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"Pay-When-Paid" Clause Not Fatal to Subcontractor's Claim

Summary judgment denying a subcontractor's Miller Act claim against a payment bond surety was vacated and remanded by the Court of Appeals for the Fourth Circuit in an unpublished opinion, because there were sufficient facts to support a jury verdict that would preclude the surety from relying on the subcontract's "pay-when-paid" clause to excuse the contractor's nonpayment. The dispute arose when the government withheld payment to adjust for what it considered unauthorized work under a contract to construct a training facility, and the contractor in turn withheld payment of the subcontractor's outstanding invoices. In denying the subcontractor's claim under the unpaid invoices, the district court concluded the contractor's failure to pay the subcontractor was not a breach that excused the subcontractor's work stoppage, because the subcontract included an enforceable "pay-when-paid" clause that shifted the risk of the government's nonpayment to the subcontractor (54 CCF 79,286).

Prevention Doctrine

However, the district court should have considered the subcontractor's "prevention doctrine" argument, which asserted the contractor's actions materially contributed to the government's failure to pay under the prime contract and prevented the contractor from relying on the pay-when-paid clause as a defense to its failure to pay the subcontractor. There was evidence the contractor directed the subcontractor to perform work without a change order or modification to the prime contract and then employed improper billing procedures to obscure the expanded scope of work under the subcontract. Based on this evidence, a jury could reasonably conclude the contractor materially contributed to the government's decision to withhold payments under the prime contract. (U.S. fuo Aarow Equipment & Services, Inc. v. Travelers Casualty & Surety Co. of America, CA-4, 55 CCF 79,547)




(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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