## Facts

- A private partnership owned and operated a 14-mile toll road project in Virginia and awarded the prime contract to Brown & Root, which also held an equity interest in the owner entity.
- Brown & Root subcontracted portions of the work to Moore Brothers Company, Inc. and The Lane Construction Corporation.
- The subcontracts included a “pay-when-paid” condition precedent stating the owner’s payment to Brown & Root was a prerequisite to Brown & Root’s obligation to pay the subcontractors.
- Highlands Insurance Company issued a payment bond under which Brown & Root and Highlands agreed that unpaid claimants could sue on the bond after 90 days for amounts “justly due.”
- The prime contract provided for additional compensation for substantial design changes constituting a “change in scope,” with arbitration as a dispute mechanism.
- To satisfy lender concerns about overruns, the owner and Brown & Root used a side letter concerning change-in-scope illustrations and concealed it and related funding risks from lenders; Brown & Root did not disclose these matters to the subcontractors.
- Brown & Root directed subcontractors to perform additional work (including a thicker pavement sub-base) later determined in arbitration to be a compensable change in scope, but the owner lacked financing to pay the award.
- Brown & Root refused to pay the subcontractors for the additional work, invoking the pay-when-paid clause; the subcontractors sued Brown & Root and Highlands in federal district court.
- Disputes also arose over an early-completion bonus provision that tied subcontractor payment to incentive bonus monies actually paid by the owner to Brown & Root.

## Issues

1. Whether a surety on a payment bond may assert a subcontract’s pay-when-paid clause to defeat or delay bond liability.
2. Whether a general contractor may rely on a pay-when-paid condition precedent when the contractor’s conduct materially contributed to the owner’s nonpayment.
3. How the contractual language governing an early-completion incentive should be construed, including whether nonpayment by the owner defeats subcontractor bonus claims.

## Decision

- The court held the surety could not rely on the subcontract pay-when-paid clause as a defense to the payment bond because the bond did not expressly incorporate that condition and the bond’s terms broadly promised payment of sums “justly due.”
- The court held Brown & Root could not invoke the pay-when-paid condition precedent for the change-in-scope work because its conduct contributed to the failure of the condition, triggering the prevention doctrine.
- The court affirmed in part, reversed in part, and remanded, including for further proceedings on aspects of the early-completion bonus dispute.

## Legal Principles

- A payment bond is construed by its own language and remedial purpose to assure payment to claimants when the principal fails to pay.
- A surety generally cannot import a subcontract’s pay-when-paid condition into bond liability absent clear bond language incorporating that condition.
- Under the prevention doctrine, a party may not benefit from a condition precedent when its own actions materially hindered or caused the condition’s non-occurrence.
- A pay-when-paid clause may allocate risk between contractor and subcontractor, but it cannot be used as a shield where the contractor’s conduct contributed to the owner’s inability to pay.
- Bonus or incentive provisions tied to amounts “paid” by the owner require close contractual construction; errors in applying payment-conditional language and prevention principles may warrant remand.

## Conclusion

The Fourth Circuit ruled that the surety remained liable under the payment bond despite the subcontract pay-when-paid clause, and that the general contractor could not avoid paying for change-in-scope work where it helped bring about the owner’s nonpayment; the court otherwise affirmed in part and remanded, including for further analysis of the early-completion bonus claims.


Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000)