2011 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-1-2011

Sloan & Company v. Liberty Mutl Ins Co

Precedential or Non-Precedential: Precedential

Docket No. 10-1725

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Recommended Citation

"Sloan & Company v. Liberty Mutl Ins Co" (2011). 2011 Decisions. Paper 612.

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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)
2

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
3

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 

(“Shoemaker”), failed to pay a subcontractor, Sloan & 

Company (“Sloan”), the remaining balance on its subcontract. 

The appellant in this case, Liberty Mutual Insurance 

Company (“Liberty Mutual”), 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 

Mutual’s appeal, and affirm the ruling on Sloan’s crossappeal.

I. Background

Isla of Capri Associates LP (“IOC”) owned and 

developed waterfront condominiums in Philadelphia. 

Shoemaker contracted with IOC to build the project (the 

“prime contract”). Shoemaker then lined up various 

subcontractors that included Sloan, who agreed to perform 

drywall and carpentry work on the project (the 

“subcontract”). Payment for the subcontractors’ work was 

insured by a surety bond issued by Liberty Mutual. At the 
4

project’s 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 subcontractors’ work was untimely and 

deficient.1

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 subcontract’s terms, found in Paragraph 6.f, 

conditioned Sloan’s right to payment on Shoemaker’s 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. 

 Shoemaker then refused to pay Sloan the full 

amount of the remaining balance Sloan claimed was due 

under their subcontract—$1,074,260. 

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 Sloan’s claim for payment 

because it identified Sloan as one of the subcontractors who 

were “bad actors.” A1018.
5

various offsets. Sloan’s claim, and Liberty Mutual’s alleged 

offsets, broke down as follows:

Sloan’s Liberty Undisputed

Claim Mutual’s Amount in

Alleged Offsets Controversy

$1,074,260

Legal fees 

(attributable to 

Sloan)

$16,5792

Repairs $40,370

Deficiencies $24,600

Time & 

Materials 

Provided

$66,324

Lump Sum 

Proposals 

Performed

$141,320

Subtotal of 

offsets claimed

$289, 193

$785,067

 2 In its second cross-motion for summary judgment, Liberty 

Mutual claimed that this amount was much higher. 
6

Meanwhile, Shoemaker’s lawsuit against IOC hit a 

dead end. Shoemaker learned that IOC’s 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 “First 

Judgment”). It rejected Liberty Mutual’s interpretation of the 

subcontract as conditioning Sloan’s right to payment on 

IOC’s 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 Sloan’s suit based on a provision of the subcontract in 

which Sloan “agree[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.” On information that Shoemaker’s case was settled, 

Sloan moved to lift the stay and for entry of summary 

judgment. 
7

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 awarded—$785,067), for an additional sum 

aggregating $145,895 (the “Second Judgment”).

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 “Final Judgment”). 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 parties agreed to preserve their rights to appeal all 

three of the District Court’s judgments, and Liberty Mutual 

does so, challenging the District Court’s interpretation of the 

subcontract. It argues that Shoemaker’s obligation to pay 

 The combined amounts in the Final Judgment

(excluding interest) were $91,790 less than Sloan’s initial 

claim of $1,074,260. 

 5

 The principal amount of this judgment was $41,179.

6

 The Final Judgment dealt with the remaining amounts in 

dispute. Per the parties’ 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 parties’ 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.
8

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 Sloan’s 

work. Liberty Mutual also contests the District Court’s 

determination on litigation costs. It argues it is entitled to 

deduct Sloan’s share of the legal fees stemming from 

Shoemaker’s suit against IOC. In addition, Sloan crossappeals 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 Sloan’s initial 

claim.7

II. Discussion 

Summary judgment is in order when “there is no 

genuine dispute as to any material fact and the movant is 

entitled to judgment as a matter of law.” Fed. R. Civ. P. 

56(a). Our review over the District Court’s 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 Court’s 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 parties’ citizenship. 28 U.S.C. § 1332. We have 

jurisdiction over the District Court’s rulings under 28 U.S.C. 

§ 1291. 
9

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: “Final 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 . . . .” That subparagraph then lists those conditions 

precedent (seven in all), one of which (condition three) is that 

“[IOC] shall have accepted the Work and made final payment 

thereunder to [Shoemaker]” (emphasis added). Another 

(condition six) is that “[Shoemaker] shall have received final

payment from [IOC] for [Sloan’s] Work” (emphasis added). 

Liberty Mutual argues that these conditions constitute 

a “pay-if-paid” 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 

subcontractor’s work. Pennsylvania courts follow suit, and

construe clauses that condition payment to the subcontractor 

on the general contractor’s receipt of payment from the owner 

as pay-if-paid clauses.

8

Sloan, on the other hand, argues that the first 

subparagraph of 6.f does not establish a condition precedent 

to Sloan’s payment, but rather is a “pay-when-paid” clause. 

On the surface, these terms seem much the same (save, 

perhaps, that paying if paid does not tell us when that 

 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). 

