The Importance of Reviewing Bond and Contract Language on Public Projects
Prime, or general, contractors working on public projects in the Commonwealth of Pennsylvania, whether state or federal, are required to post performance and payment bonds. Such bonds protect the owner against liens placed by subcontractors for nonpayment and ensure the performance of the prime contractor. Most importantly for subcontractors, the bonds provide an alternative source of payment if they are not paid. However, the existence of a payment bond on public projects does not guarantee payment for subcontractors. One significant obstacle to a subcontractor making a claim on a bond on a public project is a valid and enforceable “pay if paid” clause in its contract with the upper-tier contractor. While such clauses have been less of an obstacle to a subcontractor’s recovery on payment bonds at the federal level than at the state level, it is important to review both the subcontract language and bond language on any public project before entering into a contract.
Federal Projects
The Miller Act requires general contractors, entering into a contract of $100,000 or more with the federal government, to post payment and performance bonds. Federal courts, to date, have treated subcontractors’ payment bond claims on bonds issued under the “Miller Act” favorably, even if the subcontract contained a “pay if paid” clause. However, in issuing decisions supporting the subcontractor’s ability to make a payment bond claim, federal courts have cautioned that explicit language requiring the subcontractor to waive its rights under the Miller Act, if contained in the subcontract and the bond, could allow the surety to assert the contractor’s “pay if paid” clause as a valid defense. Thus, it is important to thoroughly review the subcontract and bond prior to entering into the contract to determine if the contract language requires a subcontractor to waive protections otherwise available under the Miller Act.
State Projects
State courts (and federal courts applying state law in cases where the federal court has diversity jurisdiction) have not consistently favored subcontractors’ bond claims on public projects and have allowed sureties to assert “pay if paid” clauses as a defense to paying on the payment bond. Thus, it is important for subcontractors, before entering into the subcontract, to consider things like:
- Whether the subcontract has a “pay if paid” clause and whether that state will enforce such a clause;
- If courts in that state have considered whether sureties may assert a valid “pay if paid” clause as a defense to a bond claim on a public project; and
- Any known history of the owner and/or prime contractor in making full and timely payments and the associated risks and costs of non-payment.
Payment bonds are undoubtedly an important protection for subcontractors providing labor and materials on public projects. However, they are not a guaranteed source of protection. Working with legal professionals to review your contract documents and applicable law before entering into subcontracts on public projects can allow you to assess the risks of nonpayment before committing to a project.
