Pay Me When? – A look at “pay-when-paid” and “pay-if-paid” construction contracts in Ohio

September 14, 2012 in Construction, Ohio Courts by Brad Council

Pay Me When?

A look at “pay-when-paid” and “pay-if-paid” construction contracts in Ohio through

EMH&T v. Triad Architects, 196Ohio App.3d 784, 2011-Ohio-4979

 

The Tenth Appellate District for the State of Ohio recently entered a decision in the case of Evans, Mechwart, Hambleton & Tilton, Inc., v. Triad Architects, Ltd., which reviews Ohio’s interpretation of “pay-when-paid” and “pay-if-paid” provisions found in most agreements between a general contractor and subcontractor.  The court also reviewed the AIA Document C141-1997 Standard Form of Agreement Between Architect and Consultant to determine if the document created a “pay-when-paid” or “pay-if-paid” situation.

In the case, the owner of a development hired Triad Architects, Ltd. (“Triad”) to provide architectural and engineering plans.  Triad then hired Evans, Mechwart, Hambleton & Tilton, Inc. (“EMH&T”) to supply civil-engineering services on the project.  Triad and EMH&T also entered into a similar agreement on another development project being handled by Triad for the same owner.  The parties used the standard AIA agreements which provided:

§12.5 Payments to the Consultant shall be made promptly after the Architect is paid by the Owner under the Prime Agreement.  The Architect shall exert reasonable and diligent efforts to collect prompt payment from the Owner.  The Architect shall pay the Consultant in proportion to amounts received from the Owner which are attributable to the Consultant’s services rendered.

and

§13.4.3*** The Consultant shall be paid for their services under this Agreement within ten (10) working days after receipt by the Architect from the Owner of payment for services performed by the Consultant on behalf of their Part of the Project.

 

Ultimately the owner canceled the project and did not pay Triad who in turn, did not pay EMH&T.  The parties argue whether the provisions above require Triad to pay EMH&T only if paid by the owner or if Triad’s duty to pay remains regardless of its receipt of payment from the owner.  This argument embodies the difference between the “pay-when-paid” and “pay-if-paid” provisions.

A typical “pay-when-paid” clause might read: “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.”  The majority of courts, includingOhio, hold that this type of provision means the contactor’s duty to pay is suspended for a reasonable time to allow the contractor to receive payment from the owner.  The duty to pay is only suspended and the risk of an owner’s nonpayment remains with the general contractor and is not passed along to the subcontractor.  In a “pay-when-paid” agreement, the owner’s nonpayment does not excuse the contractor from performing its duties under its agreement with the subcontractor.

A “pay-if-paid” clause shifts the risk of the owner’s nonpayment to the subcontractor.  A typical “pay-if-paid” provision might read, “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor, the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes this risk”

For a provision to qualify as a “pay-if-paid” provision it must expressly state: (1) payment to the contractor is a condition precedent to payment to the subcontractor (2) the subcontractor is to bear the risk of the owner’s nonpayment, or (3) the subcontract is to be paid exclusively out of a fund the sole source of which is the owner’s payment to the subcontractor.   The courts require the payment provision to be unambiguous and unequivocally show intent to create a “pay-if-paid” clause.  A condition precedent is disfavored in the law, and if there is any ambiguity in the provision the courts will interpret the provision as a “pay-when-paid” clause not a “pay-if-paid” clause.

Further, AIA commentary, while not binding upon the courts, also favors this interpretation.  The Guide for Amendments cautions that “a pay-if-paid clause must clearly establish the intent of the parties to shift the credit risk of the Owner’s insolvency and should include the words ‘condition precedent.’”

In the case at hand the court determined that the language was not specific enough to create a condition precedent and therefore the language created a “pay-when-paid” provision and Triad’s duty to pay EMH&T was not extinguished by the owner’s nonpayment.

 

The full text of the opinion may be found at:  https://www.sconet.state.oh.us/rod/docs/pdf/10/2011/2011-ohio-4979.pdf