A recent Ontario Divisional Court decision that focused on a contractor''s duty of good faith to recover payment when a ‘pay when paid’ clause is in play will have impacts on those who practice construction or commercial law, say lawyers.
Arnold Zweig, a civil litigator in Toronto who represented the successful respondent in 6157734 Canada Inc. v Bluelime Enterprises Inc., says the ruling by Justice Julie Thorburn of the Divisional Court highlights the efforts a contractor must make to recover payment for the subcontractor when a client withholds payments.
“There is an implied condition that the middle person has to try his best,” explains Zweig.?
The court decision focuses on the “pay when paid” portion of a contract that stipulates the subcontractor will only be paid if and when the contractor gets paid. The contractor can get caught in the middle, trying to justify the payment to the client and explain the non-payment to the subcontractor.
In this case, the plaintiff, Shane Suman, owned a company that provided information technology services to Alberta Justice through consultancy firm CGI.
Suman was attempting to recover two months of wages and travel expenses from the human resources placement agency Bluelime, which had arranged the work.?
Before the plaintiff started work, in 2011, Alberta Justice required Suman to disclose whether he had ever been convicted of a “work-related penal or criminal offence.”??
The plaintiff answered he had not, even though in 2010 he was found guilty of insider trading by the U.S. Securities and Exchange Commission and ordered to pay a civil penalty of $2,000,000 to the commission.
In 2012, the Ontario Securities Commission also convicted Suman of insider trading and ordered him to pay a penalty.??
When Alberta Justice and CGI discovered the breaches of the Securities Act by Suman, they immediately dismissed him and withheld an outstanding payment of almost $16,000, alleging that two or three times that amount was spent on conducting a security sweep of Alberta Justice's data environment. Bluelime asked for payment of the outstanding amounts on numerous occasions, but it was unsuccessful.
“It was reasonable for the trial judge to accept that the Respondent did not pursue the matter because there were grounds for termination, there were costs incurred to secure the third party site and it was unlikely the monies would be recovered,” said the ruling by Justice Thorburn. The trial judge had dismissed the action upon finding Bluelime was not responsible for the termination of the contract with CGI/Justice Alberta, and had used its best efforts to try to collect or reasonably settle the outstanding invoices. Thorburn agreed.
Zweig says the case centred on the issue of what represents a “good faith” effort to enforce the “pay when paid” clause.
“What’s the effort that’s needed? What’s the obligation to get the guy paid? The whole case was about the allegation that my client didn’t do enough,” he says.
Surprisingly, there was no argument about the validity of the clause itself.?
Thomas G. Heintzman, a litigator based in Toronto, explains that there is some variation in the courts' treatment of these clauses.
"The big issue is whether the clause is a timing mechanism only, and means that the contractor does not have to pay the subcontractor until the end of the job, or whether it is a complete bar to the subcontractor being paid, if not paid by the owner,” he says. “The cases are in conflict on that issue, but it was not addressed in this case.”
Zweig says in this case, “it’s almost as if the pay when paid clause was a given.”
“To the Divisional Court ,it was a no -rainer. The argument was about the implied condition that the middle person has to try his best to recover the monies,” he says.
In Bluelime, the court found that it was clear that since Bluelime was not paid by CGI/Justice Alberta, it was not obligated to pay the plaintiff. The court then turned its attention to Bluelime's obligation to make “good faith” efforts to recover the money. ?
The court also held that there was no obligation on the Rrspondent to start a court case that was likely to be vigorously resisted by Alberta Justice and CGI.
Heintzman usually addresses “pay when paid” clauses in the context of construction contracts, where contractors often use the clause to avoid making payments to their subcontractors. The client had good reason to refuse to accept further services from the plaintiff, says Heintzman.
“Obviously, when there are criminal or securities offences out there, the court will not be sympathetic,” he says.
There was some argument whether the security offences came under the description of “penal or criminal offence” as per the disclosure clause in Suman's original background check.??
The court found that securities contraventions are acts punishable by law for which penalties are imposed, and they are, therefore, penal in nature.??
“Fines like that don’t get handed out on a first offence,” says Ottawa lawyer Kathleen Robichaud, who practices in corporate and construction law. “It was a huge deal.”???
She says that lawyers must advise contractors and subcontractors that disclosure is expected and that they need to understand the question being asked. ?
“It’s becoming a standard question. It isn’t just about criminal offences, it’s regulatory offences, too, and not just in your province or country but in any country,” she says. Robichaud takes note of the fact that the client was a government body responsible for justice matters.??
“It’s not a company that produces different-coloured socks. It determines what the law will be and holds a lot of important private information that a tech-savvy person could access,” she says.
She notes that, since 2015, contractors have had to meet certain criteria to be contractors with the federal government.
“If a company has anyone in its ranks that has been convicted of white collar crimes or visited scheduled countries and is suspected of terrorism, your company can be blacklisted,” she says. “This decision is timely given the changes to how governments are contracting.”?