Forming joint ventures / partnerships for a specific public construction project is common. Sometimes, a joint venture relationship arises between entities by virtue of agreements and the conduct of the parties demonstrating they are, in actuality, operating as a partnership for a specific project. Well, what happens if a payment dispute arises on a federal project between the partners — can one of the partners assert a Miller Act bond claim? Typically, the answer is no, as the Ninth Circuit in U.S. f/u/b/o Briggs v. Grubb, 358 F.2d 508, 512 (9th Cir. 1996), explained:
“While a Miller Act payment bond does make the surety liable for labor and materials furnished by a subcontractor when the contractor under the bond defaults, such a bond does not make the surety liable for monies expended on the contract by a partner or joint venturer of the contractor under the bond.”
In this case, the government awarded the prime contract for a project in California to an Oregon-based contractor. The contractor provided Miller Act performance and payment bonds. The contractor, however, had never undertaken a project in California. As the project commenced, the contractor sought assistance and entered into an agreement with a California-based contractor (that was also a bidder on the same project). Due to a payment dispute, the California-based contractor filed suit against the Oregon-based contractor (prime contractor) and its Miller Act payment bond surety. The agreement that was entered into and evidence of the conduct of the parties established that the California-based contractor did not serve as a subcontractor, but as a partner or joint venturer for purposes of the project. For this reason, the California-based contractor could not recover under the payment bond.
Recently, the Middle District of Florida in U.S. Surety Company v. Edgar, 2014 WL 1664818 (M.D.Fla. 2014), ruled on a motion to dismiss where the prime contractor argued that the Miller Act payment bond claim should be dismissed because it was a claim from its joint venturer. While the facts of this case are complex, a completion prime contractor on a federal project entered into an agreement with a subcontractor to perform, among other things, dredging and providing the necessary equipment. The completion contractor contended that this agreement reflected that the subcontractor was actually a joint venturer of the completion contractor for purposes of the project. As a result of a lack of progress, the government threatened to terminate the completion contractor. The subcontractor further claimed that it was not getting paid which resulted in it not paying its equipment suppliers. The completion contractor’s surety, in an effort to avoid the government terminating the prime contractor, entered into a settlement agreement with the subcontractor whereby the surety would pay the subcontractor’s equipment vendor and would tender payment to the subcontractor. The government, nevertheless, terminated the completion contractor and a complicated dispute arose whereby the completion contractor and its surety sued the subcontractor. The subcontractor countersued asserting a Miller Act payment bond claim. The prime contractor and its surety moved to dismiss the payment bond claim arguing that the subcontractor was actually a joint venturer pursuant to its agreement with the completion contractor and, thus, could not assert a payment bond claim. The court, although it had access to the agreement and the settlement agreement with the surety, denied the motion to dismiss (a very early stage in the proceeding) without considering all of the relevant evidence including the conduct of the parties that would exemplify the joint venture / partner relationship between the entities. Clearly, if the evidence establishes that the subcontractor is elevated to a joint venturer, then it will not be able to recover against the bond.
If parties are operating as joint venturers for a specific project (even if a true partnership has not been formed and the prime contract was not awarded to the joint venture), an agreement between the parties should unambiguously reflect this purpose, especially if a joint venture relationship is the intent of the prime contractor. The other party needs to appreciate that such an agreement in conjunction with conduct during the course of construction demonstrating it is operating as a partner could hinder its right to recover against a Miller Act payment bond if a payment dispute arises. Perhaps this is alright if there is a good agreement in place between the parties that explains how risks are allocated, how payment is to be made, and with a dispute resolution provision, provided there is no real concern over the solvency of the prime contractor.
Please contact David Adelstein at firstname.lastname@example.org or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.