Federal District Court In West Virginia Holds Pay-If-Paid Clause No Defense To Miller Act Claim

U.S. ex. rel. Straightline Corp. v. American Casualty Corp.
2007 U.S. Dist. LEXIS 50688 (N.D. W.Va 2007)

The United States District Court for the Northern District of West Virginia held that a “pay-if-paid” clause was not a valid defense to a Miller Act claim. Straightline, involved a contract dispute between a general contractor’s surety (“surety”) and a subcontractor hired to work on the annex to the federal courthouse in Wheeling, West Virginia. The owner of the courthouse, the United States General Services Administration (“GSA”), entered into a construction agreement with a general contractor (“contractor”). Subsequently, contractor entered into a subcontract with subcontractor, which provided that subcontractor would furnish and install the interior architectural woodwork in the building for the sum of $511,520.00. Subcontractor claimed that during the course of the project, contractor directed it to perform additional work that was outside the scope of the parties’ original subcontract. The cost and value of the additional work was allegedly $233,958.46. Subcontractor claimed that the contractor still owed it $232,079.76.

Contractor claimed that subcontractor was not paid for the extra work because it was either rejected by the GSA as being non-conforming or as constituting extras for which subcontractor was not entitled to payment. Contractor also claimed that subcontractor did not complete its work on schedule, and that, pursuant to the terms of the subcontract, the contractor backcharged the cost of completing the project and assessed liquidated damages against subcontractor.

Pursuant to the Miller Act, 40 U.S.C. §§ 3131-3134, contractor obtained and delivered a payment bond to GSA. Subcontractor sought to recover the amount it was allegedly owed from that payment bond. Surety argued that it was entitled to summary judgment, because the subcontract contained a “pay-if-paid” provision, which stated that “[r]eceipt of payment from [GSA] to the contractor for [subcontractor’s] work is an absolute condition precedent to the [subcontractor’s] right to payment.” Because the contractor was not paid by the GSA for the work for which subcontractor was seeking payment, surety argued that it was entitled to summary judgment on subcontractor’s claims.

In support of its argument, surety cited a West Virginia Supreme Court of Appeals case, which held that “a pay-if-paid clause which prevents a subcontractor from proceeding against a contractor in the absence of the owner’s payment to the contractor, also prevents the subcontractor from proceeding against the contractor’s surety under a payment bond acquired by the contractor pursuant to W. Va. Code § 38-2-39 (2004).” Wellington Power Corp., 614 S.E.2d 680 (W.Va. 2005).

However, the Straightline court noted that Wellington involved a West Virginia statute, rather than the Miller Act and that the Miller Act must be construed according to federal law, as opposed to state law. Citing U.S. ex rel. T.M.S. Mech. Contractors, Inc. v. Millers Mut. Fire Ins. Co. of Tex., 942 F.2d 946, (5th Cir. 1991), the court denied contractor’s motion for summary judgment, holding that the Miller Act “conditions payment of the subcontractor not on payment by the GSA to the contractor, but rather on the passage of time from completion of the work or provision of materials.”

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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