Ohio's Fairness in Contracting Law

posted by Michael Fortney  |  Dec 14, 2009 4:43 PM in Construction Law

The Fairness in Contracting Act governs the use of the following contract provisions in construction contracts, for both public and private contracts.

No damage for delay clause. The Fairness in Contracting Act prohibits no damages for delay clauses, when the reason for the delay is the result of the owner's [or contractor's] act or failure to act. Ohio Revised Code §4113.62. Defective plans and specifications are the leading reasons for owner-caused delay damages and time extensions in Ohio. To recover delay damages, a contractor must establish that (a) the owner breached the contract, (b) the breach caused a delay to the contractor's performance, and (c) the contractor was damaged.

Final lien waiver. Upon completing the job, the contractor must usually complete a final lien waiver. The Fairness in Contracting Act provides that the requirement to sign a final waiver of claims in order to obtain final payment is void and against public policy, if the contractor has asserted a claim or request for an adjustment to the contract price. Ohio Revised Code §4113.62(B). No longer will contractors be caught between waiving a previously asserted claim, and getting paid for its work.

Waiver of bond claim on public project. Similarly, the waiver of a claim on a surety bond on a public project is void and unenforceable under the Act. Ohio Revised Code §4113.62. Thus, owners or contractors cannot leverage a waiver of a claim on a surety bond, by withholding final payment.

Notice of furnishing on public projects. In order to preserve rights under a surety bond on a public project, the Act requires a contractor or supplier to provide a notice of furnishing consistent with the mechanic’s lien law.

Pay when paid clauses. Although initially drafted to address "pay when paid" clauses, the Act as enacted simply provides that such clauses do not prohibit a contractor or supplier from protecting its rights against a surety bond or through a mechanic’s lien.

"Pay when paid" and "pay if paid" provisions remain popular and enforceable. Most pay when paid clauses only serve to delay the time for payment to the subcontractor, whereas a properly worded pay if paid clause may actually shift the burden of nonpayment to the subcontractor. How do contractors shift the burden of nonpayment by the owner? Say it clearly in a contract provision. What should be said? The contract should state that: (a) the subcontractor is paid only if the general contractor is paid, (or the subcontractor will not be paid unless the general contractor receives payment from the owner); and (b) the subcontractor assumes the risk of nonpayment by the owner due to insolvency or other inability to pay. Such contract language has been held by many courts to sufficiently shift the burden of nonpayment to the subcontractor .

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