Moore Bros. Co. v. Brown & Root, Inc.

207 F.3d 717 (4th Cir. 2000)

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Nature of the Case

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Facts

The Toll Road Investors Partnership ('TRIP') awarded the general construction contract to Brown (D). D was also an equity partner in TRIP. D entered into subcontracts with Moore Brothers Co., Inc.(P) and The Lane Construction Corp., (P), to build parts of the road. Highlands Insurance Co. (D) issued a contract payment bond as surety. The subcontracts between Brown (D) and Ps contained a general 'pay when paid' clause. The prime construction contract contains provisions for additional payment if TRIP orders substantial design changes that constitute a 'change in scope' of the project. TRIP and Brown (D) reached a side agreement concerning additional 'change in scope' illustrations and then concealed that agreement from the lenders by placing it in a side letter while leaving it out of the prime contract. Brown (D) did not tell the subcontractors that the design change illustrations and the potential need for additional 'change in scope' work was hidden from them, and therefore not adequately funded by, the lenders. A thicker pavement sub-base was needed, and Brown (D) ordered the subcontractors to proceed with the additional work. Under the terms of the 'pay when paid' condition precedent in the subcontract, Brown (D) knew that if payment for the additional work were not forthcoming from TRIP, it was the subcontractors who would assume the bulk of the loss. After the additional work was completed, Brown (D) and Ps sought arbitration of their claim for additional payment from TRIP. The arbitrator concluded that the additional work did constitute a 'change in scope' and therefore ordered TRIP to make payments beyond the base contract price. Financing was never arranged to cover payment for additional 'change in scope' work. TRIP, therefore, did not have the funds to pay. Brown (D) claims that it is not obligated to pay Ps for the additional work because of the 'pay when paid' clause contained in the subcontracts. The final version of the bonus provision in the primary contract was left vague. For Ps, a change order was added that read: Within 30 days of receipt by General Contractor, Subcontractor will receive 31.5% (or equivalent of $ 13,500.00 per day of earned bonus whichever is greater) of all Incentive Bonus monies paid to General Contractor by Owner for early completion of the General Contractor's Work Scope. Ps rejected Brown's (D) second contractor bonus proposal, which was designed to reduce the risk of substantial delay or nonpayment by TRIP because information and documents material to these risks had been either concealed or withheld from Ps by Brown (D). Brown (D) has not been paid the early completion bonus, nor has it, in turn, paid a portion of that bonus to Ps. Ps sued Brown (D) and the surety Highlands (D). The court granted Ps' motion for summary judgment against Highlands (D) as it could not assert the 'pay when paid' defense available to Brown (D). Highlands (D) did not expressly incorporate the 'pay when paid' provision into its bond contract, and because the very purpose of a surety bond is to provide payment when the principal is unable to pay, the court held that Highlands (D) was liable to Ps and must pay for the additional work performed. Ps got judgments against Brown (D) for the additional work and early completion bonuses. Both Ds appealed. Ps cross-appealed the denial of prejudgment interest on the early completion bonus and Moore's additional 'change in scope' work.