Are Pay-When-Paid Clauses Still Valid Under Ontario’s Prompt Payment Laws?

In Ontario construction contracts, payment timelines have always been a contentious issue, especially when general contractors insert pay-when-paid clauses into agreements with subcontractors. These clauses typically state that the contractor will not pay the subcontractor until the contractor themself has been paid by the project owner. While that may seem like a fair approach to protect against cash flow crunches, it often leaves subcontractors stuck waiting for payment—sometimes indefinitely—even after they have completed their work.

Recent legal changes across Canada, including Ontario’s revamped Construction Act, have introduced strict prompt payment rules. These new laws raise big questions about whether pay-when-paid clauses are even enforceable anymore. Understanding these laws is important for all contractors and subcontractors, which is why working with a lawyer experienced in construction is vital, having them review all the incoming contracts you sign on for.

What Pay-When-Paid Clauses Mean in Practice

Pay-when-paid clauses are typically used to shift risk. If the owner does not pay the general contractor, the contractor is not obliged to pay the subcontractor, at least not right away. This can create major financial headaches for subcontractors and suppliers, who may have already paid for labour, materials, and other expenses without being paid themselves.

These clauses were intended to prevent contractors from being caught in the middle of payment disputes between owners and subcontractors. But in practice, they often leave smaller players unfairly bearing the burden of payment delays that have nothing to do with their own performance.

Ontario’s Prompt Payment Rules Change the Landscape

The Construction Act was amended in Ontario to create a clear and enforceable prompt payment structure. Now, general contractors are legally required to pay subcontractors within a specific timeline after receiving a proper invoice unless they issue a formal notice of non-payment with stated reasons.

This change does not just speed up the payment process, it also significantly limits the use of pay-when-paid clauses. While the legislation does not directly ban these clauses, it effectively overrides them by requiring contractors to either pay on time or follow the statutory process for disputing an invoice.

In Ontario, courts have not yet ruled on whether pay-when-paid clauses remain enforceable under the new Construction Act, but the existing case law still references older decisions like Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. In that case, the court upheld a pay-when-paid clause that clearly stated the subcontractor would be paid only once the contractor had been paid. However, that ruling predates the current prompt payment legislation, and future cases will likely determine whether Timbro remains good law in the new legal environment.

Prompt Payment: A Statutory Pay-When-Paid Mechanism?

In some ways, Ontario’s new rules function as a form of statutory pay-when-paid system but one with firm limits. Contractors must pay subcontractors within 7 days of receiving payment from the owner. If they do not receive payment, they must issue a notice of non-payment and commit to initiating adjudication within 21 days. That means contractors cannot just pass the blame up the chain, they must take steps to resolve disputes quickly and transparently.

This structure gives all parties more clarity and accountability. It also helps ensure subcontractors are not left out in the cold when issues arise between owners and general contractors.

What Projects Do the New Rules Apply To?

It is important to note that prompt payment laws do not apply to every construction contract in Ontario. Some types of projects—like public infrastructure jobs or those governed by specific procurement rules—may follow different legislation or remain subject to common law principles. The rules also do not apply retroactively, so contracts signed before the prompt payment rules came into effect might not be impacted.

That said, most standard construction projects in Ontario now fall under the Construction Act’s prompt payment regime. As the industry adjusts, the number of contracts where old pay-when-paid clauses still apply is rapidly shrinking. If you are not sure about the terms of an existing contract, contact a construction lawyer for clarification.

Where Do We Go From Here?

The courts have not yet given a definitive answer about whether pay-when-paid clauses are legally valid under Ontario’s new prompt payment rules, but what is clear is that the window for relying on these clauses is closing fast. Contractors and subcontractors alike should take care to understand their rights and responsibilities under the Construction Act, have existing contracts reviewed by a legal advocate, and avoid relying on outdated contract terms that may no longer be enforceable.

Contractors who still wish to include pay-when-paid language must ensure those clauses are consistent with the timelines and requirements under the law, otherwise, they risk being void or ignored entirely.

Make Sure Your Construction Contracts with Pay-When-Paid Clauses Are Still Valid. Talk To Our Experienced Construction Lawyers

The introduction of prompt payment legislation in Ontario has significantly shifted how payments flow through the construction pyramid. While the courts have yet to weigh in definitively, it is increasingly risky to rely on traditional pay-when-paid clauses in construction contracts governed by the Construction Act.

If you are not sure whether your contracts are compliant or whether a payment clause will hold up under the new rules, working with the skilled construction lawyers at Gionet Fairly Wood is a smart first step. Clear, timely payment practices benefit everyone involved and can help avoid costly disputes.

With years of experience handling construction law in the Barrie, Grey, Muskoka and Simcoe County area, we can act as your legal advocates in any construction contract dispute, in or out of court. Visit our website today to schedule a consultation or call us at (705) 468-1088. 

***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.