On July 17, 2014, the Supreme Court of Ohio, in a 5-2 decision, issued its holding in Transtar Electric, Inc. v. A.E.M. Electric
Service Corp. At issue in the case was a contract provision that stated, “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 question was whether the provision was pay-when-paid or pay-if-paid.
Under Ohio law, a contract may contain a pay-when-paid or a pay-if-paid provision, but not both. A pay-when-paid provision is an unconditional promise by the general contractor to pay the
subcontractor, and if the owner never pays, the general contractor must still pay the subcontractor within a reasonable amount of time. A pay-if-paid provision, on the other hand, requires the general contractor to pay the subcontractor if and only if the project owner pays the general contractor.
Prior case law holds that a pay-if-paid provision is enforceable only if it expressly shows the intention of the parties to shift the risk of non-payment. In Transtar, Justice Kennedy, writing for the
majority, held that use of the term “condition precedent” clearly and unequivocally shows the intent of the parties to transfer the risk of nonpayment. Accordingly, any contractor wanting to pass the risk of non-payment on to its subcontractors should incorporate the above contract language into agreements entered under Ohio law. Similarly, subcontractors must be aware of the effect of such a provision and that it considerably alters the ability to recover money owed for work performed under the contract.