A SUPPLIER AND SUBCONTRACTOR’S PURSUIT OF ATTORNEY’S FEES IN MILLER ACT PAYMENT BOND ACTION

costWhile the Miller Act does not provide a statutory basis for the recovery of attorney’s fees, this does not mean that attorney’s fees cannot be recovered in a Miller Act payment bond action against the surety and prime contractor.  If the underlying contract between the claimant and its customer provides for the recovery of attorney’s fees, this can support a basis to recover attorney’s fees against the surety and prime contractor in a Miller Act payment bond action.

 

The Eleventh Circuit in U.S. f/u/b/o Southeastern Municipal Supply Co., Inc. v. National Union Fire Ins. Co. of Pittsburg, 876 F.2d 92 (11th Cir. 1989), held that a subcontractor’s supplier could recover attorney’s fees against the Miller Act surety based on a contractual provision between the supplier and the subcontractor. Other federal circuits have found similarly.  See GE Supply v. C&G Enterprises, Inc., 212 F.3d 14 (1st Cir. 2000) (supplier to prime contractor entitled to recover attorney’s fees based on attorney’s fees provision included in invoices sent to contractor with each delivery); U.S. f/u/b/o Maddux Supply Co. v. St. Paul Fire & Marine Ins. Co., 86 F.3d 332 (4th Cir. 1996) (surety liable to supplier for attorney’s fees and interest based on subcontractor’s credit application with supplier); U.S. f/u/b/o Carter Equipment Co., Inc. v. H.R. Morgan, Inc., 554 F.2d 164 (5th Cir. 1977) (finding that equipment rental supplier to subcontractor could recover attorney’s fees against surety based on contractual provision between supplier and subcontractor).

 

In pursuing a Miller Act action, it is good practice to look at the underlying contract, purchase order, or documentation forming the agreement to determine if there is a contractual basis to recover attorney’s fees.  If there is, this basis should be specifically pled in the complaint against the Miller Act surety (as well as the prime contractor as the principal of the bond) to support a basis to recover attorney’s fees.  This contractual basis should not be overlooked.  In addition, suppliers and subcontractors on federal projects may want to ensure that such a contractual basis is included in their respective agreements in the event that a Miller Act action needs to be pursued.  While suppliers will typically have a contractual provision in their agreement with their customer that allows them to recover attorney’s fees in collection efforts, there are circumstances where a prime contractor may not want to include an attorney’s fees provision in its subcontract.  One reason for this may be because the prime contractor does not want to give the subcontractor a basis to recover attorney’s fees in a Miller Act action.  Although this may not help the prime contractor in a lawsuit initiated by the subcontractor’s supplier (where there is a contractual provision for attorney’s fees between the supplier and subcontractor), the lack of a contractual basis could force a subcontractor to consider how it wants to proceed knowing it does not have a basis to recover attorney’s fees in its Miller Act action.

 

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.

LIQUIDATED DAMAGES PROVISIONS IN SUBCONTRACTS (PARTICULARLY SUBCONTRACTS FOR PUBLIC PROJECTS)

imagesThe assessment of liquidated damages should be a consideration to contractors on all projects, specifically public (federal and state) projects where the prime contract routinely contains a liquidated damages provision for delays to the completion of the project.  Many times, the subcontract will contain a provision that will allow the prime contractor to pass-through liquidated damages assessed by the government (owner) to the responsible subcontractor.  Well, what if the government did not assess liquidated damages?  Can the prime contractor still assess liquidated damages against a responsible subcontractor in accordance with the subcontract?  The opinion in U.S. f/u/b/o James B. Donahey, Inc. v. Dick Corp., 2010 WL 4666747 (N.D.Fla. 2010), would allow a prime contractor to assess liquidated damages against a subcontractor even if the government did not assess liquidated damages against the prime contractor.

