FORUM SELECTION PROVISIONS ARE NOT TO BE OVERLOOKED…EVEN ON FEDERAL PROJECTS

Posted on August 17, 2024August 17, 2024 by David Adelstein

Forum selection provisions are NOT to be overlooked. Ever. Treat them seriously. Even on federal projects where there is a Miller Act payment bond. Consider forum selection provisions on the front end when negotiating your contract.

In a recent opinion, U.S. f/u/b/o Timberline Construction Group, LLC vs. Aptim Federal Services, LLC, 2024 WL 3597164 (M.D.Fla. 2024), a joint venture prime contractor was hired by the federal government to build a temporary housing site. The joint venture prime contractor obtained a Miller Act payment bond. The joint venture then entered into a subcontract with one of its joint venture members and the member-subcontractor then engaged a sub-subcontractor. The sub-subcontractor claimed it was owed $3.5 Million and sued the member-subcontractor, as well as the prime contractor’s Miller Act payment bond, in the Middle District of Florida. The member-subcontractor and the Miller Act payment bond sureties moved to transfer venue to the Middle District of Louisiana pursuant to a forum selection clause in the contract between the sub-subcontractor and the member-subcontractor. The contract provided that the exclusive venue would be a United States District Court located in Louisiana.

Forum selection provisions are analyzed in federal court under 28 U.S.C. 1404(a): “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.” U.S. f/u/b/o Timberline, supra at *2. A forum selection provision is presumptively valid and given controlling weight. Id. (quotations and citations omitted).

The sub-subcontractor argued that venue was appropriate in the Middle District of Florida under the Miller Act. The sub-subcontractor was correct in this regard. But, as the District Court maintained, “binding precedent directs us to give the forum-selection clause the same fore we would generally give it in any other civil action. This is so because the Miller Act’s venue provision is ‘merely a venue requirement’ and not jurisdictional.” U.S. f/u/b/o Timberline, supra, at *2. And as often the case, private contracting parties can agree to litigate Miller Act claims in other venues based on their agreed-upon forum selection provision. Id.

While the District Court agreed with the sub-subcontractor that Florida has an interest in having a local controversy resolved in its courts which weighs against transfer, the District Court found: (1) a Miller Act claim deals with a federal question and courts routinely apply laws of other jurisdictions to resolve breach of contract claims; (2) Louisiana judges could resolve this dispute no different than Florida judges; and (3) the sub-subcontractor cannot show the case would unfairly burden Louisiana citizens with jury duty. This is important because the sub-subcontractor bore the heavy burden in demonstrating that transferring the case to the forum per the forum selection provision is unwarranted. The sub-subcontractor could not carry this burden.

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.

JUDICIAL ECONOMY DISFAVORS ENFORCEMENT OF MANDATORY FORUM SELECTION CLAUSE

Posted on November 25, 2023November 25, 2023 by David Adelstein

Mandatory forum (venue) selection provisions are generally construed in favor of enforceability. Parties agreed to the forum for disputes so why not enforce them, right? A recent federal district court case out of the Eastern District of Louisiana exemplifies an exception grounded in judicial economy which disfavors the enforceability of mandatory forum selection provisions. Keep in mind that this judicial economy exception is fairly limited but the fact pattern below demonstrates why enforcing the mandatory forum selection provision was disfavored due to judicial economy.

In U.S. f/u/b/o Exposed Roof Design, LLC v. Tandem Roofing, 2023 WL 7688584 (E.D.La. 2023), a sub-subcontractor filed a Miller Act payment bond lawsuit against the prime contractor and the prime contractor’s Miller Act payment bond sureties. The sub-subcontractor also sued the subcontractor that hired it. However, the sub-subcontractor’s subcontract with the subcontractor included a mandatory forum selection provision in a different form. The subcontractor moved to sever and transfer the sub-subcontractor’s claims against it to the forum agreed upon in the subcontract. The trial court denied the severance and the transfer. Below are the reasons.

