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Full Opinion
PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
Nos. 10-1725 & 10-1765
_______________
SLOAN & COMPANY
Appellant (10-1765)
v.
LIBERTY MUTUAL INSURANCE COMPANY,
Appellant (10-1725)
_______________
On Appeal from the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 2-07-cv-05325)
District Judge: Honorable Berle M. Schiller
_______________
Argued March 7, 2011
_______________
Before: SCIRICA, AMBRO,
and VANASKIE, Circuit Judges
(Opinion filed: August 1, 2011)
Robert L. Byer, Esquire (Argued)
Susan G. Schwochau, Esquire
Duane Morris
600 Grant Street, Suite 5010
Pittsburgh, PA 15219-0000
Robert M. Palumbos, Esquire
Robert A. Prentice, Esquire
Duane Morris
30 South 17th Street, United Plaza
Philadelphia, PA 19103-4196
Counsel for Appellant/Cross-Appellee
Liberty Mutual Insurance Company
Samuel J. Arena, Jr. Esquire
Neal R. Troum, Esquire
Stradley, Ronon, Stevens & Young
2600 One Commerce Square
2005 Market Street
Philadelphia, PA 19103-7098
Counsel for Amicus Appellant,
The Surety & Fidelity Association of America
Rudolph Garcia, Esquire (Argued)
Joseph R. Loverdi, Esquire
H. Marc Tepper, Esquire
Buchanan Ingersoll & Rooney
50 South 16th Street
Two Liberty Place, Suite 3200
Philadelphia, PA 19102-2555
2
Counsel for Appellee/Cross-Appellant
Sloan & Company
_______________
OPINION OF THE COURT
_______________
AMBRO, Circuit Judge
This case involves principally the interpretation of a
construction subcontract. A dispute arose when a general
contractor, Shoemaker Construction Company
(âShoemakerâ), failed to pay a subcontractor, Sloan &
Company (âSloanâ), the remaining balance on its subcontract.
The appellant in this case, Liberty Mutual Insurance
Company (âLiberty Mutualâ), is the surety on the subcontract
and the party Sloan has sued for payment on the surety bond.
Sloan cross-appeals with respect to one aspect of its claim.
For the reasons that follow, we reverse in part and remand for
further proceedings consistent with this opinion as to Liberty
Mutualâs appeal, and affirm the ruling on Sloanâs cross-
appeal.
I. Background
Isla of Capri Associates LP (âIOCâ) owned and
developed waterfront condominiums in Philadelphia.
Shoemaker contracted with IOC to build the project (the
âprime contractâ). Shoemaker then lined up various
subcontractors that included Sloan, who agreed to perform
drywall and carpentry work on the project (the
âsubcontractâ). Payment for the subcontractorsâ work was
insured by a surety bond issued by Liberty Mutual. At the
3
projectâs completion, IOC refused to pay Shoemaker nearly
$6.5 million owed under the prime contract. Of that amount,
$5 million was due the subcontractors. IOC claimed it was
withholding money for several reasons, one of which was that
some of the subcontractorsâ work was untimely and
deficient. 1 Shoemaker then refused to pay Sloan the full
amount of the remaining balance Sloan claimed was due
under their subcontractâ$1,074,260.
In May 2007, Shoemaker sued IOC to recover the
balance on the prime contract. Sloan then made a claim
against Liberty Mutual for payment on the surety bond. Five
weeks later, Liberty Mutual denied the claim in its entirety,
reserving all rights and defenses. As a ground for denying
any payment obligation to Sloan, Liberty Mutual asserted that
one of the subcontractâs terms, found in Paragraph 6.f,
conditioned Sloanâs right to payment on Shoemakerâs receipt
of payment from IOC. Relying on that interpretation of the
subcontract, Liberty Mutual claimed that Sloan was not
entitled to payment from Shoemaker because IOC had not
paid Shoemaker.
In December 2007, Sloan filed a complaint against
Liberty Mutual in the District Court. Sloan moved for
summary judgment in the amount of $1,074,260.09, plus
interest and taxable costs. Liberty Mutual cross-motioned for
summary judgment. It argued that even if Sloan were entitled
to payment, the amount at most was $785,067 because of
1
IOC deducted $418,392 from Sloanâs claim for payment
because it identified Sloan as one of the subcontractors who
were âbad actors.â A1018.
