Nos. 31869 and 31870 -
Wellington
Power Corporation, a Pennsylvania corporation, v. CNA Surety Corporation,
dba CNA Commercial Insurance, a Delaware corporation, and W. G. Tomko, Incorporated,
a Pennsylvania corporation, v. CNA Surety Corporation, dba CNA Commercial
Insurance, a Delaware corporation
Albright, Chief Justice, dissenting:
In reaching its conclusory decision that
the need to encourage freedom to contract outweighs the public policy which underlies
the legislative enactment of mechanic's lien and public bond statutes, the majority
has seriously undervalued and misweighed the various interests implicated by
the question of enforcing conditional payment provisions in construction contracts.
Accordingly, I must respectfully dissent.
Because encumbrances to public property are
disallowed as a general rule, mechanic's liens cannot be filed against public
property.
See J.E. Moss Iron Works v. Jackson Co. Court, 89 W.Va. 367,
109 S.E. 343 (1921). To avoid the problem created by exempting public property
from mechanic's liens, the Legislature enacted the payment bond statute set forth
in West Virginia Code § 38-2-39 (Supp. 2004). Without question, the purpose
of the payment bond statute is to serve as a substitute mechanism for contractors
and their laborers to collect moneys which they are owed in connection with work
performed on public buildings or property.
See syllabus, in part,
Morton
Motor Co. v. Fidelity & Cas. Co.,
109 W.Va. 67, 152 S.E. 860 (1930) (recognizing that the payment bond required
by W.Va. Code § 38-2-39 “secures [people contracting to perform work
on public structures]. . . for the reasonable price of such materials, machinery,
equipment, and labor sold and furnished by them for which they would be entitled
to a mechanics' or laborers' lien if the structure were a private instead of
a public one”);
accord Everett Painting Co. v. Padula & Wadsworth
Constr., Inc., 856 So.2d 1059, 1062 (Fla. App. 2003) (stating that purpose
of public bond statute is “to protect subcontractors and suppliers by
providing them with an alternative remedy to mechanic's liens on public projects”).
Despite recognizing that “[t]he public policy of this state is to secure
payment to the materialmen and laborers in the building of structures to be
used by the public,” the majority nonetheless turns its collective back
on this long-recognized and much-valued tenet of construction law.
State
ex rel. E.I. Du Pont De Nemours & Co. v. Coda, 103 W.Va. 676, 685,
138 S.E. 324, 328 (1927).
Preferring to protect the right of freedom
to contract, the majority disavows the public policy of securing payment for
materials furnished by vendors and work performed by laborers that is at the
core of our mechanic's lien and public bond statutes. In doing so, the majority
takes a position that is at odds with numerous jurisdictions throughout this
country.
See, e.g., Wm. R. Clarke Corp. v. Safeco Insur. Co., 938 P.2d
372, 378-79 (Cal. 1997) (holding that pay if paid provision was in effect waiver
of mechanic's lien rights in violation of legislative anti-waiver scheme and
ruling that such provision does not
insulate either general contractors or their payment bond sureties from their
contractual obligations to pay subcontractors for work performed);
West-Fair
Elec. Contrs. v. Aetna Cas. & Sur. Co., 661 N.E.2d 967, 971 (N.Y. 1995)
(holding that “pay-when-paid clause which forces the subcontractor to
assume the risk that the owner will fail to pay the general contractor is void
and unenforceable as contrary to public policy”);
see generally 8
Williston
on Contracts § 19:58 at 490-91 (4
th ed. 1998) (stating
that “recent decisions and statutory enactments with respect to 'pay when
paid' or 'pay if paid' clauses in construction contracts reveal . . . a number
of important jurisdictions declaring that such clauses violate public policy
and will not be enforced”).
(See
footnote 1)
Those jurisdictions that uphold conditional
payment clauses do so only where the intent of the contracting parties is unquestionably
clear.
(See footnote 2) In
Thomas
J. Dyer Co. v. Bishop International Engineering Co., 303 F.2d 655 (6
th Cir.
1962), the court rejected the general contractor's defense that the contractual
language which provided that no money owed to the subcontractor was due until
five days after the contractor's receipt of funds from
the owner was a condition precedent that prevented payment where the owner
was insolvent. Concluding “that it was the intention of the parties that
the subcontractor would be paid by the general contractor for the labor and
material put into the project,” the Sixth Circuit determined that the
provision was designed to allow the contractor a reasonable period of time
in which to pay the subcontractor for work performed.
Id. at 661. The
Sixth Circuit opined that the credit risk inherent in the general contractor's
undertaking could be shifted to the subcontractor, but only where the contract
contained express language “clearly showing that to be the intention of
the parties.”
Id.
While the
Dyer case is relied
upon by those who seek to enforce conditional payment provisions where the contracts
at issue contain specific “pay if paid” or “pay when paid” language,
enforcement of such language is still not automatic. Those courts that have adopted
the
Dyer approach of enforcing conditional payment clauses only when the
contract terms undeniably demonstrate the intent of the parties still “recognize
a general presumption against the enforcement of the clauses” and require “that
the presumption can be overcome only by the use of clear and unambiguous contract
language.” Francis J. Mootz, III,
The Enforceability of Pay When Paid
Clauses in Construction Contracts, 64 Conn. B.J. 257, 265 (1990).
