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Payment on payment

It is of general knowledge that it is necessary to be diligent in the context of business relations. In particular, when a person benefits of a personal claim against a debtor, the said claim is normally extinguished by the effect of the three-year extinc- tive prescription provided for the article 2925 of the civil Code of Québec 1. For instance, if A loans an amount of 10 000 $ to B reimbursable after a year, A will have three years from the end of the term of one year to file a lawsuit against B to claim the amount of the loan, failing which, A will lose her right to do so.

Sometimes, it is crucial for the creditor to agree with the debtor on realistic reimbursement terms, in order to avoid being forced to claim in a judicial context.

The payment on payment clause is a way to provide for a more realistic term. The name of this clause explains its scope: the debtor undertakes to repay the creditor, not on a specific date, but on the occurrence of an event, in this case the payment of a third party.

In the framework of a written agreement, this type of clause must be drafted precisely since its interpre- tation may vary depending on the analysis of the parties.

On the one hand, the debtor may undertake to make payments on the condition to be paid by a third party, in which case the event referred to is uncertain. Based on the drafting of the said clause, the reimbursement obligation therefore depends on the occurrence of the condition and may be avoided if the event does not occur 2. On the other hand, the third-party payment may be perceived as a certain event in which case, if the third party fails to pay, the reimbursement obligation of the debtor will become due at the time when the third-party’s pays or the payment should have reasonably occurred 3. The importance of a good drafting of this type of clause is also noted in a Court of Appeal’s decision 4.

What happens in the absence of a written agreement? In a recent judgement of the Superior Court, the Honorable Justice Marc St-Pierre, J.C.S. 5, concluded that, even in the absence of a written agreement to this effect, it is possible to demonstrate by testimony the intention of the business partners that the loan is reimbursable only when the business is profitable. This type of agreements have also been qualified as Payment on payment agreements 6.

In this specific case, the parties were involved in a partnership aimed at the development of a major real estate project. At the beginning of the partner- ship, one party, through its companies, had loaned additional money to the personal benefit of the other business partner, the whole secured by hypothec. The first loan was consented to in 2007, and the procedures started in 2016, at the end the business partnership. The opposing party argued that the claims were prescribed. However, during the trial, the evidence presented by way of testimony showed a clear intention of the parties to wait for the realization of the expected profits before setting their accounts. Thus, Justice St-Pierre dismissed the prescription arguments based on the evidence of the payment on payment agreement between the parties.

In a business partnership context where one of the partners is lending additional sums of money above the agreed amount to the other, we invite you to consult your legal advisors to protect your rights, whether upstream or downstream

1 Exceptions are applied on this principle. For more details, we invite you to consult your legal advisor
2 1497 et ss. C.c.Q.
3 1510 C.c.Q.
4 Design & Construction Giffels Québec inc. c. Excavation Yelle inc., 2016 QCCA 256
5 Coprim inc. c. Chatila, 2019 QCCS 345
6 It is to be noted that this judgement has been appealed, but not as to the existence of its principle

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