4
various offsets. Sloanâs claim, and Liberty Mutualâs alleged
offsets, broke down as follows:
Sloanâs Liberty Undisputed
Claim Mutualâs Amount in
Alleged Offsets Controversy
$1,074,260
Legal fees $16,579 2
(attributable to
Sloan)
Repairs $40,370
Deficiencies $24,600
Time & $66,324
Materials
Provided
Lump Sum $141,320
Proposals
Performed
Subtotal of $289, 193
offsets claimed
$785,067
2
In its second cross-motion for summary judgment, Liberty
Mutual claimed that this amount was much higher.
5
Meanwhile, Shoemakerâs lawsuit against IOC hit a
dead end. Shoemaker learned that IOCâs financial situation
made it unable to satisfy a judgment for the entire claim even
if one were awarded to Shoemaker. It entered into a
settlement agreement with IOC for $1 million, apparently all
that IOC was able to pay. 3 Shoemaker offered its
subcontractors their pro rata share of amounts owed in
exchange for a release of claims, but Sloan did not agree to
that arrangement and continued to press its suit against
Liberty Mutual. 4
In August 2009, the District Court granted partial
summary judgment in favor of Sloan for $785,067 (the âFirst
Judgmentâ). It rejected Liberty Mutualâs interpretation of the
subcontract as conditioning Sloanâs right to payment on
IOCâs payment to Shoemaker. The Court allowed the parties
to conduct additional discovery as to whether Sloan was
entitled to any additional amounts.
3
Liberty Mutual represented that Shoemaker had spent over
$3 million pursuing payment from IOC and, at the time of
oral argument, IOC had paid only $300,000 of the agreed
settlement.
4
Prior to this, Liberty Mutual had moved for a dismissal or
stay of Sloanâs suit based on a provision of the subcontract in
which Sloan âagree[d] to [wait to] pursue its claim against the
Contractor or its surety until the Contractor Dispute
Resolution and all appeals thereto are completed and become
final.â On information that Shoemakerâs case was settled,
Sloan moved to lift the stay and for entry of summary
judgment.
6
After discovery, the parties again moved for summary
judgment. The Court granted partial summary judgment in
favor of Sloan on the issue of legal fees and deficiencies, and
awarded prejudgment interest (on that amount as well as on
the previous sum awardedâ$785,067), for an additional sum
aggregating $145,895 (the âSecond Judgmentâ). 5
In lieu of trial on the remaining amounts, the parties
stipulated to the entry of a third and final judgment in favor of
Sloan on February 12, 2010 (the âFinal Judgmentâ). Included
within the Final Judgment were sums set forth in the First
Judgment, the Second Judgment, and the additional amount
of $179,876 ($156,224, plus prejudgment interest of
$23,652). 6 The combined amounts in the Final Judgment
(excluding interest) were $91,790 less than Sloanâs initial
claim of $1,074,260.
The parties agreed to preserve their rights to appeal all
three of the District Courtâs judgments, and Liberty Mutual
does so, challenging the District Courtâs interpretation of the
subcontract. It argues that Shoemakerâs obligation to pay
5
The principal amount of this judgment was $41,179.
6
The Final Judgment dealt with the remaining amounts in
dispute. Per the partiesâ stipulation, that judgment deducted
nothing for repairs, $11,430 for time and materials provided,
and $80,361 for lump sum proposals performed. We take
from the partiesâ briefs that only the propriety of these
deductions is challenged, but not their amounts. Therefore,
we address only whether Liberty Mutual was entitled to argue
for these deductions.
7
Sloan was conditioned on its receipt of payment from IOC,
or, put another way, Sloan was entitled to be paid only
whatever amount Shoemaker received from IOC for Sloanâs
work. Liberty Mutual also contests the District Courtâs
determination on litigation costs. It argues it is entitled to
deduct Sloanâs share of the legal fees stemming from
Shoemakerâs suit against IOC. In addition, Sloan cross-
appeals the $91,790 shortfall from its initial claim. It argues
that Liberty Mutual waived the right to claim offsets by
failing to state their bases within 45 days of Sloanâs initial
claim. 7
II. Discussion
Summary judgment is in order when âthere is no
genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.â Fed. R. Civ. P.
56(a). Our review over the District Courtâs grant of summary
judgment is plenary. Lawrence v. City of Phila., 527 F.3d
299, 310 (3d Cir. 2008). We also exercise plenary review
over the District Courtâs interpretation of state law. Emerson
Radio Corp. v. Orion Sales, Inc., 253 F.3d 159, 162 (3d Cir.
2001).
A. The Contract
The crux of the dispute is Paragraph 6.f of the
subcontract, which deals with final payment. Thus, to resolve
7
The District Court had jurisdiction based on the diversity of
the partiesâ citizenship. 28 U.S.C. § 1332. We have
jurisdiction over the District Courtâs rulings under 28 U.S.C.
