By Arina Bagga
Introduction
In Ontario, “pay-when-paid” clauses are common, but often misunderstood, features. These provisions can affect payment timelines and cash flows, possibly leaving contractors and subcontractors wondering when, and even if, they will be paid for their work. These clauses are intended to protect one party from nonpayment by a client; they can also lead to significant risks for those workers down the “payment chain”.
In this blog post, pay-when-paid clauses will be explored: what they are, their legal implications, and leading case law surrounding them in Ontario. This post will also delve into the legal test for pay-when-paid clauses in construction law, and how it shapes the enforcement of these clauses.
What is a pay-when-paid clause?
A typical condition precedent in construction subcontracts stipulates that the subcontractor is entitled to payment only to the extent that, or when, the prime contractor has received payment from the owner.[1] These are known as “pay-when-paid” clauses. In construction contracts, they stipulate that a contractor’s obligation to pay a subcontractor is contingent upon the contractor first being paid by the owner.[2]
A ‘pay-if-paid’ is different from a “pay-when-paid” clause. It goes further and says the payer only has to pay if it is paid by the person above it.[3]
For instance, if Bob hires contractor Tim, and Tim subsequently hires subcontractor Ally, but Bob fails to pay Tim, Tim may then withhold or delay payment to Ally until he receives payment from Bob. This example highlights the potential issues these clauses can create for both contractors and subcontractors.
Leading Case in Ontario:
Timbro Developments Ltd. v. Grimsby Diesel Motors Inc (ONCA)
The leading Ontario case on pay-when-paid clauses is Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. (ONCA; 1988 CarswellOnt 773; “Timbro”).[4] A brief summary of the case will be outlined below.
Facts: In this case, the owner of a construction project refused to pay the general contractor (defendant), and then the general contractor refused to pay the subcontractor (plaintiff), relying on the “pay-when-paid” clause. The clause called for payment “not more than thirty (30) days after the submission date or ten (10) days after certification or when we have been paid by the owner, whichever is the later”.[5] Timbro relied on clause 8(a) of its purchase orders with the two appellants, reading:
When used for sub-contract work the following terms will apply: Payments will be made not more than thirty (30) days after the submission date or ten (10) days after certification or when we have been paid by the owner, whichever is the later.[6] Holdback will be retained in accordance with Mechanics Lien Act in effect at the time, and when released by owner all payments will be made in Canadian Funds and will be payable at par in Welland. (emphasis added).
Issue: The issue is whether a pay-when-paid clause guarantees eventual payment to the subcontractor, merely delaying payment until the contractor is paid, or if it conditions the subcontractor’s right to payment entirely on the contractor receiving payment from the owner.
Ratio: A clearly defined pay-when-paid clause can function as a condition precedent, meaning the subcontractor’s right to payment is entirely contingent on the contractor receiving payment from the owner.
Conclusion: The subcontractor is not entitled to payment.
Reasoning:
- The majority interpreted the pay-when-paid clause as a condition precedent, meaning the contractor’s obligation to pay the subcontractor arises only if and when the contractor is paid by the owner. Because the owner did not pay the contractor, the condition was not satisfied, and thus the subcontractor is not entitled to payment.
- In dissent, it was argued that the clause should be interpreted as merely affecting the timing of payment, not the right to be paid. The dissent emphasized that the subcontractor completed the work and should not bear the risk of the owner’s non-payment, as they were not a party to the contract between the owner and the contractor.
- Finlayson J.A. dissented, stating that “the clause relates to the timing of payments due … and in no sense puts the subcontractors at risk that they will not be paid if the contractor is not paid.”[7]
Currently in Ontario, clearly and simply drafted pay-when-paid clauses remain enforceable in Ontario. Depending on the wording of the clauses, they will likely be interpreted to have pay-if-paid impacts. Ontario courts are required to follow Timbro.
Other courts are not required to follow Timbro. For instance in Nova Scotia, the Court of Appeal in Arnoldin Construction & Forms Ltd. v. Alta Surety Co, does not follow Timbro.
In Arnoldin, it was stated that contracts should be interpreted based on the plain and ordinary meaning of the language used by the parties. Individual clauses must be understood in the context of the entire contract, which is the fundamental principle of contract interpretation.[8] Furthermore, the decision in Arnoldin is factually distinguishable, from Timbro, which, while persuasive, is not binding on the NSCA and uses differing language in the contracts at issue.[9]
How are courts/subsequent cases responding to Timbro?
In future Ontario court decisions, there are wrinkles in the facts, findings, and application of Timbro; this suggests that they are trying to “lessen” the impact of Timbro.
The subcontractor should be paid regardless of whether the contractor has been paid, as the issue is not about if payment will be made, but when it will occur.
