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American Subcontractors Association News

‘Pay-If-Paid’ Clauses Should Be ‘Unenforceable,’

ASA and ASA of Ohio Tell Ohio Supreme Court

In an Ohio Supreme Court case that “will impact construction across the State of Ohio where billions of dollars of construction work is in progress,” ASA, ASA of Ohio, and the Ohio/Michigan Chapter of the National Electrical Contractors Association filed an amicus brief, urging the court to rule that “pay-if-paid” clauses are “unenforceable” in construction contracts. A decision by the Supreme Court of Ohio in Transtar Electric, Inc. v. A.E.M. Electric Services Corporation will determine whether prime contractors can shift financial risk of construction projects to subcontractors and suppliers through “pay-if-paid” clauses. “These clauses unreasonably and improvidently transfer the risk of loss from the party best able to analyze and control the loss and their own profit, the prime contractor, to all of the other parties in the construction process,” ASA, ASA of Ohio and the Ohio/Michigan chapter of NECA said in their brief, filed on June 20, 2013. The organizations urged the state Supreme Court to affirm an appeals court’s decision “determining that pay-if-paid clauses should either be extraordinarily explicit so as to convey the inherent risk of nonpayment by the project owner, a condition completely uncontrolled by the subcontractor, or eliminated as a method of subjugation of subcontractors as being void and unenforceable as against public policy.” A.E.M. was the general contractor on the construction of a swimming pool at a Holiday Inn in Maumee, Ohio. In January 2007, A.E.M. entered into a subcontract agreement with Transtar for certain electrical work to be performed on the project. The subcontract provision in question included: “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.” Transtar invoiced A.E.M. for work performed in the amount of $186,709, and A.E.M. paid Transtar $142,620.10. The remaining balance was not paid. On Sept. 27, 2010, Transtar sued A.E.M. for the unpaid amount, and A.E.M. denied liability. A.E.M. did not dispute the unpaid amount, but argued that “the project owner had failed to pay” A.E.M. that amount and more. A.E.M. said it would continue to attempt to collect the money from the project owner and pledged to pay Transtar if collection efforts were successful. Absent such payment, however, A.E.M. insisted it was not contractually obligated to pay. Transtar argued that the contractual provision that A.E.M. characterized as a pay-if-paid clause should be deemed a pay-when-paid clause. The trial court concluded that the contract clause at issue was a pay-if-paid provision, but the appeals court reversed, saying, “Because we conclude that the purported pay-if-paid contract provision does not manifest the intent of the parties to shift the risk of owner non-payment from the general contractor to the subcontractor, we reverse.” ASA’s Subcontractors Legal Defense Fund financed the brief in this case.