Top 3 Construction Law Developments of 2014

Kegler Brown Construction Newsletter

There were a number of significant legal developments impacting the construction industry over the past year. Here are my top three:

1. Ohio Supreme Court Enforces "Pay-if-Paid" Clause

The Ohio Supreme Court in Transtar Electric, Inc. v. A.E.M. Electric Services Corp., Slip Opinion No. 2014-Ohio- 3095 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 paragraph 25.

2. Texas Supreme Court Throws Out "No Damage for Delay" Clause when there is Bad Faith or Other Active Interference by the Owner

The Texas Supreme Court, in a nationally watched case, found that a "no damage for delay" clause – generally enforceable in Texas – could not bar owner-caused delay damages when they "resulted from fraud, misrepresentation, or other bad faith on the part of one seeking the benefit of the provision."

The Court also reaffirmed the principle that "a contractual provision' exempting a party from tort liability for harm caused intentionally or recklessly is unenforceable on grounds of public policy.'"

"To say otherwise would be incentivize wrongful conduct and damage contractual relations."

"This conclusion is supported by … court decisions in at least 28 American jurisdictions. We join the overwhelming consensus." Zachary Construction v. Port of Houston Authority, No. 12-0772, (TX August 29, 2014).

We assisted with the amicus brief supporting the winning position filed by the American Subcontractors Association.

3. Ohio Supreme Court Finds Later Enacted Statute of Repose Unenforceable to Bar Construction Defect Claims

Ohio and most other states have a "statute of repose" which basically provides that a certain amount of time after substantial completion one cannot be sued for construction defects or other injuries. For example, Ohio currently has a 10-year statute of repose set forth in R.C. §2305.131.

The Supreme Court of Ohio was faced with a case where a condominium complex was finished in 1990 and defects were not discovered until 2003. As Ohio had no enforceable statute of repose in 2003 (it had been declared unconstitutional), the Supreme Court ruled that the later enacted Ohio statute of repose could not be applied retroactively to bar the defect claim.

Instead the Supreme Court ruled that the condo association had four years after the date of discovery of the defect to file its claim and had timely done so. Oaktree Condominium Assn., Inc. v. Hallmark Bld. Co., 2014-Ohio-1937.

This case means that some construction defect claims, by condo associations or others, may survive even though construction was completed more than a decade ago.