Often confused within the construction industry are pay-when-paid vs. pay-if-paid provisions in contracts between general contractors and subcontractors.
Under a pay-when-paid provision, a general contractor must remit payment for work performed by subcontractors within a reasonable time even if the general contractor has not received payment from the project owner.
Conversely, pay-if-paid provisions require that a general contractor remit payment for work performed by subcontractors only after the general contractor receives payment from the project owner.
Recently, the Supreme Court of Ohio reconfirmed the enforceability of pay-if-paid provisions. However, specific and clear language must be included in contracts between the general contractor and subcontractor as follows:
RECEIPT OF PAYMENT BY CONTRACTOR FROM THE OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.
This is important to both general contractors and subcontractors. If a general contractor intends to pass along payment risk to the subcontractor, this language must be included in the contract. Vice versa, if a subcontractor intends to mitigate this risk, this language should be omitted from the contract and instead a pay-when-paid provision should be included.
Both general contractors and subcontractors need to understand these nuances and also note the fact that Ohio will continue to uphold pay-if-paid contract provisions.
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