Getting Paid or Getting Stayed? Recent Judicial Decisions in Maryland, Virginia, and Pennsylvania Limit Surety Attempts to Delay Miller Act Claims
In order to ensure the financial health of construction companies working on federal jobs, Congress has provided first and second tier subcontractors and suppliers with a potent remedy. Under the federal Miller Act, 40 U.S.C. § 3133, prime contractors are required to post a payment bond upon which subcontractors can assert claims for payment for unpaid work. If a subcontractor is forced to wait 90 days or more for payment, it is are within its rights to file a lawsuit seeking payment for the overdue amounts. This lawsuit can be filed against just the prime contractor’s surety, or, depending upon the terms of the subcontract, can include the prime as well. The payment bond litigation is often referred to as a “Miller Act Claim.”
Despite the stated purpose behind payment bonds, contract provisions are often used as a basis to temporarily avoid litigation. Frequently, sureties (and the prime contractor that posted the bond) will respond to a Miller Act Claim by asking the court to “stay” the case (i.e., hit the pause button) in order to avoid immediate payment obligations. This delay is significant, as it could be years before the subcontractor’s Miller Act Claim can resume. Sureties will cite either the government claims process with the prime contractor or arbitration language in the subcontract between the prime and the subcontractor as the basis for staying the case. Sureties also may attempt to avoid their payment obligations by citing pay-if-paid clauses in the subcontract.
In the past, there has been a great deal of inconsistency among courts in deciding whether to stay federal Miller Act Claims. More recently, however, a number of courts in the Mid-Atlantic region have shown some consistency in refusing to stay cases pending outcome of the prime contractor’s claims process. In doing so, the courts have held that the overriding purpose of the Miller Act is to ensure that subcontractors are timely paid for their work. Where sureties have cited pay-if-paid clauses, the courts recently have held that, because such clauses inhibit a subcontractor’s right to timely payment, they are void as against public policy and unenforceable.
For instance, in United States v. Zurich Am. Ins. Co., the U.S. District Court for the Eastern District of Pennsylvania held that a stay would subject the subcontract to “a substantial, indefinite delay as [the prime contractor]’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against [the prime].” The surety and prime argued that the subcontractor agreed to allow the government claims process to proceed first based on language in the subcontract incorporating the claims process. The court disagreed, citing a 1999 amendment to the Miller Act providing that a subcontractor cannot waive its Miller Act rights before work commences on the project. Because the subcontract was signed before any work commenced, the government claims process language operated as an invalid waiver and could not be invoked as the basis for a stay. In issuing this ruling, the Court emphasized the importance of not just payment, but timely payment, of claims asserted under the Miller Act.
Increasingly, other courts in the Mid-Atlantic region have followed this same line of reasoning. In United States for use & benefit of Tusco, Inc. v. Clark Constr. Grp., LLC, the U.S. District Court for the District of Maryland also denied a request by a surety for a stay of a Miller Act Claim. The District Court of Maryland held that any provisions of the subcontract that required the subcontractor, Tusco, “to wait for an indefinite period prior to suing on the Bond [were] unenforceable because they contravene the purpose of the Miller Act.” The court also took note of the recent line of cases trending against a stay, saying that “federal courts have enforced the right of subcontractors to collect on payment bonds after they have completed their work on a federal project, especially in the face of attempts by sureties to delay litigation.”
Many of these recent cases have been in the Fourth Circuit, which includes the states of Maryland, North Carolina, and Virginia. In a recent case, United States v. Continental Casualty, the prime contractor argued that allowing the subcontractor to proceed could lead to inconsistent decisions because the prime’s litigation against the government could be unsuccessful whereas the subcontractor’s claim could be successful. The District Court of Maryland rejected this argument, holding that “a stay would be inconsistent with the plain text and congressional purpose of the Miller Act.”
More recently, in Kitchens to Go v. John C. Grimberg Co., the Eastern District of Virginia echoed the reasoning of the Tusco and Continental Casualty decisions. In that case, the court held that the Miller Act precluded the surety from relying on the dispute resolution in the subcontract to stay the subcontractor’s Miller Act lawsuit against the surety. The court reasoned that the surety’s invocation of the disputes clause operated as an impermissible waiver of the subcontractor’s Miller Act rights. Notably, the court also held that the surety could not rely on the no‑damages-for-delay clause in the subcontract to preclude the subcontractor’s delay claim against the surety.
The Miller Act is designed to protect subcontractors and suppliers by ensuring that they can obtain timely payment for claims they present to a surety. While courts are increasingly recognizing the importance of allowing timely enforcement of such claims through the court system, a number of time-sensitive requirements in the Miller Act make doing so difficult. Moreover, there is no way to know whether courts will continue on this trend or eventually limit how far they will go to strike contract language in favor of public policy. Accordingly, subcontractors on federal projects should obtain experienced counsel to advise them on presenting any Miller Act claim as soon as they become aware of any payment issues.