PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
MOORE BROTHERS COMPANY,
Plaintiff-Appellee,
v.
BROWN & ROOT, INCORPORATED,
Defendant-Appellant,
and
No. 99-1232
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
No. 99-1233
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,
No. 99-1234
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,
No. 99-1235
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.
2
LANE CONSTRUCTION CORPORATION,
Plaintiff-Appellee,
v.
HIGHLANDS INSURANCE COMPANY,
Defendant-Appellant,
and
BROWN & ROOT, INCORPORATED,
No. 99-1236
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,
No. 99-1237
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.
3
Appeals from the United States District Court
for the Eastern District of Virginia, at Alexandria.
T. S. Ellis III, District Judge.
(CA-96-1809-A, CA-96-1810-A)
Argued: December 1, 1999
Decided: March 30, 2000
Before MURNAGHAN and WILKINS, Circuit Judges,
and HAMILTON, Senior Circuit Judge.
_________________________________________________________________
Affirmed in part, reversed in part, and remanded by published opin-
ion. Judge Murnaghan wrote the opinion, in which Senior Judge
Hamilton joined. Judge Wilkins wrote an opinion concurring in part
and dissenting in part.
_________________________________________________________________
COUNSEL
ARGUED: Daniel J. Kraftson, SHUMATE, KRAFTSON & SPAR-
ROW, 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, HOL-
LAND & KNIGHT, L.L.P., Falls Church, Virginia, for Appellants.
Raymond J. Diaz, Joseph F. Jackson, REES, BROOME & DIAZ,
P.C., Vienna, Virginia, for Appellees.
_________________________________________________________________
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,
4
whether a surety may rely on a "pay when paid" clause in a subcon-
tract 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 responsi-
ble 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 con-
struction contract to Brown & Root, Inc. In addition to its role as gen-
eral contractor, Brown & Root was also an equity partner in TRIP.
Brown & Root in turn entered into subcontracts with Moore Broth-
ers 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 hereun-
der; 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 pay-
ment 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
5
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 consti-
tute a "change in scope" of the project, including a provision for bind-
ing 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 addi-
tional 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 Vir-
ginia 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 pla-
cate 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 con-
tract, the Owners and Brown & Root incorporated the illustrations
6
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 addi-
tional work. Under the terms of the "pay when paid" condition prece-
dent in the subcontract, Brown & Root knew that if payment for the
additional work were not forthcoming from TRIP, it was the subcon-
tractors 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 pay-
ment 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 arbi-
trator ordered TRIP to pay Brown & Root, who was subsequently
required to pay the subcontractors.
Because the lenders were not made aware of the significant likeli-
hood 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 subcon-
tracts.
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
7
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, there-
fore, 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 distri-
bution 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, Subcon-
tractor will receive 31.5% (or equivalent of $13,500.00 per
day of earned bonus whichever is greater) of all Incentive
Bonus monies paid to General Contractor by Owner for
early completion of the General Contractor's Work
Scope. . . . Except as amended herein, all Subcontract terms
and conditions shall remain unchanged, in full force and
effect.
Regarding the bonus, the district court concluded:
Plaintiffs did not know when they negotiated and entered
into the relevant change orders that the earliest reasonably
anticipated pay out was in five to seven years, or that the
financial arrangement created a risk that the bonus would
not be paid by the Owners at all. Plaintiffs rejected Brown
& Root's second contractor bonus proposal, which was
designed to reduce the risk of substantial delay or nonpay-
ment by the owner, because information and documents
material to these risks had been either concealed or withheld
from plaintiffs by Brown & Root.
Brown & Root has not been paid the early completion bonus, nor
has it in turn paid a portion of that bonus to the subcontractors.
Plaintiffs filed separate complaints against Brown & Root and its
payment bond surety, Highlands, in the U.S. District Court for the
8
Eastern District of Virginia in December of 1996. On April 22, 1997,
the district court granted plaintiffs' motion for summary judgment
against Highlands. The court rejected Highlands' argument that it was
entitled to assert the "pay when paid" defense available to Brown &
Root. Because Highlands did not expressly incorporate the "pay when
paid" provision into its bond contract, and because the very purpose
of a surety bond is to provide payment when the principal is unable
to pay, the court held that Highlands was liable to plaintiffs and must
pay for the additional work that plaintiffs performed.
On December 30, 1998, the district court issued extensive findings
of fact and conclusions of law after a bench trial on the plaintiffs'
claims against Brown & Root. The court held that Brown & Root is
liable (1) to Lane for $1.4 million plus prejudgment interest for the
additional "change in scope" work, (2) to Lane for $2.4 million for
the early completion bonus, (3) to Moore for $2.1 million for the
additional "change in scope" work, and (4) to Moore for $2.4 million
for the early completion bonus.
