Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes

Miller Act Pay When PaidThe Federal Miller Act is a great tool that subcontractors and suppliers on Federal projects can use for collection of wrongfully withheld amounts due. However, as a recent federal case from the Eastern District of Virginia points out, the construction contract’s terms affect when a subcontractor or supplier can use this great collection tool and how much it can recover.

In Aarow v Travelers the Court looked at the interaction between a typical termination clause, a “pay when paid” clause, and the Miller Act. The key facts are these. The general contractor on the project at issue, Syska, did not get paid some disputed amounts by the owner and subsequently did not pay Aarow, the plaintiff and a subcontractor on the project. Aarow then refused to continue work and was terminated by Syska who then took over the completion of the work. Aarow sued, seeking damages for the value of its work prior to the termination. Travellers, the surety defended stating that, if Aarow was properly terminated for cause by Syska, then Aarow was not entitled to payment under the contract until such time as the work was completed and accepted by the owner. The termination clauses are set out in the linked opinion.

The Court agreed with Travelers, stating that the pay when paid clause created a situation whereby Aarow could not stop work merely because of a non-payment by Syska attributed to non-payment by the owner. The Court was clear in stating that the Miller Act trumps “pay when paid” in instances where the only cause for non-payment is non-payment by an owner. The Court then reasoned that it is the interaction between the termination and “pay when paid” provisions, and not the “pay when paid” clause itself, that exonerated Travelers because it created the default by Aarow due to its refusal to continue work. In short, Aarow was properly terminated for cause because it left the job without justification and therefore Travelers was not liable.

What can we learn from this? 1. A “pay when paid” clause, on its own, does not create a defense to a Miller Act claim; 2. Read every line of a construction contract before you, as a subcontractor, leave a job site and refuse to come back; and 3. The Miller Act does not completely absolve parties to a contract from the terms of that contract.

In sum, the careful reading of your construction documents and the advice of a construction lawyer before making a big decision like leaving a job site can go a long way toward a successful collection action under the Miller Act.

Update: The 4th Circuit reversed this ruling and gave some more insight into the interaction between the “pay if paid” and the “prevention doctrine.” I “muse” about it in my November 28, 2011 post.

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

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13 Responses to Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes
  1. Surety Bond Blog
    April 5, 2010 | 11:04 AM

    Excellent post Christopher!

    It is somewhat ironic, as many sureties and the agencies that represent require payment of bond premium prior to issuance. In a recent surety group discussion on the LinkedIn network, most agents agreed that unless the contractor is a long time client that premium is always collected up front.

  2. DouglasReiser (Douglas Reiser)
    April 5, 2010 | 1:02 PM

    Twitter Comment


    (via @constructionlaw) Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes [link to post]

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  3. Timothy R. Hughes
    Twitter:
    April 5, 2010 | 1:43 PM

    Thanks for sharing, this is an interesting case. The fact that it takes 13 pages to get a reference to the Moore Brothers case says this is less about “pay when/if paid” and more about the risk of walking off the job. In the end, this is yet another case standing for the proposition that a sub walking off the job, even for good reason, had better be sure they are right (and even then, they usually are not).
    .-= Timothy R. Hughes´s last blog post ..Do You Really Want A Construction Case?? =-.

  4. Christopher G. Hill
    Twitter:
    April 5, 2010 | 3:31 PM

    Thanks for the comment Tim! I think you’re right. The pay whn paid only made the walk off by the sub “cause” for the GC’s actions. Walking for non-payment only works if you are entitled to payment as a sub.

  5. Scott Wolfe
    Twitter:
    April 5, 2010 | 4:27 PM

    Interesting case. While this really accentuates the importance of getting counsel to help on a dispute, it also makes me think that sometimes that’s not enough, and sometimes you’re just on the wrong side of the law.

    Cool case, and good review.
    .-= Scott Wolfe´s last blog post ..CPSC Stiff Recommendations Positive Development for Homeowner Claims =-.

  6. scottwolfejr (Scott Wolfe Jr)
    April 5, 2010 | 7:04 PM

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    RT @constructionlaw: New Musings: Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes [link to post]

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  7. Christopher G. Hill
    Twitter:
    April 5, 2010 | 8:46 PM

    Thanks Scott

  8. hpandpsafety (HP&P Safety, Inc.)
    April 6, 2010 | 3:02 PM

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    Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes [link to post]

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  9. JW_Surety_Bonds (JW Surety Bonds)
    April 6, 2010 | 4:04 PM

    Twitter Comment


    RT @constructionlaw Miller Act Bond Claims Subject to “Pay If Paid”. . . Sometimes [link to post]

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  10. […] On numerous occasions, I have discussed the need to be careful with so called “pay if paid” clauses in construction contracts. While such clauses are enforceable in Virginia (when phrased correctly), there are exceptions and limitations (for instance in the Miller Act context). […]

  11. […] 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 […]

  12. Aarow Equipment v. Travelers- An Update
    November 28, 2011 | 4:03 PM

    […] 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 […]

  13. Ryan Tash
    September 17, 2014 | 2:55 PM

    Excellent article and informative for any contractor doing business in the public works arena.

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About Musings

I am a construction lawyer in Richmond, Virginia, a LEED AP, and have been nominated by my peers to Virginia's Legal Elite in Construction Law on multiple occasions. I provide advice and assistance with mechanic's liens, contract review and consulting, occupational safety issues (VOSH and OSHA), and risk management for construction professionals.

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