Court Opinion

ID: 2690022
Source: CourtListenerOpinion
Date Created: 2014-08-01 20:35:36.134972+00
Date Added: 2024-06-11T08:42:27.522038
License: Public Domain

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as
Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., Slip Opinion No. 2014-Ohio-3095.]

                                        NOTICE
     This slip opinion is subject to formal revision before it is published in
     an advance sheet of the Ohio Official Reports. Readers are requested
     to promptly notify the Reporter of Decisions, Supreme Court of Ohio,
     65 South Front Street, Columbus, Ohio 43215, of any typographical or
     other formal errors in the opinion, in order that corrections may be
     made before the opinion is published.

                         SLIP OPINION NO. 2014-OHIO-3095
           TRANSTAR ELECTRIC, INC., APPELLEE, v. A.E.M. ELECTRIC
                       SERVICES CORPORATION, APPELLANT.
   [Until this opinion appears in the Ohio Official Reports advance sheets,
       it may be cited as Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp.,
                         Slip Opinion No. 2014-Ohio-3095.]
Contracts—Condition precedent—When a contract provides that payment by a
        project owner to a general contractor for work performed by a
        subcontractor is a condition precedent to payment by the general
        contractor to the subcontractor, the provision is a pay-if-paid provision—
        The use of the term “condition precedent” in the payment provision of a
        contract between a general contractor and a subcontractor clearly and
        unequivocally shows the intent of those parties to transfer the risk of the
        project owner’s nonpayment from the general contractor to the
        subcontractor.
    (No. 2013-0148—Submitted November 5, 2013—Decided July 17, 2014.)
               APPEAL from the Court of Appeals for Lucas County,
                          No. L-12-1100, 2012-Ohio-5986.
                               ____________________
                             SUPREME COURT OF OHIO

                             SYLLABUS OF THE COURT
1. When a contract provides that payment by a project owner to a general
       contractor for work performed by a subcontractor is a condition precedent
       to payment by the general contractor to the subcontractor, the provision is
       a pay-if-paid provision.
2. The use of the term “condition precedent” in the payment provision of a
       contract between a general contractor and a subcontractor clearly and
       unequivocally shows the intent of those parties to transfer the risk of the
       project owner’s nonpayment from the general contractor to the
       subcontractor.
                             ____________________
       KENNEDY, J.
       {¶ 1} In this appeal from the Sixth District Court of Appeals, we
consider whether a provision addressing payment of a subcontractor by a general
contractor in a contract between appellant, A.E.M. Electric Services Corporation,
the general contractor, and appellee, Transtar Electric, Inc., the subcontractor, that
uses the term “condition precedent” is sufficient to establish a pay-if-paid
payment provision. We hold that the use of the term “condition precedent” is an
explicit statement of the parties’ intent to transfer the risk of the project owner’s
nonpayment from A.E.M. to Transtar.
       {¶ 2} A.E.M. advances one proposition of law:             “The unambiguous
language in the subcontract between the parties is a ‘pay-if-paid’ provision, which
without payment by the owner, does not require the contractor to pay the
subcontractor.”   For the reasons that follow, we hold that when a contract
provides that payment by a project owner to the general contractor for work
performed by a subcontractor is a condition precedent to payment by the general
contractor to the subcontractor, the provision is a pay-if-paid provision. We
further hold that the use of the term “condition precedent” in a payment provision

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of a contract between a general contractor and a subcontractor clearly and
unequivocally shows the intent of those parties to transfer the risk of the project
owner’s nonpayment from the general contractor to the subcontractor.
                        I. Facts and Procedural History
       {¶ 3} A.E.M., the general contractor, contracted with Transtar, the
subcontractor, to provide electrical services for the installation of a pool at a
Holiday Inn.
       {¶ 4} Transtar fully performed the work under the contract, submitted
invoices to A.E.M., and was paid $142,620.10 in 11 installments. However,
A.E.M. did not pay Transtar for the last three invoices, totaling $44,088.90,
because the owner of the project had failed to pay A.E.M. for the work performed
by Transtar. A.E.M. argues that Section 4 of the contract is controlling and that it
establishes a pay-if-paid payment provision. Section 4 of the contract reads:

               (b) The Subcontractor shall submit weekly certified payroll
       reports, and shall pay all workmen employed on the Project labor
       rates equal to or greater than those required by the Prime Contract.
       The weekly certified payroll reports shall set forth with
       particularity the number of hours that each employee of the
       Subcontractor has worked on the project.
               (c) The Contractor shall pay to the Subcontractor the
       amount due under subparagraph (a) above only upon the
       satisfaction of all four of the following conditions: * * * (iv) the
       Contractor has received payment from the Owner for the Work
       performed by the Subcontractor. RECEIPT OF PAYMENT BY
       CONTRACTOR           FROM       THE     OWNER       FOR     WORK
       PERFORMED BY SUBCONTRACTOR IS A CONDITION

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         PRECEDENT TO PAYMENT BY CONTRACTOR TO
         SUBCONTRACTOR FOR THAT WORK.

