Is A Pay When Paid Clause Applicable If The Contractor’s Account To The Owner Is Reduced For Reasons Unconnected With Subcontractor’s Work?

A pay when paid clause is one of the most contentious clauses in a building contract. Indeed, the clause is outlawed in most circumstances in the United Kingdom and some states of the United States. In Canada, there is conflicting case law about the application and interpretation of the clause. In Wallwin Electric Services Inc. v. Tasis Contractors Inc., the Ontario Superior court recently gave guidance as to when such a clause is applicable, and held that it does not apply if the contractor voluntarily reduces its account to the owner for reasons unconnected to the subcontractor’s work.


A pay when pay clause purports to entitle the contractor to refuse payment to the subcontractor if the contractor has not been paid by the owner. In the Wallwin case, the payment clause read as follows:

“(3) Provided that, as a condition precedent, the contractor has been paid the certificate, in which such amount has been included, by the owner.”

The contractor, Tasis said that it had no obligation to pay the subcontractor since it, the contractor, had not been fully paid by the owner. The main contract had been certified to be substantially completed. There were no outstanding deficiencies with respect to the electrical work done by Wallwin and its work was included in the certificates that had been issued by the consultant.

The owner asserted that there were deficiencies in previously certified work. Accordingly, the contractor Tasis subtracted $150,176.65 from its invoice for these deficiencies. That work was unrelated to the work performed by Wallwin. Tasis was paid for this invoice.

As the judgment in the case recorded, the parties were agreed that

“1. Wallwin made regular applications for payment as provided for in the subcontract.

  1. At no time did Tasis or the project consultant make any changes to the amount of Wallwin’s applications for payment.
  2. At no time did Tasis or the project consultant give notice to Wallwin of any changes to the amount of Wallwin’s applications for payment.
  3. Tasis was paid by the owner for each certificate in the amount certified.”

Nevertheless the contractor Tasis submitted that “the subcontractors legal entitlement to payment is contingent upon the general contractor being paid, then the subcontractor must bear the risk of nonpayment by the owner to the general contractor; the only exception being where the reason for nonpayment by the owner is the default of the general contractor.”

Decision of the Ontario Superior Court

The application judge disagreed. He held that the proper interpretation of a “pay when paid clause is as follows:

“A contractor is obliged to pay a subcontractor when:

  1. the subcontractor makes application for payment,
  2. neither the contractor or certifier have given written notice to the subcontractor of a change in the amount the subcontractor has applied to be paid
  3. the amount the subcontractor has applied to be paid has been included in a Certificate for Payment, and
  1. the contractor has been paid that Certificate for Payment by the owner.”

In particular, the court held that a contractor cannot:

“avoid its obligation to pay a subcontractor by adjusting an invoice to allow for an owner to retain contract funds when a dispute arises over previously certified payments. The certification process creates the obligation to pay. Disagreements over subcontractor applications for payment may be resolved prior to Certificate for Payment being issued, as contemplated at the end of Article 4.2, or they may be resolved after payment, but once the above conditions have been satisfied payment must be made.”

Accordingly, the court held that the subcontractor was entitled to be paid by the contractor.


This case is, perhaps, an easy one. It is hard to contemplate that a “pay when paid” clause could be interpreted to apply if the money held back by the owner is not in relation to the work undertaken by the subcontractor and the contractor has been paid in full for that work. The more difficult cases arise when the contractor is unpaid for all or part of the work done by the subcontractor because of, say, the owner’s insolvency or faulty work by the contractor.

The present decision is interesting because it introduces two ingredients into the application of the “pay when paid” clause:

whether there has been a written notice of change in the subcontract and

whether the consultant has certified the payments due under the subcontract.

These ingredients appear to introduce two new hurdles that the subcontractor must get over before payment will be paid. It is unclear where those ingredients come from.

The Canadian law relating to “pay when paid” clauses is complicated by the conflicting decisions of the Ontario Court of Appeal in Timbro Developments v. Grimsby Diesel Motors Inc. (where the clause was applied) and the Nova Scotia Court of Appeal in Arnoldin Construction & Forms Ltd v. Alta Surety Co. (where the clause was not applied). Until the law is clarified by the Supreme Court of Canada, the proper scope and application of “pay when paid” clauses will be contentious.

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

Wallwin Electric Services Inc. v. Tasis Contractors Inc, 2015 CarswellOnt 3177
2015 ONSC 1612

Thomas G. Heintzman O.C., Q.C., FCIArb                              April 10, 2015


Two Construction Lien Issues: Architect’s Pro-Forma Certificate Is Invalid; GST Must Be Added To Holdback

The Ontario Superior Court recently decided two important issues relating to construction liens. In Wellington Plumbing & Heating Ltd. v. Villa Nicolini Incorporated, the court held that a late-issued pro forma architect’s certificate was invalid, and that GST must be added to a holdback.