 

In this case, a prime contractor entered into a contract to design and build four buildings at the Pensacola Navy Station and provided a Miller Act payment bond.  The prime contractor hired a subcontractor to perform the plumbing and mechanical work.   Due to delays the general contractor believed were caused by the subcontractor, it withheld substantial payment from the subcontractor.  The prime contractor contended that the subcontractor caused 63 days of delay to the occupancy of the Visitors Quarters building and 32 days of delay to the Aviation Rescue Swimmers School building.  The subcontract provided that in the event of delays, liquidated damages would be assessed in the amount of $5,400 per day for delay to the Aviation Rescue Swimmers School and $24,898 per day for delay to the Visitors Quarters.

 

 

The subcontractor filed a Miller Act lawsuit against the prime contractor and its surety (amongst other causes of actions).  The prime contractor filed a counterclaim based on the liquidated damages that it assessed against the subcontractor, an amount in excess of what it was withholding.  The subcontractor moved for summary judgment arguing that the liquidated damages provision was unenforceable (and the prime contractor could not assess liquidated damages) because the provision was a pass-through provision; thus, because the government did not assess liquidated damages against the prime contractor, the prime contractor could not assess liquidated damages against the subcontractor.  The subcontractor further argued that the liquidated damages provision is unenforceable because it is being treated as a penalty because the subcontractor is not being provided the benefit of extensions of time granted by the government to the prime contractor that would negate delays.   The prime contractor countered that nothing in the subcontract stated that liquidated damages could only operate as a pass-through claim, that being that the government had to assess liquidated damages before the prime contractor could assess liquidated damages against the subcontractor.  The prime contractor further countered that the extensions of time granted by the government were irrelevant since they did not pertain to the subcontractor’s scope of work or affect the subcontractor’s milestone completion dates.

 

 

The Northern District of Florida agreed with the prime contractor and denied the subcontractor’s motion for summary judgment because it found the liquidated damages provision enforceable.  The Northern District explained as it pertained to the subcontractor’s Miller Act payment bond claim:

 

In considering a Miller Act claim, the trier of fact must thus look to the subcontract to determine the amount due. ‘[I]f the subcontract provides for a condition precedent to payment, or a part thereof, which is not fulfilled, the subcontractor cannot recover labor and material expenditures against the surety on the payment bond.’ In other words, if there has been a default by the subcontractor, the general contractor may assert recoupment or setoff as a defense. Because there is a genuine issue of material fact regarding the timeliness of Donaghey’s [subcontractor] performance and, therefore, Donaghey’s entitlement to the amounts withheld by Dick [prime contractor], summary judgment is inappropriate as to Donaghey’s Miller Act claim.”

Dick Corporation, 2010 WL at *3 quoting U.S. f/u/b/o Harrington v. Trione, 97 F.Supp. 522, 527 (D.C.Colo. 1951).

 

Stated differently, the Miller Act payment bond surety was entitled to rely on the prime contractor’s assessment of liquidated damages as a set-off  / recoupment defense  to the subcontractor’s Miller Act claim.  Also, if there were other conditions precedent that the subcontractor failed to comply with, the Miller Act surety would be entitled to many of these defenses as well.

 

 

Unknown-1The Northern District further maintained that a liquidated damages provision under Florida law will be enforceable if the provision does not operate as a penalty, meaning damages upon a breach must not be readily ascertainable at the time of the contract and must not be grossly disproportionate to any damages reasonably expected to follow from the breachDick Corporation, 2010 WL at *4 quoting Mineo v. Lakeside Village of Davie, LLC, 983 So.2d 20, 21 (Fla. 4th DCA 2008). The Court held that the liquidated damages provision did not operate as a penalty and it was not intended to operate only as a pass-through mechanism.  See, e.g., U.S. f/u/b/o Sunbeam Equip. Corp.  v. Commercial Constr. Corp., 741 F.2d 326, 328 (11th Cir. 1984) (“The fact that the Navy did not assess liquidated damages as such against Commercial [prime contractor], would not foreclose recovery of delay damages, if Commercial could demonstrate that damages arising out of the subcontract with Sunbeam [subcontractor] were not otherwise compensated.”)

 

There are three important take-aways from this opinion:

 

  • Liquidated damages provisions in subcontracts can operate as more than a pass-through provision for liquidated damages assessed by the government (owner).  These provisions can operate as a mechanism to assess liquidated damages against the subcontractor even if the government / owner has not assessed liquidated damages against the prime contractor.  Prime contractors and subcontractors need to keep this in mind when drafting and negotiating liquidated damages provisions.  If the intent is for the provision to only operate as a pass-through provision, this intent should be clearly stated in the subcontract.  If the intent is for it to operate more than as a pass-through provision, then this risk needs to be considered by the subcontractor.