Furthermore, in Ontario, courts have said that if a general contractor did something wrong that caused the owner not to pay them, the contractor can’t use a ‘pay-when-paid’ clause as an excuse to avoid paying their subcontractor (e.g. Kor-Ban Inc. v. Pigott Construction Ltd. (1993), 11 C.L.R. (2d) 160 (Ont. Gen. Div.) and Applied Insulation Co. v. Megatech Contracting Ltd.[10]
Additionally, in Canadian Pressure Testing Technologies Ltd v. EllisDon Industrial Inc., a 2022 case from Alberta’s Court of King’s Bench, supports Arnoldin in that contractors should be cautious when relying on Timbro, as trial decisions post-Timbro have not given it a broad reading; the Alberta Court stated:
“In summary, I am not going to follow Timbro. It is not binding on me. It appears to have been minimized, distinguished and ignored to the point that it has little precedential value. I take as a correct statement of the law the following (from Arnoldin)” [para 21].[11]
Legal Test in Construction Law
- The intention of the clause for the parties must be clear. It needs to be interpreted in its own words and in the context of the overall agreement to accurately understand what the parties intended.[12]
- In Ontario, a clear “pay-when-paid” is likely to be interpreted to mean “pay-if-paid”, meaning the subcontractor’s payment is contingent on the contractor receiving payment from the owner. In other parts of Canada, more explicit wording is typically needed to ensure that no payment will be made to the subcontractor, even if the payer (contractor) never receives payment from above.
Essentially:
- Pay-when-paid clauses must be clear and specific to be enforceable, and;
- A party relying on a pay-when-paid clause better not have caused or contributed to the non-payment circumstances.
Consequences for Liens and the Interpretation of the standard form CCA-1
Lien entitlements are generally capped at the amount the claimant is owed in contact.[13] In Ontario, case law limits the enforceability of “pay-when-paid” clauses, meaning the payer can only rely on such clauses if they have made good faith efforts to recover payment from above, and only if the reason for not paying doesn’t have to do with their own negligence/breach of contract.[14]
Conclusion
If pay-when-paid clauses are clearly worded, they are more likely than not to be upheld in Ontario and interpreted as pay-if-paid clauses, meaning the subcontractor’s right to payment is contingent on the contractor receiving payment from the owner; however, parties should exercise caution when negotiating and enforcing such clauses, as the legal interpretation can vary based on the jurisdiction and specific case circumstances.
For example, while Timbro in Ontario successfully enforced a pay-when-paid clause, the decision in Arnoldin reached a different conclusion , highlighting the fluidity of jurisprudence on this issue.
Given these nuances, both contractors and subcontractors should seek legal advice to ensure their contracts are drafted and interpreted clearly to avoid disputes.
The foregoing is for informational purposes only and should in no way be relied upon as legal advice. If you have any further questions, or would like to schedule an appointment for legal advice tailored to your circumstances and business, please contact us at dan@fridmar.com.
[1] Thomas G. Heintzman, Heintzman, West and Goldsmith on Canadian Building Contracts, 5th ed (Toronto: Thomson Reuters, 2014) at § 6:12.
[2] Robert J. Kennaley, “Assessing the Enforceability of a Pay-When-Paid Clause in Canada”, online: (2025) Kennaley Construction Law at page 1 <https://www.kennaley.ca/resources>.
[3] Ibid, page 1.
[4] Timbro Developments Ltd. v. Grimsby Diesel Motors Inc., 1988 ONCA.
[5] Robert J. Kennaley, “Assessing the Enforceability of a Pay-When-Paid Clause in Canada”, online: (2025) Kennaley Construction Law at page 1 <https://www.kennaley.ca/resources>.
[6]Arnoldin Construction & Forms Ltd. v. Alta Surety Co., 1995 NSCA, para 15.
[7] Robert J. Kennaley, “Assessing the Enforceability of a Pay-When-Paid Clause in Canada”, online: (2025) Kennaley Construction Law at page 1 <https://www.kennaley.ca/resources>.
[8] Arnoldin Construction & Forms Ltd. v. Alta Surety Co., 1995 NSCA, para 17.
[9] Arnoldin Construction & Forms Ltd. v. Alta Surety Co., 1995 NSCA, para 16.
[10] Kris Dixon, “Get Paid When?! Issues Regarding Pay-When-Paid Clauses”, online: (2024) Soloway Wright Lawyers at <https://solowaywright.com/news/get-paid-when-issues-regarding-pay-when-paid-clauses/>.
[11] Canadian Pressure Testing Technologies Ltd v. EllisDon Industrial Inc., 2022, ABKB, para 21.
[12] Arnoldin Construction & Forms Ltd. v. Alta Surety Co., 1995 NSCA, para 17.
[13] Robert J. Kennaley, “Assessing the Enforceability of a Pay-When-Paid Clause in Canada”, online: (2025) Kennaley Construction Law at page 1 <https://www.kennaley.ca/resources>.
[14] Robert J. Kennaley, “Assessing the Enforceability of a Pay-When-Paid Clause in Canada”, online: (2025) Kennaley Construction Law at page 1 <https://www.kennaley.ca/resources>.
