Can a Miller Act payment bond claimant (e.g., subcontractor) recover shared savings from the payment bond surety? The opinion in Fisk Electric Company v. Fidelity and Deposit Company of Maryland, 2013 WL 592907 (E.D.La. 2013), answered this question in the affirmative.
In this case, a prime contractor on a federal pump station project entered into a purchase order agreement where its electrical subcontractor would supply a diesel generator for $2,644,005 which was later increased to $2,710,792. The prime contractor did not pay the subcontractor and the Miller Act payment bond surety tendered $2 Million but refused to pay the $710,792 delta. As a result, the subcontractor instituted an action against the payment bond. The surety contended that there was an issue of fact regarding the delta because it included an excessive amount (profit) over and above the actual cost of the generator that was in the form of shared savings. In other words, there was a shared savings incentive if the subcontractor was able to purchase the generator on the open market below a certain amount that was previously quoted to the prime contractor from another entity. The subcontractor was able to do so and this shared savings (profit) was built into the agreed price of the purchase order.
The Eastern District of Louisiana granted the subcontractor’s motion for summary judgment ruling that the subcontractor could recover the shared savings (profit) since “the amount properly recoverable under the Miller Act by a subcontractor is the agreed contract amount without regard to whether the amount may or may not include profits.” Fisk Electric Company, supra, at *4 quoting Price v. H.L. Coble Const. Co., 317 F.2d 312, 318 (5th Cir. 1963). Indeed, the Ninth Circuit previously found that a subcontractor could recover from a Miller Act surety shared savings pursuant to a shared savings provision in the subcontract that required savings to be divided evenly. Taylor Constr., Inc. v. ABT Serv. Corp., 163 F.3d 1119 (9th Cir. 1998).
Although the surety argued that summary judgment should not be granted because the subcontractor may have perpetrated a fraud based on its large markup which could have absolved the surety of obligations under the bond, the surety did not have any evidence to support its defense. As the court explained: “The mere fact that the negotiated price included an incentive in the form of shared savings is not, in and of itself, suggestive of anything improper.” Fisk Electric Company, supra, at *6.
Knowing what is recoverable under a Miller Act payment bond will allow a claimant to best present their damages and allow a surety or prime contractor defending the surety to evaluate their defenses to the payment bond claim.
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