§ 1291.
8
the dispute, we begin by considering in detail the language
and structure of that provision.
It contains two subparagraphs. The first provides in
relevant part: âFinal payment shall be made within thirty (30)
days after the last of the following to occur, the occurrence of
all of which shall be conditions precedent to such final
payment . . . .â That subparagraph then lists those conditions
precedent (seven in all), one of which (condition three) is that
â[IOC] shall have accepted the Work and made final payment
thereunder to [Shoemaker]â (emphasis added). Another
(condition six) is that â[Shoemaker] shall have received final
payment from [IOC] for [Sloanâs] Workâ (emphasis added).
Liberty Mutual argues that these conditions constitute
a âpay-if-paidâ clause. In construction contract parlance, this
means that a subcontractor gets paid by the general contractor
only if the owner pays the general contractor for that
subcontractorâs work. Pennsylvania courts follow suit, and
construe clauses that condition payment to the subcontractor
on the general contractorâs receipt of payment from the owner
as pay-if-paid clauses. 8 See, e.g., C.M. Eichenlaub Co., Inc.
v. Fidelity & Deposit Co., 437 A.2d 965, 967 (Pa. Super. Ct.
1981); Cumberland Bridge Co. v. Lastooka, 8 Pa. D. & C.3d
475, 482 (C.P. Washington 1977).
Sloan, on the other hand, argues that the first
subparagraph of 6.f does not establish a condition precedent
to Sloanâs payment, but rather is a âpay-when-paidâ clause.
On the surface, these terms seem much the same (save,
perhaps, that paying if paid does not tell us when that
8
It is undisputed that Pennsylvania law applies.
9
payment is due). But in industry jargon, they are different. In
contrast to a pay-if-paid clause, a pay-when-paid clause does
not establish a condition precedent, but merely creates a
timing mechanism for the general contractorâs payment to the
subcontractor. See, e.g., United Plate Glass Co. Div. of
Chromalloy Am. Corp. v. Metal Trims Indus., Inc., 525 A.2d
468, 471 (Pa. Super. Ct. 1987).
To support its pay-when-paid interpretation, Sloan
points to the second subparagraph of 6.f, which describes a
process by which it may sue Shoemaker for final payment in
the event that IOC fails to make final payment to Shoemaker.
The language of that subparagraph states:
Notwithstanding anything to the contrary in this
Paragraph 6.f, if within six months of the date
that final payment is due to [Shoemaker by
IOC], [Sloan] has not received final payment
for its Work, [Sloan] may pursue its claim
against [Shoemaker] and its Surety [Liberty
Mutual] for final payment as follows:
If within six months of the date that final
payment is due and payable to [Shoemaker],
[Shoemaker] commences a legal proceedings
against [IOC] . . . (the âContractor Dispute
Resolutionâ) to resolve its own claim for final
payment, [Sloan] agrees not to pursue its claim
against [Shoemaker] or [Liberty Mutual] until
the Contractor Dispute Resolution and all
appeals thereto are completed and become final
....
10
Upon completion of the Contractor Dispute
Resolution . . . , [Sloan] may pursue any
remaining claim for final payment it may have
against [Shoemaker] or its Surety.
Notably, that subparagraph concludes by stating that
[n]othing in Paragraph 6.f is intended to modify
the provisions of Paragraph 20[, which deals
with dispute resolution,] under the Subcontract .
...
We consider each subparagraph in turn and their combined
effect on the meaning of the contract.
Pennsylvania follows the plain meaning rule of
contract interpretation, such that â[w]hen a written contract is
clear and unequivocal, its meaning must be determined by its
contents alone. It speaks for itself and a meaning cannot be
given to it other than that expressed.â Steuart v. McChesney,
444 A.2d 659, 661 (Pa. 1982) (internal quotation marks and
citation omitted). Accordingly, the cases recognize that
express language of condition is sufficient to establish a pay-
if-paid condition precedent. In C.M. Eichenlaub Co., for
example, the Pennsylvania Superior Court viewed as a
condition precedent to payment a clause that stated the
builder âshall be under no obligation to make any payments
to contractor . . . for materials delivered or for work
performed by contractor unless and until Builder is first paid
for such materials and work by the owner.â 437 A.2d at 967;
see also Cumberland Bridge Co., 8 Pa. D. & C. 3d at 479-80
(same). When certainty is lacking, however, Pennsylvania
11
courts tend to interpret payment provisions as pay-when-paid
clauses. See, e.g., United Plate Glass Co., 525 A.2d at 470.