Defendants appeal the summary judgment order against Highlands
and the judgment against Brown & Root. Plaintiffs cross-appeal the
denial of prejudgment interest on the early completion bonus and on
Moore's additional "change in scope" work.
II.
We first consider whether the district court properly granted plain-
tiffs' motion for summary judgment against Highlands. This court
reviews an order granting summary judgment de novo. United States
v. Ringley, 985 F.2d 185, 186 (4th Cir. 1993).
Jurisdiction in the district court was based on diversity of citizen-
ship. See 28 U.S.C. § 1332. We must therefore apply Virginia law to
resolve the controversy. Erie R.R. v. Tompkins , 304 U.S. 64 (1938).
Virginia courts recognize the validity of "pay when paid" clauses in
construction subcontracts. Galloway Corp. v. S.B. Ballard Constr.
Co., 464 S.E.2d 349, 354 (Va. 1995). The question presented here,
however, is whether a surety can assert the principal's defense based
on "pay when paid" language in the subcontract, where the surety did
not expressly incorporate the "pay when paid" language into the con-
9
tract payment bond. The Virginia courts have not addressed the use
of the "pay when paid" defense by a surety. Federal Ins. Co. v. Starr
Elec. Co., 410 S.E.2d 684, 689 n.3 (Va. 1991). We must therefore
determine what rule the Supreme Court of Virginia would apply in
these circumstances.
Highlands is a compensated surety. As the Supreme Court of Vir-
ginia stated,
sureties for hire . . . must abide by their contracts and pay
everything which by fair intendment can be charged against
them. They act, not to accommodate others, but to promote
their own interests, and are to be judged accordingly.
Board of Supervisors v. Southern Cross Coal Corp., 380 S.E.2d 636,
638 (Va. 1989) (quoting Southwood Builders, Inc. v. Peerless Ins.,
366 S.E.2d 104, 107 (Va. 1988)).
The contract by which Highlands must abide includes an uncondi-
tional promise to pay any claimant who has not been paid in full
within 90 days after work is completed for "sums as may be justly
due." There is no dispute that plaintiffs are claimants who completed
work more than 90 days ago and who have not been paid for that
work. The question is whether, in light of the "pay when paid" condi-
tion precedent contained in the subcontract with Brown & Root, the
money is nonetheless "justly due" the plaintiffs.
We think the only sensible answer to this question is yes. High-
lands, unlike Brown & Root, did not include an express "pay when
paid" condition precedent in its surety bond contract. Highlands'
attempt to bootstrap its own defense to the "pay when paid" defense
asserted by the principal is not persuasive for two reasons.
First, there is no indication that the parties intended the phrase
"sums justly due" to incorporate the contingency of payment by the
Owners. On the contrary, the very purpose of securing a surety bond
contract is to insure that claimants who perform work are paid for
their work in the event that the principal does not pay. To suggest that
non-payment by the Owners absolves the surety of its obligation is
nonsensical, for it defeats the very purpose of a payment bond.
10
Second, our conclusion that the Virginia Supreme Court would not
allow a surety to invoke the "pay when paid" defense available to a
principal is supported by decisions in other jurisdictions. At least
three other courts have rejected attempts by sureties to invoke a "pay
when paid" defense that is available to a principal. See OBS Co. v.
Pace Constr. Corp., 558 So. 2d 404 (Fla. 1990); Brown & Kerr, Inc.
v. St. Paul Fire and Marine Ins. Co., 940 F. Supp. 1245 (N.D. Ill.
1996); Shearman & Assoc., Inc. v. Continental Cas. Co., 901 F. Supp.
199 (D.V.I. 1995). In Brown & Kerr the court stated:
[The subcontractor] is suing under the Bond and not the sub-
contract. The two are separate agreements. [The surety] has
neither cited, nor have we discovered, any authority for the
proposition that the inability to proceed against the general
contractor because of a "pay when paid" clause in the sub-
contract necessarily prevents recovery against the surety
under the payment Bond. Indeed, such an argument runs
counter to the underlying purpose of the payment Bond, i.e.
the assurance of payment to subcontractors.
940 F. Supp. at 1249.
We therefore conclude that the district court properly granted
plaintiffs' motion for summary judgment against Highlands. As a
surety who did not include an express "pay when paid" condition pre-
cedent in the contract payment bond, Highlands may not assert the
"pay when paid" clause contained in the subcontract between the
claimants and the principal as a defense to its liability to pay on the
bond.
III.