(Capitalization and boldface sic.)
         {¶ 5} Transtar filed suit demanding judgment against A.E.M. for breach
of contract, unjust enrichment, and money damages totaling $44,088.90, plus
costs and prejudgment interest.
         {¶ 6} Both Transtar and A.E.M. filed motions for summary judgment.
A.E.M. did not dispute the facts as asserted by Transtar. A.E.M. argued that
Section 4 of the contract provided that it did not require A.E.M. to pay Transtar
until the owner of the project paid A.E.M. for Transtar’s work. The trial court
agreed and granted summary judgment in favor of A.E.M., holding that Transtar’s
claims for payment failed as a matter of law.
         {¶ 7} The Sixth District Court of Appeals reversed. The court held that
absent language making manifest the intent to shift the risk of nonpayment to the
subcontractor, a provision for payment must be construed as an absolute promise
on the part of the general contractor to pay the subcontractor within a reasonable
time. The court then held that the payment provision in the contract between the
parties was not specific enough to show that both parties understood and agreed
that the risk of the owner’s nonpayment would be borne by the subcontractor
instead of the general contractor. The court further held that to shift the risk of
the owner’s nonpayment from the general contractor to the subcontractor, “[i]t
must be made plain, in plain language, that a subcontractor must look to the
owner for payment.” 2012-Ohio-5986, 983 N.E.2d 399, ¶ 30 (6th Dist.). As a
result, the general contractor was liable to the subcontractor for the work
performed without regard to whether the general contractor had been paid by the
owner.

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                                January Term, 2014

                             II. Standard of Review
       {¶ 8} Our review of cases involving a grant of summary judgment is de
novo. Bonacorsi v. Wheeling & Lake Erie Ry. Co., 95 Ohio St. 3d 314, 2002-
Ohio-2220, 767 N.E.2d 707, ¶ 24. Summary judgment may be granted only when
(1) there is no genuine issue of material fact, (2) the moving party is entitled to
judgment as a matter of law, and (3) upon viewing the evidence in favor of the
nonmoving party, reasonable minds can come to but one conclusion and that
conclusion is adverse to the nonmoving party. M.H. v. Cuyahoga Falls, 134 Ohio
St.3d 65, 2012-Ohio-5336, 979 N.E.2d 1261, ¶ 12.
                                   III. Analysis
       {¶ 9} The cardinal principle in contract interpretation is to give effect to
the intent of the parties. Skivolocki v. E. Ohio Gas Co., 38 Ohio St. 2d 244, 313
N.E.2d 374 (1974), paragraph one of the syllabus. “[W]e will look to the plain
and ordinary meaning of the language used in the contract unless another meaning
is clearly apparent from the contents of the agreement. When the language of a
written contract is clear, a court may look no further than the writing itself to find
the intent of the parties.” Sunoco, Inc. (R&M) v. Toledo Edison Co., 129 Ohio
St.3d 397, 2011-Ohio-2720, 953 N.E.2d 285, ¶ 37.
       {¶ 10} Generally, there are two types of contractual provisions that
establish the manner by which a general contractor pays a subcontractor for the
subcontractor’s work. A general contractor can make an unconditional promise to
pay the subcontractor, usually within a reasonable time to allow the general
contractor to be paid. Thos. J. Dyer Co. v. Bishop Internatl. Eng. Co., 303 F.2d
655, 659 (6th Cir.1962). An unconditional promise to pay is a pay-when-paid
payment provision. Such a promise is not dependent on or modified by the
owner’s nonpayment.
       {¶ 11} Alternatively, the general contractor may make a conditional
promise to pay the subcontractor that is enforceable only if a condition precedent