But that is not our case. The first subparagraph of 6.f
states unequivocally that IOCâs payment to Shoemaker is a
condition precedent to Shoemakerâs obligation to pay Sloan.
We do not imagine that the parties intended otherwise merely
because they did not use additional language to underscore
their intent to create a pay-if-paid clause, as Sloan argues. To
mandate redundant provisions conjures the consequence that
only repetition makes a provision pay-if-paid. Moreover, we
agree that courts should not interpret contracts in a way that
ârender[s] at least one clause superfluous or meaningless.â
Garza v. Marine Transp. Lines, Inc., 861 F.2d 23, 27 (2d Cir.
1988). Thus, we are satisfied that the partiesâ chosen
language is sufficient to create a pay-if-paid clause in the first
subparagraph of 6.f.
The opposite conclusion would lead to bizarre results.
If Sloan failed to complete its work, per condition one, could
it then argue that it was still entitled to final payment under
the subcontract? We can see no principled reason to treat
differently conditions three and six (no payment to Sloan until
Shoemaker has received âfinalâ payment from IOC). That
seven conditions were enumerated in this provision, and
expressly delineated conditions precedents, weigh in favor of
a pay-if-paid construction. In the face of this plain language,
we shall not infer a contrary intent. 9
9
A leading construction law treatise suggests that there is
nothing inherently unfair about a pay-if-paid clause that
operates to shift risk of non-payment by the owner to the
12
However, that is not the end of the story. The parties
created an override provision in the second subparagraph of
6.f that modifies the pay-if-paid clause of the first
subparagraph. Specifically, the language of the second
subparagraph, noted above, demonstrates that the contracting
parties intended Sloan to have a âclaimâ against Shoemaker
for âany remaining final paymentâ in certain instancesâ
specifically, in the event that IOC failed to make final
payment (defined as the entire unpaid balance on the prime
contract) within six months.
A modification of a pay-if-paid condition is a not
uncommon practice in the construction industry. See The
subcontractor. This interpretation is favored where there is
âclear and unequivocal language set forth unambiguously on
the face of the contract.â For example, âthe subcontractor
should not be entitled to payment if a payment clause
specifically states that (1) payment to the contractor is a
condition precedent to payment to the subcontractor; or (2)
the subcontractor is to bear the risk of the ownerâs
insolvency; or (3) the subcontractor is to be paid exclusively
out of a fund the sole source of which is the owner's payment
to the subcontractor.â 2-7 Construction Law P 7.04 (Matthew
Bender ed., 2011). In our case, the first factor is clearly met.
Arguably, the third factor is also met given that the third
condition precedent in the first subparagraph of 6.f requires
that âOwner [IOC] shall have accepted the Work and made
final payment thereunder to Contractor [Shoemaker].â By
implication, the money used to make final payment to the
subcontractor comes directly from the final payment made to
the contractor.
13
Construction Contracts Book 160-63 (Daniel S. Brennan et
al. eds., 2d ed. 2008). There are several ways to modify pay-
if-paid clauses. Particularly â[i]n states that distinguish
between the two [i.e., pay-if-paid and pay-when-paid
provisions], an obvious way to modify a pay-if-paid clause is
to convert it to a pay-when-paid clause. This is accomplished
by eliminating the condition precedent after a contractually
stated period of time.â Id. at 162. Though we do not know
for certain, we can imagine several reasons why the parties
hereâboth sophisticated playersâmight have contracted for
such a modification. For one, âpragmatic contractor[s]â
understand subcontractorsâ reluctance to agree to an absolute
pay-if-paid clause and are thus sometimes amenable to some
form of modification or âsofteningâ of the condition
precedent. See id. at 160. Alternatively, Shoemaker may
have anticipated that Sloan would sue for payment if IOC
defaulted, notwithstanding the pay-if-paid clause. The second
part of Paragraph 6.f is a way to control the timing and extent
of Sloanâs legal action in that scenario.
