Pay-When-Paid Clauses in Alberta: What Contractors and Subcontractors Need to Know

Alberta’s Prompt Payment and Construction Lien Act (the “Act”) has changed how money flows on construction projects. One of the biggest shifts is around pay-when-paid clauses, contract terms that say a subcontractor only gets paid once the general contractor has been paid by the owner.

These clauses used to be common, but also controversial. Subcontractors argued they were unfair because they could do their work properly and still wait months for payment if the owner and contractor were fighting. Contractors, on the other hand, said they needed them to stay financially afloat, since paying subcontractors out of pocket when owners don’t pay can be impossible.

The Act now sets out strict timelines for payment and dispute resolution. The Act has now made pay-when-paid provisions the law. However, each party is required to pay or dispute payments within a very strict procedural framework, leaving much less room for disputes. Our Calgary Construction Lawyers at OP Lawyers LLP can help you navigate these changes and ensure your contracts comply with the Act.

Before the Act: Courts and Contract Language

Before the Act, pay-when-paid clauses were only governed by contracts. Courts often struck them down if they weren’t written clearly or if they unfairly shifted risk.

For example, in Canadian Pressure Testing Technologies Ltd. v. EllisDon Industrial Inc., the Alberta Court of King’s Bench said contractors couldn’t rely on a pay-when-paid clause if (i) the clauses were not clearly drafted, and (ii) the owner’s refusal to pay was caused by the contractor’s own mistakes.

The bottom line: these clauses were risky and unpredictable and resulted in costly litigation between the parties. 

The New Rules Under the Act

It’s important to note that these issues are no longer applicable. While Alberta initially proposed an explicit statutory ban on pay-when-paid clauses altogether, it subsequently relented and enacted legislation in step with the payment timelines set out in Ontario and Saskatchewan that effectively preclude such clauses. The Act introduced a “prompt payment” system that sets out clear timelines:

• Invoices: Contractors must send “proper invoices” to owners every month (with some exceptions).
• Owners’ payments: Owners must pay those invoices within 28 days.
• Disputes: If an owner disputes an invoice, they must send a written notice within 14 days, explaining why and how much they’re withholding.
• Contractors’ obligations: Contractors must pay subcontractors within 7 days of being paid by the owner.
• If not paid: If the contractor doesn’t get paid, they must either pay subcontractors anyway or send them a notice of non-payment within 7 days. That notice must:
  • Include the owner’s notice of non-payment,
  • List all reasons for not paying, and
  • Promise to take the dispute to adjudication within 21 days.

This system means contractors don’t have to pay subcontractors if they themselves haven’t been paid, but only if they follow these strict steps. OP Lawyers LLP can assist contractors and subcontractors in implementing these timelines effectively to avoid costly disputes.

Can Contractors Still Use Pay-When-Paid Clauses?

In practice, the Act leaves very little room for traditional pay-when-paid clauses. But there are a few limited situations where they may still apply where contractors can refuse to pay subcontractors, such as:

• Owner insolvency: If the owner goes bankrupt and can’t pay.
• Dispute decisions: If an adjudicator or court decides the owner doesn’t owe the contractor money. This can happen due to defective work. Therefore, despite strict payment timelines, an owner can still refuse to pay if the work done was not consistent with the contractual requirements. 
• Settlements: If the contractor and owner settle a dispute for less than the full amount.

Even in these cases, contractors must still meet the Act’s notice and adjudication requirements. It’s important to note that the strict timeline does not mean the contractors must pay subcontractors even if the work done by the subcontractor was deficient. Contracts are entitled to withhold payment if the work was substandard and issue their own notice of non-payment to the subcontractor outlining the reasons for withholding payment. At OP Lawyers LLP, our Calgary Contract Lawyers can provide guidance with respect issues that may arise for any contractual disputes. 

What Contractors and Subcontractors Should Do

• Update contracts: Any contracts written before August 29, 2022 (when the Act took effect) should be reviewed and updated. Old pay-when-paid clauses will no longer work and must be updated to be consistent with the new statutory timeline.
• Set up systems: Contractors need processes to track deadlines for invoices, notices, and adjudications. Missing a deadline could mean losing the right to withhold payment.
• Talk it through: Contractors and subcontractors should discuss upfront how they’ll handle payment disputes under the Act. Clear communication can prevent disputes in the future.

Conclusion

The Prompt Payment and Construction Lien Act has reshaped how payments work in Alberta’s construction industry. While subcontractors still need to wait for payment until the owner pays the contractor, there are now limited grounds for delaying payment and strict timelines for resolving any disputes for delaying payment.

For subcontractors, this means more certainty and faster payment. For contractors, it means stricter obligations but also a clear process to resolve disputes.

The key takeaway: review your contracts, understand the timelines, and make sure your payment practices line up with the Act. Doing so will help avoid disputes, keep projects moving, and protect your bottom line.

Our Calgary Construction Lawyers at OP Lawyers LLP are experienced at resolving and litigating disputes in the construction industry. If you are facing any issues in your construction project, feel free to contact OP Lawyers LLP for a consultation with our Calgary Contract Lawyers and our Calgary Construction Lawyers.    

Disclaimer: This blog post is intended for informational purposes only and does not constitute legal advice. For advice specific to your circumstances, please consult a qualified lawyer at OP Lawyers LLP or another legal professional.