First, the prime contractor and the Miller Act payment bond sureties were NOT parties to the subcontract. Therefore, they were not bound by the forum selection provision in the subcontract. The trial court, going through factors regarding severance, explained, “[Sub-subcontractor’s] breach of contract and quantum meruit claims against [subcontractor] arose out of the same events that gave rise to [sub-subcontractor’s] Miller Act claims against [the prime contractor and prime contractor’s Miller Act payment bond sureties]. All of the claims arise from Defendants’ alleged failure to pay [sub-subcontractor] for work it performed on the Project.” Tandem Roof Design, supra, at *7.

Second, the trial court found that the “elements of a Miller Act claim share similar elements to the breach of contract and quantum meruit claims.” Tandem Roof Design, supra, at *7. In other words, the sub-subcontractor’s Miller Act payment bond claim against the prime contractor and Miller Act payment bond sureties were “inextricably intertwined” with the sub-subcontractor’s claims against the subcontractor that hired it. See id.

Third, the trial court maintained, “judicial economy would be undermined with two similar cases proceeding in two federal district courts. If the state law claims were transferred, this Court would either have to stay the case here while [sub-subcontractor] and [subcontractor] determine how much is owed to [sub-subcontractor] or proceed with duplicate proceedings to determine [subcontractor] and the other Defendants’ liabilities to [sub-subcontractor].” Tandem Roof Design, supra, at *7.

Fourth, the trial could expressed that the “non-signatory Defendants may face prejudice if the claims against [subcontractor] were to proceed [in a different forum] without them. If [the] claims against the non-signatory Defendants were stayed in this Court, while claims against [subcontractor] proceeded in [the different forum], that court would determine the amount [subcontractor] owes to [sub-subcontractor], but then non-signatory Defendants may ultimately be held liable to [sub-subcontractor] for repayment of that amount under the Miller Act in this Court.” Tandem Roof Design, supra, at *8.

And, fifth, the trial court noted that, “the same witnesses and documents would like be presented to prove each of the claims.” Tandem Roof Design, supra, at *8.

For these five reasons, the trial could held that although the mandatory forum selection clause in sub-subcontractor’s subcontract with subcontractor favored severance and transferring venue to the forum per the clause, judicial economy, on the other hand, disfavored the severance and transfer, meaning judicial economy disfavored enforcing the mandatory forum selection provision.

LABOR UNDER THE MILLER ACT AND ESTOPPEL OF STATUTE OF LIMITATIONS

Posted on April 29, 2023April 29, 2023 by David Adelstein

If you want a case that goes into history of the federal Miller Act, check out the Fourth Circuit Court of Appeal’s opinion in U.S. ex rel. Dickson v. Fidelity and Deposit Company of Maryland, 2023 WL 3083440 (4^th Cir. 2023). While I am not going to delve into this history, it’s a worthwhile read. It is also a worthwhile read for two other points.

First, it discusses what constitutes “labor” under the Miller Act.

Second, it discusses doctrine of estoppel to prevent a surety from raising the statute of limitations to bar a Miller Act payment bond claim, which is a doctrine you do NOT want to rely on, as this case reinforces.

Both of these points applicable to Miller Act claims are discussed below.

This case dealt with a prime contractor renovating staircases that was terminated by the federal government. The prime contractor hired a professional engineer as its subcontractor to serve as its project manager and supervise labor on the project. The engineer/subcontractor also had “logistical and clerical duties, taking various field measurements, cleaning the worksite, moving tools and materials, and sometimes even watering the concrete himself.” Dickson, supra, at *1.

The subcontractor submitted an approximate $400,000 claim to the prime contractor’s Miller Act payment bond. Roughly a year later, the surety denied the claim stating the subcontractor was pursuing labor not covered under the Miller Act. The surety asked the subcontractor to resubmit its claim and, once received, will conduct another review while reserving all rights. The subcontractor elected to sue the Miller act payment bond surety.

