“Pay-if-Paid” Under Siege

Kegler Brown Construction Newsletter

There have been several recent Ohio cases finding “pay-if-paid” clauses ineffective or unenforceable because the risk-shifting associated with non-payment by the owner was not clearly and unambiguously stated in the contract.

While many have complained about the unfairness of such clauses, only recently have Ohio courts been ruling many of them ineffective. Recent examples include subcontracts that used the terms “expressly conditioned … upon … payment” (Franklin County Common Pleas Court); “within 10 working days after receipt” (Tenth District Court of Appeals); and “receipt of payment … is a condition precedent” (Twelfth District Court of Appeals).

Therefore, contractors and subcontractors can no longer assume that a purported “pay-if-paid” clause using words like “if” and “condition precedent” is effective. Given these decisions, it is anticipated that challenges to “pay-if-paid” clauses will continue to expand. And those seeking to draft enforceable “pay-if-paid” clauses must exercise great care to clearly set forth the exact risks (such as owner non-payment) being shifted in the contract; and avoid any conflicting provisions contained in other provisions of the contract.