Tag: seventh circuit

The Contractual ‘Pay-If-Paid’ Clause – How Broad Is Its Scope?

A pay-if-paid (PIP) clause in a construction contract says “I, the general contractor, will only have to pay you, the subcontractor, if the owner – the guy I contract with – pays me.”  Substitute “when” for “if” in the above example and you have a pay-when-paid clause.  Both of these clauses are standard in multi-layered construction projects (ones that involve multiple contractors and contracts). 

Neither term can be used to defend a mechanics’ lien foreclosure suit, though.  Section 21(e) of the Illinois Mechanics’ Lien Act (770 ILCS 60/21(e)) prevents a general contractor from using pay-if-paid or pay-when-paid provisions as a defense to a subcontractor’s mechanics’ lien claim.  But the terms are valid defenses to regular breach of contract claims. 

BMD Contractors, Inc. v. Fidelity and Deposit Company of Maryland, 679 F.3d 643 (7th Cir. 2012), examines whether a third party (i.e., a guarantor or surety) can use a PIP clause in defense of a subcontractor’s payment bond claim.  Under Indiana law, the answer is yes.

Facts:  When an Indiana manufacturer declared bankruptcy, it caused a chain reaction of defaults starting with the prime contract between the owner and the general contractor and cascading down to lower tier subs.

When the entity that hired plaintiff failed to pay, plaintiff sued the subcontractor’s bonding company under a payment bond.  The bonding company moved for summary judgment because of a PIP clause in the sub-subcontract. 

The bonding company said that since the subcontractor – the bonding company’s principal – wasn’t paid by the general contractor, the subcontractor didn’t have to pay the plaintiff.  The District Court agreed and granted summary judgment.  The plaintiff appealed.

Held: District Court affirmed.

Why?:

The Court defined a PIP clause as one that provides a subcontractor will be paid only if the contractor is paid by the owner; with each contractor bearing the risk of loss.  By contrast, a pay-when-paid (PWP) clause denotes a timing issue: the general contractor is obligated to pay the subcontractor – but only when or within a fixed time after the contractor is paid by the owner.  (p. 648). 

The Court, looking to other jurisdictions, held that the term “condition precedent” in a construction contract usually signals a PIP provision.  And viewing the unambiguous language of the operative contracts, the plaintiff’s right to  payment was only triggered if the subcontractor was paid by the general contractor.  (pp. 649-650)

Public Policy and Surety (Guarantor) Liability

The Court found that PIP terms don’t violate Indiana public policy reflected by two statutes that (1) prohibit contractual waivers of payment bond claims and (2) prevent conditioning a contractor’s right to record a lien on first receiving payment from a third person.  Indiana Code 32-28-3-16(b), 18(c). 

The Seventh Circuit held that these statutes didn’t apply to whether a contractual PIP term was a defense to a breach of contract suit.  Based on Indiana’s strong policy favoring freedom of contract, and because no statute outlaws PIP provisions as a breach of contract defense, the PIP term didn’t violate public policy. BMD at 652.

Summary judgment for the bonding company was also proper based on the general rule that a surety’s (the person guaranteeing another’s debt) obligations mirror those of its principal.  A surety can have no greater liability than its principal (the person whose debts are being guaranteed). 

In Indiana, payment bonds and the contracts they secure are construed together.  BMD at 654.  And since the subcontractor didn’t have to pay the plaintiff unless the subcontractor was paid by the general contractor, the bonding company’s obligations weren’t triggered and it didn’t have to pay the plaintiff.

Conclusions

(1) if a contract contains “condition precedent” (to payment) or similar language, this will signal a pay-if-paid clause and it will present a valid defense to a breach of contract suit;

2) lower-tier subcontractors should actively monitor the financial health of  the project so they aren’t caught off-guard by an owner’s or higher-tier contractor’s default.                                                       

 

 

 

Seventh Circuit Summary Judgment Practice: the ‘Production’ and ‘Persuasion’ Burdens

The Seventh Circuit remarked that parties who respond to a summary judgment motion “often misconceive what is required of them” in Modrowski v. Pigatto, 2013 WL 1395696 (7th Cir. 2013).  The case amply illustrates that summary judgment misconceptions can have unfortunate consequences.

