Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law

Aarow Equipment v. Travelers- An Update

Seal of the United States Court of Appeals for...
Image via Wikipedia

Previously here at Musings, I discussed the application of pay if paid clauses and the Miller Act. The case that prompted the discussion was the Aarow Equipment & Services, Inc. v. Travelers Casualty and Surety Co. case in which the Eastern District of Virginia Federal Court determined that a “pay if paid” clause coupled with a proper termination could defeat a Miller Act bond claim. However, as I found out a couple of weeks ago at the VSB’s Construction Law and Public Contracts section meeting, the 4th Circuit Court of Appeals reversed and remanded this case in an unpublished opinion (Aarow Equipment & Services, Inc. v. Travelers Casualty and Surety Co.)

In it’s opinion, the 4th Circuit looked at some of the more “interesting” aspects of this case. One of these circumstances was that Syska (the general contractor) directed Aarow to construct sedimentary ponds and other water management measures around the project (the “pond work”), which both agreed was outside of the scope of the work defined in their subcontract. Syska asked that the government agree to a modification of the prime contract and asked Aarow to wait to submit its invoice for the pond work until after the government issued a modification to the prime contract and Syska issued a change order to the subcontract.

Several months later, no modification or change order had been issued, and Aarow submitted an invoice to Syska for the completed pond work. Syska instructed Aarow to list the pond work under a line item designated for certain finishing work on the project that had not yet been completed. The government denied the subsequent change order request (submitted by Syska), stating that the pond work was in the scope of the original contract and Syska withheld money owed for other aspects of the work to make up the difference for the previously billed pond work.

In looking at these circumstances, the 4th Circuit Court of Appeals determined that the “prevention doctrine” may apply to these circumstances. In other words, a reasonable jury could conclude that Syska was at least partially at fault for the government’s non-payment due to the the “unusual” billing procedures (i. e. including the pond work under certain finishing work) coupled with Syska’s failure to obtain the contract modification. Should the fact finder conclude that Syska was in fact at fault, Travelers could not rely on the pay if paid clause as a defense.

While I don’t know the final result of the remand, I commend Aarow’s construction attorneys for their creative arguments. Construction professionals in Virginia would do well to obtain the advice of a qualified attorney when looking at their contracts and seeking payment in unusual circumstances such as these.

As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.

Print Friendly, PDF & Email
Send to Kindle

10 Responses to Aarow Equipment v. Travelers- An Update

  1. Chris, thanks for sharing this update. “Pay If Paid” defenses by a surety are troublesome (what’s the reason for a payment bond if not to pay claimants who don’t get paid?), but it looks like the 4th Circuit avoided the issue altogether.

  2. Brown & Kerr, Incorporated v. St. Paul Fire and Marine Insurance Company, 940 F.Supp. 1245 (N.D.Ill.1996), held that a surety could not assert a ” pay when paid” clause as a defense to payment under a payment bond. The subcontractor sued under a payment bond for money due on work performed for the general contractor, which had not been paid by the owner. The court observed that the proposition that the inability to proceed against a general contractor because of a ” pay when paid” clause in a subcontract prevented recovery against a surety under a payment bond ran counter to the purpose of the payment bond— the assurance of payment to subcontractors. Moreover, the court noted, the bond issued by the surety did not condition payment to subcontractors on the owner paying the principal, nor did it incorporate the terms of the subcontract. The clear and unambiguous terms of the bond provided that if the principal promptly paid the subcontractor, any obligation by the surety was void; however, if the subcontractor did not receive payment within ninety days after finishing work, the subcontractor could sue on the bond. Because the subcontractor satisfactorily performed under the subcontract and had not received payment, the court found the surety liable to the subcontractor.

  3. Frank, as you note, the Brown & Kerr case involved a “pay when paid” clause, while the Aarow Equipment case involved a “pay IF paid” clause. There are courts that have held this is an important distinction, although I agree the better rule is for the surety to be liable to innocent unpaid subcontractors.

  4. Chris,
    It was indeed an interesting case. The rest of the story: The surety’s principal, Syska, sued the Aarow for default shortly after the remand (Syska was not a party to Aarow’s action). A motion to consolidate that case with Aarow v. Travelers was pending when the cases were settled and dismissed. Alas, the settlement is confidential.
    The kwirk of the first action was that Travelers was not relying on the pay-if-paid clause of the Syska/Aarow agreement. Rather, Syska justified its termination of Aarow on that basis, arguing Aarow did not rightfully stop work because of owner non-payment. Travelers argument was that the termination was justified under the subcontract terms; therefore, no payment was due Aarow under the subcontract’s termination-for-cause provision, sidestepping the pay-if-paid minefield (a minefield for sureties if not contractors in VA). The trial court agreed, and the 4th Cir. never reached that issue.

Leave a reply

CommentLuv badge