The trial court granted summary judgment in favor of the surety finding the subcontractor’s work did not qualify as recoverable labor under the Miller Act. The trial court further held there were no grounds for an estoppel argument to estop the surety from raising the statute of limitations since the subcontractor’s payment bond claim was filed more than a year after its final furnishing. The subcontractor appealed.

Labor under the Miller Act

What constitutes labor under the Miller Act is important because it determines what is recoverable and, equally important, “‘[t]he statute of limitations funs ‘one year after the day on which the last of the labor was performed.’” Dickson, supra, at *6 (citation omitted).

“While published caselaw interpreting the word ‘labor’ under the Miller Act is sparse, courts have largely agreed that tasks involving “physical toil” are labor and that on-site supervision of “physical toil” is also labor.” Dickson, supra, at *3.

With respect to the subcontractor’s on-site supervision, the Fourth Circuit found this was recoverable labor under the Miller Act. “The bulk of [the subcontractor’s] work involved both direction and supervision of manual labor and occasional performance of manual labor and therefore qualifies as ‘labor.’” Dickson, supra, at *6.

The subcontractor’s supervision, however, was performed outside the one-year limitations period. In furtherance of trying to create an argument that the Miller Act payment bond lawsuit was timely filed, he argued that he performed a (timely) final inventory which should constitute labor under the Miller Act. The Fourth Circuit found this did NOT constitute labor or physical toil under the Miller Act and was merely clerical—“And we agree with the district court’s conclusion that, based on this record, taking the final inventory of a job site lacks the ‘physical exertion’ and ‘[b]odily toil’ required to qualify as labor.” Dickson, supra, at *7.

Notably, this case does have an interesting dissent that touches on a discussion that mental toil or mental exertion should constitute labor. Sure, this dissent is not the law. Yet, if you need to create an argument in this regard, this dissent provides the basis to do so.

Estoppel

For the subcontractor to have a valid Miller Act payment bond claim, the surety must be estopped from raising the statute of limitations; otherwise, the lawsuit was untimely filed. But for estoppel to apply, the subcontractor would have to demonstrate it was misled by the surety to its prejudice. Dickson, supra, at *7 (“And in Miller Act disputes, estoppel ‘arises where one party by his words, actuals, and conduct led the other to believe that it would acknowledge and pay the claim, if, after investigation, the claim were found to be just, but when, after the time for suit had passed, breaks off negotiations and denies liability and refuses to pay.’”) Id. (citation omitted).

Unfortunately for the subcontractor, estoppel did not apply. This means the lawsuit was untimely filed!

Here, there was no affirmative indication [the surety] would acknowledge and pay the claim. There were no negotiations or promises to pay. Instead, [the surety] only promised to investigate the claim. Not only did [the surety] not promise to acknowledge and pay the claim, but it repeatedly made clear its communications were for investigative purposes and reserved all rights and defenses.

Dickson, supra, at *8.

Don’t let this happen to you. Timely file your Miller Act payment bond lawsuit.

SUPERINTENDENT’S ON-SITE SUPERVISION COMPENSABLE AS LABOR UNDER MILLER ACT

Posted on February 26, 2023February 26, 2023 by David Adelstein

A recent Miller Act payment bond decision out of the District of Columbia Circuit Court of Appeals, U.S. f/u/b/o Civil Construction, LLC v. Hirani Engineering & Land Surveying, PC, 58 F.4^th 1250 (D.C. Circ. 2023), dealt with the issue of whether a subcontractor’s superintendent constitutes recoverable “labor” within the meaning of the Miller Act and compensable as a cost under the Miller Act that typically views labor as on-site physical labor.

The issue is that the Miller Act covers “[e]very person that has furnished labor or material in carrying out work provided for in a contract.” Civil Construction, supra, at 1253 quoting 40 U.S.C. s. 3133(b)(1). The Miller Act does not define labor. The subcontractor claimed labor includes actual superintending at the job site. The surety disagreed that a superintendent’s presence on a job site constitutes labor as the superintendent has to actually perform physical labor on the job site to constitute compensable labor under the Miller Act.

