## Facts

- A general contractor contracted with an owner to build part of a horse racing facility in Kentucky.
- A plumbing subcontractor entered a written subcontract with the general contractor for $115,000.
- The subcontract included a “pay-when-paid” clause stating that no part of the subcontract price would be due until five days after the owner paid the contractor, with additional retainage provisions tied to project completion and satisfaction of the owner.
- The subcontractor performed additional work through change orders and supplemental arrangements, increasing the total value of labor and materials furnished to $227,652.17.
- The subcontractor completed its work by about August 1, 1959, and the owner accepted the project on August 28, 1959.
- The contractor paid $119,133.06 but withheld an asserted balance of $108,519.11, contending it had not been fully paid by the owner and therefore owed nothing further under the pay-when-paid clause.
- The subcontractor sued the contractor and the contractor’s surety on an owner’s protective bond to recover the unpaid balance plus interest.
- The district court, on stipulated facts and summary judgment motions, entered judgment for the subcontractor for the unpaid balance plus interest.

## Issues

1. Whether the subcontract’s pay-when-paid clause applied only to the original subcontract amount or also to later change orders and additional work.
2. Whether the pay-when-paid clause created a condition precedent (eliminating the contractor’s duty to pay absent owner payment) or merely postponed the time for payment.

## Decision

- The Sixth Circuit affirmed summary judgment for the subcontractor.
- The court held the additional work was part of the original subcontract and therefore subject to the pay-when-paid language.
- The court construed the pay-when-paid clause as a timing provision postponing payment for a reasonable period, not as a condition precedent shifting the risk of owner nonpayment to the subcontractor.
- Because a reasonable time had passed after completion and acceptance without full payment to the subcontractor, the contractor’s duty to pay was enforceable notwithstanding the owner’s nonpayment.
- The surety’s liability followed the contractor’s liability, supporting judgment against both for the amount due plus interest.

## Legal Principles

- Contract terms tying payment to a future event may be enforceable, but whether they create a condition precedent or only defer payment is a question of contract interpretation.
- Pay-when-paid language is ordinarily construed as postponing the time of payment, not as making payment strictly contingent on owner payment, unless the contract clearly and unequivocally allocates owner insolvency risk to the subcontractor.
- When a pay-when-paid clause is treated as a deferral term, the contractor must pay the subcontractor within a reasonable time after completion, even if the owner fails to pay.
- Change orders and supplemental work may be treated as part of the original subcontract when the parties’ documents and conduct show they are part of the same contractual undertaking.
- A surety’s obligation on a bond generally tracks the principal’s enforceable obligation to the obligee for the covered debt.

## Conclusion

The court held that the subcontract’s pay-when-paid clause governed both the original and added work but functioned only to delay payment for a reasonable time; it did not condition the subcontractor’s right to payment on the owner’s payment, so the contractor and its surety remained liable for the unpaid balance plus interest.


Thos. J. Dyer Co. v. Bishop Int'l Eng'g Co., 303 F.2d 655 (6th Cir. 1962)