Construction Contracts between Subcontractors

Subcontractor Dispute Highlights the Significance of Accurate Verbiage in a Construction Contract Between Two Subcontractors.

For clients engaged in the construction field, the use of “pay-when-paid” and “pay-if-paid” provisions in construction contract documents is likely a common occurrence.  However, a recent decision from the Summit County Court of Appeals illustrates the care that must be taken when Subcontractor’s seek to employ these provisions in their agreements.  In Ohio Fabricators, Inc. v. Aster Elements, Inc., 2019-Ohio-3978, Ohio Fabricators brought suit against Aster for a variety of claims, including non-payment and breach of contract.  The project involved the installation of exterior panels on a construction project for Cincinnati Children’s Hospital.  Cincinnati Children’s was the “owner”, and Cincinnati Children’s in turn had hired a general contractor, who in turn had hired an exterior general contractor, which had then subcontracted certain work to Aster Elements.  Aster Elements then hired Ohio Fabricators with the completed portion of its work.  The General Conditions of the Subcontract between Aster Elements and Ohio Fabricators included the following clause: 

Home Construction project

It is specifically understood and agreed that payment to the Subcontractor including any retention shall be made only after receipt of payment by Aster Elements, Inc. from the Owner, and such payment by Owner to Aster Elements, Inc. is a condition precedent to Aster Elements, Inc.’s obligation to pay the Subcontractor.

The contract clause, on its face, would appear to operate as a “pay-if-paid” provision as it is a conditional promise to pay the Subcontractor that is enforceable only upon a condition precedent, that being payment by the Owner.  “Pay-when-paid” provisions are unconditional promises to pay that are not dependent upon the Owner’s non-payment.  Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., 140 Ohio St. 3d 193, 2014-Ohio-3095 at ¶10. 

In Ohio Fabricator’s case, Aster had defended on the basis of what it claimed was a “pay-if-paid” provision arguing that because it had not received final payment, it was under no obligation to pay Ohio Fabricators for any outstanding invoices or claims.  The Trial Court had agreed and granted summary judgment in favor of Aster, and Ohio Fabricators appealed.  The Court of Appeals reviewed the provision and held that use of the term “Owner” was a common word to be given its ordinary meaning, and that Cincinnati Children’s was the Owner on the project.  As such, and under that construction, the Court held that Aster was not able to rely on that provision to defeat Ohio Fabricator’s claims.  Under that construction, the Court noted that there was no requirement that Aster receive payment prior to having an obligation to pay Ohio Fabricators.  In short, if Aster had intended to transfer any risk of non-payment to the Subcontractor it would have needed to condition its receipt of payment from Pioneer, the entity with whom it contracted.  The provision was poorly drafted because under no circumstances was Aster going to be receiving payment directly from the Owner under the structure of the subcontract.  As a result, the “pay-if-paid” provision failed to achieve the purpose for which Aster presumably included it in its subcontract with Ohio Fabricators.  The Court failed to construe the agreement to read Pioneer into the role of Owner, because Owner was a plain and common word with ordinary meaning and was used throughout the General Conditions of the Contract.  In other words, although Aster may have assumed or intended the “pay-if-paid” provision to apply to its receipt of funds, that wasn’t how it was drafted.

The Decision highlights the importance of employing clear language in the Contract to make sure that risks are being allocated as intended. 

If you have any questions about this article or about your Construction Contract, please don’t hesitate to contact Michael W. Sandner of Pickrel, Schaeffer & Ebeling Co., L.P.A. at msandner@pselaw.com or call 937-223-1130.

AUTHOR: Mike Sandner
msandner@pselaw.com