The subcontractor argued its subcontract and the government’s quality control standards required detailed daily reports that verified manpower, equipment, and work performed at the job site. It further claimed its superintendent had to continuously supervise and inspect construction activities on-site: “[the] superintendent had to be on-site to account for, among other things, hours worked by crew members, usage and standby hours for each piece of equipment, materials delivered, weather throughout the day, and all work performed. These on-site responsibilities reflected the government’s quality control standards, under which the superintendent as ‘the most senior site manager at the project, is responsible for the overall construction activities at the site…includ[ing] all quality, workmanship, and production of crews and equipment.” Civil Construction, supra, at 1253-54.

The DC Circuit Court of Appeals, importantly, looked at how other appellate courts analyzed this issue:

Other courts have taken into account the nature of a superintendent’s oversight responsibilities in concluding that a superintendent’s cost was compensable “labor.” Referencing the trend in other courts, the Eighth Circuit concluded that “the on-site supervisory work of a project manager falls within the purview of the Miller Act if such a superintendent did some physical labor at the job site or might have been called upon to do some on-site manual work in the regular course of his job.” That is,“only certain professional supervisory work is covered by the Miller Act, namely, ‘skilled professional work which involves actual superintending, supervision, or inspection at the job site.’ ” The Eighth Circuit acknowledged that the term labor generally includes physical rather than professional work but distinguished those professionals who superintend on-site as performing labor.

Civil Construction, supra, at 1254 (internal citations omitted).

Based on this, the DC Circuit Court of Appeals, reviewing this issue for the first time, held: “Given that the construction work at issue had to be supervised and inspected for conformance with the subcontract and other requirements, such as government quality control standards, the superintendent’s on-site supervisory work constitutes “labor” within the meaning of the Miller Act.” Civil Construction, supra, at 1254.

If confronted with this issue as to the recovery of an analogous labor cost under a Miller Act payment bond claim, do exactly what the subcontractor did which is to tie the actual superintending, i.e., supervision, to the requirement of the subcontract itself including incorporated documents.

DO NOT FILE A MILLER ACT PAYMENT BOND LAWSUIT AFTER THE ONE-YEAR STATUTE OF LIMITATIONS

Posted on October 8, 2022October 8, 2022 by Edward Garber

Under the Miller Act, a claim against a Miller Act payment bond must be commenced “no later than one year after the date on which the last of the labor was performed or material was supplied by the person bringing the action.” 40 U.S.C. s. 3133(b)(4). Stated another way, a claimant must file its lawsuit against the Miller Act payment bond within one year from its final furnishing on the project.

Filing a lawsuit too late, i.e., outside of the one-year statute of limitations, will be fatal to a Miller Act payment bond claim. This was the outcome in Diamond Services Corp. v. Travelers Casualty & Surety Company of America, 2022 WL 4990416 (5^th Cir. 2022) where a claimant filed a Miller Act payment bond lawsuit four days late. That four days proved to be fatal to its Miller Act payment bond claim and lawsuit. Do not let this happen to you!

In Diamond Services Corp., the claimant submitted a claim to the Miller Act payment bond surety. The surety issued a claim form to the claimant that requested additional information. The claimant returned the surety’s claim form. The surety denied the claim a year and a couple of days after the claimant’s final furnishing. The claimant immediately filed its payment bond lawsuit four days after the year expired. The claimant argued that the surety should be equitably estopped from asserting the statute of limitations in light of the surety’s letter requesting additional information. (The claimant was basically arguing that the statute of limitations should be equitably tolled.) The trial court dismissed the Miller Act payment bond claim finding it was barred by the one-year statute of limitations and that equitable estoppel did not apply.

