Are ‘Pay-When-Paid’ Clauses Legal in Ontario Construction Contracts?

The End of Pay-When-Paid in Ontario Construction

For decades, subcontractors in Ontario’s booming construction markets-from high-rises in Toronto and Mississauga to infrastructure projects in Hamilton-struggled with cash flow. General Contractors (GCs) routinely used “pay-when-paid” clauses, telling tradespeople, “We will pay you for your electrical work only when the owner finally pays us.” This forced smaller trades to act as the bank for massive development projects.

This all changed with the modernization of the Ontario Construction Act. 📍 The provincial government introduced a mandatory “Prompt Payment” regime and a fast-track dispute resolution system called Adjudication. Under these updated rules, parties cannot legally contract out of the statutory payment timelines. If you try to enforce an old-school “pay-when-paid” clause that contradicts the Act, an Ontario adjudicator will rule it invalid, and you will be forced to pay.

Step-by-Step Guide to the Prompt Payment Regime

To navigate construction contracts legally in Ontario under the modernized regime, both General Contractors and Subcontractors must understand exactly how the Prompt Payment clock works. Missing a deadline has severe financial consequences.

Step 1: Submitting a “Proper Invoice”

The entire payment timeline is triggered the moment the GC submits a “Proper Invoice” to the project owner. Under the Construction Act, a proper invoice must include specific details, such as a description of the work, the contract authority, and the payment terms. Once this is delivered, the clock starts ticking.

Step 2: The Owner’s 28-Day Payment Window

After receiving the proper invoice, the project owner has exactly 28 calendar days to pay the General Contractor. 💰 If the owner disputes the invoice (e.g., they claim the work was defective), they must issue a formal “Notice of Non-Payment” to the GC within 14 days of receiving the invoice. If they miss this 14-day window, they must pay the invoice in full.

Step 3: The General Contractor’s 7-Day Payment Window

Once the GC receives the funds from the owner, they have a strict 7 calendar days to pay their subcontractors for the portion of work included in that invoice. This is where the old “pay-when-paid” excuse dies. The GC cannot hold onto the funds; they must distribute them immediately.

Step 4: Managing Owner Default (When the Owner Doesn’t Pay)

What happens if the owner does not pay the GC? The GC cannot simply shrug and tell the subcontractors they are out of luck. Under Section 6.5(7) of the Construction Act, if the GC wants to withhold payment from a subcontractor because the owner defaulted, they must follow strict timelines. If the owner issued a formal Notice of Non-Payment to the GC, the GC must pass down their own Notice of Non-Payment (Form 1.2) to the subcontractor within 7 days of receiving the owner’s notice. However, if the owner simply defaulted without sending a notice, the GC must issue the Notice of Non-Payment to the subcontractor within 35 days of the original proper invoice date. In either case, the GC must undertake to refer their dispute with the owner to mandatory Adjudication. Failing to meet these cascading deadlines means the GC legally loses the right to withhold payment and must pay the subcontractor in full out of their own pocket.

Understanding Construction Act Timelines

How Much Does Adjudication Cost in Ontario?

If a party violates the prompt payment rules, the unpaid party can force the issue through the Ontario Dispute Adjudication for Construction Contracts (ODACC). This process is designed to be much cheaper and faster than going to the Superior Court of Justice.

• ODACC Filing Fees: The fees depend on the size of the dispute. Under the updated Schedule of Fees, the standard fixed fee for a claim of $9,999 or less is $1,300 CAD (plus HST), while claims between $10,000 and $24,999 carry a fixed fee of $1,700 CAD (plus HST). For massive disputes over $1 million, fees can exceed $10,000 CAD.
• Lawyer Fees: While you can represent yourself, hiring an Ontario construction lawyer to draft your Notice of Adjudication generally costs between $1,500 and $5,000 CAD depending on complexity.
• Mandatory Interest: If payment is late, the Act mandates that interest must be paid at the prejudgment interest rate determined under the Courts of Justice Act, unless the contract specifies a higher rate.

How Long Does the Adjudication Process Take?

The ODACC system is built for speed to keep construction money flowing. ⻬ By law, an adjudicator must make a determination no later than 30 calendar days after receiving the claimant’s supporting documents (or day 35 after their appointment if documents are submitted within the maximum 5-day limit). While 39 days represents a typical total timeline from the initial Notice of Adjudication to the final decision-which includes up to 4 days to appoint the adjudicator and 5 days to submit materials-the statutory deadline is strictly tied to the receipt of documents. Under the modernized Construction Act rules, if the adjudicator orders a party to pay, that payment must be made within 15 days of the decision being communicated. This is exponentially faster than standard construction litigation, which can take years.

Frequently Asked Questions (FAQ)

Author: lawyerinfo.ca