Recent case on Miller Act Points Out Pitfalls: An Overview On Making Claims for Payment on Federal Projects

By

William C. Last, Jr. and Michael E. Zárate

Attorneys at Law

A recent 9th Circuit case demonstrates that the Miller Act really is a federal statutory scheme intended to protect certain levels of subcontractors from general contractors who fail to pay them. The Miller Act is a federal statutory scheme that is intended to protect certain levels of subcontractors from general contractors who fail to pay them. In essence the Act provides for a payment bond remedy for those who furnish labor or materials to a federal public works project.

In the recent case, Pre Con Industries ("PCI") acted as the general contractor on a construction project for the U.S. Veterans Administration, and subcontracted with Air Control Technologies ("ACT") for HVAC work. ACT began working on the job site in December 2008 but encountered conditions that made the work more expensive than expected. Ultimately, PCI terminated ACT in November 2009 when ACT requested reimbursement for its unanticipated costs. Sounds familiar, right?

ACT eventually filed a complaint in federal court, but on March 14, 2011, more than one year after ACT performed any work. PCI attempted to dismiss the complaint arguing the federal court didn't have any jurisdiction over the matter. While the district court bought this argument, the appeals court did not.

The appeals court stated that it maintained federal jurisdiction through other statutes and the Miller Act's one-year statute of limitations was simply a claims-processing rule. Since the complaint did not show that ACT did not work on the project within one year of filing the complaint, the complaint could not have been dismissed in the district court. While the appeals court has given ACT a short reprieve, it still failed to file a timely lawsuit and should ultimately fail in its belated claim.

If you are a contractor who works on federal projects and want to use the Miller Act remedy you must comply with strict requirements of that Act. The remainder of this article shall discuss those requirements.

What Requirements Placed on General Contractors by the Act?

On any federal project over $25,000 the general contractor must furnish a payment bond. A federal project is one where federal funds are used for the improvements or if the federal government has a financial interest in the project.

The Miller Act allows a general to post certain assets in lieu of a bond. The amount of the payment bond is equal to the total amount payable by the terms of the contract unless the contracting officer awarding the contract makes a written determination supported by specific findings that a payment bond in that amount is impractical, in which case the amount of the payment bond shall be set by the contracting officer. However, the payment bond cannot be less than the amount of the performance bond. If a bond is required and the procuring agency fails to enforce the requirement an unpaid claimant may be able to pursue the procuring agency.

Who Can Make a Claim Against a Miller Act Bond?

The Miller Act payment bond provides for payment of all persons supplying labor or material used in the work covered by the general contract. However the only first and second-tier subcontractors and material suppliers can make a claim against the bond. First-tier subcontractors/material suppliers are those with contracts directly with the prime contractor, and second-tier subcontractors/material suppliers are those with contracts directly with first-tier subcontractors. Thus third and lower tier subcontractors and suppliers, lenders, and employees of third and lower tier subcontractors cannot make a Miller Act claim. However, both an assignee of a first or second tier subcontractor/material supplier can make a claim and a lower tier subcontractor can make a claim if the first tier subcontractor who agrees to directly pay a lower tier subcontractor may make a Miller Act Bond claim.

It should also be noted that since the general contractor is the principal on the bond, it is not entitled to pursue a claim against the bond.

What Notice Requirement Are Placed on Subcontractors and Suppliers as a Prerequisite to Filing a Claim?

A first tier subcontractor or supplier does not have to file a preliminary notice. All other eligible lower tier subcontractors and material suppliers must give the prime contractor written notice within 90 days after they last furnished labor or material. The last day for furnishing labor and/or materials is determined by whether or not the work in question was part of the original contract work.

The written notice must inform the prime contractor, with substantial accuracy, the person to whom the materials and/or services were supplied that a claim for payment is being made and include the following information: (a) the claimant has furnished and labor and material to the project, (b) who the work and/or materials were supplied to, and (c) the balance owed. If you fail to satisfy this requirement, your claim on the Miller Act bond will be denied by the courts.

The notice maybe be served by any means which provides written, third-party verification of delivery to the contractor at any place he maintains an office or conducts his business, or his residence, or in any manner in which the United States marshal of the district in which the public improvement is situated is authorized by law to serve summons.

Can A Miller Act Claim Be Waived ?

Yes, but any waiver of the right to sue on the Miller Act will be void unless it is in writing, signed by the person whose right is waived, and executed after such person has first furnished labor or material for use in the performance of the contract.

How is The Miller Act Bond Claim Perfected?

Within one year after the claimant last furnished labor and/or materials the claimant must file a lawsuit in the appropriate federal court. However, there is a bar on filing the lawsuit for a period of ninety days after the claimant last furnished labor and/or materials. If a lawsuit is not filed in a timely manner the bond claim will fail. Attorney fees can only be recovered if there is an attorney's fee provision in the contract.

Conclusion

The Miller Act is an excellent payment remedy for first and second tier subcontractors. The requirements placed on the first and second tier claimants are slight in comparison to those placed on a mechanics' lien claimant. However, the success of the claim is dependent on giving the appropriate preliminary notice. Since the remedy is against the bond or security that the prime contractor posts potential claimants should satisfy themselves that the bonding company is solvent, or if assets are posted they are of the value represented by the prime contractor.

This article, ©2013, was written by William C. Last, Jr. and Michael E. Zárate. Mr. Last is an attorney who has been specializing in Construction Law for over 20 years.. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.