Pay When Paid Clauses: A different twist on use in defense

05/23/2011

Judge Trenga of the Eastern District of Virginia recently decided a new twist on the pay when paid defense in Virginia in U.S. ex rel. Aarow Equipment & Services v. Travelers Cas. & Sur. Co. of Amer., Civil Action No. 1:09-cv-00861 (March 16, 2010). The subcontractor in that case was making a Miller Act claim, and asserted that the surety could not defend on the basis of the subcontract’s pay when paid clause. The prime contractor withheld payments from Aarow that had been withheld by the government.

Aarow quit work because of that withholding, and the prime contractor terminated Aarow. Aarow then sued the surety under the Miller Act for the unpaid amounts, arguing that the surety was liable regardless of the government’s withholdings because the surety could not avail itself of the pay when paid clause. Judge Trenga disagreed, noting that the issue for that case was not one of timing, but of amount; which must be resolved from looking at the subcontract. Because the prime contractor was not liable for the amount claimed (Aarow could not justify its work stoppage because the prime contractor was not liable at the time for the monies Aarow was claiming due), nor was the surety.

Stated otherwise in that case, the pay when paid clause of itself did not preclude Aarow’s payment bond claim against the surety, but the pay when paid clause was properly considered in determining whether Aarow was properly default terminated, and thus not owed anything. This case shows pay when paid clauses still may have relevance to federally bonded projects, and subcontractors assume significant risk if they presume otherwise.

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