The Miller Act provides protection for contractors and suppliers on a federal construction project. The Act requires that the prime contractor on a federal project post a bond. This bond covers both first and second tier contractors and suppliers. Generally, if you are a third tier contractor or supplier, you have no rights under the Miller Act unless the bond says otherwise. First tier contractors and suppliers simply need to initiate a lawsuit against the bond within 1 year of furnishing labor and/or materials. Any party not directly contracted with the prime contractor must file their claim within 90 days of furnishing labor and/or materials to the project. The 90 day rule comes without any exceptions. This seems rather simple, but when contractual terms come into play, along with dynamic cash flow on these federal projects, complicated situations arise.

Contracts vs. Statutes

[quote style=”left”]A waiver of Miller Act payment bond rights is only enforceable if the waiver is: 1) in writing, 2) signed by the party waiving its payment bond rights, and 3) “executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.”[/quote]It is common in many subcontracts to include clauses or language that will dictate a dispute process. Usually, the language of the clause will try to hold off the contractor from submitting any bond claims until all contract dispute claims have been resolved between the prime contractor and the federal government. This language must be drafted very carefully because courts have determined some clauses like this are waivers that are banned by 40 U.S.C. s. 3133 of the Miller Act. A waiver of Miller Act rights is only enforceable if the waiver is in writing, signed by the waiving party, and executed after the work has been performed. Therefore, any sort of clause in a contract that results in the waiver of Miller Act rights is not enforceable.

Clauses that call for the dismissal or stay of bond claims may be considered unenforceable waivers if the result would cause a contractor to exceed the statute of limitations to file a bond claim. In other words, if the clause prevents a contractor from filing a bond claim within the 90 days or 1 year period (depending on the tier) following the last furnishing of labor/materials, the contract term would be considered an unenforceable waiver of Miller Act bond rights. These principles are evident in a string of cases over the past 20 years.

The Cases

The case, U.S. v. David Boland, Inc., 922 F.Supp. 597 (S.D.Fla. 1996), represents what courts used to decide before the Miller Act was amended to prevent subcontractors from waiving their rights before work has been performed. In this case, a subcontract existed with the following language:

[s]ubcontractor shall first pursue and fully exhaust [the procedures set forth in the standard disputes clause of the primary contract] before commencing any other action against Contractor for any claims it may have arising out of its performance of the Work herein.
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[Contractor shall] prosecute all claims submitted by Subcontractor under the contractual remedial procedure of the Prime Contract on behalf of and to the extent required by the Subcontractor.
***
[Subcontractor] agree[d] to stay an action or claim against [the prime contractor’s Miller Act bond] pending the complete and final resolution of the Prime Contract’s contractual remedial procedure.

The prime contractor moved to dismiss the subcontractors bond claim because the prime had filed a contract dispute claim against the federal government and had included the subcontractors costs in the claim. The court agreed and dismissed the case, reasoning that the subcontractor did not exhaust its administrative remedies. As the next case will show, if that case was decided after the amendment, the claim would most likely have been stayed.

In U.S. v. Dick/Morganti, 2007 WL 3231717 (N.D. Cal. 2007), the following subcontract language was being examined:

If the Owner [GSA] and the Contractor [Dick/Morganti], pursuant to the General Contract or by agreement, submit any dispute, controversy, or claim between them to arbitration or some other dispute resolution procedure specified in the General Contract and such a matter involves or relates to a dispute, controversy, or claim between the Contractor and the Subcontractor, Subcontractor agrees …to stay any action filed by the Subcontractor until the dispute resolution and appeals process between the Contractor and the Owner is exhausted.

The prime contractor had indicated that it intended to submit a claim against the federal government, including the subcontractor’s amount in this claim. The prime stated that this should result in a stay of the subcontractor’s bond claim. The court agreed, stating that the bond claim would be stayed IF the prime contractor submits its claim against the federal government.

A very recent case, however, exemplifies when neither dismissal or a stay are proper. In U.S. v. Zurich American Ins. Co., 99 F.Supp.3d 543 (E.D. Pa. 2015), the court refused to stay or dismiss a subcontractor’s bond claim despite a Contract Disputes Act Claim existing that possessed the amounts and claims from the subcontractor. A dispute resolution clause was included in the subcontract, which incorporated the requirements of the Contract Dispute Act. The prime contractor argued that this was grounds for dismissal or a stay.

The court did not agree. Dismissal was ruled out because the court was unwilling to potentially deprive the subcontractor of its Miller Act rights. If the bond claim was dismissed and could not be re-filed until after the other claim was settled, there was a strong possibility that the subcontractor would not be able to file within the statute of limitations. Essentially, the result would be an unenforceable waiver of the subcontractor’s rights.

The court did not allow for a stay either. The court held that the Miller Act entitles the subcontractor to bring a suit within 90 days after the completion of its work, so to say that recovery cannot occur until after the prime’s claim is finished would not be consistent with the terms of the Miller Act. The court further explained that it was unmoved by the claim that the prime contractor or surety would be prejudiced in the absence of a stay. The Court reasoned that both cases are entirely different and therefore can run at the same time.

What Does It All Mean?

There are a few things to take away from these cases:

  1. Miller Act Bond Claims will not be dismissed because a contract dispute claim is ongoing
  2. Miller Act Bond Claims may be stayed until the contract dispute claim is settled, BUT there must be a clear and express clause in the subcontract stating that a stay will be imposed.
    • The language should sounds something like this: “Any action filed by the subcontractor, including an action against the prime contractor’s Miller Act payment bond surety, will be stayed pending the complete resolution of any dispute resolution between the prime contractor and federal government that involves or includes the claims and amounts sought by the subcontractor.”
  3. Even if language like this is included in a subcontract, a subcontractor should still timely file a Miller Act bond claim in order to preserve its rights.

For more information on Miller Act claims, click here.

Summary
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Miller Act Claims Are Not Easily Tossed Aside
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The Miller Act is a powerful statute in place to protect subcontractors and suppliers on federal projects. Miller Act bond claims are not easily defeated.
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zlien
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