclusion of the majority of the Ontario Court of Appeal in the Timbro decision.

The other approach says that the clause is a timing mechanism only, that the clause provides for payment by the contractor to the subcontractor when the contractor is paid by the owner, but does not operate as a complete bar to the subcontractor’s claim at the end of the job. That was the approach taken by the Nova Scotia Court of Appeal in Arnoldin Construction & forms Ltd. v. Alta Surety Co. (1995), 19 C.L.R. (2d) 1. In that case, a bonding company relied upon the “pay when paid” clause to argue that it owed no monies on the bond since the contractor did not owe monies to the subcontractor due to that clause. The Nova Scotia Court of Appeal held that the clause, properly interpreted, only related to the timing of payment during the project and did not entirely bar the claim. The Court may have thought that it made no sense for the “pay when paid” clause to be interpreted as a bar to payment to the subcontractor when there was a bond in place, presumably to be called upon in the very circumstance of the owner not paying the contractor.

Smack in the middle of the heightened controversy about these clauses is the issue about whether they over-rule the construction and builders lien legislation. If they do, then the controversy would move to an even higher level. Those familiar with the “pay when paid” debate have been waiting for a decision to address this issue, and here it is in the Bradhill decision.

In Bradhill, the court held that the “pay when paid” clause did not over-rule the Construction Lien Act, for two reasons.

The first reason was that, by virtue of the Ontario Act, that Act was incorporated into the subcontract contract and the parties could not contract out of the Act.  That reasoning will not apply in all provinces. In some provinces, the construction or builders lien legislation effectively says that third parties and workers are not affected by any contract purporting to eliminate rights under the lien legislation, but does not prohibit other parties from entering into such contracts.  So if the decision in Bradhill depends on the wording of the Ontario Act, then in other provinces the “pay when paid” clause could still potentially over-rule the construction and builders lien regime.

The other reason given by the court in the Bradhill decision is based on the fundamental nature of a construction or builders lien.  The lien is not based upon the contract between the contractor and the subcontractor, or the contract between owner and the contractor. Rather, the lien is based on two ingredients: the price of the materials or services, and the supply of those services or materials to the improvement of the land.  The price or supply may be influenced by the contracts, but it is the price and supply which create the lien. The court in Bradhill effectively concluded that, based on those elements of a lien claim, the status of the accounts between the owner and the contractor are irrelevant, or could not impair the validity of the subcontractor’s lien.

This second line of reasoning should be applicable in all provinces. If adopted by other courts, this reasoning will ensure that, whatever may be the other impacts of “pay when paid” clauses, they will not over-ride the protections contained in construction and builders lien legislation.

See Heintzman and Goldsmith on Canadian Building Contracts, 4th ed., at Chapter 4 , part 2

Bradhill Masonry Inc. v. Simcoe County District School Board, 2013 ONSC 4708.

Construction Liens  –   Pay when Paid Clauses

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                           August 15, 2013