In any event, the pay-if-paid condition, as modified,
yields after six months of IOC non-payment and is replaced
with a timing mechanism that specifies when and for how
much Sloan may sue Shoemaker. Specifically, that timing
mechanism allows Sloan to âpursue any remaining claim for
final payment.â It requires Sloan to wait to âpursueâ its
âclaimâ until Shoemaker has had an opportunity to recover
what it can from IOC. Accordingly, because IOC has failed
to pay for over six months and Shoemakerâs suit against IOC
for payment has concluded, Sloan is entitled to âpursue any
remaining claim for final payment.â
14
That conclusion leads to another issue: how to define
âany remaining claim for final payment.â The structure of
Paragraph 6.f demonstrates that the parties did not intend for
Sloanâs âremaining claim for final paymentâ to equal the
entire unpaid balance on the subcontract. Such a construction
would essentially nullify the first subparagraph: whether IOC
made, and Shoemaker received, final payment on the prime
contract would be irrelevant if, in cases of IOC non-payment,
Sloan was always entitled to the entire unpaid balance on the
subcontract.
To understand what the parties intended by the phrase
âremaining claim for final payment,â we must read Paragraph
6.f in connection with Paragraph 20, for, as noted, the former
is subject to the latter. Paragraph 20âs provisions on âdispute
resolutionâ reads in relevant part:
In the event [Sloan] asserts a claim for payment
of the Subcontract Sum or a portion thereof . . .
and in the event that [Shoemaker] in its sole,
exclusive and arbitrary discretion submits said .
. . Claim to [IOC] . . . for a decision or
determination, then all decisions and
determinations made by [IOC] or its
representative shall be binding upon [Sloan]
even though [Sloan] may not be a party thereto .
...
The decision or determination of [IOC] or its
representative making the first and/or original
decision shall be final and conclusive on
[Sloan] except to the extent that [Shoemaker]
may in its sole, exclusive and arbitrary
15
discretion . . . appeal to other representatives of
[IOC] or commence a proceeding in Court or
arbitration or other dispute resolution forum
....
Then, in such event, [Sloan] agrees to be bound
to [Shoemaker] to the same extent [Shoemaker]
is bound to [IOC] by any final decisions of said
other representative of [IOC] or of a Court of
competent jurisdiction or by any final or interim
award issued in arbitration or by any final
decisions issued in any other dispute resolution
forum . . . .
This provision, also common in construction contracts,
provides a procedural mechanism for pass-through claimsâa
process by which a general contractor may assert the claims
of its subcontractors against an owner. This mechanism is
known as a âliquidating agreement.â 10 See E. Elec. Corp. v.
10
âLiquidating agreementsâ in construction contracts are not
the same as âliquidatedâ in the liquidated damages sense (the
latter converting damages for a legal injury to a sum certain in
cash, see A.G. Cullen Const., Inc. v. State Sys. of Higher
Educ., 898 A.2d 1145, 1161-62 (Pa. Commw. Ct. 2006)
(noting that liquidated damages âdenotes the sum a party to a
contract agrees to pay if he breaks some [contractual]
promiseâ)). Liquidating agreements are the mechanism by
which pass-through claims are asserted and they can,
depending on how they are drafted, âliquidateâ damages (so
to speak) to the amount that the contractor has recovered from
the owner. They range in complexity and detail, depending
on the drafting. In any event, we do not suggest that a
16
Shoemaker Const. Co., 657 F. Supp. 2d 545, 560 (E.D. Pa.
2009) (acknowledging as a liquidating agreement language
that mirrors that in our case, namely, that the âSubcontractor
agrees to be bound to the Contractor to the same extent the
Contractor is bound to the Owner by any final decisions of
[Ownerâs representative] or of a Court of competent
jurisdiction . . .[,] whether or not Subcontractor is a party to
such proceedingsâ (alterations in original)). One reason for
including this mechanism in subcontracts is to give the
subcontractor some means of redress against the owner in
situations where it would otherwise have none because it
lacks privity of contract with the owner. Thomas J. Kelleher,
Jr., Brian G. Corgan & William E. Dorris, Construction
Disputes: Practice Guide with Forms 904 (2d ed. 2002).
Sloan argues that Paragraph 20 does not apply to this
case because its only purpose is to resolve disputes between
the subcontractor and the general contractor over whether a
particular payment is owed and was not intended to resolve
disputes over final payment. We disagree.
Sloanâs narrow interpretation of Paragraph 20 is
unlikely. It seems strange that Sloan would have negotiated
for a liquidating provision that is limited in the way it
suggests, as it would be of little worth to Sloan: without the
ability to press a claim for final payment through Shoemaker
against IOC, Sloan would have no other remedy against IOC
in situations of IOCâs default. Moreover, the language of
Paragraph 6.f belies Sloanâs limited interpretation of
liquidating agreement is the same thing as a liquidated
damages provision.
