Moore Brothers Co. v. Brown & Root

Decision Date01 December 1999
Docket NumberNo. 99-1234,No. 99-1232,No. 99-1237,No. 99-1236,No. 99-1233,CA-96-1810-A,CA-96-1809-,No. 99-1235,99-1232,99-1233,99-1234,99-1235,99-1236,99-1237
Parties(4th Cir. 2000) MOORE BROTHERS COMPANY, Plaintiff-Appellee, v. BROWN & ROOT, INCORPORATED, Defendant-Appellant, and HIGHLANDS INSURANCE COMPANY, Defendant, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P., Third Party Defendant. MOORE BROTHERS COMPANY, Plaintiff-Appellee, v. HIGHLANDS INSURANCE COMPANY, Defendant-Appellant, and BROWN & ROOT, INCORPORATED, Defendant, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P., Third Party Defendant. MOORE BROTHERS COMPANY, Plaintiff-Appellant, v. BROWN & ROOT, INCORPORATED; HIGHLANDS INSURANCE COMPANY, Defendants-Appellees, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P., Third Party Defendant. LANE CONSTRUCTION CORPORATION, Plaintiff-Appellee, v. BROWN & ROOT, INCORPORATED, Defendant-Appellant, and HIGHLANDS INSURANCE COMPANY, Defendant, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P.; STATE STREET BANK & TRUST COMPANYOF CONNECTICUT, NA; BANQUE NATIONALE DE PARIS, New York Branch, Third Party Defendants. LANE CONSTRUCTION CORPORATION, Plaintiff-Appellee, v. HIGHLANDS INSURANCE COMPANY, Defendant-Appellant, and BROWN & ROOT, INCORPORATED, Defendant, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P.; STATE STREET BANK & TRUST COMPANYOF CONNECTICUT, NA; BANQUE NATIONALE DE PARIS, New York Branch, Third Party Defendants. LANE CONSTRUCTION CORPORATION, Plaintiff-Appellant, v. BROWN & ROOT, INCORPORATED; HIGHLANDS INSURANCE COMPANY, Defendants-Appellees, and TOLL ROAD INVESTORS PARTNERSHIP II, L.P.; STATE STREET BANK & TRUST COMPANYOF CONNECTICUT, NA; BANQUE NATIONALE DE PARIS, New York Branch, Third Party Defendants. (). . Argued:
CourtU.S. Court of Appeals — Fourth Circuit

Appeals from the United States District Court for the Eastern District of Virginia, at Alexandria.

T. S. Ellis III, District Judge.

[Copyrighted Material Omitted] COUNSEL ARGUED: Daniel J. Kraftson, SHUMATE, KRAFTSON & SPARROW, P.C., Reston, Virginia, for Appellants. Robert Emmett Scully, Jr., REES, BROOME & DIAZ, P.C., Vienna, Virginia, for Appellees. ON BRIEF: Charles L. Shumate, SHUMATE, KRAFTSON & SPARROW, P.C., Reston, Virginia; Thomas M. Brownell, HOLLAND & KNIGHT, L.L.P., Falls Church, Virginia, for Appellants. Raymond J. Diaz, Joseph F. Jackson, REES, BROOME & DIAZ, P.C., Vienna, Virginia, for Appellees.

Before MURNAGHAN and WILKINS, Circuit Judges, and HAMILTON, Senior Circuit Judge.

Affirmed in part, reversed in part, and remanded by published opinion. Judge Murnaghan wrote the opinion, in which Senior Judge Hamilton joined. Judge Wilkins wrote an opinion concurring in part and dissenting in part.

OPINION

MURNAGHAN, Circuit Judge:

This case arises out of the construction of the Dulles Toll Road Extension, a privately owned and operated toll road connecting Dulles Airport and Leesburg, Virginia. Two issues are raised on appeal: first, whether a surety may rely on a "pay when paid" clause in a subcontract as a defense to liability for payment on a bond; and second, whether a general contractor may rely on the non-occurrence of a valid "pay when paid" condition precedent in the subcontract as a defense to liability where the general contractor was partly responsible for the failure of the condition precedent. Because we answer both questions in the negative, we affirm the orders of the district court in part, reverse in part, and remand for further proceedings.

I.

The Dulles Toll Road Extension ("DTRE") is a fourteen mile long private toll road between Dulles Airport and Leesburg, Virginia. It was built and is operated by the Toll Road Investors Partnership II ("TRIP"). In 1993, TRIP (the "Owners") awarded the general construction contract to Brown & Root, Inc. In addition to its role as general contractor, Brown & Root was also an equity partner in TRIP.