Emphasizing that the contract at issue
clearly states the intention of the parties that the “pay if paid” language
operates as a condition precedent to payment, the majority fails to consider
the ever increasing recognition by scholars and courts alike that there is no
true bargaining that occurs with regard to these construction contracts. (See
footnote 3) Both commentators and jurists have suggested that when
issues concerning “pay if paid” provisions arise, contracts containing
these provisions should be evaluated in terms of unconscionability due to the
clearly unequal bargaining position that exists between the general contractor
and the subcontractors. See Gerald B. Kirksey, “Minimum Decencies” -
A Proposed Resolution of the “Pay-When-Paid”/“Pay-If-Paid” Dichotomy,
12 Construction Lawyer 1, 43-44 (Jan. 1992); see also Clarke, 938 P.2d
at 385, n. 2 (Chin, J., dissenting) (recognizing that pay if paid clause might
be invalidated on grounds of misrepresentation, unconscionability, or contractor's
inappropriate attempt to exculpate himself from liability for payment due to
his misconduct); 8 Williston on Contracts 19:58 at 507 (recognizing that “a
subcontractor is often, if not typically, at a bargaining disadvantage as compared
to the contractor, and contractors may abuse either their bargaining power or
the freedom from liability that a truly conditional 'pay if paid' clause gives
them”).
Only if it can be shown that the parties
truly engaged in equal bargaining (See
footnote 4) and fully intended that non-payment by the owner would
justify non-payment by the general contractor to the subcontractor (thereby agreeing
to the shifting of the risk of non-payment) should such contractual language
be upheld. The use of the terminology alone should not be conclusive evidence
of such intent, given the probable lack of any true bargaining that accompanies
the execution of these contracts. This area of the law is replete with reasons
for concluding that the legislative policy of protecting laborers in this state
tips the scales in favor of such public policy and against the freedom to enter
into contracts containing these much-debated and certainly controversial conditional
payment clauses. (See footnote
5) Consequently, I must disagree with the majority's conclusion that
the public policy inherent in the lien statutes is trumped by the freedom to
contract. (See footnote 6)
I also must part ways with the majority's
conclusion that the surety can rely upon the “pay if paid” language
to avoid complying with its contractual obligation to serve as a guarantor of
payment to the affected laborers and materialmen. The majority rests its decision
on the principle that “[a]s a general rule, the liability of the surety
is coextensive with that of the principal.” Syl. Pt. 2, Gateway Commun.,
Inc. v. Hess, 208 W.Va. 505, 541 S.E.2d 595 (2000). Reasoning that since
the general contractor has no liability given the enforceability of the “pay
if paid” clause, the majority concludes that there is no liability upon
which the surety can be required to pay. Other courts have squarely rejected
this reasoning. In Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d
717 (4th Cir. 2000), the appellate court addressed “whether a
surety can assert the principal's defense based on 'pay when paid' language in
the subcontract, where the surety did not expressly incorporate the 'pay when
paid' language into the contract payment bond.” Id. at 723. In rejecting
the surety's attempt to rely upon the contractor's defense, the Fourth Circuit
reasoned:
there is no indication that the
parties intended the phrase “sums justly due” to incorporate the contingency
of payment by the Owners. On the contrary, the very purpose of securing a surety
bond contract is to insure that claimants who perform work are paid for their
work in the event that the principal does not pay. To suggest that non-payment
by the Owners absolutely absolves the surety of its obligation is nonsensical,
for it defeats the very purpose of a payment bond.
Id. at 723 (emphasis supplied); accord OBS Pace Co. v. Pace Constr.
Co., 558 So.2d 404 (Fla. 1990); Brown & Kerr, Inc. v. St. Paul Fire
and Marine Ins. Co., 940 F. Supp. 1245
(N.D. Ill. 1996); Shearman & Assoc., Inc. v. Continental Cas. Co., 901
F.Supp. 199 (D. V.I. 1995).
Just as in Moore Brothers, the payment
bond in this case did not incorporate the “pay if paid” language that
is set forth in the contract between the general contractor and the subcontractors.
Because the subcontractors are suing on the payment bond and not their subcontracts,
and because there is no language in the payment bond that hinges payment by the
surety on the contractor's receipt of payment from the owner, there is no basis
for denying the subcontractors payment under the performance bond. As the Fourth
Circuit aptly noted in Moore Brothers, such a denial would frustrate the
very purpose of the payment bond.
Based on the foregoing, I respectfully dissent.
I am authorized to state that Justice Starcher
joins in this dissenting opinion.
Footnote: 1 If the majority's decision
was affected by the general contractor's argument that absent such “pay
if paid” provisions the costs associated with obtaining payment bonds
would increase, I note that this contention amounts to pure conjecture as there
is no supporting evidence for this claim in the record.