By:  John Swansinger, Esq.

“Condition precedent” is now perhaps the most important term in your Ohio construction subcontract following the Ohio Supreme Court’s recent decision in Transtar Electric, Inc. v A.E.M. Electric Services Corporation Slip Opinion No. 2014-Ohio-3095.  Ignore this case and it will cost you big money and give you a giant headache.

When a contract provides that payment from the project owner to a general contractor is a “condition precedent” to payment by the general contractor to the subcontractor, the provision is a “pay-if-paid” provision.  This means that if the Owner doesn’t pay the general contractor, the general contractor does not have to pay the subcontractor.

Pay-if-paid clauses are legal and transfer risk to a subcontractor.  In the Transtar case, Transtar signed a clause which included “condition precedent” language.  When owner went belly up, the general contractor, A.E.M., said “not our problem” and refused to pay Transtar, citing the pay-if-paid clause.  Transtar lost at trial, but successfully argued to the Court of Appeals that the payment clause was ambiguous.  Transtar appealed to the Ohio Supreme Court. Transtar enjoyed a groundswell of support from the state and national subcontractor lobby and essentially argued that subcontractors need additional protection from the courts beyond the clear language of their agreement.

Not so fast.  The Ohio Supreme Court held that the written contract placed the risk of the unexpected circumstances, in this case, owner default, upon the subcontractor.  The Supreme Court found that those two magic words— “condition precedent”—represent a clear and unequivocal showing of the parties’ intention.   Accordingly, all parties should expect to be held to the bargain as expressed in the four corners of the written contract.

Words to the Wise:

General Contractors – Include the words “condition precedent” in your payment clauses.

Sub-Contractors – Understand that if you sign an agreement including a pay-if-paid clause, you are accepting the risk of the owner’s default. You will have no claim against the general contractor.  You must implement exceptional credit practices as it relates to the owner before accepting such work.

All parties – You must FEAR THE FORM!