Tag Archives: Miller Act

THE DIFFICULTY IN RAISING EQUITABLE TOLLING TO JUSTIFY AN UNTIMELY MILLER ACT PAYMENT BOND LAWSUIT

Posted on by


Previously, I discussed the statute of limitations for a Miller Act payment bond claim and the equitable tolling of the limitations based on a claimant’s late filing of a Miller Act payment bond lawsuit.    

Another decision came out in U.S. ex rel. Walter Toebe Construction Co. v. The Guarantee Co. of North America, 2014 WL 7211294 (E.D. Mich. 2014), dealing with the exact same subject matter of a claimant raising equitable tolling to overcome filing a Miller Act payment bond lawsuit outside of the statute of limitations.   Understanding the statute of limitations for a Miller Act payment bond claim is vital to a claimant’s rights on a federal construction project because the doctrine of equitable tolling (of the statute of limitations) is not designed to simply allow a careless claimant to untimely file a lawsuit.

In this case, a sub-subcontractor was hired to install drilled shafts on a federal project.  The sub-subcontractor was owed approximately $500,000 and demanded arbitration with the subcontractor that hired it and the Miller Act payment bond surety. The surety apparently participated in the arbitration hearing and on the last day of the hearing the arbitrators dismissed the surety from the arbitration pursuant to the surety’s motion to dismiss for lack of jurisdiction. The arbitrators then issued an award in favor of the sub-subcontractor against the subcontractor that was confirmed by a Michigan circuit court.  The subcontractor failed to pay the judgment and the sub-subcontractor demanded that the Miller Act payment bond surety pay the judgment.  The surety (properly) refused stating that the sub-subcontractor failed to file a lawsuit within the one year limitations period set forth in the Miller Act.

The sub-subcontractor then filed a Miller Act payment bond lawsuit in federal court and argued that the statute of limitations to file a Miller Act payment bond lawsuit should be equitably tolled in light of the arbitration proceeding and the surety’s participation in the arbitration (until it was dismissed because there was no jurisdiction to bind the surety to an arbitration award).

A Miller Act payment bond lawsuit must be brought no later than one year after a claimant’s final / last furnishing of labor or materials.  Here, it was clear that the lawsuit was filed well outside of the one-year statute of limitations.  Appreciating this, the sub-subcontractor argued the statute of limitations should be equitably tolled.

 

“Equitable tolling allows a federal court to toll a statute of limitations when a litigant’s failure to meet a legally-mandated deadline unavoidably arose from circumstances beyond that litigant’s control.  

***

To determine whether equitable tolling is available to a plaintiff, a court considers five factors: (1) the plaintiff’s lack of notice of the filing requirement; (2) the plaintiff’s lack of constructive knowledge of the filing requirement; (3) the plaintiff’s diligence in pursuing her rights; (4) an absence of prejudice to the defendant; and (5) the plaintiff’s reasonableness in remaining ignorant of the particular legal requirement.”

United States ex. rel. Walter Toebe Construction Company, supra, at *3-4 (internal citations and quotations omitted).

Unfortunately for the sub-subcontractor, its failure to file a lawsuit within the one-year limitations period did not fit into any of the equitable tolling factors.   The sub-subcontractor did not suggest, nor could it really, that it did not have notice of the statute of limitations to file a Miller Act claim.  The sub-subcontractor could not argue that it actively took steps to timely file the lawsuit, because it did not. And, the sub-subcontractor could rely on no law to support its argument that the statute of limitations should be tolled pending an arbitration; and, in fact, there is law that states otherwise. 

 

This case has important considerations:

  • It is important for a potential Miller Act payment bond claimant on a federal project to know what it needs to do to preserve payment bond rights including the timely filing of a lawsuit no later than one year from its last furnishing of labor or materials. 
  • It is important for a potential Miller Act payment bond claimant to timely file its lawsuit in federal district court to ensure its lawsuit is timely filed.  Even if a claimant wants to arbitrate with the party that hired it, it is still imperative that the claimant timely files the lawsuit to preserve its payment bond rights and avoid any argument that the lawsuit was not timely filed.
  •  Equitable tolling is a challenging doctrine, especially in the Miller Act context where claimants have statutory notice of their rights.  Claimants certainly do NOT want to be in a position where they are trying to rely on this doctrine to overcome the late filing of a Miller Act payment bond claim because it is more often than not a losing argument.

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.