 

  • Liquidated damages are typically going to be deemed enforceable if they are not intended to operate as a penalty.

 

  • A Miller Act payment bond surety will be entitled to rely on set-off / recoupment affirmative defenses contained within the subcontract including, without limitation, the prime contractor’s assessment of liquidated damages or other delay damages against the subcontractor pursuant to the subcontract.

 

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.

 

SUPPLIER’S BURDEN OF PROOF IN A MILLER ACT PAYMENT BOND CLAIM

UnknownWhat does a supplier need to do to prove a Miller Act payment bond claim?  A supplier must prove the following elements:

 

(1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing [of the Miller Act].”  Jems Fabrication, Inc., USA v. Fidelity & Deposit Co. of Maryland, 2014 WL 1689249 (5th Cir. 2014).

 

As you can see, the burden of proof for a supplier in a Miller Act claim is not overly challenging, especially if the supplier has delivery or shipping tickets establishing that it delivered materials to the specific project and/or that its customer ordered the materials for the specific project.  If there is a purchase order with the supplier and its customer for the project that would also help support that the materials were supplied for purposes of that project.  And, if the supplier’s customer’s contract / subcontract requires the customer to supply those same materials for the project, that also helps to support that the materials were intended for the prosecution of the work.  But, importantly, it is irrelevant whether the supplier actually delivered the materials to the project or that the materials were incorporated into the project. See U.S. f/u/b/o Carlson v. Continental Cas. Co., 414 F.2d 431, 433 (5th Cir. 1969) (affirming summary judgment in favor of supplier where supplier showed it had good faith that the materials were supplied for specific project although supplier did not establish that materials were actually incorporated into project).

 

But, even though the materials do not necessarily have to be incorporated into the project, the supplier’s claim will still be subject to the standard that the materials were supplied for the prosecution of the work provided for in the contract and that the supplier had a good faith belief that the materials were intended for the specified work.  For example, in Erb Lumber Co. v. Gregory Industries, Ltd., 769 F.Supp. 221 (E.D.Mich. 1991), the supplier’s customer opened an account with the supplier for multiple projects.  However the supplier’s claim for unpaid materials for the specific federal project at-issue included materials supplied AFTER the project was certified as complete and were likely used for one of its customer’s other projects.  For this reason, the court expressed, “Indeed, given that contract work was certified as complete prior to any delivery materials by Erb [supplier], it is impossible for any of the materials to have been provided in prosecution of the contract work….Good faith delivery is not a substitute for supplying materials in prosecution of work provided for in the contract.”   Erb Lumber, 769 F.Supp. at 225.

 

If you are a supplier, it is important to understand your burden of proof and the elements you need to prove in a Miller Act payment bond claim.  If you are a surety or prime contractor defending the surety, it is also important to understand the supplier’s burden of proof to appropriately defend the claim and evaluate a potential resolution to the claim if it appears clear the materials supplied were used in the prosecution of the work.

 

 

For more information on the preservation of a Miller Act payment bond claim, please see:  https://floridaconstru.wpengine.com/miller-act-payment-bond-and-third-tier-subs-or-suppliers/.

 

 

 

 

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.

 

CAN A JOINT VENTURER / PARTNER OF PRIME CONTRACTOR RECOVER UNDER THE MILLER ACT PAYMENT BOND

UnknownForming 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 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.

RECOVERING SHARED SAVINGS (PROFIT) FROM A MILLER ACT SURETY

14587028-mmmainCan 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 evenlyTaylor 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.

 

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.

