Is it a pay-when-paid provision or a pay-if-paid provision?

“We were not paid at all, so we will not be paying you.”

“We were only partially paid.  We took a haircut, so you will also have to take a haircut.”

“We are not obligated to pay you until we receive payment ourselves.”

These are common statements in the construction industry when the flow of payments is disrupted.  They may arise from owner insolvency or slow payment processing.  Between the party requesting to be paid and the party refusing to pay, the determination of who is correct might depend on whether the contract used a pay-when-paid provision or a pay-if-paid provision.

The distinction is important because under a pay-when-paid provision the payment is due eventually; it’s just a matter of timing.  However, under a pay-if-paid provision there may be no obligation to pay and payment may never come due.

A pay-when-paid provision under Ohio law is, “an unconditional promise to pay the subcontractor, usually within a reasonable time to allow the general contractor to be paid….  Such a promise is not dependent on or modified by the owner’s nonpayment.”  Transtar Electric, Inc. v. A.E.M. Electric Services Corporation, 140 Ohio St.3d 193 (2014).  A pay-if-paid provision under Ohio law is, “a conditional promise to pay the subcontractor that is enforceable only if a condition precedent has occurred….  This provision requires the general contractor to pay the subcontractor only if the owner pays the general contractor.  Therefore, the risk of the owner’s nonpayment is transferred to the subcontractor.”  Id.

Construction contracts usually do not label which type of payment provision was used.  To determine whether a contract contains a pay-when-paid vs. pay-if-paid provision, the specific contract language must be evaluated.  The evaluation is to determine whether the contract language clearly shows the intent of the parties to transfer the risk of nonpayment to the lower tier entity.

The Supreme Court of Ohio held in Transtar Electric that including the words “condition precedent” was sufficient to indicate the intent to transfer the risk of nonpayment – making it a pay-if-paid provision.  Therefore, if your contract’s payment provision uses the words “condition precedent” it is likely a pay-if-paid provision.

Please contact Schwandner Law Firm LLC if you would like the help of a construction attorney for payment disputes.  Schwandner Law Firm LLC is a construction law firm located in downtown Cincinnati, Ohio.