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APPELLATE COURT REVERSES TRIAL COURT’S SUMMARY JUDGMENT, FINDING CLAUSE NOT ELIGIBLE FOR PAY-IF-PAID TREATMENT

            In Evans, Mechwart, Hambleton & Tilton, Inc. v. Triad Architects, LTD, 2011-Ohio-4979 (10th District), the Tenth District Court of Appeals in Ohio examined a payment clause in a construction contract and determined that summary judgment rendered for an architect should be reversed and, instead, judgment entered in favor its sub-consultant.  The court rejected the lower court's determination that the clause imposed a condition precedent for payment and found, to the contrary, that it was a pay-when-paid clause as opposed to a pay-if-paid clause.  The court held that the appropriate language had not been used to transfer the risk of non-payment downstream to the sub-consultant.

            In Evans, Mechwart, Hambleton & Tilton, Inc. v. Triad Architects, LTD, 2011-Ohio-4979 (10th District), the Tenth District Court of Appeals in Ohio examined a payment clause in a construction contract and determined that summary judgment rendered for an architect should be reversed and, instead, judgment entered in favor its sub-consultant.  The court rejected the lower court's determination that the clause imposed a condition precedent for payment and found, to the contrary, that it was a pay-when-paid clause as opposed to a pay-if-paid clause.  The court held that the appropriate language had not been used to transfer the risk of non-payment downstream to the sub-consultant.

            Triad Architects, Ltd. had two contracts with Centurion Development Group, L.L.C. to render architectural and engineering services for certain projects.  Triad engaged Evans, Mechwart, Hambleton & Tilton, Inc. to provide civil engineering services on both projects.  Both contracts used the standard form AIA Document C141-1997, which contained the following section as Article 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. 

In both contracts, the parties also added Article 13.4.3 which stated the following:  

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.    

The language in these two articles determined the outcome of the case. 

            The consultant provided services to the architect and billed them slightly more than $150,000.  The architect refused to make the payment to its consultant, contending that it had not been paid by the developer.  Ultimately, the developer cancelled the projects and refused to pay the architect for the worked performed.  Since the architect had never collected money from the developer, the architect contended that it owed no funds to its consultant.  The consultant filed suit and the parties filed cross motions for summary judgment.  The trial court found in favor of the architect, and the consultant appealed. 

            The issue before the appellate court was whether the clauses created a pay-if-paid provision or a pay-when-paid provision.  The architect contended that the sections created a condition precedent for payment, specifically that its obligation to pay the consultant only arose if it received payment from the developer.  The consultant contended that the two clauses imposed upon the architect an absolute duty to pay within a reasonable time.  Once that reasonable time passed, however, the architect was obligated to pay the consultant.

            In its analysis, the court acknowledged that there is a long standing disagreement between general contractors and subcontractors over the enforcement of pay-when-pay versus pay-if-paid clauses.  The court reviewed the cases from not only Ohio but also other jurisdictions to interpret the language of the contracts.  The basic question was whether the language used by the parties properly shifted the risk of nonpayment downstream to the subcontractor.  The court acknowledged that, if there was clear and unambiguous language that demonstrated the intent of the parties to transfer the risk of nonpayment downstream, a pay-if-paid clause could be enforced.  The court went on to hold the following:  

If a payment provision fails to unequivocally evince an intent to create a condition precedent or shift the risk of the owner’s nonpayment, then the majority of courts, including Ohio courts, will interpret the provision as a pay when paid, and not a pay if paid, provision.

 The court also noted how the majority approach, followed in Ohio, disfavors such conditions precedent absent clear language to the contrary.  This approach is followed due to the fact that “[t]he nonoccurrence of a condition precedent excuses a party from performing the duty promised under the contract."  Id. at para. 14.   The court noted further that:  

Because the law disfavors conditions precedent, “‘whenever possible courts will avoid construing provisions to be such unless the intent of the agreement is plainly to the contrary.’” [Citations omitted]  Id. at para. 15.

             The court first turned to Article 13.4.3 which was added by the parties as an addendum to the AIA Form Agreement.  The court noted that “this provision is a prototypical pay-when-paid provision.”  Id at para. 18.  The court next looked at Article 12.5, noting that this was a "slightly closer question."  Id at para. 19.  Ultimately, the court found that   

…. the language of section 12.5 is not explicit enough to indicate that the parties intended to create a condition precedent.  Section 12.5 does not expressly make payment from Centurion [the developer] a condition precedent to payment of [the consultant], address which party will bear the risk of Centurion’s nonpayment, or require [the architect] to pay [the consultant] exclusively out of monies paid to [the architect by the owner].”  Id. at para. 20.

             In its analysis, the court referred to the AIA’s Guide for Amendments to AIA Owner-Architect Agreements (Document B-503-2007) in which it states specifically that the standard agreement does not contain a pay-if-paid clause.  Indeed, the AIA Guide recommends that certain language be used to modify the form agreement to create a pay-if-paid provision.  That language reads as follows:

            It is specifically understood and agreed that the payment to the Consultant is dependent, as a condition precedent, upon the Architect’s receipt of payment from the Owner.  Consultant acknowledges the risk of nonpayment to the Architect by the Owner which may result in nonpayment to the Consultant by the Architect.

The court noted that this specific modification was not included in the contract.  Accordingly, the court reversed and concluded that the architect had breached its contractual obligation to pay the consultant within a reasonable time.  Not only did the court reverse and remand the case but also directed that the court below so that it may "enter judgment consistent with law and this decision.”

            This case emphasis the fact that pay-if-paid clauses are not generally favored but goes on to provide a good discussion of how parties can draft such clauses that would truly transfer the risk of nonpayment downstream to subcontractors.

David C. Olson
FROST BROWN TODD LLC
Cincinnati, Ohio
dolson@fbtlaw.com

 

Comments (1)

Posted by Mark Cobb Law Group on May 29, 2012, 2:42 pm:

Thank you for an article on a very pertinent topic; last year, I had occassion to work on a state-by-state analysis of holdings related to "pay-if-paid" contracts as I was working on a case of first impression in Georgia. This holding--and your analysis--help explain some of the goals behind these provision; consequently, it will assist those of us drafting construction contracts. Mark Cobb

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