2011 D e c i sion s O p inion s of the U nit e d S t a t e s C our t of Appe al s for the Thir d C ir c uit

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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 Appea l 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: SCIRIC A, 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 I ngersoll & Rooney 50 South 16th Street Two Liberty Place, Suite 3200 Philadelphia, PA 19102

- 25553 Counsel for Appellee /Cross

- Appellant Sloan & Company

_______________
OPINION OF THE COURT

_______________ AMBRO, Circuit Judge

This case involves pr incipally the interpretation of a construction sub contract. 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 a ppellant 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 fo llow, w e 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 cross

appeal

. I. Background

Isla of Capri Associates LP (“IOC”) owned and developed waterfront condomi niums 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 ” ). Pa yment for the subcontractors’ work was insured by a surety bond issued by Liberty Mutual. At the4 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,

rese rving 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 s ubcontract

— $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 i t identified Sloan as one of the subcontractors who were “bad actors.” A1018.5 vario us offsets. Sloan’s claim , and Liberty Mutual’s alleged offsets, broke down as follows:

Sloan’s Liberty Undisputed C laim Mutual’s Amount in Alleged Offset s Controversy $1

, 074,260

Legal fees (attributable to Sloan) $16,579 2

Repairs $40,370

Deficiencies $24,600

Time & Materials Provided $66,324

Lump Sum Proposals P erformed $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 subcont ractors their pro rata share of amounts owed in

exc hange 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 milli on 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 Sloa n “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 intere st (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 favo r of Sloan on February 12, 2010 (the “Final Judgment”). I ncluded 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 pre judgment 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 combi ned 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 f

or 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 cross

appeals th e $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 whe n “there is no genuine di spute as to any material fact and the mov ant i s 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). W e also exercise plenary review over the District Court’ s interpretation of state law. Emerson Radio Corp. v. Orion Sales, Inc

. , 253 F.3d 159, 16 2 ( 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 a fter the last of the following to occur, the occurrence of all of which shall be conditions precedent to such final
payme nt . . . .” That subparagraph then lists those conditions precedent (seven in all), one of which (condition three) is that “[IOC] shal l 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 argue s that th ese 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 clause s

. 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. C t. 1981); Cumberland Bridge Co. v. Lastooka , 8 Pa. D. & C.3d 475, 482 ( C.P. Washington 1977).

8 It is undisputed that Pennsylvania law a pplies.10 payment is due). But in industry jargon, they are different. In contrast to a pay

- if

- paid clause, a pay

- when

- paid clause do es not esta blish a condition precedent, but merely create s 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. 198 7).

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 th at 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
ag ainst [Shoemaker] and its S urety [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 R esolution”) 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 pr ovisions 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.

P ennsylvania follows the plain meaning rule of contract interpr etation , 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 pay

if

- paid condition precedent. In C.M. Eichenlaub Co.

, for example, the Pennsylvania Superior Cour t 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, Pennsylvania12 courts tend to interpret payment provisions as pay

- when

- paid clauses. See, e.g.

, Uni ted 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 i s a condition precedent to Shoemaker’s obligation to pay Sloan. We do not imagine that the parties inte nded 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. Mo reover, we agree that courts should not interpret contracts in a way that “render[s] at least one clause superfluous or meaningless.” Garza v. Marine Trans p . Lines, Inc ., 861 F.2d 23, 27 (2d Cir. 1988). Thus, we are satisfied that the parties’ chosen lan guage 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 provi sion, and
expres sly 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 the13 However, that is not the end of the story. The parties
create d an override provision in the se cond subparagraph of 6.f that modifies the pay

- if

- paid clause of the first subparagraph

. Specifically, t he 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

uncom mon practice in the construction industry. See The

subcontractor. This interpretation is favored where there is “clear an d 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 t o 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 7.0 4 (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 pay

if

- paid clauses. Particularly “[i]n states that distinguish between the two [ i.e.
, p ay

- 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. Tho ugh 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 i d. at 160. Alternatively, Shoemaker may have anticipated that Sloan would sue for payment if IOC defaulted, notwithstanding th e 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

w ith 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 ha s 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 co nclusion 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 b e 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 arbitrary16 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 decision s issued in any other dispute resolution forum

. . . . This provision, also common in construction contracts, provides a procedural mechanis m 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 th e 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 liquida ted 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” da mages (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 r edress 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 it s only purpose is to resolve disputes between the subcontractor and the general contractor over whether a particu lar 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 t he 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 thin g as a liquidated damages pro vision

.18 Paragraph 20. The f ormer 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 acce pt 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 nomin ally 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 throug h to its subcontractors on a proportional basis

. In these circumstances, that Shoemaker did no t 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 thi s 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
cont ractor recovers from the owner. See Carl A. Ca lvert & Carl F. Ingwalson, Jr., Pass Through Claims and Liquidation Agreements

, Constr . Lawyer, Oct. 1998, at 32, 33. Here, the sub contract stated that “all decisions and determinations made by [IOC]” in conn ection 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 non

payment. There, the parties agreed that nothing in that Paragraph modifies Paragraph 20, “ including [,] without limitat ion, the provisions by which [Sloan] shall be bound to the decisi on and/or determination of [IOC] , its representa tives 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 place s 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 b e 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 *420 (D.N.J. Mar. 30, 2009) (quoting MidAm. Const. M gmt. Co. v. Ma stec 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 Paragrap h 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 u nder the District Court’s analysis, Shoemaker woul d 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

s hare. 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 lan guage 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 who21 In addition

, we do not favor an interpretation that discourages contractors from vigorously pursuing owners for sums d ue 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 subcontract ors.
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 writte n and intended by the parties is contrary to public policy.22 responsible party”

— here the owner, IOC. Ca lvert & Ingwalson, supra , at 37.

As Shoemaker’s suit against IOC qualified as a “pa ss

through” 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. Leg al 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 t hey wer e not raised within 45 days of Sloan’s initial claim. Thus we deal with the cross

- appeal at the outset.

The bond required th at Liberty Mutual raise all disputes wit h 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 de fenses. Sl oan argued to the District Court that Liberty Mutual was

12 Because we decide on the basis of the parties’ express agreement that Sloan is entitl ed 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 s ub contract.23 required to state the exact amount it disputed, including the offsets for “time and m aterials p rovided, ” “lump sum
p roposals p erformed, ” and legal fees. The District Court rejected that a rgument and held that Liberty Mutual’s response met its obligations under Paragraph 6.1 of the b ond. 13

Sloan relies on three cases to support its waiver argument. The first is National Union Fire Ins urance 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); Ca sey 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 const itute a waiver of defenses. ”

Once again, the consequences of Sloan’s interpretation are untenable. Its construction would essentially require a surety to state e very 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 Slo an met the requirements of the b ond as t hose 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 b ond 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.

Sl oan 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 recoverabl e from an adverse party to a cau se 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 cos ts 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. DeYo u ng , 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 broadne ss of that phrase and the reasonableness of that interpretation in context); Burrage v. Cnty. of Bristol , 210 Mass. 299, 30 0 (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 att orneys’ fees) from Shoemaker’s case against IOC. Because Libe rty Mutual’s claim for attorney s ’ fees was dismissed at summary judgment, without discovery26 * * * * *

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 stipul ated 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.