 8 It is undisputed that Pennsylvania law applies.
10

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 contractor’s 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 “Contractor Dispute 

Resolution”) 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 

. . . .
11

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 “[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.” 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 payif-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 “shall 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.” 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 
12

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 IOC’s payment to Shoemaker is a 

condition precedent to Shoemaker’s 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 

“render[s] at least one clause superfluous or meaningless.” 

Garza v. Marine Transp. Lines, Inc., 861 F.2d 23, 27 (2d Cir. 

1988). Thus, we are satisfied that the parties’ 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 “final” 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 
13

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 “claim” against Shoemaker 

for “any remaining final payment” in certain instances—

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 

“clear and unequivocal language set forth unambiguously on 

the face of the contract.” For example, “the 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 owner’s 

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.” 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 “Owner [IOC] shall have accepted the Work and made 

final payment thereunder to Contractor [Shoemaker].” By 

implication, the money used to make final payment to the 

subcontractor comes directly from the final payment made to 

the contractor. 
14

Construction Contracts Book 160-63 (Daniel S. Brennan et 

al. eds., 2d ed. 2008). There are several ways to modify payif-paid clauses. Particularly “[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.” Id. at 162. Though we do not know 

for certain, we can imagine several reasons why the parties 

here—both sophisticated players—might have contracted for 

such a modification. For one, “pragmatic contractor[s]” 

understand subcontractors’ reluctance to agree to an absolute 

pay-if-paid clause and are thus sometimes amenable to some 

form of modification or ‘softening’ 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 Sloan’s 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 “pursue any remaining claim for 

final payment.” It requires Sloan to wait to “pursue” its 

“claim” 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 Shoemaker’s suit against IOC 

for payment has concluded, Sloan is entitled to “pursue any 

remaining claim for final payment.” 
15

That conclusion leads to another issue: how to define 

“any remaining claim for final payment.” The structure of 

Paragraph 6.f demonstrates that the parties did not intend for 

Sloan’s “remaining claim for final payment” 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 

“remaining claim for final payment,” we must read Paragraph 

6.f in connection with Paragraph 20, for, as noted, the former 

is subject to the latter. Paragraph 20’s provisions on “dispute 

resolution” 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 
16

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 claims—a 

process by which a general contractor may assert the claims 

of its subcontractors against an owner. This mechanism is 

known as a “liquidating agreement.”10

 10 “Liquidating agreements” in construction contracts are not 

the same as “liquidated” 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 “denotes the sum a party to a 

contract agrees to pay if he breaks some [contractual] 

promise”)). Liquidating agreements are the mechanism by 

which pass-through claims are asserted and they can, 

depending on how they are drafted, “liquidate” 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 

 See E. Elec. Corp. v. 
17

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 “Subcontractor 

agrees to be bound to the Contractor to the same extent the 

Contractor is bound to the Owner by any final decisions of 

[Owner’s representative] or of a Court of competent 

jurisdiction . . .[,] whether or not Subcontractor is a party to 

such proceedings” (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. 

Sloan’s 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 IOC’s default. Moreover, the language of 

Paragraph 6.f belies Sloan’s limited interpretation of 

 

liquidating agreement is the same thing as a liquidated 

damages provision.
18

Paragraph 20. The former provision is explicit that if 

Shoemaker pursues “its own claim for final payment,” that 

claim “may or may not include claims of the Subcontractor.” 

Shoemaker, Sloan argues, was not pursuing any of its 

(Sloan’s) claims in any event. We do not accept that 

Shoemaker was asserting its own claims wholly independent 

of Sloan’s. As a practical matter, there is no meaningful 

distinction between a suit brought to pay Shoemaker’s 

invoices (which include those of its subcontractors) and a suit 

brought nominally as a claim for its subcontractors’ 

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 Shoemaker’s 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 

Sloan’s “remaining claim for final payment.” 

Liquidating agreements that enable pass-through 

claims, such as the one in the contract before us, can also 

serve to limit the subcontractor’s 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 “all decisions and determinations made 

by [IOC]” in connection with a passed-through claim would 

be “binding upon [Sloan] even though [Sloan] may not be a 

party thereto.” 
19

This language in Paragraph 20 is repeated in the 

second subparagraph of 6.f, the very provision that 

establishes that Sloan has a “claim” in the event of IOC nonpayment. There, the parties agreed that nothing in that 

Paragraph modifies Paragraph 20, “including[,] 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].” In contract-speak, this is a 

“super-override.” 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 

Sloan’s remaining claims for final payment and peg Sloan’s 

recovery to the amount that Shoemaker receives from IOC for 

Sloan’s 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 owner’s insolvency on the general contractor. 

