Moore Brothers Co v. Brown & Root Inc

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