On appeal, the Fifth Circuit maintained that a party must show it was misled to its detriment when relying on equitable estoppel. The Fifth Circuit held the surety’s letter with its claim form and requesting additional information “made no representations that [the claimant] would be paid or that [the surety] would engage in claim negotiations with [the claimant], and explicitly reserved ‘all rights and defenses…include[ing], without limitation, defenses that may be available under any applicable notice and suit limitation provisions.’” Diamond Services Corp., supra. Hence, it was not reasonable for the claimant to rely on this letter in electing not to timely bring suit within the one-year statute of limitations.

Sureties, as a matter of course, will respond to its receipt of a claim requesting additional information. That letter may accompany the surety’s preferred claim form. Let’s be clear here. The completion of the claim form and furnishing of additional information is not a statutory requirement to pursue a Miller Act payment bond claim (and it’s not a statutory requirement to many statutory bonds). Whether the claim form is submitted, or whether additional information is furnished, does not equate to a surety paying a claim. It just does not. For this reason, there should NEVER be an instance where a claimant forbears its rights to timely sue thinking a surety will pay the claim based on the submission of a claim form or additional information.

Timely file your Miller Act payment bond lawsuit within the one-year statute of limitations. No ifs, ands, or buts. This is true whether you submit a claim form or additional information or you do not.

MILLER ACT STATUTE OF LIMITATIONS AND EQUITABLE TOLLING

Posted on June 4, 2022June 4, 2022 by Edward Garber

When it comes to a Miller Act payment bond claim, there is a one-year statute of limitations—“The Miller Act contains a statute of limitations provision that requires actions to ‘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 claim.’” U.S. f/u/b/o Techniquex Specialty Flooring, Inc., v. Philadelphia Indemnity Ins. Co., 2022 WL 169070, *3 (M.D.Penn. 2022) (citing the Miller Act).

There is an argument, albeit a difficult one, to support an equitable tolling of the one-year statute of limitations. This would be an argument filed when the one-year statute of limitations expires, but there is reason for missing the statute of limitations caused typically by the overt misleading of the defendant (surety/bond-principal):

“Equitable tolling functions to stop the statute of limitations from running where the claim’s accrual date has passed.” “Equitable tolling is appropriate in three situations: (1) when the defendant has actively misled the plaintiff respecting the facts which comprise the plaintiff’s cause of action; (2) when the plaintiff in some extraordinary way has been prevented from asserting his rights; and (3) when the plaintiff has timely asserted his rights in the wrong forum.” The first ground for equitable tolling“appears to be the same, in all important respects” to equitable estoppel, which “excuses late filing where such tardiness results from active deception on the part of the defendant” and “what courts describe as ‘equitable tolling’ is encompassed by the latter two parts of our Circuit’s doctrine.” The extraordinary circumstances standard may be met “where the defendant misleads the plaintiff, allowing the statutory period to lapse; or when the plaintiff has no reasonable way of discovering the wrong perpetrated against her …”

Tehniquex, supra, at *5 (internal citations omitted).

If you are involved on a federal project, it is imperative that you appreciate your Miller Act payment bond rights. This includes knowing when your last date of furnishing is as well as your last date to file a Miller Act payment bond lawsuit. While equitable tolling is an argument if the statute of limitations expires, it is admittedly a very difficult argument to prevail on and will require evidence substantiating the basis for the equitable tolling. Otherwise, you are just a party that missed the deadline to file a Miller Act payment bond claim, and in most occasions, there is really no justifiable reason for this to be the situation.

UNDERSTAND THE DISPUTE RESOLUTION PROVISION YOU ARE AGREEING TO

Posted on August 29, 2021August 29, 2021 by Edward Garber

When negotiating a contract, do not overlook the dispute resolution provision. It is one of the more important provisions in your construction contract. This provision will come into play and have ramifications if there is a dispute, which is certainly not uncommon on a construction project.

In dispute resolution provisions in subcontracts on federal projects, it is not unusual for that provision to include language that requires the subcontractor to STAY any dispute that concerns actions or inactions of the owner pending the resolution of any dispute between the owner and prime contractor relating to that action or inaction. A provision to this effect should be included for the benefit of the prime contractor. For instance, the provision may say the subcontractor agrees to stay any such claim against the prime contractor or prime contractor’s surety pending the outcome of any pass-through claim (or otherwise) submitted under the Contract Disputes Act.