Factual Background

Villa Nicolini constructed a retirement home in Vaughan. The project started in 2007 and was to be completed by the fall of 2008. In the spring of 2010, construction was 75% complete and numerous trades were unpaid and had registered liens.

The mortgagees exercised their rights to sell the project lands. To convey title to the purchaser, the mortgagees vacated the registered liens by posting a letter of credit to stand as security for the lien claims in place of the project lands.  The amount of the required holdback was in dispute between the lienholders and the mortgagees.

The lien claimants said that the required holdback was $497,236 while the mortgagees said it was $285,140. The difference between the two figures was due to the parties’ answers to two questions.

First, were the architect’s certificates of completion validity issued?  If not, as the lien claimants submitted, then the releases of holdback based on those certificates did not count toward the holdback and the mortgagees would have to add them to the holdback which had been made by the owner.

Second, was GST required to be maintained as part of the holdback?  If so, as the lien claimants submitted, the amount of GST would have to be added by the mortgagees to the holdback.

The mortgagees argued that the amount of the required holdback was reduced by about $212,000 paid by the owner to subcontractors in accordance with certificates issued by the architect during the project. Those certificates were issued under section 25 of the Construction Lien Act. That section allows the owner to pay subcontractors whose work has been certified by the “payment certifier” as being complete.  The payment certifier is normally the architect or engineer hired for the project.  Section 25 says that, on the basis of such a certificate of completion, the owner may pay the subcontractor “without jeopardy” and the payments reduce the holdback required to be maintained under the Act.

Section 33(2) of the Act says that “where a sub-contract is certified to be completed, the sub-contract shall be deemed to have been completed on the date of certification.”  Section 33(4) says that “within seven days of the date the sub-contract is certified to be completed, the payment certifier or the owner and the contractor, as the case may be, shall give a copy of the certificate” to the sub-contractor, the owner and the contractor.

The lien claimants argued that the architect’s Certificates of Completion did not comply with Act for three reasons:

(i) The certificates of completion were not in the prescribed form (Form 7 under the Act);

(ii) The certificates were not delivered in accordance with Section 33(4);

(iii)  The certificates were prepared after the holdback funds had already been released.

Issue 1:              Were the Certificates of Completion Valid?

The court held that, on the facts, each of these deficiencies actually existed. The court then considered whether those facts rendered the certificates invalid.

The court held that the form of the certificates did not make the certificates invalid. While the Act should be strictly construed so far as the existence of liens is concerned, the Act should otherwise be given a purposive interpretation. The difference in form was a minor irregularity and there was no evidence of any actual prejudice. As a result, the failure to strictly comply with the forms required by the Act did not invalidate the certificates.

As to the second ground, the court declined to decide whether the certificates were invalid, due to its finding on the third ground.  However, the court was troubled by the lien claimants asserting this ground of invalidity since, as the court said:

“the lien claimants now before the Court were never entitled to receive notice of the Certificates of Completion. It makes little sense that they should be able to complain about the non-delivery of a certificate that they were never entitled to receive, when the parties actually entitled to receive them are not complaining.”

On the third ground, the court held that the certificates were invalid.  The court explained its decision as follows:

“I have found that the Certificates of Completion in this case were issued by the architect as an after-the-fact attempt to cure payments improperly made to sub-contractors before the certificates were issued. At the time the payments were made, they were made in violation of section of the Act. There is no mechanism in the Act to cure a violation of s. 25 by a subsequently issued Certificate of Completion. Accordingly, even if [the mortgagee] was able to invoke s. 25 of the Act, I find as a fact that Villa violated the section by releasing funds before the Certificates of Completion were issued. Section 25 requires strict compliance with s. 33(1). The release of holdback funds without compliance with s. 33(1) is fatal.”

The court was concerned that the result might appear to be unfair to the mortgagees.  It concluded, however, that the mortgagees knew that they would inherit the owner’s holdback obligation whatever it might be, that “there is nothing unfair in requiring an owner to comply with the provisions of the Act” and that the subcontractors were not obtaining a windfall because there would in any event be a significant shortfall in the amounts owing to them.

Issue 2:              Was GST a required part of the Holdback?

The lien claimants asserted that GST must be added to the basic holdback obligation of the owner, and therefore, the mortgagees. They said that the contract included GST of 6%, that they were obliged to remit GST to the Canada Revenue Agency as a percentage of their gross sales and that the amounts they receive by way of holdback funds would be reduced by the GST.

