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Pay-when-paid or pay-if-paid construction contracts

On July 17, 2014, the Ohio Supreme Court clarified the distinction between “pay-when paid” versus “pay-if-paid” construction contracts.  In Transtar Electric, Inc. v. A.E.M. Electric Services Corp., 2014-Ohio-3095, 2013-0148 (2014), the Court distinguished between the two types of contractual provisions that establish the manner by which a general contractor typically pays a subcontractor for the subcontractor's work. A general contractor can make an unconditional promise to pay the subcontractor, usually within a reasonable time to allow the general contractor to be paid. An unconditional promise to pay is a pay-when-paid payment provision. Such a promise, the Court stated, is not dependent on or modified by the owner's nonpayment. A pay-when-paid contract provision places the risk of the owner’s non-payment squarely on the general contractor.

On the other hand, the general contractor may make a conditional promise to pay the subcontractor that is enforceable only if a “condition precedent” has occurred. A conditional promise to pay is a “pay-if-paid” payment provision. This provision requires the general contractor to pay the subcontractor only if the owner pays the general contractor. Therefore, the risk of the owner's nonpayment is transferred to the subcontractor.

While the distinction is important, the language of the contract may at time be vague. Ohio courts will look to the plain and ordinary meaning of the language used in the contract unless another meaning is clearly apparent from the contents of the agreement. When the language of a written contract is clear, a Court may look no further than the writing itself to find the intent of the parties.

If the contract contains language such as “'final payment shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment,” then a court will conclude the provision is a “pay-if-paid” provision.

General contractors and subcontractors alike should pay particular attention to this important contract provision.

Should you have any questions concerning this case or any construction matter, please contact Scott D. Simpkins at (216) 621-8484.