Opinion ID: 799695
Heading Depth: 2
Heading Rank: 1

Heading: Interpreting the Industrial Power/BMD Contract

Text: As construction projects have become more complex, contractors and subcontractors have developed tools to manage the possibility that some upstream contracting party will become insolvent or otherwise default in payment, raising the question of which downstream parties bear the risk of nonpayment. Two increasingly common contractual provisions address distinct kinds of payment risk in construction subcontracting: pay-if-paid clauses and pay-when-paid clauses. A pay- when -paid clause governs the timing of a contractor's payment obligation to the subcontractor, usually by indicating that the subcontractor will be paid within some fixed time period after the contractor itself is paid by the property owner. A typical clause of this type might say: Contractor shall pay subcontractor within seven days of contractor's receipt of payment from the owner. Robert F. Carney & Adam Cizek, Payment Provisions in Construction Contracts and Construction Trust Fund Statutes, 24 CONSTRUCTION LAW., Fall 2004, at 5, 5. These clauses address the timing of payment, not the obligation to pay. They do not excuse a contractor's ultimate liability if it does not receive payment by the property owner, so they do not transfer the risk of upstream insolvency from contractor to subcontractor and on down the chain. In contrast, a pay- if -paid clause, as the name suggests, provides that a subcontractor will be paid only if the contractor is paid and thus ensures that each contracting party bears the risk of loss only for its own work. A typical clause of this type might say: Contractor's receipt of payment from the owner is a condition precedent to contractor's obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner's nonpayment and the subcontract price includes the risk. Id. at 5-6. BMD argues that the conditional language in its subcontract with Industrial Power was only a pay-when-paid clause and that Industrial Power remained liable even though it did not receive full payment from Walbridge. Fidelity argues that the provision is a pay-if-paid clause, and because Industrial Power did not receive payment, it had no duty to pay the balance due to BMD. To repeat, the relevant clause in the subcontract states: 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. (Emphasis added.) This language is plain. Industrial Power's receipt of payment is a condition precedent to its obligation to pay BMD. True, the clause does not say in so many words that BMD assumes the risk of upstream nonpayment. The question here is whether express transfer of risk language is necessary to create a pay-if-paid clause or whether condition-precedent language is enough. We conclude that the condition-precedent language is clear and sufficient on its face to unambiguously demonstrate the parties' intent that BMD would not be paid unless Industrial Power itself was paid. Additional transfer-of-risk language is not necessary. The Indiana courts have not squarely addressed pay-if-paid clauses, but most jurisdictions that have done so have interpreted condition-precedent language as sufficient to create a pay-if-paid clause. See, e.g., Envirocorp Well Servs., Inc. v. Camp Dresser & McKee, Inc., No. IP99-1575-C-T/G, 2000 WL 1617840, at  (S.D.Ind. Oct. 25, 2000) (explaining that [c]ourts that have enforced [pay-if-paid] provisions do so when the provisions explicitly provide that payment to the contractor by the owner is a condition precedent to payment to the subcontractor by the contractor); see also L. Harvey Concrete, Inc. v. Agro Constr. & Supply Co., 189 Ariz. 178, 939 P.2d 811, 814-15 (App. 1997) (enforcing as a pay-if-paid clause a provision stating that contractor's receipt of payment from owner was a condition precedent to its obligation to pay subcontractor); Gilbane Bldg. Co. v. Brisk Waterproofing Co., 86 Md.App. 21, 585 A.2d 248, 249-51 (1991) (same); Berkel & Co. Contractors v. Christman Co., 210 Mich. App. 416, 533 N.W.2d 838, 839 (1995) (same). BMD cites several cases suggesting that a pay-if-paid clause requires explicit language shifting the risk of nonpayment to the subcontractor. See Thos. J. Dyer Co. v. Bishop Int'l Eng'g Co., 303 F.2d 655, 661 (6th Cir.1962) ([T]o transfer [risk of default]. . . from the general contractor to the subcontractor, the contract . . . should contain an express condition clearly showing that to be the intention of the parties.); Midland Eng'g Co. v. John A. Hall Constr. Co., 398 F.Supp. 981, 993-94 (N.D.Ind.1975) (discussing Dyer ); Oberle & Assocs., Inc. v. Richmond Hotel, Ltd., No. 33C01-8706-CP-130, 1998 WL 35297806, at -7 (Ind.Cir.Ct. July 2, 1998) (quoting the language from Dyer excerpted above). The Sixth Circuit's decision in Dyer is the leading case in this groupthe others simply follow itbut BMD misreads that opinion by conflating two distinct concepts: (1) a requirement of express language demonstrating the parties' intent to transfer the risk of insolvency, and (2) a requirement that the parties use particular language to express that intent (for example, by stating that the subcontractor assumes the risk of the owner's insolvency, or something very similar). We do not disagree that to transfer the risk of upstream insolvency or default, the contracting parties must expressly demonstrate their intent to do so; that is the rule