MILLER ACT – CONSIDERATIONS INVOLVING SUBCONTRACTOR WHEN GOVERNMENT ASSESSES LIQUIDATED DAMAGES

imagesPrime contractors and subcontractors that work on federal construction projects often find themselves in the garden variety payment dispute dealing with (1) entitlement and liability for additional work and  (2) project delays, especially when the government assesses liquidated damages. These issues can put the prime contractor in the undesirable position because it may not have been paid for the additional work items and the government may be assessing liquidated damages against the prime contractor for the delays.

 

The case of U.S. ex rel. W.W. Gay Mechanical Contractor, Inc. v. Walbridge Aldinger Co., 2013 WL 5859456 (11th Cir. 2013), illustrates this garden variety construction payment dispute scenario between a subcontractor and prime contractor on a delayed federal project. This case involves a subcontractor asserting a Miller Act payment bond claim (pursuant to 40 U.S.C. s. 3133) against the prime contractor’s surety for unpaid retainage and additional work items, as well as a breach of contract claim against the prime contractor for the same amounts. The prime contractor argued that it was entitled to withhold payment from the subcontractor due to delays to the completion date of the project that the subcontractor was responsible for causing. In particular, the prime contractor was being assessed sizable liquidated damages from the government (Navy) and although it was appealing the liquidated damages exposure through the Contract Disputes Act, it wanted to offset monies that were owed to the subcontractor based on its potential liquidated damages exposure. The prime contractor relied on subcontract provisions that contained that “time is of the essence” as to the subcontractor’s performance; that it was entitled to withhold sums from the subcontractor for its breach of contract; and that the subcontractor may be liable for liquidated damages and other damages for causing delays in the progress of the project.

 

At the trial court level, the district court granted partial summary judgment in favor of the subcontractor finding that the subcontractor was entitled to payment for the retainage and additional work. Attorneys‘ fees were also granted to the subcontractor.

 

On appeal, the Eleventh Circuit first discussed the purpose of the Miller Act and what a party needs to do to assert a Miller Act claim:

 

The MIller Act protects subcontractors on federal projects by requiring contractors to post a bond to ensure payment to their subcontractors. To establish a Miller claim, W.W. Gay [subcontractor] must show (1) that it supplied labor and materials for work in the particular contract at issue; (2) that it is unpaid; (3) that it had a good faith belief that the materials were for the specified work; and (4) that jurisdictional requisites are met.” Walbridge Aldinger, 2013 WL at *1 (internal citations omitted).

 

Irrespective of favorable contractual provisions, the Eleventh Circuit held that the prime contractor “has failed to produce more than a ‘scintilla of evidence’ that W.W. Gay’s alleged delays resulted in the liquidated damages assessed against it by the Navy.” Walbridge Aldinger, 2013 WL at *2.  Although the prime contractor tried to rely on deposition testimony that correspondence was sent to the subcontractor regarding the delays, this was not proof that the subcontractor actually caused delays to the project. This is especially true because the prime contractor was also arguing that the Navy caused delays to the project, i.e., the likely reason it was appealing the liquidated damages assessment.

 

The Eleventh Circuit further analyzed the issue of whether the subcontractor was entitled to monies for additional work pertaining to re-routing an underground storm pipe. The Court found that the record reflected that when the subcontractor learned of the issue regarding the planned location of the storm pipe it notified the prime contractor and the prime contractor directed the subcontractor to install the pipe in the planned location. The prime contractor then waited six weeks before sending a request for information to the government and the government responded telling the prime contractor to re-route the pipe. The prime contractor then directed the subcontractor to re-route the pipe (through the constructive change directive provision or CCD provision in the subcontract). The subcontractor then notified the prime contractor that it expects to get paid for this work and the prime contractor indicated it would pay. The government, however, only paid for a fraction of the additional work item. For this reason, the prime contractor argued that even though it directed the extra work it was only responsible for paying the subcontractor the amount allowed by “applicable provisions” of the prime contract (agreement with the government). In support of this, the prime contractor relied on the following language in its subcontract:

 