We next consider whether the district court properly found that
Brown & Root is liable to the plaintiffs for payment for the additional
"change in scope" work. First, we will determine whether the record
supports the district court's findings of fact regarding Brown &
Root's conduct. This court reviews findings of fact under the deferen-
tial "clearly erroneous" standard. Fed. R. Civ. P. 52(a). Second, we
will determine whether, given those findings of fact, the district court
correctly applied the "prevention doctrine" to hold that Brown & Root
11
is liable to plaintiffs for the additional work claims, notwithstanding
the non-occurrence of the condition precedent contained in the sub-
contracts. Conclusions of law are reviewed de novo. Bowers v.
Atlanta Motor Speedway, Inc., 99 F.3d 151, 154 (4th Cir. 1996).
A. Findings of fact
The district court found that Brown & Root's own actions in con-
nection with the prime contract and the arrangements for financing
additional "change in scope" work contributed to the non-occurrence
of the condition precedent. The court found that Brown & Root knew
that additional "change in scope" work on the DTRE project would
likely be necessary to accommodate design changes regarding the
thickness of the pavement sub-base material.1 Brown & Root none-
theless assured the lenders that no additional work would be necessary.2
Brown & Root then acquiesced in the decision to remove the "change
in scope" illustrations from the contract to accommodate the lenders'
interest in capping costs, while at the same time protecting themselves
with the Policy and Procedures Letter which memorialized the change
illustrations as a "side agreement."3
In short, the district court found that Brown & Root agreed to
remove the design change illustrations from the prime construction
contract to placate the lenders, placed those illustrations in a side
agreement (the existence of which was not revealed to the lenders),
and assured the lenders that no additional work or design changes
would be necessary. In finding these facts, the district court weighed
the credibility of witnesses, the testimony offered during the prior
arbitration, and various documents entered into evidence during the
trial. Because the district court's findings of fact are consistent with
_________________________________________________________________
1 See the testimony of James Harvey, the Brown & Root DTRE project
manager, offered during the prior arbitration of the"change in scope"
claim. J.A. at 1330.
2 See representations made in a Consent Agreement signed by Brown
& Root. J.A. at 710, 1330.
3 See internal Brown & Root documents (including a memo prepared
by James Harvey dated August 11, 1993) and the trial testimony of
James Cowen, Brown & Root's in-house counsel. J.A. at 693, 695.
12
the evidence contained in the record before this court, those findings
are not clearly erroneous.4
B. Conclusions of law
The subcontracts between Brown & Root and the plaintiffs contain
a valid "pay when paid" condition precedent. See Galloway, 464
S.E.2d at 354. Because the Owners have not paid Brown & Root for
the arbitration judgment regarding the additional"change in scope"
work, Brown & Root can, as an initial matter, assert the non-
occurrence of the condition precedent as a valid defense to plaintiffs'
claims.
Having found that by its own actions Brown & Root contributed
to the non-occurrence of the condition precedent, however, the district
court applied the "prevention doctrine" to waive the condition prece-
dent and held that Brown & Root is liable to the plaintiffs for pay-
ment for the additional "change in scope" work notwithstanding the
"pay when paid" clause in the subcontract.
The prevention doctrine is a generally recognized principle of con-
tract law according to which if a promisor prevents or hinders fulfill-
ment of a condition to his performance, the condition may be waived
or excused. See Restatement (Second) of Contracts § 245 (1981); 13
Williston on Contracts, 4th ed., Lord, § 39:4; 17A Am. Jur. 2d, Con-
tracts, § 703; 17B C.J.S., Contracts, § 530. The Supreme Court of
Virginia recognized the prevention doctrine in Parrish v. Wightman,
34 S.E.2d 229, 232 (Va. 1945).
_________________________________________________________________
4 Brown & Root challenges the district court's findings of fact as "ab-
surd" because, they argue, Brown & Root stood to lose money as a result
of the Owner's failure to pay just as the subcontractors did. Brown &
Root claims that there was no reason for them to thwart the proper fund-
ing of the additional work. But Brown & Root assumed the risk for only
20% of the additional work, and as a 13% equity partner in TRIP, Brown
& Root would have had to contribute substantially to its own payment.
We find Brown & Root's bare assertion that it had no reason to engage
in the action described by the district court, therefore, to be an inadequate
basis for finding clear error in the court's findings.
13
The prevention doctrine does not require proof that the condition
would have occurred "but for" the wrongful conduct of the promisor;
instead it only requires that the conduct have "contributed materially"
to the non-occurrence of the condition. See Restatement (Second) of
Contracts § 245 cmt. b (1981) ("but for" causation is not necessary).
But see 17A Am. Jur. 2d, Contracts, § 703 ("but for" causation is nec-
essary). The Supreme Court of Virginia does not require the plaintiff
to prove "but for" causation. Rather, as that court specifically noted,
"[i]t is as effective an excuse of performance of a condition that the
promisor has hindered performance as that he has actually prevented
it." Parrish, 34 S.E.2d at 232 (quoting Amies v. Wesnofske, 174 N.E.
