Opinion ID: 1846346
Heading Depth: 1
Heading Rank: 6

Heading: May Kruger Recover From Federal Under the Payment Bond?

Text: We agree with the trial court's finding that Kruger established that it had complied with the terms of the payment bond and established the elements necessary to recover under the little Miller Act. Having concluded that Kruger is excused from further performance under the Harbert-Kruger subcontract and that the pay-when-paid clause created a timing mechanism for payment rather than a condition precedent to payment, we conclude that Harbert and Federal did not rebut Kruger's showing that it was entitled to a summary judgment on its claim for payment under the payment bond. Accordingly, we affirm the summary judgment in favor of Kruger against Harbert and Federal. We also affirm the summary judgment entered against Federal for another reason. We note that Kruger's claim against Federal is premised upon the terms of the payment bond, rather than on the terms of the Harbert-Kruger subcontract. The payment bond and the subcontract are separate contracts, and neither references nor incorporates the terms of the other. More specifically, the payment bond does not condition payment to Kruger on the Water Board's making a final payment to Harbert. Moreover, allowing a surety on a payment bond, such as Federal, to assert a pay-when-paid clause as a defense to an action seeking payment on the bond would defeat the very purpose of a payment bond issued to guarantee payment to a subcontractor. The reasons for this limitation upon the surety are aptly noted in Brown & Kerr Inc. v. St. Paul Fire & Marine Insurance Co., supra, a case postured almost identically to this one. In Brown & Kerr Inc., St. Paul, as surety for a general contractor, sought to defend a subcontractor's claim made against the payment bond by relying upon a pay-when-paid clause in the subcontractor's contract. St. Paul contended that the liability of a surety under a payment bond is coextensive with that of its principal and that the rights and defenses of the principal also belong to the surety. 940 F.Supp. at 1248-49. In rejecting St. Paul's defense, the federal district court stated: [The subcontractor] is suing under the Bond and not the subcontract. The two are separate agreements. St. Paul [the surety] has neither cited, nor have we discovered, any authority for the proposition that the inability to proceed against the general contractor because of a `pay when paid' clause in the subcontract necessarily prevents recovery against the surety under the payment Bond. Indeed, such an argument runs counter to the underlying purpose of the payment Bond, i.e., the assurance of payment to subcontractors. Moreover, the specific payment Bond issued by St. Paul does not condition payment to [the subcontractor] on the owner making final payment to [the general contractor]. Nor does the Bond incorporate the payment terms of the subcontract. The terms of the bond are clear and unambiguous. If [the general contractor], as principal, promptly pays [the subcontractor], then any obligation by St. Paul is void. However, if [the subcontractor] has not received final payment from [the general contractor] within ninety days after finishing work, [the subcontractor] may sue on the bond, prosecute the suit to final judgment, and have execution thereon. [The subcontractor] has satisfactorily performed under the subcontract and has yet to receive final payment and, therefore, St. Paul as surety is liable. St. Paul argues that the `90 day' provision in the payment Bond merely allows the subcontractor to bring suit under the Bond but does not guarantee payment unless the claimant has complied with all provisions of the subcontract including the `pay when paid' clause. Significantly, however, [the subcontractor's] obligations under the Bond are completely unrelated to the `pay when paid' clause. Moreover, payment by the owners to [the general contractor] is not within [the subcontractor's] control. Pursuant to St. Paul's theory, a subcontractor could satisfactorily perform all of its own obligations under the subcontract and yet never recover under the Bond if the general contractor does not receive payment from the owner. We do not believe the Bond contemplates that payment of subcontractors should await the determination of an extended legal dispute between the owner and general contractor concerning his work which is completely unrelated to [the subcontractor], particularly since the underlying purpose of the bond is to assure the payment of subcontractors and when, as here, [the subcontractor] has completed performance under the subcontracts. Brown & Kerr Inc., 940 F.Supp. at 1249 (citations omitted). This reasoning is both persuasive and applicable to the facts of this case; we, therefore, conclude that Federal may not assert the pay-when-paid clause as a defense to Kruger's suit on the payment bond. For this additional reason, we affirm the summary judgment entered against Federal on the payment bond.