Contractor may, without invalidating the Subcontract or any bond given hereunder, order extra and/or additional work, deletions, or other modifications to the Work, such changes to be effective only upon written order of Contractor. Any adjustment to the Subcontract Price or the time for completion of the Work shall be made in accordance with the applicable provisions of the Agreement between Owner and Contractor and the lump sum or unit prices set forth in Exhibit E or, in the absence of such provisions on an agreed, equitable basis. Notwithstanding any inability to agree upon any adjustment or the basis for an adjustment, Subcontractor shall, if directed by Contractor, nevertheless proceed in accordance with the order, and the Subcontract shall be adjusted as reasonably determined by the Contractor with any dispute to be resolved after the completion of the Work. If requested by the Contractor, the Subcontractor shall perform extra work on a time and material basis, and the Subcontract price shall be adjusted based on time records and materials checked by the Contractor on a daily basis.”

 

Yet, the prime contractor never advised what “applicable provisions” of the prime contract supported its argument. Thus, the Eleventh Circuit maintained that the subcontractor should be entitled to be paid for its work on a time and materials basis based on time sheets per the very provision the prime contractor relied upon. Notably, the Eleventh Circuit minimized the significance of the contractual language by stating:

 

“Even assuming that the interpretation of the contract raises issues of material fact, Walbridge is still liable, as the district court found, under the duty of good faith and fair dealing implied in all contracts. Walbridge ordered W.W. Gay to install the storm pipe despite the problem that W.W. Gay had promptly called to Walbridge’s attention; Walbridge then waited six weeks to ask the Navy for advice; and after W.W. Gay had already finished installing the pipe, Walbridge ordered W.W. Gay to reroute the pipe. W.W. Gay understandably insisted that it receive full compensation for its work, and Walbridge accepted, or at least manipulatively encouraged, this expectation. Moreover, the only reason that the Navy did not pay for W.W. Gay’s work is because of Walbridge’s initial error in judgment. Thus, Walbridge cannot now invoke the Navy’s refusal to pay to avoid its obligations to W.W. Gay.” Walbridge Aldinger, 2013 WL at *5.

 

 

CONSIDERATIONS:

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  • It’s hard to play both sides of the fence. In this case, the prime contractor wanted to play both sides by arguing on one hand that the Navy (government) caused delays it was assessing liquidated damages for and on the other side arguing that the subcontractor caused delays. It takes more than “conjecture” or argument to establish an actual delay. If a party argues delay, it needs to prove the delay (to the critical path that contributed to the overall delay to the project’s schedule) and not just that it “may” have caused delay or that it “could” have caused the delay based on the outcome of the dispute with the government over the assessment of liquidated damages. If the prime contractor wants to employ this tactic, it should include a provision that would allow it and its surety to withhold sums for any potential delay, although unsupportable, if the government assesses liquidated damages until the government’s assessment of liquidated has been resolved and that all claims between the parties regarding such sums shall be stayed pending the resolution. Naturally, such a clause needs to be ironed out with much more specificity and thoroughly considered because there are pros and cons to the provision including whether such a provision would be enforceable against a Miller Act surety (considering suits against the surety must be filed within a year from the subcontractor’s final furnishing). Otherwise, playing both sides can be challenging unless the prime contractor is taking the position with supportable schedule analysis that the subcontractor actually caused delays to the critical path.

 

  • The entitlement to additional work items is a common dispute between subcontractors and prime contractors. Thus, it is important to ensure that there are good notice provisions in the subcontract and that the subcontract clearly specifies what a subcontractor needs to do to be entitled to additional work. In this case, the subcontractor did send notice and was directed to proceed with the work and maintained time sheets verifying its additional work amounts. Too often subcontractors do not keep track of such amounts on a time and materials basis as specified in the subcontract and/or fail to submit timely notice.

 

  • The Eleventh Circuit’s discussion of the implied obligation of good faith and fair dealing is an interesting discussion. The reason being is that it creates an argument that a subcontractor could be entitled to additional work items even if it did not truly comply with contractual provisions, especially if the subcontractor was directed to perform the work pursuant to a construction change directive or another provision.

 

For more information on the a Miller Act payment bond, please see http://www.floridaconstructionlegalupdates.com/522/ and http://www.floridaconstructionlegalupdates.com/an-argument-to-recover-attorneys-fees-against-a-miller-act-payment-bond/

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.