436 (N.Y. 1931) (quoting 2 Williston on Contracts§ 677)); see also
Whitt v. Godwin, 139 S.E.2d 841, 844 (Va. 1965) (citing 5 Williston
on Contracts, 3d ed., Jaeger, § 677A for the same proposition).
The district court found that Brown & Root misled the lenders
regarding its expectations that potentially costly design changes
would occur. By misleading the lenders in this way, Brown & Root
made it less likely that the lenders would arrange additional financing
to cover the cost of anticipated design changes. We therefore agree
with the district court's conclusion that Brown & Root's conduct
"hindered" the fulfillment of the condition precedent.
Brown & Root offers an alternative explanation for the failure of
the condition precedent. The failure, they contend, was caused by the
financial insolvency of the DTRE project, which was a result of lower
than projected traffic flow on the DTRE. According to TRIP's Chief
Financial Officer, because of the project's financial distress, some-
time in December of 1995 the lenders halted all payments to Brown
& Root since it was a partner in the DTRE project. Brown & Root
concludes, therefore, that the May 1996 arbitration award would not
have been paid regardless of whether additional contingency funding
had been arranged by the lenders.
We are not persuaded by Brown & Root's argument. The fact that
the lenders halted payments to Brown & Root under the circum-
stances as they existed in December of 1995 is not proof that the lend-
ers would have forbidden TRIP to draw on some other source of
funds to pay Brown & Root for the additional work after the arbitra-
tion award in May of 1996 under different circumstances. Had the
14
lenders been apprised early on of the strong possibility that the pave-
ment design would change, it is reasonable to infer that appropriate
funding would have been arranged and made available for payment
to Brown & Root.
The question is essentially a factual inquiry: why did TRIP fail to
pay Brown & Root for the additional "change in scope" work? The
district court found that TRIP failed to pay, at least in part, because
of Brown & Root's misconduct. Because the district court's findings
of fact are not clearly erroneous, and given the speculative nature of
Brown & Root's alternative explanation, we do not find reversible
error in the conclusions reached below as to the additional work
claims. We agree that Brown & Root's misrepresentations "contrib-
uted materially" to TRIP's failure to pay for the additional "change
in scope" work.
Having so concluded, we hold that the prevention doctrine was
properly invoked and the performance of the condition precedent was
correctly waived as to the additional "change in scope" work. Without
the condition precedent as a defense, Brown & Root is liable to the
plaintiffs for payment for the additional work.
IV.
We next consider whether the district court properly found that
Brown & Root is liable to the plaintiffs for payment of the early com-
pletion bonus.
The subcontract change orders at issue state:
THE TERMS AND CONDITIONS FORMING THE
ORIGINAL SUBCONTRACT ARE MADE A PART OF
THIS CHANGE ORDER EXCEPT TO THE EXTENT
MODIFIED ON THE FACE HEREOF. . . . Within 30 days
of the receipt by General Contractor, Subcontractor will
receive thirty-one and one-half percent (31.5%) (or the
equivalent of $13,500.00 per day of earned bonus whichever
is greater) of all Incentive Bonus monies paid to General
Contractor by Owner for early completion of the General
Contractor's Work Scope.
15
At trial, Brown & Root relied on the "pay when paid" condition
precedent contained in the base subcontracts and argued that it was
not liable to plaintiffs for the early completion bonus because TRIP
never paid Brown & Root any bonus monies. The plaintiffs argued
that Brown & Root was liable for payment of the bonus because (1)
the "pay when paid" clause in the base subcontracts did not apply to
the early completion bonus change orders, and alternatively (2) the
condition precedent was waived under the prevention doctrine.
The district court agreed with the plaintiffs' first contention. The
court examined the language in the change orders without reference
to the "pay when paid" clause in the base subcontracts and found that
the change orders were "infected with latent ambiguity." After finding
that there was no meeting of the minds as to the meaning of the
"within 30 days of receipt" language in the change orders, the district
court concluded that such language could not be interpreted as a con-
dition precedent. Relying on Galloway, the court construed the
"within 30 days of receipt" language as merely a time of payment pro-
vision, rather than a risk shifting provision.
Whether a contract is ambiguous is a question of law which we
review de novo. Denzler v. Questech, Inc., 80 F.3d 97, 101 (4th Cir.
1996); Ross v. Craw, 343 S.E.2d 312, 316 (Va. 1986). While the
change orders, standing alone, are arguably ambiguous under the dis-
trict court's analysis, in the instant case the relevant change orders do
not, in fact, stand alone. They very clearly incorporate the terms of
the base subcontract to the extent that those terms are not modified
by provisions in the change orders. The "within 30 days of receipt"
language in the change orders is consistent with and does not modify
the "pay when paid" condition in the base subcontracts. Payment of
the bonus for early completion of the project was, therefore, subject
to the "pay when paid" condition precedent in the base subcontracts.
