In a prior posting, I discussed how federal courts have discretion to stay a subcontractor’s lawsuit against a payment bond surety pending an arbitration between the subcontractor and general contractor. This posting did not pertain to a Miller Act payment bond. However, low and behold, this same rationale would apply to a subcontractor’s lawsuit against a Miller Act payment bond.
In U.S. f/u/b/o John Jamar Construction Services v. Travelers Casualty and Surety Co. of America, 2015 WL 757858 (S.D.Tex. 2015), a subcontractor sued the prime contractor’s Miller Act payment bond. The prime contractor countered that the subcontractor materially breached the subcontract causing it to terminate the subcontractor for default.
The subcontract contained an arbitration provision and the prime contractor served an arbitration demand on the prime contractor. The surety was not bound by the arbitration provision (as it was not a party to the subcontract) but moved to stay the Miller Act lawsuit pending the outcome of the arbitration between the prime contrator and subcontractor. The federal district court agreed with the surety and stayed the litigation because the factual and legal issues between the prime contractor and subcontractor substantially overlapped with the subcontractor’s claims against the Miller Act payment bond surety.
Accordingly, if you are a prime contractor and involved in a dispute with a subcontractor where your subcontract contains an arbitration provision–such as in this case where the prime contractor terminated the subcontractor for default–there is little downside in demanding arbitration pursuant to the subcontract. If the subcontractor initiates a Miller Act lawsuit, there is authority that the lawsuit will be stayed pending the outcome of the arbitration.
Conversely, if you are a subcontractor and involved in a dispute with a prime contractor where your subcontract contains an arbitration provision, there is upside in moving forward with the Miller Act lawsuit to ensure the lawsuit is filed within the one-year limitations period. However, if there is concern the prime contractor will move to demand arbitration under the subcontract (as a means to stay the Miller Act litigation), you may want to consider simultaneously moving to demand arbitration against the prime contractor to preserve your status as the claimant (plaintiff) in the arbitration.
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.