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contract

Two interpretations of the “pay-on-pay-as-you-go” clause

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Bélanger Paradis avocados
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1/5/23

As you know, it is possible for a general contractor to include in his subcontract a “payment on payment” clause, which is a clause requiring that the amounts invoiced by the subcontractor be paid only when the general contractor has received the corresponding payment from the client.

However, there are two types of “pay-on-payment” clauses, one that can be described as a conditional obligation and the other as a term obligation.

The distinction between the two types of clauses is important as they have completely different impacts.

The term bond

The term bond is defined by article 1508 of the Civil Code of Quebec. Here, the parties agree that payment will be deferred until the arrival of a future and certain event, i.e. payment to the general contractor by the client. In doing so, when the event considered certain does not happen, for example when the client goes bankrupt and the general contractor will never receive all the amounts due to him, the amounts owed by the general contractor to the subcontractor will then become payable.

The conditional obligation

As for the conditional obligation, it is defined by article 1497 of the Civil Code of Quebec. Here, the parties agree that payment should be made upon the arrival of a future, but uncertain, event. In other words, and unlike the term obligation, the conditional obligation means that the subcontractor will only be paid if the contractor is paid by the client. Consequently, for this type of obligation, the general contractor may never have to pay his subcontractor even if it becomes obvious that he will never receive the corresponding payment from the client.

Case law has established that the conditional “payment upon payment” clause must be written in clear and precise terms using words such as “if” or “provided that” 1. As soon as ambiguity is demonstrated, the “payment upon payment” clause will be considered to be a term obligation. For example, the following clause was considered ambiguous by the courts: “the contractor will pay the subcontractor within 5 days of payment by the owner” 2.

In summary, not only does the presence of a “pay-on-payment” clause have consequences on the payment of the subcontractor's invoices, but the type of obligation that results from it (long-term or conditional) may result in its invoices remaining unpaid and inpayable for several months, several years, or even forever.

The nuance between the two types of pay-on-payment clauses is not obvious and it is recommended that you consult a lawyer in order to fully understand the implications and consequences.

1) In this regard, see in particular the decisions Signalisation SMG inc. v. Construction Garnier ltee, 2020 QCCS 1049; Design & construction Giffels Québec inc. v. Excavation Yelle inc., 2016 QCCA 256 and Plomberie KRTB inc. v. Construction Citadelle inc. v. Construction Citadelle inc., 2015 QCCS 3103.2) This clause is similar to the one that was the subject of the dispute in the Design & Construction Giffels Québec Inc. decision., 2016 QCCA 256 and Plomberie KRTB inc. v. Construction Citadelle inc. v. Construction Citadelle inc., 2015 QCCS 3103.2) This clause is similar to the one that was the subject of the dispute in the Design & Construction Giffels Québec Inc. decision. c. Excavation Yelle Inc., supra.

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