Brown & Root in turn entered into subcontracts with Moore Brothers Co., Inc. and The Lane Construction Corp., the plaintiffs, to build parts of the road. Highlands Insurance Co. issued a contract payment bond as surety.

The subcontracts between Brown & Root and plaintiffs contain a general "pay when paid" clause:

Notwithstanding any other provision hereof, payment by Owner to General Contractor is a condition precedent to any obligation of General Contractor to make payment hereunder; General Contractor shall have no obligation to make payment to Subcontractor for any portion of the Sublet Work for which General Contractor has not received payment from the Owner.

The contract payment bond issued by Highlands states in part:

The above named Principal [Brown & Root] and Surety [Highlands] hereby jointly and severally agree with the Obligees that every claimant herein defined who has not been paid in full before the expiration of a period of 90 days after the date on which the last of such claimant's work or labor was done or performed, or materials were furnished by such claimant, may sue on the bond for the use of such claimant, prosecute the suit to final judgment for such sum or sums as may be justly due claimant, and have execution thereon.

The prime construction contract contains provisions for additional payment if the Owners order substantial design changes that constitute a "change in scope" of the project, including a provision for binding arbitration. The early drafts of the contract also contained several specific design change illustrations to clarify the type of situation in which Brown & Root would be entitled to additional payment from the Owners.

Changing the thickness of the pavement sub-base material was included in the examples of design changes that would warrant additional payment. Changing the thickness of the pavement sub-base is a common and costly design change in highway construction, and throughout the development of the DTRE project there was some uncertainty about the adequacy of the initial pavement design and the thickness of the sub-base material that would be required by the Virginia Department of Transportation. As early as 1991 the Brown & Root project manager knew that the initial pavement design for the DTRE was on the "marginal end."

The lenders who were financing the highway project, however, wanted to contain the costs of the project and insisted on a "high degree of certainty" in assessing the total project costs. They were hesitant to agree to a contract that contained specific illustrations of design changes that would warrant additional payment. The Owners and Brown & Root, therefore, agreed in July of 1993 to delete the specific illustrations of design changes from the prime contract to placate the lenders. At the same time, the Owners and Brown & Root assured the lenders that no substantial changes in the work, as defined in the base contract, were anticipated.

After deleting the design change illustrations from the prime contract, the Owners and Brown & Root incorporated the illustrations into a "Policy and Procedures" letter, the existence of which was not revealed to the lenders. In essence, the Owners and Brown & Root 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 & Root did not tell the subcontractors that the design change illustrations and the potential need for additional"change in scope" work were hidden from, and therefore not adequately funded by, the lenders.

When the need for a thicker pavement sub-base became apparent, Brown & Root ordered the subcontractors to proceed with the additional work. Under the terms of the "pay when paid" condition precedent in the subcontract, Brown & Root 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, both Brown & Root and the subcontractors sought arbitration of their claim for additional payment from the Owners. The arbitrator concluded that the additional work did constitute a "change in scope" and therefore ordered the Owners to make payments beyond the base contract price. The arbitrator ordered TRIP to pay Brown & Root, who was subsequently required to pay the subcontractors.

Because the lenders were not made aware of the significant likelihood that additional work would be necessary, financing was never arranged to cover payment for additional "change in scope" work. TRIP, therefore, did not have the funds to pay Brown & Root the amount of the arbitration award. Brown & Root, as a result, claims that it is not obligated to pay the subcontractors for the additional work because of the "pay when paid" clause contained in the subcontracts.

The DTRE project was completed ahead of schedule in September of 1995. The matter of a bonus for early completion of the project was the subject of extensive negotiations between Brown & Root, TRIP, and the lenders before the prime construction contract was signed and the financing agreements were reached. The Note Agreement, which governed the financing of the project, contained restrictions on the contractor bonus. In essence, payment of the bonus was subordinated to virtually all other project debts, and could not be made until the outstanding balance of the revolving credit loan was zero, which was anticipated to take five to seven years. Brown & Root knew, therefore, that payment of the early completion bonus would be delayed for at least five to seven years. They did not, however, reveal that information to the subcontractors during the negotiations over distribution of the bonus.

The final version of the bonus provision in the primary contract was left somewhat vague. In the subcontracts, however, a change order was added that read:

Within 30 days of receipt by General Contractor, Subcontractor will receive 31.5% (or equivalent...

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