No case authority was cited to the court which was directly on point, although the Master’s office regularly calculates holdbacks inclusive of GST.  The court acknowledged that “the Act does not mention GST as a component of the basic holdback.” However, GST funds are trust funds and they must be remitted to the CRA.  If the holdback does not include GST then the parties receiving the holdback will not, on a net basis, receive the 10 percent holdback prescribed by statute.  In the course of the project the owner would normally hold back from the progress payments to the contractor the statutory 10 percent plus GST, and pay that holdback amount, including the GST, at the end of the project.  Accordingly, it is appropriate that the mortgagee should pay the GST into court, and the court so ordered.


These two issues are of practical importance to the building industry and to lenders. Certificates of completion allow a building project to proceed smoothly by permitting the owner to pay subcontractors during the job without fear of having to repay those monies again later.  But the court will not permit that permission to be abused.  If the certification process is a mockery, and if certificates are later issued to paper over payments made without adherence to the statutory procedures, they will be ineffective.

There may be border line situations.  What if the architect actually scrutinizes the subcontractor’s work and decides it is complete and so advises the owner before the payment is made, but writes up the certificate of completion sometime later?  What if the architect writes up the certificate and gives it to the owner before inspecting the work and being satisfied that the work is complete, and then inspects the work later and is so satisfied?  Do these situations offend the Act?  This decision has opened these issues to judicial scrutiny.  The limits of validity of certificates of completion will depend on the extent to which the certificate satisfies or abuses the real purposes of the Act.

The requirement that the holdback include GST, or now HST, seems appropriate, especially when the contract itself refers to HST. This requirement will likely impose an obligation on mortgagees to pay the HST into court to discharge liens since it is doing nothing more than the defaulting contractor would have done if it had paid the holdback to the contractor, that is, pay the holdback and the HST.

Wellington Plumbing & Heating Ltd. v. Villa Nicolini Incorporated, 2012 ONSC 5444

Building Contracts  –  Subcontractor  –  Certificates of Completion  –  Holdback

Thomas G. Heintzman O.C., Q.C., FCIArb                                                     December 28, 2012

May a Contractor Sue a Subcontractor When It Agreed With The Owner To Obtain Project Insurance?

One of the most difficult issues in Canadian construction law is the impact of insurance on claims between owners, contractors and subcontractors.

There are two levels to the issue:

What is the impact of a clause in the building contract by which one party agrees to obtain insurance?

And what is the impact of the terms of the insurance itself?

Decisions of the Supreme Court of Canada and provincial appellate courts make it clear that insurance clauses and insurance policies can bar claims between the parties engaged in a building project.  Those decisions adopt two principles:

 First, the insurance regime relating to a building project should benefit all the parties to the project, so that each party does not have to go through the duplicative and expensive process of obtaining insurance for the same risk.

Second, the fundamental insurance law rule is that an insurer cannot pay a claim under a policy, say by the owner, and then bring a subrogated claim against a party that is a named or unnamed insured under the policy, say against the contractor.  But while the principles seem clear, the effect of a specific clause or policy remains unclear.

In Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, the Ontario Superior Court of Justice applied these principles to a new situation.  In this case, a subcontractor (or consultant to the contractor) sought to rely upon the insurance clause in the main contract between the owner and the contractor.  It did so in a motion to dismiss an action against it by the contractor.  While the court dismissed the motion, there are a number of fascinating issues raised by the subcontractor’s reliance upon the insurance clause in the main contract to which it was not a party.

The Background Facts

As the general contractor, Castonguay entered into a contract with Commonwealth for the expansion of a warehouse owned by Commonwealth.  At the end of the project, Castonguay sued for the holdback and Commonwealth counterclaimed for alleged deficiencies. Castonguay then issued a third party claim against Zenix which had provided engineering consulting services to Castonguay on the project, alleging that any fault with the construction was due to Zenix’s faulty design.

In the main contract between Commonwealth and Castonguay, Castonguay had agreed to obtain “wrap-up” liability insurance which was expressly to cover the “Contractor’s Consultant” as an unnamed insured and was to “preclude subrogation claims by the insurer against anyone insured thereunder.”

The main contract also required Castonguay to obtain comprehensive general liability insurance, which was to include coverage for damages to property, including blanket contractual and cross liability coverage. The CGL policy contained exclusions for improper material, workmanship and design.

In fact, Castonguay didn’t read the main contract and didn’t obtain this insurance.  But it did have a CGL policy of its own, and that policy had “Contractor’s Edge” coverage which provided coverage, subject to exceptions relating to defective materials and workmanship.  Castonguay’s insurer was defending it under this insurance policy.

