Subcontractor Payment Provisions

If you regularly perform services as a general contractor or a subcontractor, then you should be aware of the recent Ohio Supreme Court ruling in the case of Transtar Electric, Inc. v. A.E.M. Electric Services Corp.  The court’s ruling pertained to a very specifically worded payment provision.  Transtar Electric, Inc., the general    contractor, retained the services of A.E.M. Electric Services Corp., a subcontractor.  Apparently, the subcontractor performed its work  obligations under their agreement without any timely or quality related issues.  The subcontractor submitted a total of 14 invoices to the general contractor for payment but the general contractor only paid 11 of the invoices.

The contract between the parties contained the following provision: The    general contractor shall pay to the subcontractor the amount due “only upon the satisfaction of all four of the following conditions: … (4) the general contractor has received payment from the owner for the work performed by the subcontractor.  RECEIPT OF PAYMENT BY GENERAL CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY GENERAL CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.”

There are two types of payment provisions – pay-when-paid and pay-if-paid.  The difference between the two payment provisions is that pay-when-paid is considered to be an unconditional promise to pay.  A pay-if-paid provision is a conditional promise and requires payment from the general contractor to the subcontractor only once the general contractor receives payment.  The Supreme Court ruled that the above payment provision at issue was considered to be a “pay-if-paid” provision.

Now, in order to make such a fundamental shift in the subcontractor taking on all of the risk of non-payment, the Supreme Court also held that the agreement must clearly and unequivocally show the intent of the parties.  The Supreme Court held that the use of the phrase “condition precedent” was sufficient to clearly and unequivocally state the agreement and understanding between the parties.  In Transtar Electric, Inc. case, the Supreme Court ruled that the agreement transferred the risk of non-payment to the subcontractor.  I think it is safe to assume that at the time of contracting the subcontractor was not aware of this provision or did not appreciate the significance of this provision.

It is important to know and understand the nuances of the information or statements contained within an agreement that you are drafting or reviewing.  Just the change of a few words in an agreement can radically alter the risk levels between parties – meaning, will I have to pay a subcontractor for work completed even if I did not get paid from the owner or if non-payment occurs who do I go after – the general contractor or the general contractor’s client.  As they say, the devil is in the details.

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Chris Corpus

Founding Partner at Corpus Law Inc

This article does not provide legal advice or create an attorney-client relationship. If you have any questions or would like to learn more about this topic or if you have other legal questions, do not hesitate to contact Chris Corpus, Esq. of Corpus Law Inc at 216-973-2475. Copyright Christopher A. Corpus 2016.