In This Issue

• "Pay When Paid" Clause Does Not Shift the Risk of Owner Non-Payment to the Sub
• Retainage Ordered Released Even Without Substantial Completion
• Bonding Company Pays for Its Inaction
• How Does Ohio Rank for Subcontractor Rights?

"Pay When Paid" Clause Does Not Shift the Risk of Owner Non-Payment to the Sub

Donald W. Gregory
Construction
Law chair

For years, our firm has been advising subcontractors that, in Ohio, a "pay when paid" clause (contractor will pay sub within days of being paid by the owner) does not shift the risk of owner non-payment like a "pay if paid" clause (payment by the owner is a condition precedent to payment by the contractor to the sub), meaning that contractors still must pay subs within a "reasonable period of time" under a "pay when paid" clause.

A Court of Appeals (based in Cleveland) on July 22, 2004 has confirmed that interpretation in the case of Chapman Excavating v. Fortney & Weygandt, Inc. The subcontract clause interpreted in that case said:

"Partial payments of the subcontract sum shall be made within ten (10) days after payment is received by (contractor) from Owner."

The Court held that this was a "pay when paid" clause which only shifted the timing of payment but did not change the sub's entitlement to payment from the contractor within a "reasonable period of time," regardless of the status of payment from the owner to the contractor. The Court further determined that a reasonable period of time had elapsed so the sub was due the money.

This case demonstrates the crucial differences between "pay when paid" and "pay if paid" clauses under Ohio law.

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Retainage Ordered Released Even Without Substantial Completion

An Ohio appellate court on August 6, 2004 has ruled that a contractor should be paid his retainage due to the owner's delay in ultimately allowing the work to be completed. (Stone Excavating, Inc. v. Newmark Homes, Inc.) In that case, the owner suspended the last phase of asphalt work for several years. Although the contract did not contain a specific contract completion date, the court implied a reasonable period of time and concluded that the owner breached the contract by failing to allow the contractor to complete within a two (2) year period.

The Court therefore found that the retainage was due the contractor, even though the owner had used those funds to pay another contractor to finish the work four years after the project started.

Contractors may be able to use this case to argue for release of retainage when the work is delayed or suspended by the owner for a considerable period of time.

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Bonding Company Pays for Its Inaction

A recent case out of Maryland, called National Fire Ins. Co. v. Wadsworth Golf Constr. Co., gives subcontractors and suppliers greater leverage in getting paid under payment bonds. Most states, including Ohio, has a statutory waiting period (Ohio is 60 days) where a bond claimant can take no action on the claim. This period was created to give the bonding company time to investigate the claim but often is used by the bonding company to do virtually nothing but delay the ultimate recovery.

In this Maryland case, the Court granted summary judgment on the sub's $720,000 payment bond claim ruling that the bonding company waived its defenses to the claim because it failed to respond timely (within the 45 day period under the AIA A312 bond form). The Court expressly found that the bonding company had a duty to act reasonably and timely and recognized that "as a practical matter, the suppliers and small contractors on large construction projects need reasonably prompt payment for their work and materials in order for them to remain solvent and stay in business."

This case may be used by payment bond claimants to encourage bonding companies to timely deal with their claims or face dire legal consequences.

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How Does Ohio Rank for Subcontractor Rights?

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Credits

Kegler, Brown, Hill & Ritter's Construction Law Newsletter is prepared by Donald W. Gregory for the Construction Law practice group.

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