Zenix brought a motion to dismiss Castonguay’s third party claim against it.  It made two submissions:

First, Zenix submitted that, in light of the total circumstances it was entitled to the benefit of Castonguay’s CGL and Contractor’s Edge policy even though Zenix was not named as an insured in those policies.

Second, Zenix said that it was entitled to the benefit of Castonguay’s obligation in the main contract with Commonwealth to obtain insurance.  Because of that obligation in the main contract, Zenix said that Castonguay was prohibited from asserting any claim against it.

The Decision

The motion judge dismissed Zenix’s motion.  What is not entirely clear is why he did so.  On the one hand, he could have said that the action had some apparent merit and that the insurance issues were too complicated to be dealt with by way of motion.  At some points in his reasons, the motion judge appears to be saying that.  But he went on to deliver sixteen pages of reasons which contain some very pointed comments about the insurance clause and policy issues.

The motion judge dismissed the motion for two reasons:

First, he was not satisfied that the “wrap-up” or CGL insurance which Castonguay should have obtained under the main contract would have applied to Castonguay’s claim against Zenix in the present case.  He referred to various exclusions in that sort of insurance which might well apply to the claim against Zenix.  He noted that there was no evidence that the provision of insurance, and the terms in the main contract relating to insurance, had been discussed in the negotiations leading up to the Castonguay-Zenix contract. In the result, he was not prepared to find that there was an implied term, in the contract between Castonguay and Zenix, that Zenix was entitled to the benefit of the insurance that Castonguay actually obtained or ought to have obtained.

Second, he declined to find that Castonguay was a third party entitled to rely on the insurance provisions in the main contract. He was unwilling to analogize a subcontractor or consultant on a construction project to an employee or tenant entitled to the insurance protection of the employer or landlord. In the result, he concluded that the “law of privity does not provide for a principled exception that should extend to the circumstances of this case.”

The Implications of this Decision

On one level, this decision is simply a pleadings decision in which the motions judge has held that the claim should proceed further.  On this basis, it would demand little attention.

But the decision does reveal some fascinating tensions in two recently judge-made rules:

the Rule providing a defense based upon insurance clauses and policies;

and the Rule relating to third party beneficiaries.

The third party beneficiary rule requires that, before a party can gain the protection or benefit of a contract to which it is not a party, it must prove that:

1.  The parties to the contract intended to extend the contractual rights or protection in question to the third party; and

2. The activities performed by the third party are the very activities coming within the scope of       the contract.

In the present case, the motion judge held that it was not plain and obvious to him that these conditions were satisfied. He examined the terms of the main contract and the terms of “wrap-up” policies and held that it was not clear that either the terms of those sort of policies, or the third party beneficiary rule, applied to Castonguay’s claim against Zenix.  He concluded his decision by saying: “In the absence of any evidence of express terms in the subcontract between Castonguay and Zenix contemplating a waiver of liability, it is not plain and obvious that the Third Party Claim cannot succeed.”

So in this case, this issue will have to be finally decided at trial.  For the moment, the decision must be read that there is a possibility that the consultant/subcontractor may be able to rely on the insurance provisions in the main contract.

Clearly, there are some good policy reasons for the subcontractor or consultant to have the protection of the insurance regime put in place under the main contract.  Those policy reasons have been repeatedly stated by the courts as they have developed the rule precluding claims in the face of insurance clauses. Those rules have not depended upon the negotiations or dealings between the third party and a contracting party, but upon all of the circumstances.  Nor are those negotiations or dealings relevant to the two components of the third party beneficiary rule (the “intention to benefit” and the “very activities”). Thus, if Castonguay had taken out the insurance called for in the main contract, and if a claim had been made by either the owner or Castonguay against Zenix, then it is hard to see why Zenix would not fall within the third party beneficiary rule.

If this is so, then two very interesting issues emerge.

First, does the third party beneficiary rule apply at all if the party to the contract has failed to perform its contractual duty?  Can a third party rely on a breach of a contract to which it is not even a party?  In this case, was Zenix entitled to rely on a breach by Castonguay of its contractual obligation to Commonwealth to obtain insurance? It certainly seems to be a stretch of the third party beneficiary rule to allow a third party to rely upon a breach of a contract to which it is not a party.

Second, was it necessary to consider the terms of the policies to decide the motion?  Castongauy and Zenix apparently argued the motion on the basis that it was.  But wasn’t the real issue whether Zenix was entitled at all to the benefit of the insurance which Castonguay ought to have placed?  If Zenix was, then judgment to that effect might have been granted. If judgment to that effect was granted, then there would simply be a coverage dispute as to whether Castonguay’s claim fell with the coverage.  That dispute might be no different than Castonguay’s own claim for coverage.

