One of the many items of construction law that has always been about as clear as mud has been the interaction between a contractual pay if paid clause and payment bond claims either under the Federal Miller Act or Virginia’s “Little Miller Act.” While properly drafted contractual “pay if paid” clauses are enforceable by their terms in Virginia, what has always been less clear is whether a bonding company can take advantage of such a clause when defending a payment bond claim. As always, these questions are very fact specific both under the Federal Act and the state statute. I wish that this post would answer this question, but alas, it will not.
A recent case from the City of Roanoke, Virginia looked at the interaction between a payment bond and a “condition precedent” pay if paid clause as it relates to a private project that is not subject to the Little Miller Act. In the case of IES Commercial, Inc v The Hanover Insurance Company, the Court examined a contractual clause between Thor Construction and IES Commercial in tandem with the bond language between Hanover Insurance Company and Thor as it related to a surprisingly familiar scenario. The general facts are these: IES performed, Thor demanded payment from the owner for the work that IES performed and the owner, for reasons that are left unstated in the opinion, refused to pay. IES sues Hanover pursuant to the payment bond and Hanover moves to dismiss the suit because Thor hadn’t been paid by the owner and therefore Hanover could take advantage of the pay if paid language.
After determining both that the pay if paid language was of the type that precluded any obligation to pay absent payment from the owner, the Court looked at the contract between Hanover and Thor. While citing certain provisions of the bond contract, the Court determined that, under the facts of this case, Hanover had no obligation to pay outside of any obligation to pay owed by its principal, Thor. The Court further went on to say that Virginia had no public policy that explicitly required a payment by a surety where no independent contractual obligation existed. Finally, as one last nail in the public policy coffin, the Court stated that the presence of a payment bond on a private project does not preclude the recording of a mechanic’s lien, regardless of the equity of filing such a claim in the face of an existing payment bond. After taking all of this into account, the Court held that Hanover could in fact take advantage of the pay if paid language and dismissed IES’s claim against Hanover.
My takeaway from this is that, at least on private projects, the general Virginia deference to the terms of a construction contract will hold sway even in cases such as this. Also, subcontractors and suppliers need to note the Court’s specific reference to the Virginia mechanic’s lien statute in its opinion. Just because there is a payment bond (presumably to avoid the specter of mechanic’s liens) does not mean that a subcontractor or supplier should not preserve its mechanic’s lien rights by recording a memorandum of lien should the circumstance arise. Finally, always have an experienced Virginia construction attorney review all of the contract documents, including any payment bonds, prior to beginning work.
As always, I recommend that you download and read the full opinion.
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