VENUE FOR MILLER ACT PAYMENT BOND DISPUTE

imagesCAHCUM9ZThe venue (or locale of the forum) in which to initiate or transfer a Miller Act (40 USC s. 3131-3134) payment bond dispute is an important consideration.    The Miller Act provides that the venue must be “in the United States District Court for any district in which the contract was to be performed and executed, regardless of the amount in controversy.”  40 USC s. 3133(3)(B).  However, this venue requirement will not prevent a party from initiating the Miller Act payment bond lawsuit or transferring the lawsuit to a venue governed by a mandatory forum selection provision (one in which provides an exclusive venue for disputes) in the subcontract. See, e.g., U.S. f/u/b/o Pittsburgh Tank & Tower, Inc. v. G&C Enterprises, Inc., 62 F.3d 35  (1st Cir. 1995) (finding that Miller Act payment bond lawsuit was subject to venue provision in subcontract).

 

 

For instance, in U.S. f/u/b/o MDI Services, LLC v. Federal Insurance Company, 2014 WL 1576975 (N.D.Ala. 2014), a subcontractor on a federal project initiated a Miller Act payment bond lawsuit against the surety and the prime contractor in the Northern District of Alabama because that is where the project was located. The surety and prime contractor moved to transfer the venue of the lawsuit to the Middle District of Florida pursuant to a venue provision in the subcontract.  The district court explained that “a valid forum-selection clause can trump the Miller Act’s venue provision.”  MDI Services, supra, at *2 citing In re Fireman’s Fund Ins. Cos., 588 F.2d 93, 95 (5th Cir. 1979) (finding that Miller Act venue clause is subject to variation pursuant to the parties’ forum selection clause).  The district court, therefore, granted the motion to transfer venue.

 

If you are a prime contractor, it is a safe idea to include language in the forum selection provision that reflects that it governs any claim against the contractor’s payment bond surety.  This way, if the dispute is asserted only against the payment bond surety, the surety (routinely being defended by the prime contractor) can transfer the venue to the mandatory venue per the forum selection provision in the subcontract.  On the other hand, if you are a subcontractor  and the venue is silent as it relates to claims regarding the payment bond surety, perhaps you only want to assert the payment bond claim against the surety (and not the prime contractor) to, at a minimum, create the argument that the surety should not be able to transfer the venue based on a forum selection provision that should not govern the surety.

 

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.

MILLER ACT PAYMENT BOND AND THIRD TIER SUBS OR SUPPLIERS

untitledSubcontractors and suppliers working on federal projects need to understand their recourse in the event they remain unpaid–the Miller Act payment bond (40 USC s. 3131 – 3134).  Prime contractors, likewise, need to know how far down stream their Miller Act payment bond applies.  In other words, if a subcontractor hires a sub-subcontractor or supplier, does the Miller Act payment secure nonpayment to the sub-subcontractor or supplier? YES! What about a sub-sub-subcontractor or supplier (third tier entities) to a sub-subcontractor? NO!

 

Simply put, the Miller Act payment bond is not designed to protect third tier or more remote entities.  The Miller Act provides in relevant part:

 

(2) Person having direct contractual relationship with a subcontractor.–A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. 40 USC s. 3133(b)(2).

 

A third tier subcontractor, by way of example, that does not have a direct relationship with a subcontractor (engaged by the prime contractor) does not have recourse against the Miller Act payment bondSee J.W. Bateson Co. v. United States ex rel. Board of Trustees of National Automatic Sprinkler Industry Pension Fund, 434 U.S. 586 (1978) (explaining that congress knew the difference between subcontractor and sub-subcontractor when drafting statute so those remote parties not in privity with the subcontractor have no recourse against the bond).

 

The recent decision in U.S. f/u/b/o M&M Insulation, Inc. v. International Fidelity Ins. Co., 2014 WL 1386452 (W.D.Okla. 2014), illustrates that the Miller Act payment bond does not provide protection to a sub-sub-subcontractor (third tier subcontractor).