The question remains whether, regarding the bonus claims, the
"pay when paid" condition in the subcontract should be waived under
the prevention doctrine.5 The district court did not reach this issue. To
_________________________________________________________________
5 Although we held in part III that the prevention doctrine was correcly
applied to waive the "pay when paid" condition as to payment for the
16
properly apply the prevention doctrine and waive the"pay when paid"
condition precedent as to the bonus claims, the district court must
determine whether active, wrongful conduct by Brown & Root "pre-
vented or hindered" TRIP's payment of the early completion bonus
to Brown & Root. Judgment in plaintiffs' favor on the bonus claims
is proper only if plaintiffs have demonstrated that Brown & Root's
conduct contributed materially to TRIP's failure to pay Brown &
Root the bonus. Since factual questions are properly considered by
the district court in the first instance, we remand for further proceed-
ings to consider whether the "pay when paid" condition should be
waived as to the bonus claims under the prevention doctrine.
V.
Finally, we consider the plaintiffs' contention on the cross-appeal
that the district court improperly denied prejudgment interest as to
payment for the early completion bonus and Moore's additional
"change in scope" work.6
The award of prejudgment interest is within the discretion of the
district court. Maksymchuk v. Frank, 987 F.2d 1072, 1077 (4th Cir.
1993). District courts must weigh the equities in a particular case to
determine whether an award of prejudgment interest is appropriate.
McDevitt & Street Co. v. Marriott Corp., 754 F. Supp. 513, 515 (E.D.
Va. 1991).
_________________________________________________________________
additional "change in scope" work, application of the doctrine to waive
the condition for the early completion bonus involves a separate and dis-
tinct inquiry. Our holding in part III affirmed the district court's finding
that Brown & Root's active conduct hindered TRIP's payment to Brown
& Root for the additional "change in scope" work. Those findings of fact
are unrelated to the bonus claim. Although there is only one "pay when
paid" clause in each subcontract, the clause creates separate conditions
precedent regarding payment for the various elements of plaintiffs' per-
formance under the subcontract.
6 Denial of prejudgment interest on the bonus claims may become a
moot issue on remand. In the event that the district court makes findings
of fact to support judgment in favor of the plaintiffs on the bonus claims,
however, we will review the decision below regarding prejudgment inter-
est.
17
Here, the district court concluded that a legitimate controversy
existed between Brown & Root and the plaintiffs regarding the pre-
cise timing of the payment of the early completion bonus. Plaintiffs
agreed to a change order regarding the bonus which contained a fair
degree of uncertainty over the timing of the payment. Because plain-
tiffs expressly accepted some uncertainty as to the timing of the bonus
payment, the district court did not abuse its discretion by denying
plaintiffs prejudgment interest on that portion of the award.
The district court was also within its discretion in denying Moore
prejudgment interest as to the additional "change in scope" work.
Whereas the Lane subcontract, in Article 6.5, contains a provision
requiring the payment of interest on payments delayed beyond forty-
five days, the Moore subcontract contains no such provision. The dis-
trict court's decision, therefore, to grant Lane prejudgment interest as
to the "change in scope" work, while denying same to Moore, was
reasonable.
VI.
For the reasons discussed above, we affirm the orders of the district
court in part, reverse in part, and remand for further proceedings con-
sistent with this opinion.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED
WILKINS, Circuit Judge, concurring in part and dissenting in part:
The majority opinion affirms the grant of summary judgment
against Highlands Insurance Co. (Highlands), affirms the judgments
in favor of Moore Brothers Co., Inc. (Moore) and The Lane Construc-
tion Corporation (collectively, "the Subcontractors") with respect to
the "change in scope" claims, and reverses the ruling of the district
court that the pay-when-paid clauses do not apply to the early com-
pletion bonus, remanding the early completion bonus claims to the
district court for further proceedings. The majority opinion also
affirms the denial of the Subcontractors' request for prejudgment
interest on the early completion bonus claims and Moore's request for
prejudgment interest on its change in scope claim. I agree that the dis-
18
trict court erred in awarding judgment to the Subcontractors on the
early completion bonus claims and that the district court did not err
in denying the requests for prejudgment interest. However, because
Virginia law and the surety bond itself allowed Highlands to assert
Brown & Root, Inc.'s (Brown & Root) pay-when-paid defense, I
would conclude that the district court erred in holding that Highlands
could not assert that defense. I would also conclude that the district
court erred in holding that the prevention doctrine excused the nonful-
fillment of the pay-when-paid condition with respect to the change in
scope claims.
I.
