7th Circuit Upholds Surety’s Pay-If-Paid Defense in Indiana

A recent 7^th Circuit opinion suggests that Indiana will allow a surety to assert a contractor’s pay-if-paid defense and likely, by extension pay-when-paid defenses.  These defenses have not been addressed directly by the Indiana Supreme Court.

A pay-if-paid clause provides that a subcontractor will be paid only if the contractor is paid.  This clause ensures that each contracting party bears the risk of loss only for its own work. A typical clause of this type might say: “Contractor’s receipt of payment from the owner is a condition precedent to contractor’s obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner’s nonpayment and the subcontract price includes the risk.”  BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, 679 F.3d 643, 645 (7th Cir. 2012) as amended (July 13, 2012).

A pay-when-paid clause governs the timing of a contractor’s payment obligation to the subcontractor.  Usually the clause indicates that the subcontractor will be paid within some fixed time period after the contractor itself has been paid.  A typical clause might state “Contractor shall pay subcontractor within seven days of contractor’s receipt of payment from the owner.”  Id. 

The 7^th Circuit Court of Appeals in BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, held that a surety may assert the principal’s pay-if-paid defense which eliminated the surety’s liability under the payment bond.  BMD Contractors, Inc. (“BMD”), who was a subcontractor for Industrial Power Systems, Inc. (“Industrial Power”), who was a subcontractor for Walbridge Aldinger Company (“Walbridge”), the general contractor executed a payment bond with Fidelity and Deposit Company of Maryland (“Fidelity”), making Fidelity a surety for Industrial Power’s payment obligations to BMD. Ultimately, the manufacturer declared bankruptcy, causing a series of payment defaults to flow down the levels of contractors and subcontractors. Walbridge failed to pay Industrial Power, Industrial Power failed to pay BMD, and Fidelity refused to pay BMD. BMD sued Fidelity on the bond. The Court held, “the Industrial Power/BMD subcontract expressly provides that Industrial Power’s receipt of payment is a condition precedent to its obligation to pay BMD. This language is clear and properly construed as a pay-if-paid clause.”  Id.

The Court pointed out that Indiana surety law is clear on two points:  (1) sureties are generally liable only where the principal itself is liable and (2) concurrently executed bonds and the contracts they secure are construed together.

Until this case, it was generally believed in Indiana that a surety was barred from asserting pay-when-paid and pay-if-paid defenses under Midland Eng’g Co. v. John A. Hall Constr. Co., 398 F.Supp. 981, 993–94 (N.D.Ind.1975) (discussing Dyer ); Oberle & Assocs., Inc. v. Richmond Hotel, Ltd., No. 33C01–8706–CP–130, 1998 WL 35297806, at *5–7 (Ind.Cir.Ct. July 2, 1998).  The BMD case distinguished this case.  It agreed that

to transfer the risk of upstream insolvency or default, the contracting parties must expressly demonstrate their intent to do so; that is the rule from Dyer. But by clearly stating that the contractor’s receipt of payment from the owner is a condition precedent to the subcontractor’s right to payment, the parties have expressly demonstrated exactly that intent. Adding specific assumption-of-risk language would reinforce that intent but is not strictly necessary to create an enforceable pay-if-paid clause. BMD Contractors, Inc. v. Fid. & Deposit Co. of Maryland, 679 F.3d at 650.

The Court went on to state that “the Industrial Power/BMD contract unambiguously states that Industrial Power’s receipt of payment is a condition precedent to BMD’s right to payment.”  Id. Finally the Court noted that “the subcontracts at issue in Dyer, Midland, and Oberle did not use condition-precedent language.”  Id.

Therefore, if a subcontract contains clear “condition precedent” language in either a pay-if-paid or pay-when-paid clause, it is likely that the Indiana courts will allow a surety to assert these defenses if its principal can also assert the defenses.

Oh Those Pesky Deadlines: Indiana Payment Bond Claims

Happy 2011!!  Now that the ball has dropped, the champagne is drunk, and the glitter is gone, it is time to commit to your New Year’s resolutions.  One of my ongoing resolutions is stay on top of all deadlines.  So, with my outlook calendar in hand and reminders popping up faster than popcorn, I wanted to remind all of our Indiana contractors of the deadlines for submitting payment bond claims and the suit limitations period for filing suit against sureties on various Indiana public projects.  Again, it’s always a good idea to consult with an attorney to make sure that you have complied with all notice and suit requirements as well as any deadlines.

Indiana does not require payment bonds to be posted on private projects.  If a bond is posted the deadlines for filing a claim and filing suit will be outlined in the bond. It is also essential that regardless of the statutory deadlines, you should always read the bond.  If the bond enlarges these time periods, the deadlines in the bond will control.

There are four different types of public projects in Indiana.  It’s important to know which type of project you are working on so that you are aware of your statutory rights and obligations. The four types of projects are:

Title 4 State Projects – Indiana Code §4-13.6-1-1 et seq.

Title 4 projects are Indiana state public works projects solicited by the Indiana Department of Administration, the Public Works Division.  Unless the bond provides for a greater period of time, a claimant must file a claim with the Public Works Division and the surety within 60 days from the last date labor was performed, material furnished or service rendered.  If you have submitted your notice of claim and have not yet been paid, you must wait at least 30 days before filing suit against the surety to recover under the Bond.  However, any suit must be brought against the surety within 1 year after final settlement of the contract with the contractor.

Title 5 State Projects – Indiana Code §5-16-1-1 et seq.