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                             SUPREME COURT OF OHIO

has occurred.    Id.   A conditional promise to pay is a pay-if-paid payment
provision. 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. Chapman Excavating Co., Inc. v.
Fortney & Weygandt, Inc., 8th Dist. Cuyahoga No. 84005, 2004-Ohio-3867, ¶ 22.
       {¶ 12} A contract may include either a pay-when-paid or a pay-if-paid
contract provision, but a contract cannot contain both.
       {¶ 13} Courts in Ohio have upheld pay-if-paid payment provisions. See N.
Mkt. Assn., Inc., v. Case, 99 Ohio App. 187, 132 N.E.2d 122 (10th Dist.1955);
Smith v. Shoemaker, 81 Ohio Law. Abs. 451, 162 N.E.2d 237 (C.P.1959).
       {¶ 14} We begin our determination by examining Dyer, 303 F.2d 655;
Sloan & Co. v. Liberty Mut. Ins. Co., 653 F.3d 175 (3rd Cir.2011); and Evans,
Mechwart, Hambleton & Tilton, Inc. v. Triad Architects, Ltd., 196 Ohio App. 3d
784, 2011-Ohio-4979, 965 N.E.2d 1007 (10th Dist.).
       {¶ 15} In Dyer, Bishop International Engineering Company entered into a
subcontract with the Thomas J. Dyer Company, an Ohio business, to provide
plumbing services for a horse racetrack that Bishop Engineering was building for
the Kentucky Jockey Club, Inc. After it completed the work and was not paid,
Dyer brought an action against Bishop Engineering for payment. However, the
club had declared bankruptcy, and Bishop Engineering asserted that according to
the contract language, it had no obligation to make payments to Dyer to the extent
that the club had not paid it. The contract stated:

                “The total price to be paid to Subcontractor shall be $109
       [sic] Dollars ($115,000.00) lawful money of the United States, no
       part of which shall be due until five (5) days after Owner shall
       have paid Contractor therefor * * *.”

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                               January Term, 2014
303 F.2d at 656.
       {¶ 16} In examining this language, the Sixth Circuit Court of Appeals
stated that the crucial issue was “whether [the contract language] is to be
construed as a conditional promise to pay, enforceable only when and if the
condition precedent has taken place.” (Emphasis added.) Id. at 659. The court
concluded that the contract language was insufficient as a matter of law to absolve
Bishop Engineering of its duty to pay Dyer. Specifically, it held that the contract
language did not “contain an express condition clearly showing that to be the
intention of the parties.” Id. at 661-662, citing Page, The Law of Contracts,
Section 2100 (1919).
       {¶ 17} In Sloan, the Shoemaker Construction Company contracted with
Sloan & Company for Sloan to perform drywall and carpentry work on a
waterfront condominium development in Philadelphia. At the completion of the
project, the owner refused to pay Shoemaker, claiming that the work performed
by some of the various subcontractors, including Sloan, was untimely and
deficient. In turn, Shoemaker refused to pay Sloan the balance owing under their
contract.
       {¶ 18} The contract stated, “ ‘Final payment shall be made within thirty
(30) days after the last of the following to occur, the occurrence of all of which
shall be conditions precedent to such final payment * * *.’ ” 653 F.3d at 179.
The Third Circuit Court of Appeals concluded that this language was a pay-if-
paid provision, stating that the quoted language “states unequivocally that [the
owner’s] payment to Shoemaker is a condition precedent to Shoemaker’s
obligation to pay Sloan.” (Emphasis added.) Id. at 181.
       {¶ 19} Finally, in Evans, the Tenth District Court of Appeals was faced
with a dispute between Triad Architects, Ltd., and Evans, Mechwart, Hambleton
& Tilton, Inc. (“EMH & T”). Triad contracted with EMH&T to supply civil-
engineering services for two residential development projects for which Triad was

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                            SUPREME COURT OF OHIO

to provide architectural and engineering plans. EMH & T completed all services
under the two contracts and billed Triad. Triad refused to pay, because the owner
had canceled both projects and refused to pay Triad.
       {¶ 20} The contracts contained the following language:

              “§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.
              “* * *
              “§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 the
       services performed by the Consultant on behalf of their Part of the
       Project.”

196 Ohio App. 3d 784, 2011-Ohio-4979, 965 N.E.2d 1007, at ¶ 4.
       {¶ 21} In concluding that the two clauses were not pay-if-paid payment
clauses, the Evans court found:

       [T]he language of [the contract] is not explicit enough to indicate
       that the parties intended to create a condition precedent. [The
       contract] does not expressly make payment from [the owner] a
       condition precedent to payment of [the subcontractor] * * *.

