Opinion ID: 799695
Heading Depth: 2
Heading Rank: 2

Heading: Indiana Public Policy

Text: BMD argues in the alternative that pay-if-paid clauses are void under Indiana public policy. This argument is easily rejected. As a preliminary matter, Indiana has a strong background presumption favoring freedom of contract. See Zollman v. Geneva Leasing Assocs., Inc., 780 N.E.2d 387, 392 (Ind.Ct.App.2002) ([A]s a general rule, the law allows competent adults the utmost liberty in entering into contracts that, when entered into freely and voluntarily, will be enforced by the courts.). Indiana courts will not enforce contracts that violate state statutes, but they will not find a violation `unless the language of the implicated statute is clear and unambiguous that the legislature intended that the courts not be available for either party to enforce a bargain made in violation thereof.' Shelly & Sands, 756 N.E.2d at 1073 (quoting Cont'l Basketball Ass'n, Inc. v. Ellenstein Enters., Inc., 669 N.E.2d 134, 140 (Ind.1996)). BMD cites two Indiana statutes in support of its position, but neither is on point. The first is a statute voiding waivers of claims against payment bonds. Section 32-28-3-16(b) of the Indiana Code provides in relevant part: (b) A provision in a contract for the improvement of real estate in Indiana is void if the provision requires a person. . . who furnishes labor, materials, or machinery to waive a right to: . . . (2) a claim against a payment bond; before the person is paid for the labor or materials furnished. This statute invalidates any contract provision that requires a party to waive its claims under a payment bond; it does not cast doubt on the validity of pay-if-paid clauses. Nothing in the Industrial/BMD subcontract required BMD to waive its right to recover under the payment bond. Rather, the subcontract allocated the risk of loss if Getrag defaulted on payment, ensuring that each party would bear the risk of loss only for its own work. Under the terms of the pay-if-paid clause, Industrial Power's obligation to pay BMD was conditioned on its own receipt of payment; the clause is not a waiver of BMD's right to make a claim under the Fidelity bond. BMD insists that this distinction is illusory and that pay-if-paid clauses, in effect, always amount to waiver of payment, thus defeating the entire purpose of the payment bond. This argument mistakenly assumes that the purpose of a payment bond is to guarantee payment under any set of circumstances, rather than when payment is otherwise due under the specific terms of the subcontract. If the condition precedent here had occurredif Industrial Power had been fully paid but refused to pay BMDthen BMD would have a valid claim against Fidelity under the payment bond. The bond's coverage is therefore not illusory; BMD's right to recovery is simply limited by the terms of its subcontract with Industrial Power. BMD also relies on section 32-28-3-18(c) of the Indiana Code, which prohibits certain conditions on lien rights: (c) An obligor's receipt of payment from a third person may not: (1) be a condition precedent to; . . . the provider's right to record or foreclose a lien against the real estate that was improved by the provider's labor, material, or equipment. By its terms this statute only prohibits contract conditions that operate on a contractor's lien rights. Nothing in the pay-if-paid clause limits BMD's right to file a lien against the subject property. To the contrary, both BMD and Ferguson filed mechanic's liens against the Getrag property. The liens were uncontested and yielded substantial payments when the property was sold. This statute does not affect the validity of pay-if-paid clauses.