It is often said that a payment bond surety may assert all of the contractual defenses to payment enjoyed by its principal. If the principal is a general contractor with a “pay-if-paid” clause in its subcontracts, must a subcontractor wait for the general contractor to be paid before it can collect on a payment bond? I promised elaboration on this question in an earlier blog (#8).
For public works contracts where payment bonds are required by statute (RSA 447:16 et seq. for state and municipal projects, the Miller Act for federal projects), the answer appears to be “No.” These statutes set the passage of time that the subcontractor is unpaid as the only precondition to payment under the bond, and courts reason that any other precondition would be inconsistent with the statutory scheme. United States ex rel. Walton Technology v. Westar Engineering, 290 F.3d 1199, 1206 (9th Cir. 2002) (“Thus, the liability of a surety and its principal on a Miller Act payment bond is coextensive with the contractual liability of the principal only to the extent that it consistent with the rights and obligations created under the Miller Act.”). No New Hampshire case has yet considered whether the same result obtains under state law, but the same logic applies.
What about payment bonds on private construction projects? Outside of New Hampshire there is a split of authority on the question. OBS Co. v. Pace Construction Corp., 558 So. 2d 404 (1990), construing Florida law, held that general contractor’s “pay-if-paid” defense was not available to a surety. Wellington Power Corp. v. CNA Surety Corp., 217 W.Va. 33, 614 S.E.2d 680 (2005), construing West Virginia law, held that it was. Several precedents can be found on both sides of the argument.
While New Hampshire’s Supreme Court has yet to take either side, it has held that when “a bond refers to and is conditioned on the performance of a specific agreement the latter’s terms become a part of the bond and the instruments should be read together as a whole. [citations omitted] By its terms the bond insured the faithful performance of the contract . . . Thus the liability of the company as surety is coextensive with that of the principal . . .” Paisner v. Renaud, 102 N.H. 27, 29 (1959). This means one must examine the language of the bond in order to ascertain which “specific agreement” is incorporated into the bond, and thus which contract’s provisions are the measure of the surety’s exposure.
Many payment bonds in vogue today (the popular AIA A312 is an example) contain both indemnity obligations to the project owner and direct payment obligations to subcontractors and suppliers, but incorporate by reference only the prime contract between owner and general contractor. That prime contract, of course, won’t contain “pay-if-paid” language, which is only found in subcontracts – and nothing in the bond’s description of payment obligations to subcontractors purports to incorporate their agreements. Some courts have ruled against the surety on this basis. See Paige International, Inc. v. XL Speciality Ins. Co., 267 F.Supp.3d 205, 215-16 (D.D.C. 2017), holding that the surety enjoys only the contractual defenses in its principal’s contract with the indemnitee, not those found in lower-tier subcontracts.
Incorporation of the terms of the prime contract may, depending on those terms, end up playing a decisive role. Such was the situation in Maine Bonding & Casualty Company v. Foundation Constructors, Inc., 105 N.H. 470, 473 (1964), affirming a surety’s liability to pay subcontractor claims where the bond incorporated by reference a prime contract providing that “unless otherwise stipulated, the contractor shall provide and pay for all materials, labor, water, tools, equipment, light, heat and power necessary for the execution of the work.” If the prime contract contains an unqualified directive that the contractor pay its subs and suppliers, that directive is likely to impose liability on the surety in an action under the bond, even if the claimant would strike out in an action under a "pay-if-paid" subcontract.
For public works contracts where payment bonds are required by statute (RSA 447:16 et seq. for state and municipal projects, the Miller Act for federal projects), the answer appears to be “No.” These statutes set the passage of time that the subcontractor is unpaid as the only precondition to payment under the bond, and courts reason that any other precondition would be inconsistent with the statutory scheme. United States ex rel. Walton Technology v. Westar Engineering, 290 F.3d 1199, 1206 (9th Cir. 2002) (“Thus, the liability of a surety and its principal on a Miller Act payment bond is coextensive with the contractual liability of the principal only to the extent that it consistent with the rights and obligations created under the Miller Act.”). No New Hampshire case has yet considered whether the same result obtains under state law, but the same logic applies.
What about payment bonds on private construction projects? Outside of New Hampshire there is a split of authority on the question. OBS Co. v. Pace Construction Corp., 558 So. 2d 404 (1990), construing Florida law, held that general contractor’s “pay-if-paid” defense was not available to a surety. Wellington Power Corp. v. CNA Surety Corp., 217 W.Va. 33, 614 S.E.2d 680 (2005), construing West Virginia law, held that it was. Several precedents can be found on both sides of the argument.
While New Hampshire’s Supreme Court has yet to take either side, it has held that when “a bond refers to and is conditioned on the performance of a specific agreement the latter’s terms become a part of the bond and the instruments should be read together as a whole. [citations omitted] By its terms the bond insured the faithful performance of the contract . . . Thus the liability of the company as surety is coextensive with that of the principal . . .” Paisner v. Renaud, 102 N.H. 27, 29 (1959). This means one must examine the language of the bond in order to ascertain which “specific agreement” is incorporated into the bond, and thus which contract’s provisions are the measure of the surety’s exposure.
Many payment bonds in vogue today (the popular AIA A312 is an example) contain both indemnity obligations to the project owner and direct payment obligations to subcontractors and suppliers, but incorporate by reference only the prime contract between owner and general contractor. That prime contract, of course, won’t contain “pay-if-paid” language, which is only found in subcontracts – and nothing in the bond’s description of payment obligations to subcontractors purports to incorporate their agreements. Some courts have ruled against the surety on this basis. See Paige International, Inc. v. XL Speciality Ins. Co., 267 F.Supp.3d 205, 215-16 (D.D.C. 2017), holding that the surety enjoys only the contractual defenses in its principal’s contract with the indemnitee, not those found in lower-tier subcontracts.
Incorporation of the terms of the prime contract may, depending on those terms, end up playing a decisive role. Such was the situation in Maine Bonding & Casualty Company v. Foundation Constructors, Inc., 105 N.H. 470, 473 (1964), affirming a surety’s liability to pay subcontractor claims where the bond incorporated by reference a prime contract providing that “unless otherwise stipulated, the contractor shall provide and pay for all materials, labor, water, tools, equipment, light, heat and power necessary for the execution of the work.” If the prime contract contains an unqualified directive that the contractor pay its subs and suppliers, that directive is likely to impose liability on the surety in an action under the bond, even if the claimant would strike out in an action under a "pay-if-paid" subcontract.
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