SUING FEDERAL GOVERNMENT ON A CONTRACT CLAIM; EQUITABLE SUBROGATION CLAIM BY LIABILITY INSURER AGAINST GOVERNMENT NOT ALLOWED

Posted on by


Equitable subrogation is a doctrine that liability insurers rely on when paying a claim on behalf of an insured.  Under this doctrine, the insurer equitably subrogates—steps in the shoes—to the rights of the insured and sues as an equitable subrogee of the insured in order to seek reimbursement for the claim it paid.

 

What if the liability insurer tried to pursue an equitable subrogation claim against the federal government?  In other words, what if the insurer paid out insurance proceeds on behalf of its insured-prime contractor and then tried to recoup the insurance proceeds from the federal government as an equitable subrogee of the prime contractor?  The United States Court of Federal Claims in Fidelity and Guaranty Insurance Underwriters v. U.S., 2014 WL 6491835 (Fed.Cl. 2014) explained that a liability insurer CANNOT sue the federal government as an equitable subrogee of the prime contractor in order to recoup insurance proceeds paid out on a claim.

 

In this case, the government hired a prime contractor to abate asbestos at a post office.  The prime contractor was having difficulty obtaining CGL liability insurance to specifically cover asbestos removal for a reasonable premium and the government, through the contracting officer, agreed to execute an addendum to the prime contract that required the government to save harmless and indemnify the contractor from personal injury claims attributable to the asbestos removal work.

 

More than ten years later, a former government employee sued the prime contractor claiming he contracted cancer from his exposure to asbestos while it was being removed and abated at the project.  The prime contractor demanded that the government defend and indemnify it for this claim; however, the government refused.  The prime contractor then tendered the claim to its CGL liability insurer and its insurer settled the claim.  After the settlement, the prime contractor once again demanded that the government reimburse it by honoring the indemnification language in the addendum; again, the government refused.

 

The prime contractor’s liability insurer then filed suit against the federal government as the equitable subrogee of the prime contractor in order to recoup the insurance proceeds it paid to the former government employee.  The thrust of the claim was that the government breached the indemnification provision.  The government moved to dismiss the lawsuit contending that the Court of Federal Claims does not have subject matter jurisdiction to entertain the lawsuit because the liability insurer is not in privity with the government and, therefore, cannot sue the government.  The Court of Federal Claims agreed and dismissed the lawsuit.  Why? Because a plaintiff suing the federal government on a contract claim must be in privity of contract with the federal government with limited exceptions to this rule:

 

“The Federal Circuit has recognized limited exceptions to the requirement that parties seeking relief for breach of contract against the government under the Tucker Act must be in privity of contract with the United States. These limited exceptions include (1) actions against the United States by an intended third-party beneficiary; (2) pass-through suits by a subcontractor where the prime contractor is liable to the subcontractor for the subcontractor’s damages; and (3) actions by a Miller Act surety for funds that the government improperly disbursed to a prime contractor [after the surety financed completion of a defaulted subcontractor]. As the court of appeals has observed, the common thread that unites these exceptions is that the party standing outside of privity by contractual obligation stands in the shoes of a party within privity.“

Fidelity and Guaranty Insurance Underwriters, supra(internal quotations and citations omitted).

 

Since none of the limited exceptions applied to allow a liability insurer to sue the government as an equitable subrogee of its insured-prime contractor, the Court of Federal Claims lacked subject matter jurisdiction.

 

This ruling does not prevent the prime contractor from suing the government directly for breaching the indemnification provision; it simply prevents the liability insurer from suing as an equitable subrogee of the prime contractor. Even though the insurer paid the claim, perhaps it can enter into an agreement with the prime contractor whereby the prime contractor sues the government directly for breach of contract.

 

 

The case demonstrates the limited exceptions available to a claimant on a construction project that wants to pursue a claim directly against the government when the claimant is not the prime contractor hired by the government.  While prime contractors can sue the government for breach of contract, subcontractors, in particular, that want to pursue a claim against the government can only do so as a pass-through claim, meaning they are suing in the name of the prime contractor and will require the cooperation of the prime contractor.

 

Also, as an aside, the indemnification provision from the government and the prime contractor required the government to save harmless and indemnify the prime contractor.  I always like to include the word “defend” in an indemnification provision so it is crystal clear that the indemnitor’s indemnification obligations extend to its contractual obligation to defend the indemnitees for any 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.