 

In this case, the following contractual relationship is important:

 

Owner = United States

Prime = Nationview/Bhate Joint Venture III (joint venture entity)

Subcontractor = Bhate Environmental Associates (entity that was part of joint venture prime)

Sub-subcontractor =Jennings Service Company

Sub-sub-subcontractor = M&M Insulation (claimant- third tier subcontractor)

 

The claimant, M&M Insulation, argued that it is really a second tier subcontractor (sub-subcontractor) that has rights under the Miller Act bond because the prime contractor and subcontractor Bhate Environmental Associates (“Bhate”) were in reality one-in-the-same and should be treated as a single entity.    To support this, the claimant argued that (i) there was not a written subcontract between the prime contractor and Bhate; (ii) Bhate identified itself as the prime contractor in its subcontract with Jennings Service Company (second tier subcontractor); (iii) Bhate shared the same office as the prime contractor; and (iv) Bhate was not listed as a subcontractor in the government’s records (probably because the joint venture never identified Bhate as a subcontractor in its proposal/bid). In other words, the claimant argued that the prime contractor was a sham entity controlled by Bhate and, thus, they should be regarded as a unitary contractor which would make Jennings Service Company the subcontractor and M&M a sub-subcontractor protected under the Miller Act.

 

Unfortunately for the claimant, the Western District of Oklahoma did not buy the argument.  The Court was not going to simply disregard corporate formalities because the joint venture subcontracted a portion of the work to one of the entities that made up the joint venture.  The joint venture was the prime contractor and there is nothing in the record that was sham about the fact that the joint venture hired Bhate as a subcontractor even though there was not a written agreement memorializing the subcontract.   Although the Court was willing to give the claimant an opportunity to provide additional documentation to support its theory that the prime contractor was a sham entity, the Court’s ruling reflects the unlikely scenario of the claimant actually proving this relationship.

 

Based on the Court’s ruling, the claimant’s recourse was against the sub-subcontractor that engaged it in a breach of contract action.  If the sub-subcontractor had pay-if-paid language in the subcontract, then this could pose an issue for the claimant.  The key is to know the recourse for nonpayment before undertaking work.  For instance, if you know you are a third tier entity that does not have recourse against the Miller Act payment bond, perhaps you need to negotiate the contract with that in mind (removing pay-if-paid language or negotiate other language and accept certain risks).

 

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.

SUPPLIER / SUB-SUBCONTRACTOR NOTICE REQUIREMENTS UNDER THE MILLER ACT

imagesSub-subcontractors and suppliers to subcontractors working on federal projects NEED to know what they need to do to preserve Miller Act payment bond rights. Prime contractors need to know too so that they know what defenses to raise against the unwary sub-subcontractor/supplier that asserts a claim against their Miller Act payment bond. The Miller Act requires:

 

A person having a direct contractual relationship with a subcontractor but no contractual relationship, express or implied, with the [prime] contractor furnishing the payment bond may bring a civil action on the payment bond on giving written notice to the contractor within 90 days from the date on which the person did or performed the last of the labor or furnished or supplied the last of the material for which the claim is made. The action must state with substantial accuracy the amount claimed and the name of the party to whom the material was furnished or supplied or for whom the labor was done or performed. The notice shall be served–
(A) by any means that provides written, third-party verification of delivery to the contractor at any place the contractor maintains an office or conducts business or at the contractor’s residence; or
(B) in any manner in which the United States marshal of the district in which the public improvement is situated by law may serve summons.
40 U.S.C. s. 3133 (b)(2)

 

In U.S. f/u/b/o Columbus Fire & Safety Equipment Co., Inc. v. Anderson Electric Co., Inc., 2014 WL 931262 (M.D. GA 2014), a supplier to a subcontractor was not paid on a federal project. The supplier notified the Miller Act surety and prime contractor of the non-payment. However, the supplier appeared to only notify the surety of the specific amount it claimed it was due which the surety communicated to the prime contractor. When the supplier remained unpaid, it instituted a Miller Act lawsuit. The surety and prime contractor moved for summary judgment arguing that the supplier failed to provide proper notice to the prime contractor pursuant to the Miller Act. Specifically, the surety and prime contractor argued that the supplier failed to notify the prime contractor of the amount the supplier claimed to be due as required by the Miller Act.

 

Under the Miller Act, “If a subcontractor fails to pay a supplier of materials on such a project, that supplier can sue on the bond by giving written notice to the general contractor within ninety days of last supplying the material for which the claim is made.” Anderson Electric, supra, at *2 citing 40 USC s. 31333(b)(2).