See, e.g., Thos. J. Dyer Co. v. Bishop Int’l Eng’g Co., 303 

F.2d 655, 660-61 (6th Cir. 1962). But it is also industry 

custom that “various legal and contractual provisions . . . are 

used to reduce this [risk] to a minimum,” and that “express 

condition[s] clearly showing that to be the intention of the 

parties” may “transfer this normal credit risk incurred by the 

general contractor from the general contractor to the 

subcontractor.” Id. at 660-61. A way to do this is to put in 

the contract a pay-if-paid provision, as it is “meant to shift the 

risk of the owner’s nonpayment under the subcontract from 

the contractor to the subcontractor.” Fixture Specialists, Inc. 

v. Global Const., LLC, No. 07-5614, 2009 WL 904031, at *4 
20

(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: “[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.” 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 

IOC’s 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 Court’s 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 IOC’s 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 

Pennsylvania’s public policy because, to procure the 

subcontract, it was required to waive its mechanic’s lien 

(which is a legal interest in the property held by those who 

 
21

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 “provide a means to simplify the 

pursuit of pass through claims while preserving working 

relationships and reducing costs,” and the industry’s 

understanding that “the 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 mechanic’s 

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 mechanic’s 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. 
22

responsible party”—here the owner, IOC. Calvert &

Ingwalson, supra, at 37.

As Shoemaker’s suit against IOC qualified as a “passthrough” claim of all its subcontractors, and IOC’s decision to 

settle was a qualifying “determination” by it (the outcome of 

which now binds Sloan), Sloan’s 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 Sloan’s recovery the latter’s share of 

Shoemaker’s attorneys’ 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 Court’s 

decision to allow Liberty Mutual’s offset claims to proceed, 

arguing they were not raised within 45 days of Sloan’s initial 

claim. Thus we deal with the cross-appeal at the outset. 

The bond required that Liberty Mutual raise all 

disputes with Sloan’s claim within 45 days. As noted, 

Liberty Mutual generally denied Sloan’s 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 parties’ 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.
23

required to state the exact amount it disputed, including the 

offsets for “time and materials provided,” “lump sum 

proposals performed,” and legal fees. The District Court 

rejected that argument and held that Liberty Mutual’s 

response met its obligations under Paragraph 6.1 of the 

bond.13

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 subcontractor’s claim at all; it merely 

acknowledged receipt of the subcontractor’s 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). 

 We agree.

In any event, it is clear to us that Sloan’s 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 Sloan’s claim, stating, inter 

alia, the bases for challenging any disputed amounts of that 

claim. 
24

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 

surety’s failure to discharge obligations under Paragraphs 6.1 

or 6.2 “shall not be deemed to constitute a waiver of 

defenses.” 

Once again, the consequences of Sloan’s 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

Turning now to the merits, Paragraph 20 of the 

subcontract states that “[i]f [Sloan]’s 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.” 

As discussed, we believe Paragraph 20 applies to this case

and Shoemaker asserted a pass-through claim on behalf of 

 We 

believe that Liberty Mutual’s response to Sloan met the 

requirements of the bond as those requirements were 

understood in the industry at the time of Liberty Mutual’s 

response, and we thus conclude that it did not breach the 

surety bond contract.

 

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.
25

Sloan. Thus, the only remaining question is whether the term

“expenses and costs” includes attorneys’ 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 attorneys’ fees in Paragraph 20, they would have 

stated so explicitly. Indeed, the “settled” law of Pennsylvania 

is that “attorneys[’] fees are recoverable from an adverse 

party to a cause only when provided for by statute, or when 

clearly agreed to by the parties.” 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 

attorneys’ fees and litigation costs were within the purview of 

the contract. The most natural and likely meaning of 

“expenses and costs” in a paragraph discussing procedural 

mechanisms for lawsuits and other dispute resolution 

proceedings is that the term includes attorneys’ fees and not

simply court and mediation costs. See Wrenfield 

Homeowners Ass’n v. DeYoung, 600 A.2d 960 (Pa. 1991) 

(interpreting contractual agreement to pay the “costs of 

collecti[ng]” home-owner association assessments as 

including attorneys’ 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 “word ‘expenses’ [is] broad enough to include 

counsel fees” and whether it does depends on the context).15

 15 Our holding is limited to Liberty Mutual’s right to expenses 

and costs (including attorneys’ fees) from Shoemaker’s case 

against IOC. Because Liberty Mutual’s claim for attorneys’

fees was dismissed at summary judgment, without discovery 

 
26

* * * * *

For the reasons discussed above, we reverse the 

District Court’s Final Judgment to the extent that it granted 

summary judgment to Sloan on (1) its interpretation of the 

subcontract and (2) Liberty Mutual’s claim for the 

proportional offset against Sloan of legal fees Shoemaker

incurred in its suit again IOC; we affirm the Court’s denial of 

Sloan’s waiver claim (the subject of Sloan’s 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 Sloan’s claim to its pro rata share of the 

amount recovered so far, $300,000, we believe it reasonable 

for Liberty Mutual to offset Sloan’s claim, at most, by the 

appropriate pro rata share of that $300,000.