A recent decision from the Seventh Circuit Court of Appeals has recognized and upheld a "Pay-If-Paid" clause under Indiana law. The court held that, pursuant to the clause, a subcontractor was not entitled to payment when the upstream contractor had not been paid. The court also held that even if language construed as a "pay-when-paid" clause also exists in the contract, the condition precedent identified by the 'pay-if-paid' clause controls. The actual language considered by the court was:
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 case, BMD Contractors, Inc. v. Fidelity and Deposit Company of Maryland, decided May 11, 2011, also clarified Indiana suretyship law, declaring that a surety is entitled to all defenses available to its principal, including whether payment is actually due to a subcontractor pursuant to a pay-if-paid clause.
The case marks a turning point in Indiana jurisprudence which has been relatively silent on the effect of "pay-if-paid" clauses in Indiana contracts.
Contact any of the Attorneys at Einterz & Einterz to discuss how a 'pay-if-paid' clause might affect your contract relationships.