Certain Contract Language Explicitly Transfers Risk of Nonpayment by Client to Subcontractor
A general contractor asking the Ohio Supreme Court to uphold the terms of its contract with a subcontractor requiring it to pay the subcontractor only if it was first paid by the client won its appeal today.
In a 5-2 decision, Justice Sharon L. Kennedy concluded that when a contract states that payment by the project owner to the general contractor for work done by a subcontractor is a “condition precedent” to the general contractor paying the subcontractor, that term “clearly and unequivocally” shows the intent to transfer the risk of the project owner’s nonpayment from the contractor to the subcontractor.
The decision reverses the judgment of the Sixth District Court of Appeals and reinstates the trial court’s summary judgment in favor of the general contractor, A.E.M. Electric Services Corporation.
A.E.M. hired subcontractor Transtar Electric to install electrical services for a pool at a Maumee Holiday Inn. Transtar completed the work and was paid about $143,000. However, A.E.M. did not pay Transtar the remaining $44,088 for the project because the owner of the project had not paid A.E.M.
The contract between A.E.M. and Transtar included a provision stating, “The Contractor shall pay to the Subcontractor the amount due … only upon the satisfaction of all four of the following conditions: … (iv) the Contractor has received payment from the Owner for the Work performed by the Subcontractor. RECEIPT OF PAYMENT BY CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.”
Transtar sued A.E.M. in 2010 for the unpaid balance. The trial court granted A.E.M.’s request for summary judgment in its favor. Transtar appealed to the Sixth District, which reversed the trial court’s decision, and A.E.M. appealed.
Justice Kennedy described two types of payment provisions common in contracts between general contractors and subcontractors. A “pay-when-paid” provision is a promise by the contractor to pay the subcontractor unconditionally. A “pay-if-paid” provision is a conditional promise, requiring the contractor to pay the subcontractor only if the client pays the contractor. Justice Kennedy noted that Ohio courts have upheld pay-if-paid contracts.
A “condition precedent” has been defined as “a condition that must be performed before obligations in a contract become effective,” Justice Kennedy added.
“The [contract’s] language stating that receipt of payment by the contractor is a condition precedent to payment to the subcontractor requires that the owner first pay the contractor,” Justice Kennedy wrote. “The parties intended that the risk of the owner’s nonpayment shift to the subcontractor rather than remain with the general contractor.” Accordingly, the parties agreed to a pay-if-paid provision, she reasoned.
Also, the use of the phrase “condition precedent” clearly expresses the parties’ intent to transfer the risk of the project owner’s nonpayment to the subcontractor and eliminates the need for any additional language to express this intent, Justice Kennedy concluded.
The majority opinion was joined by Chief Justice Maureen O’Connor and Justices Terrence O’Donnell, Justice Judith Ann Lanzinger, and Justice Judith L. French. Justice William M. O’Neill dissented in an opinion joined by Justice Paul E. Pfeifer.
In his dissent, Justice O’Neill stated that the trial court should not have granted summary judgment in this case, and Transtar deserved to have “its day in court.”
“I agree that use of the term ‘condition precedent’ in the parties’ contract supports A.E.M.’s argument,” Justice O’Neill wrote. “But employing the summary-judgment standard under Civ.R. 56(C), I am not convinced that the language used in this contract could lead reasonable minds to but one conclusion or that the language is sufficient on its face to shift the risk of the owner’s nonpayment to the subcontractor.”
Noting that Transtar cannot file a lawsuit against the project owner for breach of contract because there is no contract between them, he concluded that for the general contractor to prevail on summary judgment the contract must explicitly state in plain language that the contractor intended to shift the risk of the client’s nonpayment from itself to the subcontractor.
Please note: Opinion summaries are prepared by the Office of Public Information for the general public and news media. Opinion summaries are not prepared for every opinion, but only for noteworthy cases. Opinion summaries are not to be considered as official headnotes or syllabi of court opinions. The full text of this and other court opinions are available online.
PDF files may be viewed, printed, and searched using the free Acrobat® Reader
Acrobat Reader is a trademark of Adobe Systems Incorporated.