MILLER ACT AND TIMELY SERVING NOTICE OF NON-PAYMENT WITHIN 90 DAYS OF LAST FURNISHING

Posted on by


Federal district courts interpreting the Miller Act provide value to those prime contractors, subcontractors, suppliers, and sub-subcontractors that work on federal construction projects, even if the decisions and projects are outside of Florida.

 

Remember, the Miller Act requires sub-subcontractors and suppliers in direct contract with a subcontractor but that have no contractual relationship with the prime contractor to serve a notice of non-payment to the prime contractor within 90 days from their last furnishing of labor or materials to the subcontractor.   Failure to provide this notice will result in a very strong defense from the prime contractor and surety that the supplier or sub-subcontractor has NO Miller Act payment bond rights.  Do not…let me repeat, do not…put yourself in this position if you are a supplier or sub-subcontractor on a federal project.  And, if you are a prime contractor or surety defending a Miller Act payment bond claim from a sub-subcontractor or supplier, analyze whether the claimant timely served its notice of non-payment within 90 days from its last furnishing to the subcontractor.

 

For example, in U.S. ex rel. Sun Coast Contracting Services, LLC v. DQSI, LLC, 2014 WL 5431373 (M.D.La. 2014), a sub-subcontractor initiated a Miller Act payment bond claim.  But–and this is a big but–the sub-subcontractor could not dispute the fact that it independently failed to serve a notice of non-payment within 90 days from its last furnishing to the subcontractor that hired it.   Instead, the sub-subcontractor argued that a notice of non-payment from the subcontractor to the prime contractor served as its notice since it included amounts the subcontractor owed to it.  Yet, the letter that the sub-subcontractor relied on never mentioned the sub-subcontractor or the amount the subcontractor owed to the sub-subcontractor.  Therefore, it was easy for the federal district court to conclude that the sub-subcontractor had NO Miller Act payment bond rights:

 

Beyond SCCS’s [subcontractors] letter, whose content did not even allude to the existence of a claim by Plaintiff [sub-subcontractor], Plaintiff has not put forth any assertion that it communicated its claim to DQSI [prime contractor] within ninety days after the date of Plaintiffs last performance on the project. By failing to provide proper notice according to statutory requirements, Plaintiff has no right to sue Defendants DQSI or Western Surety under the Miller Act.

Sun Coast Contracting Services, LLC, supra, at *4.

 

While federal courts liberally construe the method of service of the notice of non-payment from the supplier or sub-subcontractor to the prime contractor, it really should never get to this point as it simply gives the prime contractor and surety a legitimate defense to a Miller Act claim.  If you are a supplier or sub-subcontractor, do NOT deal with this unnecessary headache.  Properly preserve your Miller Act payment bond rights.  On the other hand, if you are a prime contractor or surety, you should absolutely explore whether the Miller Act payment bond claimant properly preserved its payment bond rights and, if not, defend the claim based on this failure.

 

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 TIME

Posted on by


If you are a subcontractor or a sub-subcontractor / supplier in direct privity of contract with a subcontractor on a federal project, you NEED to know your Miller Act payment bond rights.  Why?  Because the payment bond is designed to protect YOUR interests as a mechanism to insure non-payment.

 

Sub-subcontractors and suppliers in direct privity of contract with a subcontractor MUST serve the prime contractor within 90 days of their final furnishing date a notice of non-payment stating “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 [e.g., the subcontractor].”  40 USC 3133(b)(2).  Please do not neglect this all-important initial step in preserving a Miller Act payment bond claim.  The notice should be served from the final furnishing of labor or materials exclusive of punchlist or warranty / corrective work.  (Notably, subcontractors in direct privity of contract with the prime contractor do not need to serve this notice of non-payment on the prime contractor.)

 

 

In U.S. f/u/b/o Butler Supply, Inc. v. Power & Data, LLC, 2014 WL 4913421 (E.D.Miss. 2014), a supplier furnished electrical materials to an electrical subcontractor working on a federal project.  Due to non-payment, the supplier sued the prime contractor’s Miller Act payment bond.   The prime contractor argued that the supplier is not a valid Miller Act payment bond claimant because it did not have a direct contract with the supplier.  The federal district court dismissed this argument because the electrical subcontractor signed a credit application and corresponding personal guaranty that served as the basis of a direct contract between the supplier and subcontractor. To this point, the federal district court expressed, “[S]eparate order of materials under an open account or credit basis, typically represented in purchase orders or invoices, satisfy the [Miller] Act’s underlying contract requirement.”  Butler Supply, supra, at *3.

