“Pay When Paid” Clause Does Not Shift the Risk of Owner Non-Payment to the Sub
Kegler Brown Construction Newsletter December 1, 2004
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.