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Payment Contract language

OhioConstruction Contract

Our Company has been awarded a contract. In the payment section, it states that the General Contractor has absolutely no obligation to pay us if the Owner does not pay them. What is your opinion on this language? We are thinking of asking the GC to retract that line before signing the contract. What would be the best way to say this, is there specific language we should use when asking them to remove that sentence?

1 reply

Jun 18, 2021

The language you reference is generally referred to as a "pay if paid" provision. The two construction contract payment provisions that are recognized in Ohio are "pay if paid" and "pay when paid". The general consensus from the Supreme Court of Ohio is that a pay if paid clause limits the general contractor's obligation to pay subcontractors in only requiring payment after first being paid by the owner of the project. The Supreme Court has also said that virtually any other payment provision in a construction contract is a "pay when paid" provision that obligates the general contractor to pay subcontractors in a "reasonable time" even if the general contractor has not been paid by the owner. 

Pay if paid provisions are extremely popular in the eyes of general contractors, but they are not necessarily a bad thing. It's a shifting of risk just like most contract terms. In this case, the risk of owner non-payment falls on your shoulders. As such, in that unlikely scenario, you would want to file a mechanic's lien, which would protect your right to payment by securing a lien against the property. This is a risk not only of money, but also of possible additional time and expense spent prosecuting a lien claim. 

Your best bet, just like any contract, is to negotiate the terms and think them through. If you are taking a risk here, perhaps the GC can accept additional risk elsewhere in the contract (to make the contract more fair), or perhaps your bid should increase in order to be paid more for accepting the additional risk. There are a number of ways to address this with the GC, but it should definitely be addressed if you are uncomfortable with the provision. 

In addition, with or without the provision, you should make sure you are following all of the required procedures for subcontractors to retain your mechanic's lien rights, namely be serving the owner with a notice of furnishing. 

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