Miller Act Claims and Dispute Resolution Procedures
Federal government construction contractors know that the Miller Act requires them to furnish a payment bond for the benefit of subcontractors. Many contractors are familiar with the process by which subcontractors may seek payment under a surety’s payment bond in federal court when there is a payment dispute, in the form of a Miller Act claim. What many contractors do not know is how their subcontractors’ Miller Act rights affect the dispute resolution procedures included or incorporated in their subcontracts. Indeed, many contractors on federal projects who thought they were protected against unnecessary courtroom litigation by strong contractual dispute resolution procedures have discovered that their subcontractors can short circuit some of these procedures by means of a Miller Act lawsuit against the contractor’s surety. To avoid this result, contractors need to know what alternative dispute resolution procedures are enforceable to prevent litigation of Miller Act claims and which ones are less likely to be enforced.
First, the good news: contract clauses that require arbitration between the contractor and the subcontractor are enforceable in the face of a Miller Act claim. When a subcontractor attempts to avoid its obligation to arbitrate its dispute with the contractor by filing a Miller Act claim against the bond, the federal district courts generally allow the contractor to intervene and compel arbitration. The actual Miller Act claim will not be sent to the arbitrator, as this is between the subcontractor and the surety, but will be stayed (suspended) by the court while the contractor and the subcontractor arbitrate the payment dispute. Even though the Miller Act claim is stayed, it will usually be resolved by the outcome of the arbitration because the surety is typically only liable to the same extent the contractor is liable. For payment disputes between contractors and subcontractors, the Miller Act does not provide a means for the subcontractor to avoid arbitration.
So if arbitration is enforceable, what’s the problem? The problem is that an arbitration clause in the subcontract does not apply to claims against the federal government. In fact, the only way to recover funds from the federal government on behalf of a contractor or a subcontractor is by following the procedures established in the Contract Disputes Act (“CDA”). When a subcontractor has a claim that implicates the federal government, the subcontractor must submit the claim to the contractor to be passed through to the government. Yet, rather than pursuing a pass-through claim, some subcontractors attempt to recover their losses through a bond claim rather than from the federal agency that is actually responsible. In these situations, instead of cooperating with the subcontractor in the presentation of its claim to the federal government, the contractor may get stuck litigating the subcontractor’s Miller Act claim to avoid paying damages that are the responsibility of the federal government.
Contractors on federal projects typically address this problem by having a two-tiered dispute resolution procedure. For subcontractor claims that are purely against the contractor, the subcontract includes an arbitration clause. For subcontractor claims that implicate the federal government, however, the subcontract includes a pass-through clause that requires the subcontractor to follow CDA resolution procedures set forth in the prime contract. This is where trouble arises: unless the pass-through clause is written specifically to incorporate the dispute resolution procedures set forth in prime contract, the federal district courts may refuse to enforce it.
Federal district court judges are reluctant to order a subcontractor to submit a pass-through claim for multiple reasons, including: a concern that the subcontractor did not understand or intend to limit its remedy to a pass-through claim against the government; the court’s lack of jurisdiction over the federal government to ensure adequate and timely consideration of the subcontractor’s claim; and the court’s inability to force the contractor to cooperate with the subcontractor in the presentation of its pass-through claim to the government. All of these concerns, however, can be overcome by carefully drafted subcontract language. The subcontract should, if possible, set forth the dispute resolution provisions of the prime contract verbatim. It also should obligate the contractor to participate and cooperate in the pass-through claims process. It should reference the sections of the CDA that guarantee that the government will timely consider properly submitted claims. Finally, it should include a clause, known as a liquidating agreement, which clearly waives the subcontractor’s right to recover any damages from the contractor other than what the contractor and surety may recover from the federal government on the subcontractor’s behalf.
The Miller Act is meant to protect subcontractors against nonpayment — not enable them to avoid participating in the dispute resolution procedures they agreed to in a subcontract. If a subcontract is drafted correctly, federal district courts will frequently order the subcontractor’s Miller Act claim stayed pending resolution of the subcontractor’s pass-through claim against the federal government. Careful attention to the subcontract language prior to execution is necessary to achieve this result. If you are a general contractor performing federal construction work and have questions about the language of your subcontract, you should contact an attorney to be sure you are properly shielded from unnecessary and costly litigation.