Law Times

Law Times • apriL 4, 2016 Page 5 www.lawtimesnews.com Ruling focuses on contractors' obligation to recover payments for subcontractors BY JUDY VAN RHIJN For Law Times A recent Ontario Division- al Court decision that focused on a contrac- tor's duty of good faith to recover payment when a "pay when paid" clause is in play will have impacts on those who practice construc- tion or commercial law, say law- yers. Arnold Zweig, a civil litiga- tor in Toronto who represented the successful respondent in 6157734 Canada Inc. v Blue- lime Enterprises Inc., says the ruling by Justice Julie Thorburn of the Divisional Court high- lights the efforts a contractor must make to recover payment for the subcontractor when a cli- ent withholds payments. "There is an implied condi- tion 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 tech- nology services to Alberta Justice through consultancy firm CGI. Suman was attempting to re- cover 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 re- quired Suman to disclose wheth- er 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 Securi- ties Commission also convicted Suman of insider trading and or- dered 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 outstand- ing payment of almost $16,000, alleging that two or three times that amount was spent on con- ducting a security sweep of Al- berta Justice's data environment. Bluelime asked for payment of the outstanding amounts on nu- merous occasions, but it was un- successful. "It was reasonable for the trial judge to accept that the Respon- dent did not pursue the matter because there were grounds for termination, there were costs in- curred to secure the third party site and it was unlikely the mon- ies would be recovered," said the ruling by Justice Thorburn. The trial judge had dismissed the ac- tion upon finding Bluelime was not responsible for the termina- tion 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 need- ed? What's the obligation to get the guy paid? The whole case was about the allegation that my cli- ent didn't do enough," he says. Surprisingly, there was no ar- gument about the validity of the clause itself. Thomas G. Heintzman, a liti- gator 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 contrac- tor does not have to pay the sub- contractor 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 conf lict on that issue, but it was not ad- dressed in this case." Zweig says that, in this case, "it's almost as if the pay when paid clause was a given." "To the Divisional Court, it was a no-brainer. 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 Blue- lime 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 respon- dent 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 con- tracts, where contractors often use the clause to avoid making payments to their subcontrac- tors. The client had good rea- son 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. LT NEWS THE MOST COMPLETE DIRECTORY OF ONTARIO LAWYERS, LAW FIRMS, JUDGES NEW EDITION Perfectbound Published December each year On subscription $80 One time purchase $83 L88804-764 Multiple copy discounts available Plus applicable taxes and shipping & handling. 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Untitled-1 1 2016-03-29 4:05 PM Course Leaders David Di Paolo, Partner, Borden Ladner Gervais LLP Paul Mingay, Partner, Borden Ladner Gervais LLP Managing & Avoiding Securities Lititgation SWIMMING WITH THE SHARKS IN THE SECURITIES MARKET INSIDER TRADING | SHAREGOLDER ACTIVISM | CLASS ACTIONS FULLY ACCREDITED IN-CLASS PROGRAM & LIVE WEBINAR Toronto, June 1 • Webinar, June 1 REGISTER BEFORE MAY 6 AND SAVE $300 To register and learn more visit www.lexpert.ca/cpdcentre Untitled-3 1 2016-03-29 2:08 PM Arnold Zweig says a recent case he acted in centred on the issue of what represents a good faith effort to enforce a 'pay when paid' clause.

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