Conditional Payment Magic Language in Ohio
Kegler Brown Construction Newsletter July 21, 2014
On July 17, 2014, the Ohio Supreme Court issued a divided opinion (Justices Pfeifer and O'Neill dissenting) in Transtar Electric, Inc. v. A.E.M. Electric Services Corp., Slip Opinion No. 2014-Ohio-3095, and announced a bright line rule that "[t]he use of the term 'condition precedent' in the payment provision of a contract between a general contractor and a subcontractor" is essentially magic language that on its own "clearly and unequivocally shows the intent of those parties to transfer the risk of the project owner's nonpayment from the general contractor to the subcontractor." Opinion, at syllabus #2.
Ohio courts have traditionally enforced 'pay-if-paid' language to operate as an absolute bar to a lower-tier's right to payment only if the 'pay-if-paid' clause clearly and unequivocally showed that the parties intended to shift the traditional risk of owner non-payment from the general contractor to its lower-tier.
If the payment clause did not meet this high bar, Ohio law instead required courts to find that the 'pay-if-paid' clause was to be treated as a 'pay-when-paid' clause that did not shift the risk of nonpayment but instead still required the contractor to pay its lower tier within a reasonable period of time. Disputes over the enforceability of 'pay-if-paid' or 'pay-when-paid' clauses in Ohio have thus turned on whether the contract has clearly and unambiguously indicated that the lower tier was accepting the risk of owner-non-payment.
Though the Ohio Supreme Court's decision in Transtar does not change the Ohio law that requires clear and unambiguous language to enforce a pay-if-paid clause, it establishes Ohio as a state where the phrase "condition precedent" in a subcontract payment clause will create a pay-if-paid clause and "negate the need for additional language to demonstrate the intent to transfer the risk [of owner nonpayment]." Opinion at ¶25.