I first address Highlands' argument that the district court erred in
granting summary judgment against it. Although some jurisdictions
prohibit a general contractor from shifting the risk of an owner's
insolvency to its subcontractors, see, e.g., N.C. Gen. Stat. § 22C-2
(1999), Virginia law is clear that when a subcontract unambiguously
states that payment by the owner to the contractor is a condition pre-
cedent to payment by the contractor to the subcontractor, such a term
will be enforced. See Galloway Corp. v. S.B. Ballard Constr. Co., 464
S.E.2d 349, 354 (Va. 1995). Virginia law is also clear that because a
surety and its principal are in privity, a surety"stands in the princi-
pal's shoes and may assert ... those defenses available to the princi-
pal." Board of Supervisors v. Southern Cross Coal Corp., 380 S.E.2d
636, 639 (Va. 1989).
Because Highlands stands in the shoes of Brown & Root, to the
extent that Brown & Root can assert the pay-when-paid defense,
Highlands can do so as well. Without mentioning this dispositive
principle of Virginia law, the majority holds that Highlands cannot
assert Brown & Root's defense because the pay-when-paid clause
was not incorporated into the bond. See ante, at 9-11. However, even
assuming that Virginia law provided that a surety can assert a defense
of its principal only when the contract language providing the basis
for the defense is incorporated into its bond, Highlands can assert the
pay-when-paid defense because the pay-when-paid clause here was
incorporated into the bond. The bond provided in relevant part that
Brown & Root, as principal, and Highlands, as surety:
19
jointly and severally agree with the Obligees [Toll Road
Investors Partnership II, L.P. ("TRIP"), the lenders, and the
Virginia Department of Transportation ("VDOT")] that
every claimant as herein defined, who has not been paid in
full before the expiration of a period of ninety (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 this 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.
J.A. 1818 (emphasis added). The phrase "justly due" in this context
can only mean "justly due" from the contractor under the subcon-
tracts, as the subcontracts provide the only basis for the Subcontrac-
tors being "due" any payment at all. Cf. Taylor Constr. Inc. v. ABT
Serv. Corp., 163 F.3d 1119, 1122 (9th Cir. 1998) (stating, in applying
the Miller Act, see 40 U.S.C.A. §§ 270a-270d (West 1986 & Supp.
1999), that "[l]ong-standing precedent confirms that `sums justly due'
means the sums due the party under the bonded contract"); United
States ex rel. Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co.,
86 F.3d 332, 336 (4th Cir. 1996) (per curiam) (relying on terms of the
contract between the subcontractor and materials supplier in deter-
mining that interest and attorneys' fees were included in the "sums
justly due" the supplier under the Miller Act); United States ex rel.
Woodington Elec. Co. v. United Pac. Ins. Co., 545 F.2d 1381, 1383
(4th Cir. 1976) (stating that "sums justly due" a subcontractor under
the Miller Act "must be determined by reference to the subcontract").
Here, because the Subcontractors were entitled to be paid under the
subcontracts only if Brown & Root received payment from TRIP and
that condition did not occur, the Subcontractors were not entitled to
payment under the bond.
In rejecting the notion that sums "justly due" refers to sums justly
due under the terms of the subcontracts, the majority fails to explain
to what it believes the phrase "sums justly due" refers.1 Rather, the
_________________________________________________________________
1 Assuming arguendo that"justly due" refers to some general notion of
fairness, rather than to the subcontracts, I cannot understand how subcon-
20
majority simply concludes that allowing Highlands to assert the pay-
when-paid defense against the Subcontractors "is nonsensical, for it
defeats the very purpose of a payment bond," which the majority
asserts without analysis to be "to insure that claimants who perform
work are paid for their work in the event that the principal does not
pay."2 Ante, at 10. Of course, to baldly characterize the "purpose" of
the bond in such a broad fashion is merely to assume that the parties
intended that Highlands' liability would not be coextensive with
Brown & Root's--an assumption that both Virginia surety law and
the bond suggest is completely unwarranted.3
Moreover, in proclaiming that allowing Highlands to assert Brown
& Root's pay-when-paid defense would defeat the purpose of the
bond, the majority overlooks the fact that Brown & Root agreed to
indemnify Highlands for amounts that Highlands would have to pay
under the bond. The simple fact here is that someone--either Brown
& Root, the Subcontractors, or Highlands--had to bear the risk that
TRIP would not pay Brown & Root. Virginia law specifically allows
subcontractors to bear that risk, and the Subcontractors here agreed
to do so. The majority essentially rewrites the agreements that these
sophisticated parties negotiated at arms length and shifts the risk of
nonpayment by TRIP back to Brown & Root. This result is com-
pletely at odds with the freedom of contract principles embraced in
Galloway and is most assuredly not the result that the Supreme Court
_________________________________________________________________
tractors who agreed that they would be entitled to payment only if the
owner pays the contractor can be said to be "justly due" payment when
the owner does not pay the contractor. Here, Brown & Root specifically
contracted with Highlands to indemnify Highlands for any losses suf-
fered by Highlands as a result of the bond. Therefore, the effect of pre-
venting Highlands from asserting Brown & Root's defense is simply to
expand Brown & Root's liability. Given the parties' agreement, it would
be unfair to force Brown & Root to pay the Subcontractors when it has
never been paid by TRIP.