 

The question in this case was whether the prime contractor was on sufficient notice of the supplier’s claim since it was not provided with direct notice from the supplier of the amount the supplier claimed it was owed. The Middle District of Georgia noted that courts typically allow flexibility concerning the method notice is given. However, the notice must be sufficiently specific to place the prime contractor on notice of the claim that the supplier is asserting. “The purpose of the notice requirement of the Miller Act is to alert a general contractor that payment will be expected directly from him, rather than from the subcontractor with whom the materialman [supplier] dealt directly.” Anderson Electric, supra, at *3 quoting United States ex rel. Jinks Lumber Co. v. Fed. Ins. Co., 452 F.2d 485, 487 (5th Cir.1971). Regarding the notice requirement, the Middle District of Georgia stated:

 

That notice does not, however, have to be entirely in one writing for it to comply with the Miller Act. Written notice may be considered in conjunction with other writings or even oral statements to determine whether the general contractor was adequately informed, expressly or impliedly, that the supplier is looking to the general contractor for payment so that it plainly appears that the nature and state of the indebtedness was brought home to the general contractor.Anderson Electric, supra, at *3 (internal quotations omitted and citation omitted).

 

Here, there was no evidence that the supplier notified the prime contractor of the amount it claimed it was owed. However, there was evidence that the supplier notified the surety of the amount it claimed it was due and the surety notified the prime contractor of this amount within the 90-day deadline. For this reason, the Middle District of Georgia denied the summary judgment and found that “communication between the…claimant, the contractor’s surety, and the general contractor can be considered by the jury in its determination of whether the general contractor received sufficient notice, that the supplier is looking to the general contractor for payment of some specific amount of a specific subcontractor’s indebtedness.” Anderson Electric, supra, at *4.

 

This opinion illustrates the importance of a supplier or sub-subcontractor giving the prime contractor on a federal project proper notice of its claim for non-payment within 90 days of their final furnishing date. Not doing so can be fatal to their Miller Act claim. A prime contractor that is aware of this will raise this as a defense and move for summary judgment on this point. In this case, it appeared that the surety assisted the supplier by notifying the prime contractor of the supplier’s claimed amount within the supplier’s 90 day deadline. Also, due to the flexibility of the notice requirements, the supplier/sub-subcontractor may have arguments to survive a summary judgment, especially if it notified the surety and the surety notified its principal-prime contractor within 90 days of the supplier/sub-subcontractor’s final furnishing date. But, it should not even get to this point as the notice requirements of the Miller Act should absolutely be met to ensure Miller Act payment bond rights are timely preserved.

 

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.

THE STATUTE OF LIMITATIONS ON A MILLER ACT PAYMENT BOND CLAIM AND THE DOCTRINE OF EQUITABLE TOLLING

UnknownComplying with the one-year statute of limitations to assert a Miller Act (40 USC s. 3133) payment bond claim is an absolute must! Not complying will likely deprive the claimant of its payment bond rights. A claimant should never want this scenario as, in most instances, it is always better to file a lawsuit and preserve the rights to the payment bond. In a recent non-Florida federal case, U.S.A ex rel. Liberty Mechanical Services, Inc. v. North American Specialty Ins., 2014 WL 695106 (E.D.Pa. 2014), the Court discussed whether the doctrine known as equitable tolling could toll the statute of limitations to file a Miller Act payment bond action so that a late filed payment bond lawsuit was deemed timely filed.

 

In Liberty Mechanical Services, the Department of Veteran Affairs hired a contractor to preform renovation work. The prime contractor hired a mechanical and plumbing subcontractor. The subcontractor completed its work in January 2012 and was owed approximately $53,000. As a result of nonpayment, it obtained a copy of the prime contractor’s payment bond from the Department of Veteran Affairs in September 2012 (nine months from completing its work–there were allegations that it had difficulty obtaining a copy of the bond from the government). The subcontractor then sent a letter to the surety advising that it would not provide close out documents until it was paid in full and that its lawyer will be filing a claim against the bond. The surety responded that it would get the ball rolling regarding the claim while reserving all of its rights. Subsequently, the prime contractor reached out to the subcontractor and advised that it would pay and, therefore, an action against the bond would not be necessary. However, in February 2013, more than a year after the subcontractor completed its work, it still had not received payment from the prime contractor. Then, the surety told the subcontractor that it would not pay because the subcontractor’s claim was now time-barred by the one-year statute of limitations to sue on a Miller Act bond. Accordingly, in June 2013, approximately fifteen months from the subcontractor’s completion date, it filed a Miller Act lawsuit.