17
Paragraph 20. The former provision is explicit that if
Shoemaker pursues âits own claim for final payment,â that
claim âmay or may not include claims of the Subcontractor.â
Shoemaker, Sloan argues, was not pursuing any of its
(Sloanâs) claims in any event. We do not accept that
Shoemaker was asserting its own claims wholly independent
of Sloanâs. As a practical matter, there is no meaningful
distinction between a suit brought to pay Shoemakerâs
invoices (which include those of its subcontractors) and a suit
brought nominally as a claim for its subcontractorsâ
payments. In any event, Shoemaker made a claim of $6.5
million against IOC, $5 million of which was for the
exclusive benefit of its subcontractors. It intends to pass all
funds received from the settlement through to its
subcontractors on a proportional basis. In these
circumstances, that Shoemaker did not specifically name
Sloan in Shoemakerâs complaint against IOC is of no
consequence. We conclude that Paragraph 20 applies in this
case, and now turn to how this affects the nature and extent of
Sloanâs âremaining claim for final payment.â
Liquidating agreements that enable pass-through
claims, such as the one in the contract before us, can also
serve to limit the subcontractorâs damages to the amount the
contractor recovers from the owner. See Carl A. Calvert &
Carl F. Ingwalson, Jr., Pass Through Claims and Liquidation
Agreements, Constr. Lawyer, Oct. 1998, at 32, 33. Here, the
subcontract stated that âall decisions and determinations made
by [IOC]â in connection with a passed-through claim would
be âbinding upon [Sloan] even though [Sloan] may not be a
party thereto.â
18
This language in Paragraph 20 is repeated in the
second subparagraph of 6.f, the very provision that
establishes that Sloan has a âclaimâ in the event of IOC non-
payment. There, the parties agreed that nothing in that
Paragraph modifies Paragraph 20, âincluding[,] without
limitation, the provisions by which [Sloan] shall be bound to
the decision and/or determination of [IOC], its representatives
or a court or other fact finding dispute resolution forum[,]
concerning the claims of [Sloan].â In contract-speak, this is a
âsuper-override.â As Sloan is a sophisticated contracting
party, we cannot believe it did not understand the import of
this language that it agreed to twice. We thus conclude that
Paragraphs 20 and 6.f create a mechanism for passing through
Sloanâs remaining claims for final payment and peg Sloanâs
recovery to the amount that Shoemaker receives from IOC for
Sloanâs work.
We believe that this outcome is consistent with the
way in which the parties chose to allocate the risk of IOC
non-payment. As a general matter, industry custom places
the risk of an ownerâs insolvency on the general contractor.
See, e.g., Thos. J. Dyer Co. v. Bishop Intâl Engâg Co., 303
F.2d 655, 660-61 (6th Cir. 1962). But it is also industry
custom that âvarious legal and contractual provisions . . . are
used to reduce this [risk] to a minimum,â and that âexpress
condition[s] clearly showing that to be the intention of the
partiesâ may âtransfer this normal credit risk incurred by the
general contractor from the general contractor to the
subcontractor.â Id. at 660-61. A way to do this is to put in
the contract a pay-if-paid provision, as it is âmeant to shift the
risk of the ownerâs nonpayment under the subcontract from
the contractor to the subcontractor.â Fixture Specialists, Inc.
v. Global Const., LLC, No. 07-5614, 2009 WL 904031, at *4
19
(D.N.J. Mar. 30, 2009) (quoting MidAm. Const. Mgmt. Co. v.
Mastec N. Am., Inc., 436 F.3d 1257 (10th Cir. 2006)). Such
risk-shifting devices are easy to understand: â[f]ew
contractors can financially absorb a major default in payment
by an owner in connection with a large construction project.
In the absence of an enforceable pay-if-paid clause, if the
owner defaults, the likely result would be an insolvent or
bankrupt contractor.â Construction Contracts Book, supra, at
158.
In this case, however, we believe the parties intended,
per the second part of Paragraph 6.f, to share the risk of
IOCâs non-payment. Shoemaker will bear its share of the loss
by distributing all of the settlement proceeds pro rata to its
subcontractors and keeping nothing for itself. But under the
District Courtâs analysis, Shoemaker would bear all of the
loss and Sloan none. It would also force the other
subcontractors to shoulder a disproportionate amount of loss:
if Shoemaker is forced to pay Sloan the full balance, the
others might get nothing and certainly less than their pro rata
share. We do not believe Shoemaker and Sloan intended such
an outcome when they drafted the subcontract and we shall
not redistribute risk and loss in such a counterintuitive way
absent clear language to that effect. As such, Sloan must bear
its share of IOCâs failure to pay by accepting only a pro rata
share of the recovery by Shoemaker rather than the full
balance on its subcontract. 11
11
Sloan complains that the situation is contrary to
Pennsylvaniaâs public policy because, to procure the
subcontract, it was required to waive its mechanicâs lien
(which is a legal interest in the property held by those who
20
In addition, we do not favor an interpretation that
discourages contractors from vigorously pursuing owners for
sums due to subcontractors. Shoemaker purportedly spent
over $3 million in order to get back a $1 million settlement,
of which we understand only $300,000 has been paid. It has
stated that it will pass through all sums recovered subject to
the parties sharing pro rata in all expenses and costs. Were
we to interpret the subcontract to give Sloan the entire
balance on the subcontract, contractors in the future would be
very reluctant to expend such substantial costs for the
exclusive benefit of their subcontractors.
