If you’re like anyone else, you think that once you’ve been hired, you perform your work and you get paid. Simple, sensible. The Ohio Supreme Court recently confirmed that like anything else, your right to be paid for your work is more complicated than it seems, such that you might not have a right to be paid at all.
In Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., an electrical subcontractor (Transtar) sued a general contractor (AEM) for work it performed on a construction project. AEM had claimed it was not liable for payment because (i) the project owner did not fully pay AEM for Transtar’s work, and (ii) the parties’ subcontract provided that the owner’s payment for Transtar’s work was “a condition precedent to payment by” AEM. The lower appellate court ruled that the subcontract did not show a clear intent to shift the risk of nonpayment by the owner to Transtar, and that AEM was required to pay Transtar, regardless of whether the owner paid AEM. The Supreme Court, however, held that when a contract makes a project owner’s payment to the general contractor a “condition precedent” to the contractor’s duty to pay, the contract contains a pay-if-paid provision, and unequivocally shifts the risk of owner nonpayment to the subcontractor. In other words, unless
and until the owner pays AEM, Transtar has no right to be paid by AEM.
The Transtar Elec. case demonstrates that a subcontractor or material supplier can furnish thousands of dollars in goods or services to its customer. But if the customer’s client (e.g., the project owner) does not pay the customer and the contract at issue contains the appropriate (and very simple) language, the subcontractor or supplier may never get paid. Transtar Elec. is a construction case, but there is no reason to believe that the same result would occur in a manufacturing or supply chain circumstance. The bottom line is every supplier of goods or services must review and understand the payment provisions in its contracts, and we can help.