Last week, my partner, Seth Price, and I gave a presentation about Payment and Performance Bonds to the Construction Section of the Atlanta Bar Association.   Part of our presentation focused upon recent cases (decided within the last 18 months or so) involving payment and performance bond issues.  We called them “scary” cases because the outcomes were very surprising and unpredictable and could not have been contemplated or foreseen by the claimants without extraordinary “due diligence” before providing labor or materials to the project.

I’ll share a couple cases to see if you agree with our characterization:

Scary case #1:

U.S. ex. rel. Roc Carter Co, LLC v. Freedom Demolition, Inc., 2009 WL 3418196 (M.D. Ga. 2009)

  • In this case, the U.S. leased property on a military base to a private corporation for the purpose of constructing, operating and maintaining a military housing facility
  • The lease limited government’s liability to that of a lessor and stated construction was a private undertaking
  • The corporation then entered into design-build contract to construct military housing on the leased property
  • The contractor provided payment and performance bonds naming the U.S. and project lender as co-obligees
  • A second-tier subcontractor sued the contractor and surety its under the Miller Act for labor and materials provided to the project
  • The U.S. District Court dismissed the subcontractor’s suit, holding that the Miller Act did not apply because U.S. was not a party to the design-build contract and the project did not involve a contract to construct a “public work”
  • The District Court set for the three elements that it determined were required to have a “public work” contract: (1) there must be a construction contract, (2) the U.S. must be a party to the construction contract; and (3) the contract must require Payment and Performance bonds that are in favor of U.S.

The “scary” part of this case is that there would have been no reasonable way for the second-tier subcontractor to know that the Miller Act would not apply to its claims against the surety.  The subcontractor would not have had access to the lease between the U.S. and the private company, and likely would not even had access to the construction contract between the lessee and the general contractor.  The work was performed on a U.S. military base, and involved the construction of military housing.  The payment and performance bonds issued by the contractor named the U.S. as a co-obligee, and therefore, it would have been reasonable to assume that the U.S. was a party to the construction contract.

I suppose the lesson of this case is that now all parties supplying labor and materials to a construction project which they believe to be a federal government project must undertake “due diligence” to make sure that the U.S. is a party to the construction contract and that the payment and performance bonds are written in favor of the U.S.

Scary case #2:

U.S ex. rel. Sigler v. AMC and E.C Scarborough, 2010 WL 5100913 (D. Nev. 2010)

  • This case involved a second-tier supplier suing a surety under the Miller Act
  • The surety was an individual, not a corporation (yes, that’s possible under the Miller Act in very limited circumstances)
  • The individual surety collected a premium for only one year and the payment bond stated that it was limited to the first year of the project
  • The supplier did not deliver materials to the project until Year 2 of the project
  • The supplier argued that the limitations period in the bond impeded the purpose of the Miller Act, and that the GC violated the Act.
  • The U.S. District Court granted the surety’s motion for summary judgment, finding that “The Court cannot hold a surety liable for coverage that it did not intend to provide.”

Again, the “scary” part of this case is that there was no reasonable way for the supplier to have known at the time that it supplied the materials that the limitations period for the bond had already expired!!  Typically, subcontractors and suppliers do not request a copy of the payment bond until after they supply materials and labor and do not get paid.  In fact, the Miller Act only requires a Contracting Officer to provide a copy of the payment if requested by a subcontractor or supplier by affidavit post performance. At that point, it was already too late for the supplier to file a bond claim under limitation provided for in this bond.

In this case the supplier has filed a motion for reconsideration that is still pending, so this decision is not yet final.  But this case, like the Roc Carter case described above, require subcontractors and suppliers to take exceptional measures to secure copies of the contracts and bonds prior to beginning any work—measures that have not been common practice in the construction industry to this point. 

From our perspective, these cases are scary for contractors and their lawyers who counsel them about precautions to take to preserve and protect payment bond claim rights.  The two cases create new hurdles for contractors performing work on federal public projects to jump in order to protect their bond claim rights.

What do you think—is “scary” an appropriate adjective to describe the outcomes of these cases?

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