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.

The Court appears to apply the traditional approach to this clause, but opened a door for subcontractors to avoid its severity.

The fundamental question is 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 the risk rather than the contractor?

The same issue can, of course, arise in a sub-subcontract or a supply contract if that contract contains a Pay When Paid clause. The risk here is the contractor's insolvency.

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

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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