For example, in U.S.A. f/u/b/o Ballard Marine Construction, LLC v. Nova Group, Inc., 2021 WL 3174799 (W.D. Wash. 2021), a prime contractor hired a subcontractor to perform a scope of work at a naval shipyard. A differing site condition was encountered and the subcontractor was directed to continue performance and track its costs. The subcontractor completed its work and submitted its approximate $13 Million claim from the prime contractor and its Miller Act payment bond surety. The prime contractor and surety refused to pay until the resolution of the pass-through differing site conditions claim to the federal government. The prime contractor had submitted a claim under the Contract Disputes Act to the federal government. The subcontractor was not interested in waiting until the resolution of the Contract Disputes Act claim and filed suit against the prime contractor and Miller Act payment bond surety. The prime contractor and surety moved to stay pending the outcome of the Contract Dispute Acts claim. The trial court agreed with the prime contractor explaining, “It is not fruitful to require [the prime contractor] to fend off [the subcontractor’s] claim against it, and the [Miller Act] sureties [the prime contractor] agreed to indemnify, while simultaneously advancing [the subcontractor’s] claim for additional payment from the government through the ongoing CDA process. [The subcontractor] agreed to such a dispute resolution procedure, and it does not claim that the increased costs were [the prime contractor’s] fault.” Nova Group, supra, at *8.

A subcontractor with such a provision is still required to timely perfect and preserve its rights by timely filing a lawsuit against the Miller Act payment bond surety. However, the subcontractor is now beholden to the Contract Dispute Act procedure which requires an initial decision by the contracting officer and, then, certain appeal rights. This is not what the subcontractor wanted because it elongates any potential resolution. However, this is what the subcontractor agreed to in the dispute resolution provision and benefits the prime contractor so that it does not have to fight the fight on two fronts, particularly when it is supporting the pass-through claim under the Contract Disputes Act claim process.

Remember, the dispute resolution provision in your contract is important and should not be overlooked; the provision has ramifications as shown in the above case!

NOT ALL WORK IS COVERED UNDER THE FEDERAL MILLLER ACT

Posted on April 25, 2021April 25, 2021 by Edward Garber

The recent opinion out of the Eastern District Court of Virginia, Dickson v. Forney Enterprises, Inc., 2021 WL 1536574 (E.D.Virginia 2021), demonstrates that the federal Miller Act is not designed to protect ALL that perform work on a federal construction project. This is because NOT ALL work is covered under the Miller Act.

In this case, a professional engineer was subcontracted by a prime contractor to serve on site in a project management / superintendent capacity. The prime contractor’s scope of work was completed by January 31, 2019. However, the prime contractor was still required to inventory certain materials on site, which was performed by the engineer. The engineer claimed it was owed in excess of $400,000 and filed a Miller Act payment bond lawsuit on February 5, 2020 (more than a year after the project was completed).

There are two immediate questions that pop out that this court deal with: (1) are the type of project management / superintendent-type services the engineer performed covered under the Miller Act; and 2) did the engineer timely file the Miller Act payment bond lawsuit within the statute of limitations if the project was completed more than a year prior to the engineer filing suit. Both answers resulted in a resounding No!

MILLER ACT PROTECTS LABOR

The Miller Act protects labor, and while “labor” is not a defined term under the Miller Act, “courts have limited the term to refer only to physical toil or manual labor.” Dickson, supra, at *2. Supervisory work is generally not considered labor unless it also includes manual labor. Id. “[C]lerical or administrative tasks [] even if performed at the job site, do not involve the physical toil or manual work necessary to bring them within the scope of the Miller Act.” Id. (citation omitted).