 

Next, the prime contractor argued that the supplier did not timely serve its written notice of non-payment within 90-days of final furnishing because the supplier could not prove that the materials were delivered to the job. The federal district court dismissed this argument too since actual delivery or incorporation of materials into a federal project is immaterial with respect to a supplier’s Miller Act rights.  What is material is the “supplier’s good faith belief that the materials were intended for the specified work [project].”  Butler Supply, supra, at *4 (internal quotation and citation omitted).   In this instance, the supplier submitted invoices showing the material furnished, the price of the material, the name and location of the project, and delivery tickets showing the materials were signed by the subcontractor.

 

In Butler Supply, the federal district court granted summary judgment in favor of the supplier’s Miller Act claims dismissing the prime contractor’s arguments.  Although this ruling it outside of Florida, the same result should be achieved in a Miller Act suit in Florida.   The key is to (a) establish a direct contractual relationship with a subcontractor and (b) establish your final furnishing date with documentary evidence (since you can expect the prime contractor to challenge the timeliness of the written notice of non-payment).  In Butler Supply, the supplier relied on a credit application (and subsequently submitted invoices), which is a routine document required by suppliers, especially suppliers that furnish material on credit or through an open account.   And, the supplier relied on invoices and delivery tickets reflecting its final furnishing date and that it had a good faith belief the materials furnished would be utilized on the project.

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.

CONVERTING THE DREADFUL TERMINATION FOR DEFAULT INTO A TERMINATION FOR CONVENIENCE

Posted on by


Contractors, whether prime contractors or subcontractors, terminated for default (also known as termination for cause) want to convert that termination for default into a termination for convenience.   The termination for default ultimately means the contractor materially breached the contract and would be liable for any cost overrun associated with completing their contractual scope of work.  On the other hand, if the termination for default is converted into a termination for convenience, the contractor would be entitled to get paid for the work performed through the termination along with reasonable profit on the work performed and, depending on the contract, reasonable anticipatory profit on the work NOT performed.  A huge difference and the fundamental reason contractors terminated for default should aim to convert that termination for default into a termination for convenience!

 

Under the Federal Acquisition Regulations, contractors terminated for convenience may recover reasonable profit on work performed, but NOT profit for work not performed.  (See F.A.R. s. 52.249-2 and 49.202)

 

But, under the standard AIA A201 General Conditions, if an owner terminates a general contractor for convenience, “the Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.”  (See AIA A201, para. 14.4.3)

 

Yet, under the ConsensusDocs 200, “If the Owner terminates this Agreement for Convenience, the Constructor shall be paid: (a) for the Work performed to date including Overhead and profit; and (b) for all demobilization costs and costs incurred as a result of the termination but not including Overhead or profit on Work not performed.” (See Consensus Docs, 200, para. 11.4.2)

 

As reflected above, a contractual provision will dictate the costs recoverable when there is a termination for convenience.  The AIA A201 General Conditions is favorable to a contractor by providing for reasonable overhead and profit on the work not executed.  Whether reasonable  profit on work not performed is recoverable, the objective should always be converting that termination for default into one for convenience so that at least the contractor can recover for work performed and profit on the work performed along with other associated termination costs that the contract may provide.

 

When a party is terminated for default, the key issues that will arise will typically be: (a) whether the termination for default was proper, i.e., whether the terminating party procedurally complied with the termination for default provision in the contract, (b) whether the cause or default was material and rose to the level of constituting a default termination, and (c) converting the termination for default into a termination for convenience and the recoverable costs pursuant to the termination for convenience provision in the contract.  Again, a termination for default will likely mean that the terminated party owes the terminating party money associated with the overrun for completing their scope of work.  A termination for convenience, on the other hand, will likely mean that the terminated party is owed money for work it performed irrespective of any overrun experienced by the terminating party.

 

 


A recent ruling in U.S.A. f/u/b/o Ragghianti Foundations III, LLC v. Peter R. Brown Construction, Inc., 2014 WL 4791999 (M.D.Fla. 2014), illustrates a dispute between a prime contractor and a subcontractor on a federal project after the prime contractor default terminated the subcontractor.   The prime contractor hired a subcontractor to construct the foundation, slab on grade, and site concrete.  As the subcontractor was pouring the slab on grade concrete, it was determined that there were deficiencies in the concrete.  The prime contractor sent the subcontractor notice under the subcontract regarding the deficiencies and that the subcontractor needed to provide an action plan prior to future concrete placement. Although the subcontractor responded with a plan including when it was going to demolish the defective portion of the slab, it failed to live up to its own recovery schedule.  Accordingly, the prime contractor terminated the subcontractor for default and incurred costs well in excess of the subcontractor’s original subcontract amount to complete the subcontractor’s scope of work.  The subcontractor filed suit against the prime contractor and its Miller Act surety and the prime contractor counter-claimed against the subcontractor.

