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Indiana Construction Law Update – July 2012
 

 

            As with every legislative session, July in Indiana brings about change with new laws that take effect with the start of the State’s fiscal year. Creditors whose rights to secure payment may depend upon lien and bond statutes should take heed of recent Indiana amendments which alter time limits and other requirements for perfecting the right to payment on public works projects. Moreover, a recent Indiana case not only affirmed the enforceability of paid-if-paid clauses in construction contracts, but also highlighted the importance of fully understanding the ramifications of such clauses. This article will address these two important issues and provide guidance to the unwary creditor to prevent unwanted surprises in the area of construction law.


I.          Amendments to Titles 4, 5 and 36 Governing Public Works Projects


            Lien and bond statutes relating to public works projects are found at I.C. § 4-13.6-7-1, et seq. (relating to certain state public works), I.C. § 5-16-5-1, et seq. (relating to state public works not governed by Title 4) and I.C. § 36-1-12-1, et seq. (relating to local public works).[1] Effective July 1, 2012, the time period to “lien” retainage/contract proceeds and file claims against payment bonds under Titles 4, 5 and 36 will change. When House Enrolled Act No. 1163 takes effect on July 1, 2012, a person making a claim against retainage/contract proceeds or a payment bond under Titles 4, 5 or 36 will be required to file its claim with the public body and deliver a copy of the claim to the contractor not later than sixty (60) days after the date the last labor was performed, the last material was furnished, or the last service was rendered by that person.  

            This represents a change from existing law. Currently, on Title 4 projects, claims against retainage and the payment bond are timely if filed within sixty (60) days of the last materials or labor supplied to the project by any contractor, subcontractor or supplier. See Electrical Specialties, Inc. v. Siemens Building Technologies, Inc., 837 N.E.2d 1052 (Ind. Ct. App. 2005). In addition, under existing law, claims against payment bonds on Title 5 and Title 36 projects are timely if filed within sixty (60) days after the last materials or labor are supplied to the project by any contractor, subcontractor, or supplier.[2] See Indiana Carpenters Cent. & W. Ind. Pension Fund v. Seaboard Surety Co., 601 N.E.2d 352 (Ind. Ct. App. 1992).

            Beginning July 1, 2012, those asserting claims under Titles 4, 5 or 36 will no longer be able to rely on the last date other contractors, subcontractors or suppliers performed labor or furnished materials on the project for the timeliness of their own claims. Instead, the date which will trigger the running of the sixty (60) day time period to file a claim is the date the person asserting the claim last performed labor or furnished material or services. The practical effect of these changes will be to reduce the time within which to file statutory claims on public works projects.

            The amendments to Titles 4, 5 and 36 also require that a copy of the claim filed with the public body be provided to the contractor on the project.[3] Suit may not be brought against the surety on the bond before thirty (30) days after filing of the claim with the public body and delivery of a copy of the claim to the contractor. Accordingly, the right to file suit on the bond appears to be conditioned on the claimant providing a copy of the claim to the contractor and the failure to do so may invalidate the claim.

            Bottom line: Effective July 1, 2012, calculate your sixty (60) day deadline for making claims on public works projects under Titles 4, 5 and 36 from the date you last performed labor or furnished materials or services to the project. Also, when making claims under Titles 4, 5 and 36, provide the contractor with a copy of your claim in addition to filing it with the appropriate public body.

 

II.        Paid-If-Paid Clauses and Surety Defenses   
            A recent decision of the Seventh Circuit Court of Appeals reaffirmed that paid-if-paid clauses, which are routinely found in construction contracts, are enforceable in Indiana. The decision further established that sureties of payment bonds may rely on paid-if-paid clauses found in their principals’ contracts as a defense to their own liability under the bonds.

            In BMD Contrs., Inc. v. Fid. & Deposit Co. of Md., 2012 U.S. App. LEXIS 9558 (7th Cir. 2012), a subcontractor on a commercial construction project executed a payment bond with the surety. The subcontractor entered into a subcontract with a sub-subcontractor for the provision of materials to the project. The subcontract contained language conditioning the subcontractor’s duty to pay the sub-subcontractor on its own receipt of payment. The owner of the project eventually filed bankruptcy, which caused a series of payment defaults to flow down the levels of contractors and subcontractors. The sub-subcontractor demanded payment from the subcontractor who refused to pay based upon the paid-if-paid clause in the subcontract. The sub-subcontractor then demanded payment from the surety under the payment bond. The surety also refused to pay claiming it could rely upon its principal’s (the subcontractor’s) defense under the paid-if-paid clause. The district court entered summary judgment in favor of the surety and the sub-subcontractor appealed. 

            In affirming the decision of the district court in favor of the surety, the Seventh Circuit Court of Appeals rejected the sub-subcontractor’s argument that the conditional language in the subcontract was only a paid-when-paid clause, which governed the timing of the payment obligation, and not a paid-if-paid clause, which conditioned the subcontractor’s obligation to pay on its own receipt of payment. Because the language in the subcontract clearly made the subcontractor’s receipt of payment a condition precedent to its obligation to pay the sub-subcontractor and the subcontractor had not been paid, the sub-subcontractor was not entitled to payment. 

            The Seventh Circuit also rejected the sub-subcontractor’s argument that the surety could not rely on the paid-if-paid provision in the subcontract because the payment bond did not expressly incorporate the terms of the subcontract. Under firmly established surety law in Indiana, the surety has the same defenses as its principal and cannot be liable where its principal is not. Because the subcontractor was not liable to the sub-subcontractor based on the paid-if-paid clause, the surety also was not liable on the bond.

            Bottom line: When signing construction contracts, be weary of so-called paid-if-paid clauses which condition your right to receive payment on the party with whom you contracted receiving payment. These types of clauses shift the risk of the owner or general contractor’s default to you and may leave you without a contractual remedy. In addition, the existence of a payment bond does not ensure your payment where a paid-if-paid clause exists in your subcontract. A surety is entitled to assert the same defenses as its principal, including a defense based on a paid-if-paid clause.

 


 

[1] Lien and bond rights also exist under Title 8 for state highway projects. See I.C. § 8-23-9-1, et seq. The amendments that take effect on July 1, 2012 do not impact Title 8, however, and it is therefore not addressed in this article.
 
[2] The time period for making a claim to impound contract proceeds under Titles 5 and 36 is currently, and following the effective date of the amendments, will continue to be sixty (60) days after the last labor, materials or service rendered by the person making the claim.
 
[3] The “contractor” is the prime or general contractor that has the public work contract with the public body, division or board that owns the project.
 
 
Disclaimer

These materials are intended for general informational purposes only. Accordingly, they should not be construed as legal advice or legal opinion on any specific facts or circumstances.   Instead, you are urged to consult counsel on any specific legal questions you may have concerning your situation.
 
RUBIN & LEVIN, P.C.    |    342 Massachusetts Avenue    |    Indianapolis, IN 46204     |   www.rubin-levin.com
 

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