Finally, our interpretation is consistent with the
industry custom and usage surrounding liquidating
agreements, which is to âprovide a means to simplify the
pursuit of pass through claims while preserving working
relationships and reducing costs,â and the industryâs
understanding that âthe major reason for negotiating
liquidation agreements is to bring the claim against the
provide unpaid labor or materials to build or improve the
property, see Halowich v. Amminiti, 154 A.2d 406, 407 (Pa.
Super. Ct. 1959)), and was given the surety bond instead. It
cites to state law that conditions the validity of a mechanicâs
lien waiver on posting a surety bond. 49 Pa. Cons. Stat. Ann.
§ 1401(a)(2)(ii) (West 2007). However, this amendment to
Pennsylvania law came into effect after Sloan bid for and
accepted the subcontract. Without relying on that policy,
Sloan freely accepted the tradeoff between a mechanicâs lien
and a surety bond. In this context, we do not believe that
enforcing the contract as written and intended by the parties is
contrary to public policy.
21
responsible partyââhere the owner, IOC. Calvert &
Ingwalson, supra, at 37.
As Shoemakerâs suit against IOC qualified as a âpass-
throughâ claim of all its subcontractors, and IOCâs decision to
settle was a qualifying âdeterminationâ by it (the outcome of
which now binds Sloan), Sloanâs claim against Shoemaker is
limited to its pro rata share of the settlement proceeds. 12
B. Legal fees
Liberty Mutual also argues that it was entitled to
deduct (or offset) from Sloanâs recovery the latterâs share of
Shoemakerâs attorneysâ fees, costs, and expenses incurred in
the suit against IOC. Before we deal with the merits of this
issue, we note that Sloan cross-appeals the District Courtâs
decision to allow Liberty Mutualâs offset claims to proceed,
arguing they were not raised within 45 days of Sloanâs initial
claim. Thus we deal with the cross-appeal at the outset.
The bond required that Liberty Mutual raise all
disputes with Sloanâs claim within 45 days. As noted,
Liberty Mutual generally denied Sloanâs entire claim within
35 days, but rather than explaining the various offsets it
planned to claim, it simply reserved its rights and defenses.
Sloan argued to the District Court that Liberty Mutual was
12
Because we decide on the basis of the partiesâ express
agreement that Sloan is entitled only to its pro rata share of
the settlement amount, we need not determine whether the
Pennsylvania Contractor and Subcontractor Payment Act, 73
Pa. Stat. Ann. § 507 (West 2006), provides an additional basis
for imposing a pay-if-paid condition on the subcontract.
22
required to state the exact amount it disputed, including the
offsets for âtime and materials provided,â âlump sum
proposals performed,â and legal fees. The District Court
rejected that argument and held that Liberty Mutualâs
response met its obligations under Paragraph 6.1 of the
bond. 13 We agree.
Sloan relies on three cases to support its waiver
argument. The first is National Union Fire Insurance Co. v.
Bramble, Inc., 879 A.2d 101 (Md. 2005). But there the surety
did not refute the subcontractorâs claim at all; it merely
acknowledged receipt of the subcontractorâs letter and
requested proof of the claim. The other two cases relate
tenuously at best, as neither is precedential. See J.C. Gibson
Plastering Co. v. XL Specialty Ins. Co., 521 F. Supp. 2d 1326
(M.D. Fla. 2007) (vacated with instructions that it shall not be
cited or serve as precedent and modified to make exception
for facts not reasonably available in the 45-day period); Casey
Indus., Inc. v. Seaboard Surety Co., No. 1:06cv249, 2006 WL
3299932 (E.D. Va. Oct. 25, 2006) (unpublished decision
holding that the surety was precluded from developing new
bases for dispute outside the 45-day period).
