The U.S. Miller Act gives subcontractors, suppliers, and laborers a bond claim on federal projects. The Act requires that a payment bond be posted by the prime contractor for every federal project. Think of the bond as a pile of money. When a contractor or subcontractor goes unpaid, they have a claim against this pile of money, rather than a claim against the underlying property itself. The underlying intent of the Miller Act is to provide lower-tiered construction participants protection, and to provide recourse when they go unpaid. Accordingly, general contractors do not have any rights under the Miller Act. Therefore, it is very beneficial for GC’s to have parties under them waive their Miller Act rights, but as this California federal court has expressed, a waiver of Miller Act rights must be very clear and straightforward. Tricky wording and contract provisions are not enough to constitute a waiver.
The Case Background
McCarthy Building Companies, Inc. contracted with the Department of Veteran Affairs (“VA”) to construct an 80-bed psychiatric hospital in Palo Alto, California. The contract had an alternative dispute resolution stipulation. Put simply, any disputes that arose would be settled outside of court. McCarthy then entered into a subcontract with DVBE Trucking Construction Co. to conduct paving, grading, and excavation duties on the project. The subcontract (specifically Section 11.1) mandated that DVBE be bound by the dispute resolution procedures stipulated in the prime contract between VA and McCarthy.
Work on the project was delayed by VA. This delay caused complication and required additional work to be done by McCarthy, DVBE and other subcontractors. Eventually, McCarthy submitted a request for additional payment on behalf of itself and all its subcontractors. The dispute resolution lasted over two years, but DVBE refused to finalize the agreement. The U.S., on behalf of DVBE, then initiated a suit against McCarthy, Federal Insurance Company, and Traveler’s Casualty and Surety through the Miller Act, breach of contract, account stated, and quantum meruit. Initially, all parties agreed to stay the proceedings until negotiations were finalized between McCarthy and VA, but eventually the stay was lifted. The defendants motioned to reinstate the stay.
In U.S. v. McCarthy Building Companies, Inc. et al, the main issue we are concerned with is the Miller Act claim. The defendants argument in this case to stay the proceedings is that Section 11.1 of the subcontract stipulates that if DVBE has a claim involving VA, it must follow the dispute resolution proceedings in the prime contract. Therefore, in this scenario where the outcome of this suit is directly affected the outcome of the dispute being negotiated between VA and McCarthy, this proceeding must be stayed until that dispute is resolved.
DVBE argued that Section 11.1 of the subcontract constitutes as a waiver of its Miller Act rights, but the waiver does not meet the statutory requirements and is therefore unenforceable. The court agreed, reasoning that the provisions forced DVBE to await a decision from a process it was not allowed to participate in and be bound by that decision. The provision is directly against the intent of the Miller Act and therefore, effectively, an unenforceable waiver of Miller Act rights. The court stated
Here, Section 11.1 is an invalid waiver of DVBE’s Miller Act claim. First, because the subcontract was signed before the work began, Section 11.1 was not an effective waiver of the Miller Act under 40 U.S.C. § 3133(c). Second, Section 11.1 does not constitute a “clear and explicit” waiver of DVBE’s rights under the Miller Act.
Therefore, the term of the subcontract was declared an invalid waiver of Miller Act rights and the motions to stay and to dismiss were denied.
The Miller Act affords subcontractors, suppliers, and laborers very unique and powerful rights to protect themselves against nonpayment. Therefore, courts make it difficult for these rights to be waived. If you are a subcontractor or other party benefiting from the Miller Act, find comfort in the fact that it is near to impossible for a general contractor to swindle you out of your rights. That being said, it is still best practice to read and understand everything in your contract before signing. A more clear and explicit provision could have easily lost this subcontractor its Miller Act rights.