Travelers Cas. & Sur. Co. of Am. v. Sweet's Contracting, Inc.

• Decision Date: 20 November 2014
• Docket Number: No. CV–13–779.,CV–13–779.
• Parties: TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA; BCC Construction, LLC d/b/a Boyd Corley Construction, LLC, Appellants v. SWEET'S CONTRACTING, INC., Appellee.
• Court: Arkansas Supreme Court

2014 Ark. 484

450 S.W.3d 229

TRAVELERS CASUALTY & SURETY COMPANY OF AMERICA; BCC Construction, LLC d/b/a Boyd Corley Construction, LLC, Appellants

v.SWEET'S CONTRACTING, INC., Appellee.

No. CV–13–779.

Supreme Court of Arkansas.

Nov. 20, 2014.

Newland & Associates, PLLC, by: Joel Hoover and Ashlea Brown, Little Rock, for appellants.

Blair Arnold, Batesville, and Robert S. Tschiemer, Mayflower, for appellee.

Opinion

JIM HANNAH, Chief Justice.

The issues in this appeal involve a pay-if-paid clause in a construction subcontract and the scope of a surety's obligations under a lien-release bond. Appellant, BCC Construction, LLC, d/b/a Boyd Corley Construction, LLC (“BCC”), and appellee, Sweet's Contracting, Inc. (“SCI”), entered into a subcontract on August 7, 2008. BCC, as the general contractor, hired SCI to perform excavation work on a Walgreens project in Batesville, Arkansas. The subcontract contained what is commonly known in the construction industry as a pay-if-paid clause. The pay-if-paid clause in this case specified that BCC's receipt of payment from the project owner for work performed by SCI was an absolute condition precedent to BCC's obligation to pay SCI for that work. After a dispute arose regarding how much compensation SCI was owed under the subcontract, SCI filed a materialmen's lien against the Walgreens project, and BCC filed a bond in contest of the lien. Appellant, Travelers Casualty & Surety Company (“Travelers”), issued a lien-release bond as surety on behalf of its principal, BCC.

SCI filed suit against BCC and Travelers, seeking recovery against BCC for breach of contract and against both BCC and Travelers under the lien-release bond. The case proceeded to a jury trial in which SCI sought $70,184.38 in damages. At the close of SCI's case, both BCC and Travelers argued that they were entitled to a directed verdict because SCI failed to prove that it had complied with the terms of the subcontract, that SCI's evidence of damages was speculative, and that SCI's claim for the work it performed for another subcontractor, RAW, LLC, was barred by the statute of frauds. They also argued that they were entitled to a directed verdict pursuant to the pay-if-paid clause contained in the subcontract between BCC and SCI because SCI failed to present any evidence showing that the owner had paid BCC for the work SCI alleged it had performed.¹ In support of their argument, they cited Brown v. Maryland Casualty Co., 246 Ark. 1074, 442 S.W.2d 187 (1969), in which this court held that a conditional-payment clause in a contract created a condition precedent to payment, explaining that “ ‘a provision for the payment of an obligation upon the happening of an event does not become absolute until the happening of the event.’ ” Id. at 1080, 442 S.W.2d at 191 (quoting Mascioni v. I.B. Miller, Inc., 261 N.Y. 1, 184 N.E. 473 (1933) ).

Based on our decision in Brown, the circuit court directed a verdict in favor of BCC, ruling that the pay-if-paid clause in the subcontract barred recovery from BCC because there was no evidence that BCC had been paid by the owner for the work SCI alleged it had performed.² Accordingly, the circuit court dismissed the claims against BCC with prejudice. The circuit court declined, however, to direct a verdict in favor of Travelers, and the case against Travelers on the lien-release bond was submitted to the jury. The jury reached a verdict in favor of SCI and awarded damages against Travelers in the amount of $25,478.20.

After trial, Travelers filed a motion for judgment notwithstanding the verdict or, in the alternative, motion for new trial on the same grounds as its motion for a directed verdict. SCI filed a motion to alter or amend ruling, requesting that the circuit court reverse its decision to direct a verdict in favor of BCC pursuant to the pay-if-paid clause. The circuit court denied all the posttrial motions.

BCC and SCI also filed motions for attorney's fees. The circuit court denied BCC's motion, rejecting BCC's contention that it was entitled to fees as the prevailing party in the suit between BCC and SCI. The circuit court granted SCI's motion in its suit against Travelers, and awarded SCI $48,197.45. Travelers and BCC appeal, and SCI cross-appeals.³ On appeal, Travelers contends that the circuit court erred in denying Travelers' motion for directed verdict, motion for judgment notwithstanding the verdict, and motion for a new trial because (1) a surety's liability on a lien-release bond cannot exceed the liability of its principal, (2) there was not substantial evidence for the jury to find that SCI complied with its subcontract with BCC, (3) there was not substantial evidence of SCI's damages to support the verdict, and (4) SCI did not present evidence of a writing or consideration to support its claim that BCC agreed to be responsible for RAW, LLC's debt to SCI. Travelers also contends that the circuit court abused its discretion in granting SCI's motion for attorney's fees because Travelers' liability cannot exceed the liability of BCC and because SCI was not entitled to attorney's fees under the materialmen's lien statute. BCC contends that the circuit court abused its discretion in denying its motion for attorney's fees because BCC was the prevailing party in its suit against SCI.