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                                 January Term, 2014

(Emphasis added.) Id. at ¶ 20.
       {¶ 22} Accordingly, these cases hold that a contract provision is pay-if-
paid when payment by the owner is a condition precedent to payment of the
subcontractor by the general contractor. A “condition precedent” is “a condition
that must be performed before obligations in a contract become effective.”
Coffman v. Ohio State Adult Parole Bd., 10th Dist. Franklin No. 12AP-267, 2013-
Ohio-109, ¶ 11, citing Atelier Dist., L.L.C. v. Parking Co. of Am., Inc., 10th Dist.
Franklin No. 07AP-87, 2007-Ohio-7138, ¶ 35. “ ‘If the condition is not fulfilled,
the parties are excused from performing.’ ” Id., quoting Atelier at ¶ 35.
       {¶ 23} As stated above, Section 4 states:

       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.

(Capitalization and boldface sic.)
       {¶ 24} The above language stating that receipt of payment by the
contractor is a condition precedent to payment to the subcontractor requires that
the owner first pay the contractor. The parties intended that the risk of the
owner’s nonpayment shift to the subcontractor rather than remain with the general
contractor. To echo the Seventh Circuit Court of Appeals, “This provision means
just what it says—that [the contractor’s] duty to pay [the subcontractor] is
expressly conditioned on its own receipt of payment—thus evincing the parties’
unambiguous intent that each party assumes its own risk of loss if [the owner]
becomes insolvent or otherwise defaults.” BMD Contrs., Inc. v. Fid. & Deposit

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                             SUPREME COURT OF OHIO

Co. of Maryland, 679 F.3d 643, 650 (7th Cir.2012). Accordingly, A.E.M. and
Transtar have agreed to a pay-if-paid clause.
       {¶ 25} Finally, the use of the term “condition precedent” negates the need
for additional language to demonstrate the intent to transfer the risk. It is true that
the rule in Dyer requires that the parties’ intent to transfer the risk of nonpayment
be clear. 303 F.2d at 660-661. The use of the term “condition precedent”
expresses that intent. The Seventh Circuit thoroughly discussed this reasoning in
BMD Contrs:

       We do not disagree that to transfer the risk of upstream insolvency
       or default, the contracting parties must expressly demonstrate their
       intent to do so; that is the rule from Dyer. But by clearly stating
       that the contractor’s receipt of payment from the owner is a
       condition precedent to the subcontractor’s right to payment, the
       parties have expressly demonstrated exactly that intent. Adding
       specific assumption-of-risk language would reinforce that intent
       but is not strictly necessary to create an enforceable pay-if-paid
       clause. Dyer does not hold otherwise.
               ***
               * * * Although it’s possible to reinforce the clarity of a
       pay-if-paid clause by using redundant language—e.g., “in agreeing
       to this condition precedent, subcontractor assumes the risk of
       owner's insolvency”—additional language like this is not necessary
       if the meaning of the condition precedent is otherwise clear.
       MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d
1257, 1263 (10th Cir.2006) (noting that a similarly worded
       subcontract’s “failure to say all that it might have said is not
       enough to throw the intent of the contracting parties into doubt”).

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                                January Term, 2014

(Emphasis sic.) 679 F.3d at 650.
       {¶ 26} Similarly, in finding the use of the term “condition precedent”
sufficient to create a pay-if-paid contract provision, the Sloan court stated,

       We do not imagine that the parties intended [a pay-when-paid
       contract provision] merely because they did not use additional
       language to underscore their intent to create a pay-if-paid clause
       * * *. To mandate redundant provisions conjures the consequence
       that only repetition makes a provision pay-if-paid.         Moreover,
       * * * courts should not interpret contracts in a way the “render[s]
       at least one clause superfluous or meaningless.”

Sloan, 653 F.3d at 181, quoting Garza v. Marine Transp. Lines, Inc., 861 F.2d 23,
27 (2d Cir.1988).
                                     Conclusion
       {¶ 27} Therefore, we hold that when a contract provides that payment by
a project owner to a general contractor for work performed by the subcontractor is
a condition precedent to payment by the general contractor to the subcontractor,
the provision is a pay-if-paid provision. We further hold that the use of the term
“condition precedent” in the payment provision of a contract between a general
contractor and a subcontractor clearly and unequivocally shows the intent of those
parties to transfer the risk of the project owner’s nonpayment from the general
contractor to the subcontractor.
       {¶ 28} Section 4 of the contract between A.E.M. and Transtar is a pay-if-
paid provision. The “condition precedent” language used in that section clearly
and unequivocally shows that the parties intended to transfer the risk of the
owner’s nonpayment from A.E.M. to Transtar.

