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Friday, May 11, 2012

Ind. Decisions - 7th Circuit issues one Indiana decision today

In BMD Contractors v. Fidelity & Deposit Co. (SD Ind., Pratt), a 30-page opinion, Judge Sykes writes:

This case requires us to decide an increasingly important question in complex multitiered construction contracts—if the property owner becomes insolvent or otherwise defaults in payment, preventing a contractor from paying a subcontractor, which contractor bears the risk of loss? There is an additional wrinkle here because the question arises in a suit on a payment bond.

BMD Contractors, Inc. (“BMD”) was a subcontractor for Industrial Power Systems, Inc. (“Industrial Power”), which was itself a subcontractor for Walbridge Aldinger Company (“Walbridge”), the general contractor overseeing the construction of a manufacturing plant near Indianapolis, Indiana. Industrial Power executed a payment bond with Fidelity and Deposit Company of Maryland (“Fidelity”), making Fidelity a surety for Industrial Power’s payment obligations to BMD. The construction project proceeded on schedule for about a year, but the manufacturer then 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 subcontract between Industrial Power and BMD contains language conditioning Industrial Power’s duty to pay on its own receipt of payment. The district court construed this language as a “pay if paid” clause, which requires Industrial Power to pay BMD only if it receives payment under its own contract with Walbridge. The court rejected BMD’s counterargument that the contract language in question is a “pay when paid” clause, which would have controlled only the timing of Industrial Power’s payment obligation, not its ultimate duty to pay. The court also rejected BMD’s argument that pay-if-paid clauses are void under Indiana public policy. Finally, the court held that Fidelity, as a surety, could assert all the defenses of its principal, Industrial Power, even though the bond itself did not specifically incorporate the pay-if-paid language. Based on these holdings, the court granted summary judgment in favor of Fidelity, and BMD appealed.

We affirm. 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. While the subcontract might have gone further—for example, it might also have said that BMD assumed the risk of the property owner’s insolvency—this additional language was not necessary to create an enforceable pay-if-paid provision. We also agree with the district court that pay-if-paid clauses are not void under Indiana public policy. Finally, under basic Indiana surety-law principles—reinforced by the weight of authority from other jurisdictions—Fidelity may assert all the defenses of its principal. Because Industrial Power was never obligated to pay BMD in the first place, BMD may not recover against Fidelity on the payment bond. * * *

The clear trend of recent caselaw bolsters the basic principle of Indiana law that a surety may assert all the defenses of its principal. Fidelity, no less than Industrial Power, may rely on the pay-if-paid clause in the Industrial Power/BMD subcontract to defend against this suit on the payment bond. Summary judgment was properly entered in favor of Fidelity.

Posted by Marcia Oddi on May 11, 2012 11:46 AM
Posted to Ind. (7th Cir.) Decisions