In any event, it is clear to us that Sloanâs argument
runs contrary to standard industry practice. The Surety &
Fidelity Association of America explains in its amicus brief
that in recent revisions of the standard payment bond form,
13
Paragraph 6.1 required Liberty Mutual to answer Sloan
within 45 days of its receipt of Sloanâs claim, stating, inter
alia, the bases for challenging any disputed amounts of that
claim.
23
the industry chose language to clarify that Paragraph 6 does
not put sureties at risk of waiving claims to specific offsets.
Brief for Surety & Fidelity Assoc. of Am. as Amicus Curiae
Supporting Appellants, Liberty Mutual Ins. Co., Nos. 10-
1725 & 10-1765, at 15-17. The revised form clarifies that a
suretyâs failure to discharge obligations under Paragraphs 6.1
or 6.2 âshall not be deemed to constitute a waiver of
defenses.â
Once again, the consequences of Sloanâs interpretation
are untenable. Its construction would essentially require a
surety to state every reason or contention it has or may later
have in connection with a general denial of the claim lest it be
precluded from asserting those defenses in the future. 14 We
believe that Liberty Mutualâs response to Sloan met the
requirements of the bond as those requirements were
understood in the industry at the time of Liberty Mutualâs
response, and we thus conclude that it did not breach the
surety bond contract.
Turning now to the merits, Paragraph 20 of the
subcontract states that â[i]f [Sloan]âs claims are prosecuted or
defended by [Shoemaker] against [IOC] or others, then
[Sloan] agrees . . . to pay or reimburse [Shoemaker] for all
expenses and costs, if any, incurred in connection therewith.â
As discussed, we believe Paragraph 20 applies to this case
and Shoemaker asserted a pass-through claim on behalf of
14
Moreover, the bond required only a barebones demand for
payment of a sum certain without any backup documentation.
It makes little sense, then, to require the surety to reply with a
detailed and exhaustive accounting.
24
Sloan. Thus, the only remaining question is whether the term
âexpenses and costsâ includes attorneysâ fees in addition to
other litigation-related expenses and costs. We believe that it
does.
Sloan contends that if the parties had intended to
provide for attorneysâ fees in Paragraph 20, they would have
stated so explicitly. Indeed, the âsettledâ law of Pennsylvania
is that âattorneys[â] fees are recoverable from an adverse
party to a cause only when provided for by statute, or when
clearly agreed to by the parties.â Fidelity-Phila. Trust Co. v.
Phila. Transp. Co., 173 A.2d 109, 113 (Pa. 1961). The latter
is our case; the parties were sufficiently explicit that
attorneysâ fees and litigation costs were within the purview of
the contract. The most natural and likely meaning of
âexpenses and costsâ in a paragraph discussing procedural
mechanisms for lawsuits and other dispute resolution
proceedings is that the term includes attorneysâ fees and not
simply court and mediation costs. See Wrenfield
Homeowners Assân v. DeYoung, 600 A.2d 960 (Pa. 1991)
(interpreting contractual agreement to pay the âcosts of
collecti[ng]â home-owner association assessments as
including attorneysâ fees, given the broadness of that phrase
and the reasonableness of that interpretation in context);
Burrage v. Cnty. of Bristol, 210 Mass. 299, 300 (1911)
(noting the âword âexpensesâ [is] broad enough to include
counsel feesâ and whether it does depends on the context). 15
15
Our holding is limited to Liberty Mutualâs right to expenses
and costs (including attorneysâ fees) from Shoemakerâs case
against IOC. Because Liberty Mutualâs claim for attorneysâ
fees was dismissed at summary judgment, without discovery
25
* * * * *
For the reasons discussed above, we reverse the
District Courtâs Final Judgment to the extent that it granted
summary judgment to Sloan on (1) its interpretation of the
subcontract and (2) Liberty Mutualâs claim for the
proportional offset against Sloan of legal fees Shoemaker
incurred in its suit again IOC; we affirm the Courtâs denial of
Sloanâs waiver claim (the subject of Sloanâs cross-appeal in
this case); and remand for further proceedings consistent with
this opinion. Though the parties do not contest the stipulated
amounts of the offsets in the Final Judgment, we leave to the
District Court whether on remand they may argue those other
offsets.
regarding the amounts and reasonableness of those fees, we
leave it to Liberty Mutual to prove that on remand. However,
because we limit Sloanâs claim to its pro rata share of the
amount recovered so far, $300,000, we believe it reasonable
for Liberty Mutual to offset Sloanâs claim, at most, by the
appropriate pro rata share of that $300,000.
26