On December 14, 2012, the Sixth District Appellate Court released its decision in Transtar Electric, Inc. v. A.E.M. Electric Services Corporation. The effect of this decision, if upheld by the Ohio Supreme Court, will be to restrict the use of “pay-if-paid” provisions in construction contracts. General contractors often include a “pay-if-paid” provision in a contract with a subcontractor in order to shift the risk of owner nonpayment from the general contractor to the subcontractor. This is distinguished from a “pay-when-paid” provision, which may delay payment but still contractually obligates the general contractor to pay the subcontractor. Ohio courts have held that when there is a “pay-when-paid” provision, the general contractor must still pay the subcontractor within a reasonable time after work is completed regardless of owner nonpayment.
Ohio courts historically have construed a contract clause a “pay-if-paid” provision if the clause expressly noted that owner payment to the general contractor was a “condition precedent” to subcontractor payment. In Transtar Electric, however, the Court held that “absent language making manifest the intent to shift risk of payment, the provision must be construed as a pay-when-paid clause.” This decision could have a significant impact on construction contracts. By placing additional restrictions on the use of “pay-if-paid” clauses, Transtar Electric provides meaningful safeguards for subcontractors in Ohio.
The Supreme Court of Ohio certified the case for appeal on March 27, 2013. Given the important implications of Transtar Electric, our attorneys will follow the appeal to the Supreme Court of Ohio and keep you apprised of developments in and the outcome of this case. If you have any questions or concerns, please contract Ronald P. Friedberg, Chair of our Construction Practice Group, at firstname.lastname@example.org (216-831-0042 ext. 136), Peter D. Brosse, Chair of our Business Practice Group, at email@example.com (ext. 144), or another attorney in our Construction Practice Group.