CPA & Business Advisory Blog

Why the Condition Precedent Matters in Contracts

A little wording can go a long way, especially when it comes to the terms, “condition precedent” and “pay-if-paid.” For a subcontracting company called Transtar Electric, Inc., these simple phrases equated to lost revenues totaling more than $44,000, while protecting general contractor A.E.M. Electric Services Corporation from having to pay money never received from their shared client.

The Ohio Supreme Court released its ruling on the Transtar case July 17, 2014 (Transtar Elec., Inc. v. A.E.M. Elec. Servs. Corp., Slip Opinion No. 2014-Ohio-3095), which has deemed “pay-if-paid” clauses as being valid and enforceable in Ohio.

In their ruling, the court also decided that a contract provision using the words “condition precedent” explicitly creates a pay-if-paid provision.

The Transtar case involved construction of a swimming pool at a Holiday Inn. Transtar performed approximately $187,000 worth of work, and A.E.M. paid them $142,620.10. However, A.E.M. did not pay the remaining balance of $44,088.90 since the owner of the project failed to pay A.E.M., and the contract involved a condition precedent.

Transtar sued A.E.M., but the court stated the contract’s wording indicated a “pay-if-paid” contract, therefore negating A.E.M.’s duty to furnish any remaining payments unless paid by the owner.

When crafting contracts, be sure to ensure wording is carefully examined. As this case proves,  a couple of words can have a significant impact on your cash flow and bottom-line.

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