Any Indiana state public works project not covered under Title 4 or Title 8 are Title 5 projects.  In order to make a claim against the bond on a Title 5 project, the claimant must file a verified claim with the state agency that commissioned the project within 60 days after completing labor or furnishing materials.  The state agency will furnish a copy of the claim to the surety.  The claimant must then wait at least 30 days.  If payment has not been received a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days from the date of the final completion and acceptance of the project.

Title 8 Indiana Department of Transportation Projects – Indiana Code §8-23-9-1 et. seq.

Title 8 covers any project for the Indiana Department of Transportation.  In order to make a claim on a bond posted for a Title 8 project, a claimant must within 1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due.  The claimant must wait at least 60 days after furnishing the statement to file suit against the surety.  The claimant must bring any action within 18 months from the date of final acceptance of the project by the Commissioner.

Title 36 Local Government Projects – Indiana Code §36-1-12-1 et. seq.

Title 36 projects are projects for local governments, political subdivisions or their agencies.  A claimant must within 60 days of last performing labor or furnishing material file with the local government board a signed statement of the amount due.  The board will forward the statement to the surety.  The claimant must then wait 30 days.  If payment has not been received, a suit may be filed against the surety.  Any suit against the surety must be brought within 60 days after the date of the final completion and acceptance of the project.

Dizzy yet?  It can be difficult to keep track of things.  So here is a quick reference guide.  Legal Construction Zone wishes you Happy and Profitable New Year!

Project Type	Notice of Bond Claim Deadline	Grace period before filing suit	Suit Against the Surety Deadline
Title 4	60 days from the last date of labor performed, material furnished or services rendered	30 days after filing notice to file suit against the surety	1 year from final settlement with the contractor
Title 5	60 days after completion of labor or service or within 60 days after last item of material was furnished	30 days after filing notice to file suit against the surety	60 days from the date of final completion and acceptance of the project
Title 8	1 year after acceptance of the labor, material, or services by the Commissioner furnish the surety a statement of the amount due	60 days after furnishing the statement to file suit against the surety	18 months from the date of final acceptance of the project by the Commissioner
Title 36	60 days from the date of last performing labor or furnishing materials	30 days after filing the notice of claim	60 days after the date of final completion and acceptance of the project

Remake of a Classic – Changes to the A312 Bond Form

In 1984, Apple introduced the first mac computer, the world had only met Vice President George Bush, Miami Vice altered men’s fashion (for the better?), and the American Institute of Architects released the A312 Payment and Performance Bond forms.  The A312 bond forms have only grown in popularity over the years.  They have become some of the most commonly used forms for projects throughout the country.  This year, the AIA has released revised versions of the bond forms.  In this two-part series, we examine the most significant changes in each of the Payment and Performance Bond forms. 

For quick reference and a more thorough comparison, the AIA has provided a handy side by side comparison chart of the A312-1984 and A312-2010 Payment and Performance Bond forms which can be found here. 

A312 – 2010 Payment Bond

Most significant, the A312-2010 Payment Bond addresses the consequence of the notorious Bramble case, Nat’l Union Fire Ins. Co. of Pittsburgh v. David A. Bramble, Inc., 879 A.2d 101 (Md. 2005).  As most sureties are aware, following the Bramble ruling, a surety may waive its defenses for any portion of a payment bond claim if the surety does not strictly comply with Section 6 of the A312 payment bond which requires a surety within 45 days after receipt of the claim, to state the amounts that are undisputed and the basis for challenging any amounts that are disputed.  A surety must also pay or arrange for payment of any undisputed amount. 

The revised A312-2010 bond form Sections 7.1 and 7.2 increases the timeframe for a surety to respond and arrange for payment of undisputed amounts to a claimant from 45 days to 60 days.  New Section 7.3 expressly provides that a surety’s failure to discharge its obligations under Section 7.1 and 7.2 shall not be deemed to constitute a waiver of defenses the Surety or Contractor may have or acquire as to a Claim, except as to undisputed amounts for which the Surety and Claimant have reached agreement.  However, if a Surety does fail in its obligations under Section 7.1 or 7.2 the Surety must indemnify the Claimant for reasonable attorney’s fees incurred to recover any sums found to be due and owing to the Claimant. 

Another significant revision of the A312 Payment Bond is the claim submission process.  Section 5 requires claimants to submit “Claims” to the surety, not just “Notice” of a claim.  Section 16.1 of the Bond defines “Claim” which requires a Claimant to submit a written statement and at a minimum the following:

1. The name of the Claimant;
2. The name of the person for whom the labor was done, or materials or equipment furnished;
3. A copy of the agreement or purchase order pursuant to which labor, materials or equipment was furnished for use in the performance of the Construction Contract;
4. A brief description of the labor, materials or equipment furnished;
5. The date on which the Claimant last performed labor or last furnished materials or equipment for use in the performance of the Construction Contract;
6. The total amount earned by the Claimant for labor, materials, or equipment furnished as of the date of the Claim;
7. The total amount of previous payments received by the Claimant; and
8. The total amount due and unpaid to the Claimant for the labor, materials or equipment furnished as of the date of the Claim. 

The changes to the claims process is intended to prevent claimants from submitting bare bones notice of claim in the hopes that a surety will be unable to timely respond.  As with any bond form, time will tell whether the new payment bond form will be widely adopted.  At a minimum the new A312 – 2010 Payment Bond addresses the significant challenges and concerns faced by sureties struggling to properly investigate a claim without waiving its entire defense of the claim under the Bond. 

Next time, we will review the more significant changes of the AIA A312-2010 Performance Bond.