from Dyer. But by clearly stating that the contractor's receipt of payment from the owner is a condition precedent to the subcontractor's right to payment, the parties have expressly demonstrated exactly that intent. Adding specific assumption-of-risk language would reinforce that intent but is not strictly necessary to create an enforceable pay-if-paid clause. Dyer does not hold otherwise. Condition precedent is a legal term of art with a clear meaning: An act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. BLACK'S LAW DICTIONARY 334 (9th ed. 2009). The Industrial Power/BMD contract unambiguously states that Industrial Power's receipt of payment is a condition precedent to BMD's right to payment. This provision means just what it saysthat Industrial Power's duty to pay BMD is expressly conditioned on its own receipt of paymentthus evincing the parties' unambiguous intent that each party assumes its own risk of loss if Getrag becomes insolvent or otherwise defaults. Notably, the subcontracts at issue in Dyer, Midland, and Oberle did not use condition-precedent language like that at issue here, so those cases cannot be read as suggesting that the use of this terminology is insufficient to create a pay-if-paid provision. Although it's possible to reinforce the clarity of a pay-if-paid clause by using redundant languagee.g., in agreeing to this condition precedent, subcontractor assumes the risk of owner's insolvencyadditional language like this is not necessary if the meaning of the condition precedent is otherwise clear. MidAmerica Constr. Mgmt., Inc. v. MasTec N. Am., Inc., 436 F.3d 1257, 1263 (10th Cir.2006) (noting that a similarly worded subcontract's failure to say all that it might have said is not enough to throw the intent of the contracting parties into doubt). BMD identifies a single district-court decision in which condition-precedent language was held to create only a pay- when -paid clause. See Sloan Co. v. Liberty Mut. Ins. Co., No. 07-5325, 2009 WL 2616715, at  (E.D.Pa. Aug. 25, 2009) ([T]he mere presence of language such as `condition precedent' . . . is insufficient to determine whether a clause is a pay-if-paid or pay-when-paid provision.). Sloan, of course, is not controlling, and we do not find it persuasive. It stands in marked contrast to the weight of other authority. Even taken on its own terms, Sloan would not resolve this case. There, the district court asked whether the clause reveals the parties' intent to shift the risk, id., and held that the parties' use of condition-precedent language, while not sufficient, was strong evidence of that intent, see id. at  (`A pay-if-paid condition generally requires words such as condition, if and only if, or unless and until that convey the parties' intention that a payment to a subcontractor is contingent on the contractor's receipt of those funds.' (quoting LBL Skysystems (USA), Inc. v. APG-Am., Inc., No. Civ. A. 02-5379, 2005 WL 2140240, at  (E.D.Pa. Aug. 31, 2005))). Moreover, the contract provision in Sloan, unlike the one at issue here, had attributes of a pay- when -paid provision. It provided that [f]inal payment [to the Sub contractor] shall be made within thirty (30) days after the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final payment:. . . (6) Contractor shall have received final payment from the Owner. . . . Sloan, 2009 WL 2616715, at . Establishing a specific time frame in which payment must be made is the hallmark of pay-when-paid clauses. In contrast, the relevant contract clause in this case makes no mention of the timing of payment; instead, it identifies the owner's acceptance of BMD's work and Industrial Power's receipt of payment as conditions precedent to Industrial Power's duty to pay BMD. [4] To the extent that Sloan can be read to require that contracting parties use specific words to create a pay-if-paid clause, we disagree, for the reasons we have explained. Finally, BMD argues that the operative language in the subcontract is ambiguous and as such should be interpreted against Industrial Power, the drafter of the contract. See MPACT Constr. Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 910 (Ind.2004) (ambiguity in a contract is construed against its drafter). Contract language is ambiguous only if it is susceptible to more than one interpretation and reasonably intelligent persons would honestly differ as to its meaning. Ind. Dep't of Transp. v. Shelly & Sands, Inc., 756 N.E.2d 1063, 1069-70 (Ind.Ct.App.2001). As we have explained, the condition-precedent language in this contract is not ambiguous. The provision contains none of the standard features of a pay-when-paid clause and therefore is not reasonably susceptible of more than one meaning. BMD argues in the alternative that the condition-precedent provision is ambiguous by comparison to a similar provision in the separate Walbridge/Industrial Power subcontract, which adds specific language to the effect that the subcontractor (there, Industrial Power) assumes the risk of the owner's insolvency. BMD argues that the presence of this additional assumption-of-risk language in the Walbridge/Industrial Power stands in direct conflict with the parallel provision in the Industrial Power/BMD subcontract, which does not include similar additional language. There is no conflictat least not one that carries any dispositive significance. One contract is just more explicit than the other.