Sixth District Court of Appeals Construes Traditional “Pay-If-Paid” Clause as “Pay-When-Paid.”
Kegler Brown Construction Newsletter January 1, 2013
The Ohio Sixth Appellate District in Toledo ruled on December 14, 2012, that a subcontract using the words “condition precedent” was not a “pay-if-paid” clause because it did not unambiguously “shift the risk of owner non-payment from the general contractor to the subcontractor.” Transfer Electric v. A.E.M. Electrical, Case No. L-12-1100. Instead, the Court of Appeals considered the clause “pay-when-paid,” which under long-settled Ohio law obligates the general contractor to pay the subcontractor within a reasonable period of time.
This case means that most of the purported “pay-if-paid” clauses being utilized in subcontracts are probably unenforceable in Ohio, at least in the Sixth Appellate District. It also means that drafters of subcontracts desiring “pay-if-paid” protection for general contractors will have to be much clearer about the effort to shift the credit risk of owner non-payment from the general contractor to the subcontractor.