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                              SUPREME COURT OF OHIO

       {¶ 29} We reverse the judgment of the Sixth District Court of Appeals
holding that A.E.M. is not entitled to summary judgment as a matter of law and
reinstate the judgment of the trial court.
                                                                Judgment reversed.
       O’CONNOR, C.J., and O’DONNELL, LANZINGER, and FRENCH, JJ., concur.
       PFEIFER and O’NEILL, JJ., dissent.
                              ____________________
       O’NEILL, J., dissenting.
       {¶ 30} I disagree with the majority’s holding.        I think that Transtar
Electric, Inc., deserves its day in court. I agree with the Sixth District Court of
Appeals’ conclusion that when a contract seeks to alter a fundamental custom
between a general contractor and a subcontractor, such as shifting the risk of a
project owner’s nonpayment from the general contractor to the subcontractor, the
intent to do so must be clear; that is, it must be stated in plain language that the
subcontractor must look past the general contractor to the owner for payment.
2012-Ohio-5986, 983 N.E.2d 399 (6th Dist.); see Thos. J. Dyer Co. v. Bishop
Internatl. Eng. Co., 303 F.2d 655 (6th Cir.1962).
       {¶ 31} This litigation is the result of Transtar’s effort to recover payment
for its work based on its contract with A.E.M. Electric Services Corporation, the
general contractor. Even though it has completed all its work according to the
contract, Transtar cannot bring an action against the project owner for breach of
contract because no contract exists between Transtar and the owner, who now has
the benefit of Transtar’s work essentially for free. Corporex Dev. & Constr. Mgt.,
Inc. v. Shook, Inc., 106 Ohio St. 3d 412, 2005-Ohio-5409, 835 N.E.2d 701 (only
parties to the contract may bring an action for breach of contract). Likewise, lack
of privity also makes it difficult for Transtar to prevail in an action against the
owner in quantum meruit or unjust enrichment.

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                                January Term, 2014

       {¶ 32} I agree that the use of the term “condition precedent” in the parties’
contract supports A.E.M.’s argument. But employing the summary-judgment
standard under Civ.R. 56(C), I am not convinced that the language used in this
contract could lead reasonable minds to but one conclusion or that the language is
sufficient on its face to shift the risk of the owner’s nonpayment to the
subcontractor.
       {¶ 33} Absent from this contract is any indication that the subcontractor
expressly assumed the risk of nonpayment by the owner.            Neither does the
contract include a statement or an acknowledgment that the contract price
included the risk of the owner’s nonpayment or a statement regarding what
recourse is available to the subcontractor if the owner fails to pay anyone for the
subcontractor’s work. My view is that these ambiguities create genuine issues of
material fact that make summary judgment inappropriate in this case. Taken to its
logical conclusion, the majority decision implies that the contractor can take its
profit from the venture, pull up stakes, and wish the subcontractor well as the
subcontractor embarks on the task of wrestling with the owner over money owed
on a contract to which the owner is not a party.
       {¶ 34} I think the Sixth District got this case right in holding that
summary judgment was improper. I would hold that the provision in the contract
between Transtar and A.E.M. is not sufficient as a matter of law to demonstrate
that these parties intended to shift the risk of the owner’s nonpayment from the
general contractor, A.E.M., to the subcontractor, Transtar.        When a general
contractor seeks to transfer the risk of the owner’s nonpayment to the
subcontractor as a matter of law, the contract must explicitly state that the parties
intend to do so. To hold otherwise amounts to adopting a rule that allows
property owners to arbitrarily refuse to pay subcontractors for work that is
actually performed. That should not be the law of Ohio.
       PFEIFER, J., concurs in the foregoing opinion.

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                             ____________________
       Luper Neidenthal & Logan, Luther L. Liggett Jr., and Heather Logan
Melick, for appellee.
       Spengler Nathanson, P.L.L., and James P. Silk Jr., for appellant.
       Meyers, Roman, Friedberg & Lewis, R. Russell O’Rourke, and Debra J.
Horn, for amici curiae, American Subcontractors Association, Inc., American
Subcontractors Association of Ohio, Inc., and Ohio/Michigan National Electric
Contractors Association.
                           _________________________

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