Here, the engineer was hired in a management and superintendent (supervisor) capacity. He was subcontracted to oversee manual labor. Any manual labor, to the extent there was any such as field measurement or inspections performed by the engineer, were incidental to his supervisory duties and “[t]aking field measurements and inspecting materials…were administrative tasks incidental to his role as project manager….[and] they do not rise to the level of physical toil necessary to recover under the Miller Act.” Dickson, supra, at *2 (citations omitted).

The type of work the engineer performed and sought payment for was NOT work covered under the Miller Act.

MILLER ACT STATUTE OF LIMITATIONS

The Miller Act requires a plaintiff to file suit “no later than one year after the day on which the last of the labor was performed or material was supplied” by the plaintiff. Dickson, supra, at *3 citing 40 U.S.C. s. 3133(b)(4).

Here, the project was concluded as late as January 31, 2019. “Work performed after the termination of the prime contract, like the inventory [the engineer] conducted February 8, 2019 is a post-project task and thus not recoverable under the Miller Act.” Dickson, supra, at *3.

Putting aside that inventory control would be deemed a clerical task and not “labor” covered under the Miller Act, the engineer cannot extend the one-year statute of limitations beyond one-year after the termination / completion of the project. Id.

IS A MILLER ACT PAYMENT BOND SURETY BOUND BY A DEFAULT OR DEFAULT JUDGMENT AGAINST ITS PRINCIPAL?

Posted on January 2, 2021January 2, 2021 by Edward Garber

Maguire-O’Hara Construction, Inc. v. Cool Roofing Systems, Inc., 2020 WL 6532852 (W.D. Oklahoma 2020) is an interesting case dealing with suretyship law and the subject of whether a Miller Act payment bond surety is bound by a default or default judgment against its prime contractor (bond principal).

In this case, a subcontractor sued a prime contractor for breach of contract and the contractor’s Miller Act payment bond surety for a breach of the payment bond. The prime contractor did not respond to the lawsuit and the subcontractor obtained a default against the contractor. The Miller Act payment bond surety did engage counsel to defend itself in the dispute. Prior to trial, the subcontractor moved in limine to preclude the surety from raising defenses at trial under the subcontract because a default was entered against the prime contractor. The subcontractor argued that the surety should be bound by the default and, therefore, precluded from raising liability defenses under the subcontract. Such a ruling would leave the surety no defenses disputing liability at trial.

[A] suretys’ liability under the Miller Act coincides with that of the general contractor, its principal. Accordingly, a surety [can] plead any defenses available to its principal but [can]not make a defense that could not be made by its principal.

Maguire-O’Hara Construction, supra, at *2 (internal citations and quotations omitted).

Here, the trial court held that a default against the prime contractor does not preclude its payment bond surety from raising the liability defenses of the prime contractor (the principal of the bond). In reaching this decision, though, the trial court indicated this ruling may have likely been different if a judgment, such as a default final judgment, had been entered against the prime contractor. The trial court cited the Eleventh Circuit Court of Appeals ruling in Drill South, Inc. v. International Fidelity Ins. Co., 234 F.3d 1232 (11^th Cir. 2020) where the appellate court affirmed a judgment against the surety because the surety was bound by the default judgment against the prime contractor.

To the extent that [the Miller Act payment bond surety] argues that it had no obligation to defend the action against [the prime contractor], we are not persuaded. We believe the issue is not whether the Agreement of Indemnity imposed an obligation on [the surety] to defend [the prime contractor], but whether it conferred a right to defend. The law requires only that a surety have notice and an opportunity to defend before it is bound by a judgment against its principal. We believe [the surety] had this right and opportunity, and simply chose, for whatever reason, not to exercise its right.

[The surety] argues, however, that when a surety and principal are sued in the same action, and the surety answers and defends on its own behalf, the surety is not bound by a default judgment entered against the surety’s principal. Although we recognize the existence of authority supporting [the surety’s] position, those cases are not binding on this Court; nor do we find their reasoning persuasive.

