## Facts

- The Memphis Housing Authority hired Construction Technology, Inc. (CTI) as general contractor for a public housing improvement project.
- CTI subcontracted the project’s painting work to Mark Koch (a painting subcontractor).
- The subcontract stated that partial payments “shall be made when and as payments are received by the Contractor,” and permitted CTI to require proof that Koch paid his own labor and material obligations as a condition to payment.
- Koch completed the subcontract work by July 31, 1989.
- CTI paid Koch $148,110.96 but withheld the remaining subcontract balance, asserting the owner had not fully paid CTI.
- Koch sued CTI for breach of contract and also sought recovery from Fidelity and Deposit Company of Maryland (FDCM) as surety on CTI’s payment and performance bond issued for Koch’s benefit.
- The trial court awarded Koch partial relief but did not award the full amount sought.
- The court of appeals affirmed, construing the pay-when-paid language as a condition precedent and treating the bond as statutory, which it concluded prevented Koch’s direct claim against FDCM.

## Issues

1. Whether the subcontract’s pay-when-paid clause created a condition precedent making CTI’s duty to pay Koch contingent on CTI’s receipt of payment from the owner.
2. Whether the bond issued in connection with the subcontract was a statutory bond or a common-law bond, and whether Koch could sue the surety directly.

## Decision

- The Tennessee Supreme Court reversed the court of appeals and remanded.
- The Court held the pay-when-paid clause did not create a condition precedent and did not shift the risk of owner nonpayment to the subcontractor.
- The Court construed the clause as governing the timing of payment—allowing payment to be deferred for a reasonable period while the contractor sought payment—but not eliminating CTI’s ultimate obligation to pay for completed subcontract work.
- The Court held the bond was a common-law bond, not a statutory bond, and that Koch could maintain a direct action against FDCM as surety.

## Legal Principles

- Contractual conditions precedent are disfavored and are not found unless stated in clear, unequivocal terms.
- Pay-when-paid provisions are generally interpreted as timing mechanisms rather than as risk-shifting conditions that bar subcontractor recovery if the owner does not pay, absent explicit language making owner payment a true condition precedent.
- A bond’s classification depends on its language, purpose, and intended beneficiaries; a common-law bond arising from private agreement may permit direct suit by the beneficiary against the surety.

## Conclusion

The court treated the subcontract’s pay-when-paid language as postponing payment rather than conditioning payment on the owner’s funding, and it classified the subcontract bond as a common-law bond that allowed the subcontractor to sue the surety directly for amounts due.


Koch v. Constr. Tech., Inc., 924 S.W.2d 68 (Tenn. 1996)