In Modrowski, a former employee sued two property management firms under the Computer Fraud and Abuse Act (CFAA), 18 U.S.C. § 1030, after he was fired and  locked out of his personal Yahoo email account.

The defendants moved for summary judgment, arguing that plaintiff produced no evidence that he sustained at least $5,000 in monetary loss as required by the CFAA.  18 U.S.C. § 1030(c)(4)A)(i)(I); (g).  The District court agreed and granted defendants’ summary judgment motion.

The Seventh Circuit rejected plaintiff’s argument that the defendants failed to meet their summary judgment burden of production.  The Court noted that Federal Rule of Civil Procedure 56 imposes an initial burden of production on the summary judgment movant (here, defendants) to show the court why a trial isn’t necessary. 

The (summary judgment) moving party can meet the initial burden by either (1) producing affirmative evidence that negates an essential element of the plaintiff’s claim; or (2) asserting that the plaintiff failed to produce sufficient evidence to establish an essential element of his claim.  

The defendants opted for the latter, “trickier” path – pointing out a lack of evidence in support of plaintiff’s CFAA minimum monetary loss ($5,000) element.  Once the defendants made this initial showing, the burden shifted back to the plaintiff to point to admissible record evidence that established the $5,000 loss threshold.

Question: How does a summary judgment respondent do this? 

Answer:  The nonmovant doesn’t have to depose her own witnesses or produce evidence in a form that would be admissible at trial, but she must at least produce affidavits, deposition excerpts, interrogatory answers, or record admissions to demonstrate that there is evidence upon which a jury could potentially find in the nonmovant’s favor on the challenged element. 

The plaintiff in Modrowski miscalculated his summary judgment burden.  Instead of citing evidence to support his claim that he suffered at least $5,000 in monetary loss, plaintiff opted to attack perceived flaws in defendants’ summary judgment motion.  Plaintiff argued that defendants failed to file a Local Rule 56.1 Statement, failed to cite to the evidentiary record in support of their factual statements and didn’t support their arguments with supporting case law.  (p. 4). 

Plaintiff claimed that these motion defects were so major, his burden to produce evidence on his CFAA loss element didn’t trigger.

The Seventh Circuit disagreed.  On the defendants’ failure to file a Local Rule 56.1 Statement, the Court said that while a failure to provide the Statement can result in the denial of a summary judgment motion, the district court has wide discretion whether to require strict compliance with local court rules and can freely overlook a rules violation.

Substantively, the Court emphasized that the plaintiff bore the burden of persuasion on the $5,000 damages element of a colorable CFAA claim.  Because of this, the plaintiff had to produce admissible evidence in support of this element to survive summary judgment. 

The court even gave examples of the type of evidence plaintiff could have offered such as (1) affidavits from prospective business partners who were unable to contact plaintiff after defendants hijacked his Yahoo account, (2) receipts and expense documents relating to amounts paid by plaintiff to replicate the lost emails and billing records, or an (3) affidavit signed by plaintiff attesting to the number of hours he spent trying to recover his erased emails.  

On this last point, the Court noted that self-serving affidavits in response to summary judgment are proper if they are fact-specific and based on personal knowledge. 

Take-aways: Summary judgment is the “put up or shut up” moment of the lawsuit and the time in which the respondent must marshal admissible evidence to prove his case.  

Modrowski‘s clear lessons are that if you have the burden of proof on an issue at trial and you’re served a summary judgment motion, you must do more than point out facial defects in your opponent’s motion (like a failure to file a LR 56.1(a) statement).  You must also do more than simply rely on your pleadings.  Instead, you should comb the record for evidence in support of each element of your cause of action.