Can a contractor refuse to pay a subcontractor if he doesn't get paid?

Question

Can a contractor refuse to pay a subcontractor until the contractor receives his payment from the company/client? Does it matter if it's in a written contract? Can the buck be passed like that?

"Payment is contingent on when Client pay Contractor. In the case where a Client uses net-30 payment schedules, the Contractor can expect to be paid up to 30 days after the first day of the month after Subcontractor submitted invoice." They slipped this one by me. Hypothetically if the Client doesn't pay Contractor does that mean I wouldn't get paid and there would be nothing I could do about it? Is there even a deadline?

Answer 1

At common law there is no prohibition such a term

Contract law is based on the premise that the contract is made by consenting people who want to make enforceable promises to each other and they know what’s best for themselves. At common law, you can’t agree to a contract and then avoid its consequences because you don’t like them or don’t think they are “fair”.

At common law, the only way to avoid a contractural obligation is to demonstrate that it is unconscionable, that is, the term is so onerous that no reasonable person would have agreed to it. A “pay when paid” clause is not unconscionable.

Contracts are about risk allocation - if a subcontractor agrees to assume the risk of the principal not paying the contractor there there is nothing to stop them doing so.

Statute law sometimes recognises that people need protection

The conceit of the common law is that contracts are formed by parties of relatively equal power who are able to negotiate and agree the terms of their contract. Since this is not necessarily the case, the legislature in various jurisdictions has stepped in to regulate some contracts.

Most commonly this occurs in the context of consumer protection law. Canada (and it’s provinces) have these laws so you need to check if your contract is covered - “consumer” can include businesses in some jurisdictions.

Further, in Canada (and it’s provinces), certain contracts in building and construction are covered by prompt payment laws which, if they apply, make “pay when paid” clauses void.

Answer 2

Can a contractor refuse to pay a subcontractor until the contractor receives his payment from the company/client?

No. Some details missing in your description determine the type of claim you would have and the entity you would need to sue, but the sort of waiver on contingency that is presented to you is either inapplicable or devoid of legal merit.

If your work conditions meet the notion of pay period as defined in section 1 of the Employment Standards Act (this is of British Columbia, but other provinces very likely have similar legislation), the potential 30-day delay of payment clearly exceeds the delay allowed in section 17(1). Section 4 precludes any waiver of this and employee's other rights under the Act, whence the clause you mention is null and void to the extent it contravenes the Act. The fact that your contract is in writing or verbal makes no difference.

Even if (1) the client does not pay and (2) your work days don't meet the statutory definition of pay period or your work situation falls outside the scope of that legislation, you would still have against the client a claim of unjust enrichment. That being said, the statutory definition of "employee" (section 1) suggests that the client most likely is subject to the Act. If anything, the contractor's clause might have the effect of precluding claims [of breach] against him insofar as he does not benefit from the client's nonpayment of your work.

For enforcement of your rights in the event of a violation of the Act (or its provincial equivalent), see Parts 10-13. This does not necessarily preclude actionability of extra-legislative claims, such as the aforementioned unjust enrichment.