 

The Miller Act mandates:

 

“[E]very contractor on a federal government contract exceeding $100,000 to provide ‘[a] payment bond with a surety … for the protection of all persons supplying labor and material in carrying out the work provided for in the contract. Any supplier or sub-contractor who has not been paid in full within 90 days for labor performed or supplies furnished may bring a civil action on the payment bond for the amount unpaid at the time the civil action is brought and may prosecute the action to final execution and judgment for the amount due… The Act requires that suit must be brought no later than one year after the day on which the last of the labor was performed or material was supplied by the person bringing the action.” Liberty Mechanical Services, supra, *3 (internal citations and quotations omitted).

 

Here, the Miller Act lawsuit was admittedly outside the one-year statute of limitations (more than one year from the subcontractor’s final furnishing date in January 2012); however, the subcontractor argued that the limitations period should be equitably tolled to allow it to move forward with the lawsuit and excuse its late filing.

 

The Third Circuit has explained that the doctrine of equitable tolling can apply to excuse a late filing after the expiration of the statute of limitations under the following circumstances:

 

“(1) where the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) where the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) where the plaintiff has timely asserted his or her rights mistakenly in the wrong forum.” Liberty Mechanical Services, supra, at *8 quoting Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1387 (3d Cir. 1991).

 

The plaintiff, or late-filer, in applying the circumstances, must show it exercised reasonable diligence in investigating its claim and filing suit on its claim.

 

Notably, Florida district courts have applied equitable tolling under analogous circumstances:

 

(1) the late filing plaintiff has been misled by defendant’s misconduct into allowing the statutory period to expire; (2) the plaintiff was unaware that his/her rights had been violated and therefore of the need to seek redress; or (3) the plaintiff actively pursued his/her judicial remedies but filed a defective pleading during the limitations period, timely filed in an improper forum and has exercised due diligence in all other respects in preserving his legal rights.” Booth v. Carnival Corp., 510 F.Supp.2d 985, 988 (S.D.Fla. 2007) citing Justice v. U.S., 6 F.3d 1474, 1479 (11th Cir. 1993).

 

The subcontractor in Liberty Mechanical Services alleged random facts to support its late filing. It first argued that it took roughly nine months from its final furnishing date to receive a copy of the payment bond from the Department of Veteran Affairs. Yet, this argument failed because the subcontractor still had three months left under the statute of limitations to timely pursue an action on the bond. The subcontractor argued that the prime contractor indicated it would pay so there was no need for the subcontractor to file a bond claim. Yet, this argument failed because nothing prevented the subcontractor from timely preserving its rights and filing a claim. In other words, the prime contractor indicating its intent to pay did not deprive the subcontractor of timely pursuing its rights. And, the subcontractor argued that the surety indicated that it would “get the ball rolling” once it was notified of the claim while reserving all rights. Yet, this argument failed because the surety never represented that it would pay, but, in essence, simply responded that it received and would investigate the claimant’s claim–a common response from a surety.

 

While equitable tolling could possibly work to support the basis for a late filed Miller Act payment bond claim, the plaintiff / claimant must plead and prove: 1) it used due diligence to timely file its claim and 2) the circumstances fit into one of the three limited categories identified above as to why the plaintiff could not have timely filed the lawsuit even exercising due diligence. However, the facts to support equitable tolling should be severe such that equity would require the tolling of the limitations so that a late filed Miller Act lawsuit is excused and deemed timely filed. Otherwise, claimants would simply conjure up excuses to support the late filing and completely water down the intent of the statute of limitations. The key for a claimant is to: 1) know the statute of limitations for a Miller Act payment bond claim, 2) know the final furnishing date, and 3) timely file the payment bond claim – no excuses!

 

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.

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 https://floridaconstru.wpengine.com/522/ and https://floridaconstru.wpengine.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.