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The validity of “pay-if-paid” and “pay-when-paid” clauses
varies from state to state and, it seems, changes from year to
year. Before relying on such a clause, therefore, the prudent
contractor must identify whether a court will enforce such a
term. Further, just because a subcontract includes such a
conditional payment clause does not mean that a surety may
legally rely on such a term. As demonstrated by Casey Industrial,
Inc. v. Seaboard Surety Co., 2006 U.S. Dist.
LEXIS 74589 (E.D. VA 2006), when a “pay-when-paid”
provision is not expressly incorporated into the bond agreement,
a surety may not raise such a provision in the subcontract
as a defense to payment.
In Casey, the Defendant Surety (“Surety”) issued a payment
bond in favor of the general contractor (“General Contractor”).
When General Contractor delayed Plaintiff Subcontractor’s
(“Subcontractor”) performance, Subcontractor demobilized
with work remaining under its subcontract (the
“Subcontract”). During the course of its performance under
General Contractor, Subcontractor informed General Contractor
and Surety of increased costs, claims, and delays. At
this time, neither General Contractor nor Surety took any
action on this notice.
Eventually, the owner terminated General Contractor and
notified Surety of its obligation to complete performance.
When Surety appointed a rescue general contractor
(“Rescuer”) to the project as a replacement for General Contractor,
Rescuer demanded Subcontractor’s return to the
jobsite. Subcontractor returned and completed work on the
project, believing that it was completing work under the
Subcontract. Surety, however, argues that Subcontractor’s
return to the work site created a different “implied in fact”
contract and that, as such, Subcontractor’s claims for additional
money under the original contract were without merit.
As part of its defense, Surety asserted that the “pay-when-paid”
provision in the Subcontract afforded Surety a defense
against claims by Subcontractor for additional costs. First,
the court determined that the language, “only to the extent
of amounts that Contractor, on behalf of Subcontractor, recovers
from Owner or other subcontractors
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for such delay
and interference,” amounted to a pay-when-paid clause.
The court then found that, although the Subcontract contained
“pay-when-paid” language, the bond agreement did
not. As such, the court reaffirmed the Fourth Circuit’s ruling
in Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717,
723 (4th Cir. 2000) where the court held that “pay-when-paid”
provisions must be expressly incorporated into bond
agreements if a surety is to assert such a defense to payment.
The court in Casey refused to entertain a “pay-when-paid”
clause defense by a surety who did not incorporate such a
provision in its bond agreement. This case serves notice to
sureties that if they intend to rely on such a contractual provision,
it must provide for it in their bond agreement. Moreover,
after the decision in Casey, subcontractors should recognize
that a surety claiming a “pay-when-paid” clause defense
may not be permitted to raise such a defense at trial.
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