 

 

There were numerous interesting issues raised in this case.  This article will only touch upon a couple of the legal issues. The first issue was whether the prime contractor properly terminated the subcontractor for default pursuant to the subcontract; if not, the termination should be deemed a termination for convenience.  The Court found that the termination was procedurally proper, but declined to determine whether the termination was wrongful, perhaps because the Court determined that once the termination for default was properly implemented pursuant to the subcontract there was no reason to delve into any further analysis.  In other words, once the prime contractor procedurally, properly terminated the subcontractor for default pursuant to the subcontract, it appeared irrelevant whether the cause forming the basis of the default was material.   This implication is certainly beneficial for the prime contractor and it is uncertain why the Court did not entertain the argument as to whether the procedurally proper termination was wrongful.   This determination would seem important because if the termination was wrongful, the terminating contractor would be responsible for its own cost overrun in addition to the costs incurred by the terminated subcontractor.  Although, in this case, by the Court finding that the termination for default was procedurally proper, the Court seemed to recognize that there was cause supporting the implementation of the termination for default; otherwise, the termination for default would not have been procedurally proper.

 

The next issue discussed in this case pertained to recoverable delay-type damages under the Miller Act.  The Court expressed:

 

A Miller Act plaintiff is entitled to recover under the bond the out-of-pocket labor and expenses attributable to delays. 

***

[A] damage claim against a surety that does not flow directly and immediately from actual performance [of its agreement] is barred by the Miller Act….A subcontractor cannot recover on a Miller Act payment bond for the cost of labor and materials provided after the termination of work under a government construction project, and cannot recover profits on out-of-pocket expenditures attributable to delay.

Ragghianti Foundations, supra, at *18, 19 (internal quotations and citations omitted).

What does this mean?  This means that a subcontractor is not entitled to recover against a Miller Act surety:  (a) anticipated lost profits on work not performed, (b) delay-related costs that do not flow directly and immediately from actual performance under the subcontract, (c) profit on delay-related costs, and (d) costs incurred after the termination of the work.  These are all categories of damages that are applicable to a terminated subcontractor that it will NOT be able to recover against a Miller Act surety.  This is important because if a subcontractor is looking to capitalize on its damages for converting a termination for default into one of convenience, it may want to sue the terminating contractor so that it is not leaving any damages on the table by only suing the Miller Act 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 REQUIREMENT FOR SUPPLIER ON AN ONGOING OR OPEN ACCOUNT

Posted on by


Suppliers oftentimes rent or furnish supplies or equipment on credit to a customer (such as a subcontractor) on an ongoing or open account.  Under this scenario, the supplier typically has its customer enter into a credit application (ideally, where there is a personal guarantor) and then there may be a sales or rental agreement (or purchase order) documenting the costs of the supplies bought or rented in accordance with the account.

 

The case of Romona Equipment Rental, Inc. ex rel. U.S. v. Carolina Casualty Ins. Co., 2014 WL 2782200 (9th Cir. 2014), illustrates an argument raised against a supplier of rental equipment in a federal Miller Act payment bond action when the supplier rented equipment to a subcontractor on an open account.  In this case, the subcontractor entered into a credit application with the supplier that established the open account for the subcontractor to rent equipment on a federal construction project.  The rental equipment that the subcontractor would utilize would be documented by rental agreements and corresponding invoices. The subcontractor entered into 89 rental agreements with the supplier where the supplier furnished the rental equipment on credit.   Around this time, the prime contractor terminated the subcontractor from the project leaving the subcontractor owing the supplier substantial sums of money for the rental equipment.

