Reader Vance Koven prodded me to look at this post by Marianna Brown Bettman on her blog Legally Speaking Ohio (via this post on ContractsProf Blog). It’s about an appellate decision involving a contract between a general contractor and a subcontractor. Here’s the language at issue:
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.
The trial court held that this was a “pay-if-paid” provision, in that it transferred to the subcontractor the risk that the owner fails to pay. The first appellate court reversed, holding that the language wasn’t clear. The Supreme Court of Ohio then reversed the first appellate court, with two judges dissenting.
My question is, what made the subcontractor think there was anything unclear about this language? And why did this dispute have to go through three courts? The meaning of the language at issue seems as clear as can be, although if I had been the drafter I would have used just “condition” instead of “condition precedent,” which is unnecessarily legalistic.
This case goes to show that no matter how clear contract language is, someone might opt to pick a fight over it. It also goes to show that you can’t count on courts to interpret contract language sensibly. So this sort of unnecessary dispute would seem to be a risk of entering into contracts.
By the way, the Supreme Court contrasted “pay-if-paid” provisions with “pay-when-paid” provisions, saying as follows: “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.” Calling such provisions “pay-when-paid” is seriously misleading, as the contractor has to pay whether or not it’s paid. I’d call such provisions “pay-whether-or-not-paid,” or some such.
What an interesting case. I draw several conclusions:
(1) I suspect the drafter added the condition precedent language specifically to signal that this was a pay-if-paid clause, in light of earlier case law. I think the sentence has been added as a gloss. The core provision, not quoted above, was:
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.
(2) Five sevenths of me thinks this wording is absolutely clear and that summary judgment is appropriate. However, I have a niggling doubt about whether it might be open to argument that the above wording is about the timing of payment, and does not qualify the obligation, ultimately to make payment. If it is open to argument, then summary judgment is not appropriate. This argument might depend on there being further implied terms:
(a) as presumably is the case with most or all pay-when-paid clauses under Ohio law, an obligation to pay within a reasonable time if the customer fails to pay; or
(b) at the very least, an obligation on the head contractor to try to secure payment from the customer – eg a clause such as the following which appears in one of the cited cases: “The [Architect] shall exert reasonable and diligent efforts to collect prompt payment from the [Owner].”
(3) I think the condition precedent sentence is lamely drafted, with use of the passive and several phrases bolted to one another by prepositions. However, if I had the drafter’s objective of drawing on case law to make this a pay-if-paid clause, I would probably use the phrase “condition precedent”, despite your correct point about precedent being redundant. That’s because I want to win in court as well as having clear drafting!
Thank you for looking at this more closely than I did! As regards omitting “precedent,” it doesn’t change meaning. As usual, my interest in concision does not come at the expense of increased risk.
You say: “This case goes to show that no matter how clear contract language is, someone might opt to pick a fight over it. It also goes to show that you can’t count on courts to interpret contract language sensibly. So this sort of unnecessary dispute would seem to be a risk of entering into contracts.” Precisely right, and humbling to the drafter.
Clear modern drafting won’t necessarily prevent fights, but it aims at reducing their likelihood (never to zero) and at reducing the likelihood (never to zero) of judges’ misinterpreting the drafters’ intent. The converse is that often poor, sloppy drafting will spawn no fight, and that often courts will interpret poor, sloppy drafting to catch exactly the parties’ intent.
Contract drafting is like raising children: with the best care, things sometimes turn out badly; with the worst care, they sometimes turn out well. The moral is, you do the best you can and trust to luck for the rest.
A drafter does well to recall: “Against stupidity, the gods themselves struggle in vain.”
Ken, I disagree with you here. The contract language is admittedly very clear. The question of whether the contract language can withstand public policy considerations, however, is quite complicated. In fact, I strongly believe that the Ohio Supreme Court got this particular decision wrong. It should have been decided in favor of the subcontractor, and the pay-if-paid language should have been struck as invalid.
I wrote up an explanation of my position here:
Ohio Supreme Court Gets Pay If Paid Decision Wrong, Hurts Subcontractors
http://www.zlien.com/articles/ohio-supreme-court-gets-pay-paid-decision-wrong-hurts-subcontractors/
Scott: Thanks for providing some context. The discussion I read was framed in terms of what the language meant, not whether it was void as a matter of public policy. Ken