2 Of course, the majority's argument would work equally well against
the assertion by the surety of any of its principal's defenses.
3 A more accurate characterization of the purpose of the bond, consid-
ering Virginia surety law and the terms to which the parties agreed, is
that the bond insured against Brown & Root's wrongful default.
21
of Virginia would reach.4 Accordingly, I would reverse the grant of
summary judgment against Highlands. See Doe v. Doe, 973 F.2d 237,
240 (4th Cir. 1992) (explaining that the function of this court in a
diversity case is to resolve the state law issues as we predict the high-
est court in the state would).
II.
I next address Brown & Root's contention that the district court
erred in ruling that Brown & Root could not assert the nonfulfillment
of the pay-when-paid condition as a defense to the change in scope
claims because Brown & Root prevented or hindered the fulfillment
of the condition.
_________________________________________________________________
4 Even if existing Virginia law did not make the correct result in this
case perfectly clear, the cases from other jurisdictions relied upon by the
majority would provide little support for its result. In Shearman & Asso-
ciates, Inc. v. Continental Casualty Co., 901 F. Supp. 199 (D.V.I. 1995),
and OBS Co. v. Pace Construction Corp., 558 So. 2d 404 (Fla. 1990),
the lien statutes for the two relevant jurisdictions required the posting of
statutory payment bonds by a private owner wishing to exempt its prop-
erty from subcontractor liens. See Shearman, 901 F. Supp. at 201-02;
OBS, 558 So. 2d at 408. Those courts held that local lien law would be
thwarted if the protection provided by the bonds was not equal to that
which would have been provided under the liens. See Shearman, 901 F.
Supp. at 202-03; OBS, 558 So. 2d at 408. Here, by contrast, the Subcon-
tractors waived their rights to assert mechanics liens well before High-
lands issued its bond, and the bond was not a statutory substitute for
those rights.
The result in Brown & Kerr, Inc. v. St. Paul Fire & Marine Insurance
Co., 940 F. Supp. 1245 (N.D. Ill. 1996), rested in part on the conclusion
of the court that a pay-when-paid clause is not a valid condition prece-
dent to payment from the contractor under the subcontract. See Brown,
940 F. Supp. at 1250. Beyond that, the Brown court employs the same
circular reasoning that the majority employs in the present case. In deter-
mining whether a surety is entitled to assert all of the defenses of its prin-
cipal, the Brown court simply assumes that the "purpose" of a bond is to
ensure that subcontractors receive payment, and therefore concludes that
allowing a surety to assert its principal's pay-when-paid defense would
contravene that purpose. See id. at 1249. That analysis is flawed for the
reasons already discussed.
22
Under the prevention doctrine, when a promisor hinders or pre-
vents fulfillment of a condition and that hindrance or prevention "con-
tributes materially" to the nonoccurrence of the condition, the
condition is excused. Restatement (Second) of Contracts § 245
(1981). Because the prevention doctrine "is purely one of waiver,"
only "active conduct of the conditional promisor, preventing or hin-
dering the fulfillment of the condition" excuses nonfulfillment of the
condition. Parrish v. Wightman, 34 S.E.2d 229, 232 (Va. 1945) (inter-
nal quotation marks omitted). Moreover, "the action of the party
whose conduct is alleged to have prevented performance must be
wrongful, and, accordingly, in excess of his legal rights." Whitt v.
Godwin, 139 S.E.2d 841, 844 (Va. 1965) (internal quotation marks
omitted).
The district court found that four acts by Brown & Root excused
the nonfulfillment of the pay-when-paid condition, none of which, in
my view, supports excusing nonfulfillment. The primary act on which
the district court relied--and the one on which the majority relies in
affirming--was that Brown & Root "concealed from the lenders its
expectation that changes in scope would occur." Lane Constr. Corp.
v. Brown & Root, Inc., 29 F. Supp. 2d 707, 724 (E.D. Va. 1998). The
district court reasoned that absent the concealment, the lenders would
have provided adequate contingency funding and "money would have
been available to pay Brown & Root for the change in scope claims."
Id. These findings were clearly erroneous because the district court
had no reasonable basis for concluding that Brown & Root's conceal-
ment of its concern that scope changes would be necessary contrib-
uted materially to TRIP's failure to pay Brown & Root for the change
in scope work.
