Bonding Company Still Has to Pay Despite “Pay When Paid” Clause

Kegler Brown Construction Newsletter

A federal case from the Ninth Circuit has ruled that a Miller Act surety's liability is established by the Miller Act itself and not by the contractors' subcontract language and therefore a subcontractor can still recover on its payment bond claim despite signing a "pay when paid" clause. United States ex rel. Walton Technology, Inc. v. Westar Engineering, Inc., 290 F.3d 1199 (9th Cir. 2002). This reasoning leads to the ironic result that the contractor would not have liability to the subcontractor, but his bonding company would. This is a notable exception to the general rule that a bonding company is not liable for debts beyond those owed by its principal (contractor).

The Court emphasized that the proper analysis under a Miller Act claim is whether a subcontractor had expressly waived its Miller Act rights in the subcontract itself. The Courts generally hold that such a Miller Act waiver must be clear and explicit and include an express reference to the Miller Act or a subcontractor's payment bond recovery. As the "pay when paid" clause in this case did not have such express bond waiver language, it did not defeat the subcontractor's payment bond claim.

As Ohio has a statute (Ohio Revised Code ยง4113.62), that prohibits clauses that waive bond rights "up front" in a subcontract, it is believed that an express waiver of either a Miller Act payment bond on a federal project in Ohio or a "little Miller Act" payment bond on state work in Ohio would be unenforceable. Therefore, one could conclude that a "pay if paid" or "pay when paid" clause in Ohio would not insulate a bonding company from a payment bond claim. The question remains whether a contractor would be forced to reimburse his bonding company under his indemnity agreement for a loss sustained on such a payment bond claim if he had a good defense to the underlying contract claim in the first instance.