A resolution of the motion in this fashion seems possible if Castonguay had taken out the required insurance, but difficult or impossible when it had not and the court was required to surmise or guess at what that insurance coverage might have been.  In the result, the Castonguay decision does not answer the question of whether a subcontractor or other third party may rely upon the insurance clause in the main contract if the insurance policies are in fact taken out in compliance with that clause.

Another interesting aspect of the Castonguay decision is that there is no reference to the main contract being incorporated into the subcontract or consultant’s contract.  If there had been such incorporation, then the insurance clauses in the main contract might have been directly relied upon by Zenix.

In the result, we will have to await the trial in this action, or further decisions, to resolve the degree to which those engaged in construction projects can rely upon insurance clauses in contracts to which they are not a party, or insurance policies taken out by the parties to those contracts.

Building Contract  –  Third Party Rights  –   Subcontractor   –   Consultant – Insurance

Castonguay Construction (2000) Ltd. v. Commonwealth Plywood Co. Ltd, 2012 ONSC 3487

Thomas G. Heintzman O.C., Q.C., FCIArb                                                                        June 24, 2012


Pay-When-Paid: When Is The Contractor Not Obliged To Pay The Subcontractor?

Construction Law  –  Building Contract  –  “Pay When Paid”

The Ontario Superior court recently wrestled with the issue of how to interpret and apply a “Pay When Paid” clause in a subcontract.

In 1473662 Ontario Limited v. Avgroup Consulting Services Limited, the Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

Avgroup was the general contractor for a hotel construction project. The numbered company (which carried on business as “Dyson Electric”) was the electrical subcontractor.  Avgroup alleged that the parties had contracted pursuant to the CCDC subcontract, and that the contract contained a “Pay When Pay” clause which read:

“The Contractor shall pay the Subcontractor no later than thirty (30) days after the Submission Date or three (3) working days after the Contractor receives payment from the Owner, whichever is the later.”

However, that contract was never signed.  Dyson alleged that the contract was found in the invoices which it had submitted to Avgroup and which Avgroup had accepted as the basis for payment.  Those invoices did not contain a Pay When Paid clause.

The Court appeared to accept that the Pay When Paid clause in the form of CCDC contract relied upon by Avgroup was substantially similar to the clause in the contract which had been considered by the Ontario Court of Appeal in Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (1988) 32 C.L.R. 32 (Ont. C.A.).  The clause in that case stated:  “Payments will be made not more than thirty (30) days after the submission date or ten (10) days after the certification or when we have been paid by the owner, whichever is the later.”

The Court of Appeal in Timbro held that such a clause was not just a payment-timing clause operating during the project, but entirely precluded the sub-contactor from recovering from the contractor in the event that the contractor was not paid by the owner.

The court in the present case evidently felt itself to be bound by the Timbro decision.  But the court held that there was a triable issue relating to whether the contract was in the form of the CCDC subcontract or in the form of the subcontractor’s invoices.  Accordingly, the court dismissed Dyson’s motion for summary judgment.

This decision highlights the need for the Supreme Court of Canada to review the Pay When Paid issue.  There is conflicting authority in Nova Scotia (Arnoldin Construction & Forms Ltd. v. Aslta Surety Co (1995), 19 C.L.R. (2d) 1 (N.S. C.A.)) and leave to appeal that decision was dismissed by the Supreme Court of Ontario.  Moreover, members of the construction industry, and the drafters of the CCDC subcontract, should clarify their intention about the meaning of a Pay When Paid clause.

The fundamental questions are these:  Who should bear the risk of the owner’s insolvency, the contractor or the subcontractor?

Why should the subcontractor, who has no dealings with the owner and no means of managing the risk of the owner’s insolvency, bear that risk rather than the contractor?  A subcontractor may reasonably be expected to bear the risk of the timing of the payments by the contractor during the project, but it is more difficult to understand why the subcontractor should bear the risk of the owner’s insolvency.

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause.  Here, the risk is the contractor’s insolvency.  Is it reasonable for the sub-subcontractor or supplier to the sub-contractor to bear the risk of the contractor’s insolvency when they have no dealings with the contractor?

These are questions which the courts and the construction industry need to carefully consider.

See Goldsmith and Heintzman, Canadian Building Contracts (4th ed), Chapter 4, part 2).

Construction Law – Building Contract – “Pay-when-Paid”: 

1473662 Ontario Limited v. Avgroup Consulting Services Limited, 2011 ONSC 2900 (CanLII)

Thomas G. Heintzman O.C., Q.C.                                                                               June 26, 2011