We believe that the general rule that a surety is bound by a judgment entered against its principal when the surety had both notice and opportunity to defend applies whether the principal and surety are sued in the same action or in separate actions.

Drill South, 234 F.3d at 1237-1237.

MILLER ACT PAYMENT BOND SURETY BOUND TO ARBITRATION AWARD

Posted on November 28, 2020November 28, 2020 by Edward Garber

Here is an interesting case binding a Miller Act payment bond surety to an arbitration award against its prime contractor (bond principal) that it received sufficient notice of. Notice is the operative word. The surety could have participated in the arbitration, elected not to, and when its prime contractor (bond principal) lost the arbitration, it was NOT given another bite out of the apple to litigate facts already been decided.

In BRC Uluslararasi Taahut VE Ticaret A.S. v. Lexon Ins. Co., 2020 WL 6801933 (D. Maryland 2020), a prime contractor was hired by the federal government to make security upgrades and interior renovations to a United States embassy in the Czech Republic. The prime contractor hired a subcontractor to perform all of the installed contract work. The prime contractor terminated the subcontractor for default during the course of construction.

The subcontractor demanded arbitration in accordance with the subcontract claiming it was wrongfully terminated. The subcontractor also filed a lawsuit asserting a Miller Act payment bond claim against the prime contractor’s surety (as well as a breach of contract action against the prime contractor). The subcontractor made clear it intended to pursue its claims in arbitration and hold the payment bond surety jointly and severally liable. The parties agreed to stay the lawsuit since the facts were identical to those being arbitrated. The arbitration went forward and an award was entered in favor of the subcontractor and against the prime contractor for approximately $2.3 Million.

The subcontractor moved to lift the stay entered in the lawsuit to confirm the arbitration award against the prime contractor and Miller Act payment bond surety. The prime contractor moved to vacate the award.

Beginning with the prime contractor’s motion to vacate the arbitration award, the Federal Arbitration Act gives limited grounds to support vacating an arbitration award. The grounds the prime contractor raised will not be discussed. They were all denied because it is difficult to vacate an arbitrator’s final award and that is the important take-away message. In support of this (and contained in a noteworthy, lengthy discussion by the Court), the Court stated: “The FAA [Federal Arbitration Act] creates a ‘strong presumption in favor of confirming arbitration awards,’ and ‘judicial review’ of such awards ‘must be an extremely narrow exercise.’” BRC Uluslararasi Taahut, supra, at *4.

Of significance here, the subcontractor moved to enforce the arbitration award against the Miller Act payment bond surety, as it should. Even though the surety was not a party to the arbitration, it was on notice of the arbitration, was notified the subcontractor would look to hold it jointly and severally liable, and the surety consented to the stay of the lawsuit pending the outcome of the arbitration. The Court noted, “[s]uch notice is sufficient to bind [the surety] to the arbitration award.” BRC Uluslararasi Taahut, supra, at *9 (citing cases showing that if the surety has notice of the proceedings against its principal, it can be bound by an arbitration award against the principal). Further, the Court intuitively stated:

[The surety] clearly knew that the arbitration would occur. Now dissatisfied with the outcome, [the surety] wishes not to be bound by the very proceeding [the surety] averred would avoid duplicative litigation. The Court suspects that had [the prime contractor] prevailed in arbitration, [the surety] would be singing a different tune. [The surety] will not be afforded a second bite at the litigation apple simply because it must now honor its obligations as the surety on the project.

Id.

Remember, if you are arbitrating rights, do not neglect to timely file your Miller Act payment bond lawsuit, or for that matter, any statutory payment bond lawsuit. Give the surety NOTICE that you intend to hold it jointly and severally liable for any arbitration award entered against its prime contractor (bond principal). Whether the surety elects to participate in the arbitration is within its discretion, but the key is to give the surety notice so that if you do prevail, you find yourself in same shoes as the subcontractor discussed in this case—binding the payment bond surety to the award entered against the prime contractor. The prime contractor and its surety should also recognize this likely outcome.