The Miller Act is legislation passed in order to protect the subcontractors, suppliers, and other down the chain laborers on federal construction projects. Under the Miller Act, general contractors on federal projects exceeding $100,000 in value must provide performance and payment bonds on which subcontractors and suppliers may file a claim after going unpaid. On private projects, such protection may not be as important or practical as these parties often have mechanics lien rights they can utilize in order to settle payment disputes. However, because public property is not subject to mechanics liens, mandating that a contractor post payment bonds provides similar protection to subcontractors and suppliers.
As we have written about before, Miller Act claims are not easily tossed aside or waived. It should come as no surprise, then, that the provisions of Miller Act prevail when they are at odds with contractual provisions. Recently, the U.S. District Court in Maryland determined that contingent payment clauses (pay if paid and pay when paid clauses) and indirect dispute resolution clauses in construction contracts do not control when in conflict with the Miller Act.
For more on pay if paid contracts and their validity, check out our Pay If Paid Clause Infographic.
The incredibly thorough decision of the case Tusco Inc. v. Clark Construction can be found here.
Clark Construction, the general contractor, hired Tusco as a subcontractor on a federal project to construct a new base of operation for the Defense Intelligence Agency in Bethesda, Maryland. As the project was well over $100,000, Clark obtained performance and payment bonds from Travelers. Tusco’s contract with Clark contained both a pay if paid provision and a provision stating that the subcontractor would also be bound by all terms of Clark’s contract with the United States (U.S.).
As with many projects, there were changes made while work was being completed resulting in change orders and increased payment for such changes. Though Tusco was paid the principal amount on the contract, the subcontractor remained unpaid for the amounts it was owed resulting from change orders throughout the project. Seeking payment, Tusco filed a bond claim on the project’s surety bond with Travelers. Tusco did not receive a payment, or even a response, and eventually filed suit.
Pay if Paid, Dispute Resolution Clauses
Travelers argued that the inclusion of pay if paid language in the subcontract should prevent Tusco from making a claim on the surety bond. According to Travelers, this language established Clark receiving payment form the U.S. was a condition precedent, without which Clark had no obligation to pay Tusco. In other words, Tusco was only entitled to be paid if and when Clark was paid.
Travelers also asserted that because Clark’s contract with the U.S. contained a provision stating that all payment disputes would first go through dispute resolution procedures before a suit would be filed, Tusco was also bound to use the dispute resolution process. This argument flowed from the subcontract language that stated the subcontractor would also be subject to the terms of the prime contract between Clark and the U.S.
The Miller Act Prevails
The court was unpersuaded by these arguments. As for the pay if paid language, the court was quick to note that federal courts have consistently ruled that a surety may not benefit from pay if paid or a pay when paid clause between a contractor and a sub. The court explained that the whole purpose behind the Miller Act is to take some of the risk away from subcontractors and subs and placing that potential liability on general contractors. Further, there are practical concerns about forcing a subcontractor to wait for the general contractor to receive payment. During this time period, a potential claimant would have its hands tied with no voice in the process. Considering that relating back under the Miller Act is a losing battle, the time to file a Miller Act claim would quickly expire, leaving a potential claimant with little recourse. While a subcontractor or supplier may waive their Miller Act rights, such a waiver must be done clearly and explicitly. For this purpose, pay if paid language will not suffice.
Regarding the dispute resolution language, the court held that the Miller Act again prevented the stripping of the subcontractor’s right to a bond claim. Had Tusco been required to wait for the dispute resolution process to play out, its Miller Act claims would have expired. The court explained that under the Miller Act, a claim arises due to nonpayment and the passage of time. Claims are not contingent on anything else- not prior payment of the contractor nor the contractor’s use of the dispute resolution process. Also mentioned by the court was the very real possibility that Tusco would be injured by the use of the dispute resolution process without opportunity to intervene. Neither Clark nor the U.S. would have any incentive to quickly settle the claim for Tusco’s benefit. What’s more, should the parties settle, Tusco could be relegated to a greatly diminished sum, or no payment at all.
I suppose the takeaway from this case is that this is just another case proving the strength of claimant’s rights under the Miller Act. Pay if paid provisions are generally disfavored across the country, and in many places even banned, so it is no great surprise that such a clause would not hold up in the face of a Miller Act claim. In order to waive any rights, courts often require such a waiver to be done in writing and a heightened knowledge of the rights being waived. With the Miller Act, this is doubly true. While the Miller Act may have some warts, the legislation goes a long way to ensuring payment for the workers down the chain on federal construction projects.