In reviewing this issue, it is important to view the information con-
cealed in light of the information that the lenders did have. The lend-
ers must have been aware that there was a possibility that changes--
particularly changes in the asphalt thickness--would occur: As the
district court found, the consulting engineering firm retained by the
lenders recommended the additional pavement thickness. See id. at
713. The lenders also must have been aware that a change in asphalt
thickness and similar changes might entitle Brown & Root to addi-
tional payment under the contract: Although the parties had deleted
language in the contract stating that a change in asphalt thickness
23
would constitute a substantial change in project scope, the parties had
not included language in the contract stating that such a change would
not constitute a substantial change in project scope. Accordingly, the
lenders were well aware that there was a possibility that TRIP would
have to pay for increased asphalt thickness.
With this background, it is important to recognize that the only
information that Brown & Root "concealed" from the lenders relating
to whether extra work would be required was Brown & Root's con-
cern that the lenders' own consultant's view that the asphalt needed
to be thicker might prevail with the VDOT over the contrary view
advanced by Brown & Root's engineering firm. The question then
becomes what effect, if any, the lenders' knowledge of Brown &
Root's concern would have had on the lenders' evaluation of the
views of the lenders' own engineer. Importantly, there is no testimony
from the lenders stating that had they known of Brown & Root's con-
cern, they would have required further funding. Without such evi-
dence, the district court could only speculate concerning whether the
concealment had any effect at all on the lenders' evaluation of the
probability that TRIP would have to pay for thicker asphalt.
It is possible that disclosure of Brown & Root's concern to the
lenders would have had some effect on the lenders' assessment of the
probability that TRIP ultimately would have to pay for thicker
asphalt. Nevertheless, there simply was no reasonable, nonspeculative
basis from which a factfinder could conclude that this disclosure, had
it been made, would have caused the lenders to decide that funding
for the project was inadequate. And, even if such a basis existed, a
factfinder still would have been left to speculate as to whether knowl-
edge of Brown & Root's concern would have prompted the lenders
to provide more funding or would have prompted the lenders to
decide not to fund the project at all.5 In short, the Subcontractors
_________________________________________________________________
5 The district court also found that had the Subcontractors known that
the lenders had been misled concerning the scope of the project, the Sub-
contractors "could have refused to agree to the pay-when-paid condi-
tion." Lane Constr., 29 F. Supp. 2d at 724. However, the prevention
doctrine would apply only if Brown & Root's conduct contributed mate-
rially to the nonfulfillment of the condition. The extent to which Brown
& Root's conduct may have caused the pay-when-paid clause to come
into existence is irrelevant.
24
failed miserably in their attempt to prove that Brown & Root contrib-
uted materially to TRIP's failure to pay for the change in scope
claims. Accordingly, I believe the district court erred in excusing the
nonfulfillment of the pay-when-paid condition by virtue of the pre-
vention doctrine, and the majority errs in holding otherwise.
III.
In sum, I would reverse the grant of summary judgment against
Highlands; reverse the judgments against Brown & Root on the Sub-
contractors' change in scope claims; remand the early completion
_________________________________________________________________
The other three acts by Brown & Root that the district court found jus-
tified excusing the nonfulfillment of the pay-when-paid condition also do
not warrant application of the prevention doctrine. The second basis
identified by the district court was that Brown & Root "signed the con-
struction contract, from which the changes in scope had been deleted at
the lenders['] insistence." Id. Clearly, however, it cannot be said that
Brown & Root's signing the contract contributed materially to TRIP's
failure to pay Brown & Root. The existence of the contract was Brown
& Root's only basis of entitlement to payment. To the extent that what
the district court really meant was that the pay-when-paid condition was
excused by Brown & Root's failure to sign another contract with differ-
ent terms, such a failure obviously is not active conduct, and therefore
cannot excuse the fulfillment of the pay-when-paid condition. See Par-
rish, 34 S.E.2d at 232.
The district court next found that fulfillment of the pay-when-paid
condition was excused because Brown & Root "did not disclose to [the
Subcontractors] the relevant provisions in the financing agreements,
including the provisions relating to the lenders['] right to refuse payment
for changes in scope." Lane Constr., 29 F. Supp. 2d at 724. Again, how-
ever, there is no evidence in the record that this nondisclosure contrib-
uted materially to TRIP's failure to pay Brown & Root.
The district court finally found that the nonfulfillment of the pay-
when-paid condition was excused because Brown & Root"ordered [the
Subcontractors] to perform the work stemming from changes in scope
with knowledge, not available to [the Subcontractors], that no sources of
funding of payment for the extra work could realistically be said to
exist." Id. Yet again, it is not the case that Brown & Root's ordering the
work contributed materially to TRIP's failure to pay Brown & Root.
25
bonus claims; and affirm the denial of the requests for prejudgment
interest.
26