I know I sound like a broken record on this, but courts keep interpreting pay-if-paid clauses. The latest case I read was out of Ohio, Transtar Electric, Inc. v. A.E.M. Electric Services Corp., in which the trial court ruled the clause was a pay-if-paid clause, but was overruled by the Court of Appeals.
In that case, the subcontract conditioned payment to the sub on payment received by the contractor from the owner for the sub’s work. The pay-if-paid clause stated:
(c) The Contractor shall pay to the Subcontractor the amount due [for work performed] only upon the satisfaction of all four of the following conditions: (i) the Subcontractor has completed all of the Work covered by the payment in a timely and workmanlike manner, . . . (ii) the Owner has approved the Work , . . . (iii) the Subcontractor proves to the Contractor’s sole satisfaction that the Project is free and clear from all liens . . . and (iv) the Contractor has received payment from the Owner for the Work performed by Subcontractor. RECEIPT OF PAYMENT BY CONTRACTOR FROM OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.
Seems pretty clear — the subcontractor will not get paid until the contractor gets paid. But, the Ohio Court of Appeals found that there was no language that clearly and unambiguously indicated that the parties intended to transfer the ultimate risk of nonpayment to the subcontractor. Given the court’s finding, I’m not certain what language would clearly and unambiguously transfer the risk to the subcontractor, but it appears that in Ohio you would have to include language that the subcontractor bears the ultimate risk of nonpayment.
As I’ve said time and time again, make sure you know whether your contract contains a pay-if-paid clause and how the courts in that jurisdiction interpret the contract language.
[…] complete contingencies (i.e. pay if paid clauses) void and against public policies. Other courts, like the Ohio courts in a very recent case, will make it virtually impossible to create a strict contingency to shift financial risk down the […]