Monday, July 21, 2014
This is a edited version of a longer post from the Legally Speaking Ohio blog, written by Marianna Brown Bettman (pictured), a law professor at the University of Cincinnati College of Law, where she teaches torts, legal ethics, and a seminar on the Supreme Court of Ohio. She is also a former Ohio state court of appeals judge.
Professor Bettman's full blog post can be found here.
On July 17, 2014, the Supreme Court of Ohio handed down a merit decision in Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., Slip Opinion No. 2014-Ohio-3095. In a 5-2 opinion authored by Justice Kennedy, the Court held that a contract for work performed by a subcontractor for a general contractor which contains a provision that payment by the project owner to the general contractor is a condition precedent to payment by the general contractor to the sub is a pay-if-paid provision. Such a provision clearly and unequivocally shows the intent of the parties to transfer the risk of the owner’s nonpayment from the general contractor to the subcontractor. Justice O’Neill dissented, for himself and Justice Pfeifer. The case was argued November 5, 2013.
A.E.M was the general contractor on the construction of a swimming pool at a Holiday Inn. A.E.M. entered into a subcontract with Transtar to perform electrical work on the project. Transtar fully performed the work under the contract, and was paid $142,620. A.E.M. did not pay Transtar the remaining balance of $44,088 because A.E.M. contended the owner failed to pay it for Transtar’s work.
Section 4 of the subcontracting agreement included this provision, which was in bold and in capital letters: “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.”
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Analysis of Merit Decision
Definitions: Pay-when-Paid versus Pay-if-Paid
The Court explains there are two types of contract provisions between general and subcontractors. A pay-when-paid provision is one in which a general contractor makes an unconditional promise to pay the subcontractor, within a reasonable period of time to allow the general contractor to be paid. A pay-when-paid provision is not affected by the owner’s nonpayment.
By contrast, a pay-if-paid provision is a conditional promise to pay that is enforceable only if a condition precedent has occurred. Under this type of contract, the general contractor is only required to pay the subcontractor if the owner pays the general contractor. Under a pay-if-paid contract, the risk of the owner’s nonpayment is shifted to the subcontractor.
The issue in the case is which kind of contract provision was this one? Short answer: pay-if-paid.
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Application of the Rule to the Contract in this Case
The Court held that Section 4 of the contract between A.E.M. and Transfer is a pay-if-paid provision, and clearly and unequivocally shows that the parties intended to transfer the risk of the owner’s nonpayment from A.E.M. to Transtar.
The court of appeals is reversed and the judgment of the trial court granting summary judgment to A.E.M. is reinstated.
Justice O’Neill, joined by Justice Pfeifer in dissent, would find the language in this particular contract inadequate as a matter of law to transfer the risk of nonpayment by the owner from A.E.M. to Transtar. He would find the ambiguities in the wording create genuine issues of material fact that make summary judgment inappropriate.
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