 

 

The supplier served the prime contractor with its notice of nonpayment within 90 days of the last day it furnished rental equipment (as it was required to do under the Miller Act since the supplier was not in privity of contract with the prime contractor).  The supplier then filed suit against the prime contractor’s Miller Act payment bond for the unpaid rental charges.  The prime contractor and surety argued that the supplier’s notice of nonpayment was untimely as to ALL the rental equipment furnished to the construction project more than 90 days before service of the notice.  The prime contractor and surety further argued that the supplier failed to mitigate its damages by continuing to supply equipment despite nonpayment. At trial, the district court held that the supplier’s notice of nonpayment covered ALL rental equipment the supplier furnished to the subcontractor for the project in light of the open book account.  The district court further held that the supplier’s duty to mitigate damages occurred 4 days after the subcontractor was terminated and, therefore, the supplier was not entitled to recover for rental equipment after this date.

 

The main issue on appeal to the Ninth Circuit Court of Appeals was whether the supplier’s notice of nonpayment was timely as to ALL rental equipment furnished on an open book account more than 90 days before the notice.   Stated differently, the issue was whether each rental agreement created, in essence, a separate contract with a separate requirement to serve a notice of nonpayment within 90 days from the last date the specific equipment was furnished pursuant to each rental agreement.   The Ninth Circuit, relying on precedent from the First, Fourth, and Fifth Circuits, affirmed that: “if all the goods in a series of deliveries by a supplier on an open book account are used on the same government project, the ninety-day notice is timely as to all of the deliveries if it is given within ninety days from the last delivery.”  Romona Equipment Rental, supra, at *3.   This is a good ruling for suppliers!

 

Interestingly, while the Ninth Circuit agreed with the district court as to the date when the supplier’s duty to mitigate occurred (4 days after the subcontractor was terminated), there was discussion on this issue.  It turned out that the subcontractor originally paid its supplier the first 9 invoices for rental equipment, but then only paid 2 of the remaining  invoices.  The supplier ceased renting equipment to the subcontractor when it learned that the subcontractor was terminated from the project.   Yet, before the subcontractor was actually terminated, the subcontractor and prime contractor were trying to resolve the issues that led to the subcontractor’s termination (not uncommon).  Thus, the supplier had a good faith belief that the issues would get resolved and it would get paid. Also, the subcontractor and supplier had a longstanding relationship and the supplier was currently furnishing equipment on another federal project and was being paid by the subcontractor.  For these reasons, the Ninth Circuit explained that, “Although Ramona [supplier] failed to alert Candelaria [prime contractor] to Otay’s [subcontractor] delinquency until the seventy-eight invoices from Otay were overdue, this does not render the district court’s conclusion-that Romona had commercially reasonable justifications for choosing not to mitigate its damages prior to June 10, 2008 [4 days after the termination]—illogical.”  Romona Equipment Rental, supra, at *4.

 

This dialogue raises an interesting issue regarding the mitigation of damages defense (or duty to mitigate losses/damages) raised by a prime contractor or surety when a supplier goes unpaid for an extended period of time but continues to furnish supplies or equipment.  The point of termination raised an easy line of demarcation as to when the credit for rental equipment needed to be cut off.  But, what if the subcontractor was not terminated and the supplier continued to rent equipment despite nonpayment? Even though the supplier typically expects payment net 30 days and does not have a pay-when-paid provision in its rental agreements or purchase orders, it still many times will give its customer (e.g., subcontractor) the appropriate slack while its customer is awaiting payment, especially a longstanding customer, a good customer, or when it has a good faith belief that it will ultimately get paid.  Also, as it relates to rental equipment, while the supplier can stop furnishing new rental equipment, it is not that easy simply showing up to a project (let alone a federal project) unannounced and removing equipment being rented on a monthly or daily rate.  So, there are definitely commercially reasonable justifications where a supplier will continue to let an account grow when it is not getting timely paid.  The key for the supplier to establish that it tried to mitigate its losses is to lay the foundation that it sent communications to its customer and its customer’s customer (such as the prime contractor) regarding the delinquent account and its expectation that the equipment  be returned when it becomes apparent (or the supplier is concerned) that it may not get paid (or when it no longer has the good faith belief that it will get paid).  In Romona Equipment Rental, although the prime contractor likely knew the subcontractor was renting construction equipment (and was not in a position to pay unless the subcontractor received payment), the prime contractor still argued that the supplier should have notified the prime contractor of the subcontractor’s delinquent account as a means to mitigate damages.

 

For more information on a supplier’s burden of proof in a Miller Act action, please see: https://floridaconstru.wpengine.com/suppliers-burden-of-proof-in-a-miller-act-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.

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

Posted on by


While 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)

Posted on by


The 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.

 The 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 breach.  Dick 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

Posted on by

What 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

Posted on by


Forming 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.