On July 17, 2014,the Ohio Supreme Court continued its literal interpretation and application of construction contracts. In the case, Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., Slip Opinion No. 2014-Ohio-3095, a general contractor hired a sub-contractor to provide electrical services for the installation of a pool at a hotel. The sub filed suit seeking payment of $44,000 that was never paid by the GC or project owner. The subcontract included the following language:

“(c) The Contractor shall pay to the Subcontractor the amount due under subparagraph (a) above only upon the satisfaction of all four of the following conditions: * * * (iv) the Contractor has received payment from the Owner for the Work performed by the Subcontractor. RECEIPT OF PAYMENT BY CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.”

The issue in the case was whether the contract language constitutes:

(1) a pay-if-paid clause or, (2) a pay-when-paid clause. A general contractor’s unconditional promise to pay the subcontractor (usually within a reasonable time to allow the general contractor to be paid) is a pay-when-paid clause. This type of clause does not depend on eventual payment from the owner – the GC merely has a reasonable time to pay the sub. Conversely, a general contractor’s conditional promise to pay a sub is apay-if-paid clause.  IE:  The owner paying the GC is an express condition precedent, and must occur, before the GC pays the sub. If the owner never pays the GC, the GC is not required to pay the sub.

The Supreme Court determined the applicable contract language first requiring receipt of payment by the contractor from the owner is a condition precedent to payment to the subcontractor. Thus, the clause is a pay-if-paidclause.  “The parties intended that the risk of the owner’s nonpayment shift to the subcontractor rather than remain with the general contractor.” 

The Court concluded that when a contract provides that payment by the owner to the GC for work performed by a sub is a “condition precedent” to payment by the GC to the sub, the provision is a pay-if-paid clause. If the contract clause includes the magic language, “condition precedent” – the risk has probably shifted to the sub for risk of no payment from the owner. In conclusion, in Ohio a contract is a contract.  Say what you mean, and mean what you say.