Indiana Court of Appeals holds that a “pay-if-paid” clause in a subcontract will prevent a subcontractor from recovering under a payment bond.

In BMD Contractors Inc. v. Fidelity and Deposit Company of Maryland, the Indiana Court of Appeals denied a subcontractor from recovering for unpaid sums under a payment bond because its subcontract contained a “pay-if-paid” clause.

Facts: Walbridge Aldinger, the general contractor, hired Industrial Power on a plant manufacturing project.  Industrial Power was required to post a payment bond with Fidelity and Deposit Company of Maryland. Industrial Power entered into a subcontract with BMD, which contained a “pay-if-paid” clause:

“IT IS EXPRESSLY AGREED THAT OWNER’S ACCEPTANCE OF SUBCONTRACTOR’S WORK AND PAYMENT TO THE CONTRACTOR FOR THE SUBCONTRACTOR’S WORK ARE CONDITIONS PRECEDENT TO THE SUBCONTRACTOR’S RIGHT TO PAYMENTS BY THE CONTRACTOR.”

The manufacturer went bankrupt and was unable to pay Walbridge, which in turn was unable to pay Industrial Power.  Industrial Power refused to pay BMD and BMD filed a bond claim for the outstanding sums owed. Fidelity refused to pay BMD relying on the “pay-if-paid” clause.

Decision: The Indiana Court of Appeals affirmed the trial court’s decision. The Court stated that Indiana surety law is quite clear that sureties are generally liable only where the principal itself is liable and that concurrently executed bonds and the contracts they secure are construed together.

“These surety-law principles firmly support Fidelity’s position that it cannot be liable under the payment bond if Industrial Power is not liable under the subcontract. Although there are no Indiana cases applying these general principles in this particular context, courts in other jurisdictions have done so.”

“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.”

A note to take from this case is to pay close attention to the contracts you sign. While a payment bond can help secure payment on a project, if you waive the right to payment by agreeing to a “pay-if-paid” clause, you may also be waiving your right to collect on the bond.

By: Roy Rodabaugh

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