## Facts

- A condominium developer hired a general contractor for a Philadelphia project; the contractor hired Sloan & Company as a drywall and carpentry subcontractor.
- The contractor obtained a payment bond from Liberty Mutual Insurance Company to secure payment to subcontractors; the bond obligation tracked the contractor’s obligations under the subcontract.
- The subcontract stated that the subcontractor’s right to final payment was conditioned on the contractor’s receipt of final payment from the owner (pay-if-paid language).
- The subcontract also included a six-month clause allowing the subcontractor to pursue payment if it remained unpaid six months after the owner’s payment became due.
- The subcontract contained a liquidating/cost-sharing arrangement tying the subcontractor’s recovery to its proportional share of any owner payment the contractor ultimately recovered and allocating to the subcontractor a share of the contractor’s costs in pursuing the owner.
- After substantial completion, the owner withheld about $6.5 million from the contractor, including sums attributable to subcontractors, citing alleged delays and deficiencies.
- The contractor withheld over $1 million claimed by Sloan; Sloan then sought payment from Liberty Mutual under the bond.
- Liberty Mutual denied liability, asserting that the pay-if-paid condition barred any duty to pay absent owner payment, and argued it could reduce any payment by Sloan’s share of the contractor’s litigation fees and costs against the owner.

## Issues

1. Whether the subcontract’s payment language created an enforceable pay-if-paid condition precedent under Pennsylvania law.
2. Whether the subcontract’s six-month clause limited or modified any pay-if-paid condition so that the subcontractor could sue after six months of owner nonpayment.
3. Whether the surety could offset any bond liability by the subcontractor’s contractually allocated share of the contractor’s attorneys’ fees and costs incurred in pursuing payment from the owner.
4. Whether Pennsylvania’s strict construction of indemnity and cost-shifting provisions barred broader fee/indemnity recovery beyond what the subcontract expressly provided.

## Decision

- The Third Circuit held the subcontract initially created a valid pay-if-paid condition precedent because it used clear conditional language.
- The court held the six-month clause modified the pay-if-paid condition, permitting the subcontractor to proceed for payment after six months even if the owner still had not paid.
- The court held Liberty Mutual could offset Sloan’s recovery by Sloan’s proportionate share of the contractor’s litigation fees and costs against the owner, as provided by the subcontract’s liquidating/cost-sharing terms.
- The court affirmed limits on any broader indemnity claims, declining to impose indemnity or fee-shifting obligations not stated in clear and unequivocal terms.
- The court affirmed in part, reversed in part, and remanded for further proceedings consistent with its interpretation of the subcontract and offsets.

## Legal Principles

- Under Pennsylvania law, pay-if-paid clauses are enforceable only when the contract clearly and unequivocally makes owner payment a condition precedent to the subcontractor’s right to payment.
- Contract provisions must be read together; a time-limited “sue-after” clause can modify a pay-if-paid condition and operate as a mechanism allowing suit after a specified period of nonpayment.
- Liquidating agreements in construction subcontracts that link a subcontractor’s recovery to the contractor’s recovery from the owner, and allocate related litigation costs, are enforceable when clearly stated and can limit the amount and timing of payment.
- A surety’s liability on a payment bond is generally coextensive with the principal’s contractual obligation; defenses and contractual limitations (including permitted offsets) may be asserted to the same extent as the principal.
- Indemnity and cost-shifting provisions are strictly construed under Pennsylvania law and must be expressed in clear, unequivocal language, particularly where one party seeks fees or indemnity arising from litigation between the contracting parties.

## Conclusion

The Third Circuit treated the subcontract as creating a pay-if-paid condition that was time-limited by a six-month clause allowing the subcontractor to pursue payment despite continued owner nonpayment, and it permitted the surety to reduce bond payments by the subcontractor’s contractually assigned share of the contractor’s owner-litigation costs while rejecting any broader, non-explicit indemnity or fee-shifting.


Sloan & Co. v. Liberty Mut. Ins. Co., 653 F.3d 175 (3d Cir. 2011)