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Law and Public Contracts section meeting, the 4th Circuit Court of Appeals reversed and remanded this case in an unpublished opinion (Aarow Equipment & Services, Inc. v. Travelers Casualty and Surety Co.)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.
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