In Ohio Fabricators, Inc. v. Aster Elements, Inc., 2019-Ohio-3978, Ohio’s Ninth District Court of Appeals recently refused to uphold a purported pay-if-paid clause despite the fact the clause included the phrase “condition precedent.” In the past, the use of the term “condition precedent” normally signified the payment terms were “pay-if-paid,” which required the general contractor to pay the subcontractor only if the general contractor is paid by the owner, therefore transferring the risk of nonpayment to the subcontractor. But in this dispute, the contracting chain at issue was not between the general contractor and its subcontractor, but instead between two lower-tier subcontractors.
The dispute involved a Cincinnati Children’s Hospital project and payment for the installation of exterior panels. The hierarchy of contractors began with the general contractor, Messer Construction, which hired the exterior general contractor, Pioneer Cladding and Glazing (“Pioneer”), which hired Aster Elements, Inc. (“Aster”) as an exterior subcontractor. Aster subsequently hired Ohio Fabricators, Inc. (“Ohio Fabricators”). Travelers issued a payment bond and a performance bond for Aster’s scope of the project, with Pioneer as the obligee and Aster as the principal.
The issue was whether the payment provision below, which referenced the “owner” payment to Aster as the condition precedent, would shield Aster and Travelers from their obligation to pay Ohio Fabricators when Aster had not been paid by Pioneer. From the payment provision:
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.
While trial court interpreted the use of the term “Owner” to also mean Pioneer, the Ninth District Court of Appeals saw it differently. Instead, the Ninth District Court interpreted the term “Owner” to mean Cincinnati Children’s Hospital, which meant the purported pay-if-paid clause would only apply if it were the Hospital that had not paid Aster. In this case, the issue was a lack of payment by Pioneer to Aster, which was not enough to trigger a pay-if-paid defense under the clause contained in the subcontract between Aster and Ohio Fabricators.
While this case does not alter Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., 140 Ohio St.3d 193, 2014-Ohio-3095, decided by the Ohio Supreme Court in 2014 that found pay-if-paid clauses are enforceable, it does highlight the scrutiny these clauses will face if their wording is open to multiple interpretations. It remains to be seen how persuasive other courts outside of the Ninth District (Lorain, Medina, Summit, and Wayne counties) find this case and whether the case will be appealed to the Ohio Supreme Court for further review.