On cross-appeal, SCI contends that the circuit court erred in granting a directed verdict for BCC on the pay-if-paid clause. SCI also contends that the circuit court erred in ruling that the subcontract was ambiguous on the issue of fill and in allowing parol evidence. Finally, SCI contends that this court should grant SCI attorney's fees and costs for both defending the action below and for those incurred in this appeal.

We hold that the circuit court erred in denying Travelers' motion for directed verdict and that the circuit court did not err in granting BCC's motion for directed verdict. We reverse the award of attorney's fees to SCI, and we do not address BCC's argument concerning attorney's fees. Accordingly, we affirm in part and reverse in part on direct appeal, and we affirm in part and reverse in part on cross-appeal.

Many of the issues raised by the parties are intertwined. For clarity and ease of discussion, we first address SCI's point on cross-appeal that the circuit court erred in granting a directed verdict for BCC on the pay-if-paid clause.

I. Grant of BCC's Directed–Verdict Motion

The underlying dispute between BCC and SCI arose pursuant to the pay-if-paid clause in the subcontract.

A typical “pay-if-paid” clause might read: “Contractor's receipt of payment from the owner is a condition precedent to contractor's obligation to make payment to the subcontractor; the subcontractor expressly assumes the risk of the owner's nonpayment and the subcontract price includes this risk.” Under a “pay-if-paid” provision in a construction contract, receipt of payment by the contractor from the owner is an express condition precedent to the contractor's obligation to pay the subcontractor. A “pay-if-paid” provision in a construction subcontract is meant to shift the risk of the owner's nonpayment under the subcontract from the contractor to the subcontractor.

Robert F. Carney & Adam Cizek, Payment Provisions in Construction Contracts and Construction Fund Statutes: A Fifty State Survey, 24 Construction Law, 5, 5–6 (2004). The subcontract between BCC and SCI contained the following provisions:

Subcontractor will receive payment from the contractor once the contractor has been paid by the owner. No monies are owed to the subcontractor until BCC has received payment from the owner for the subcontractor's work.

The parties hereto agree and acknowledge, that as an absolute condition precedent to Progress Payments to the SUBCONTRACTOR [SCI], the CONTRACTOR [BCC] must receive corresponding payment from the OWNER for SUBCONTRACTOR'S [SCI's] Work. In the event of nonpayment by OWNER, SUBCONTRACTOR'S [SCI's] remedies are against the OWNER.

[N]o payment from CONTRACTOR [BCC] to SUBCONTRACTOR [SCI] shall be due unless the CONTRACTOR [BCC] receives payment from OWNER for the Work of the SUBCONTRACTOR [SCI]. In the event of nonpayment by OWNER, SUBCONTRACTOR'S [SCI's] remedies are against the OWNER.

The circuit court directed a verdict in favor of BCC, ruling that the pay-if-paid clause⁴ in the subcontract barred recovery from BCC because there was no evidence that BCC had been paid by the owner for the work SCI alleged it had performed. SCI contends that the circuit court should not have considered the affirmative defense of the pay-if-paid clause because BCC failed to plead or argue it under Arkansas Rules of Civil Procedure 8(c)and 9(c) (2014).⁵ Generally, in deciding whether the grant of a motion for directed verdict was appropriate, appellate courts review whether there was substantial evidence to support the circuit court's decision. E.g., Switzer v. Shelter Mut. Ins. Co., 362 Ark. 419, 432, 208 S.W.3d 792, 800 (2005). This particular point on cross-appeal, however, requires us to construe a court rule; therefore, our appellate review is de novo. E.g., Kesai v. Almand, 2011 Ark. 207, at 3, 382 S.W.3d 669, 671.

We hold that the circuit court correctly ruled that the pay-if-paid clause was not an affirmative defense that must be specifically pled under Rule 8(c).⁶ “The basic rule as developed under the common law is that any issue raised by the plaintiff in the complaint may be countered by a general denial in the answer, but any issue raised in the answer for the first time constitutes a new matter that must be specifically set out by the defendant as an affirmative defense.”Poff v. Brown, 374 Ark. 453, 455, 288 S.W.3d 620, 622 (2008). An affirmative defense must be pled when a defendant admits the material allegations of the complaint but seeks to avoid the effect of such admittance by an affirmative allegation of new matter “avoiding plaintiff's case.” Id., 288 S.W.3d at 622. In this case, SCI asserted in its...