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Suppose on a federal construction project, the government orders extra work. The general contractor directs the subcontractor to perform the extra work, which it does. The government has not gotten around to approving an equitable adjustment to the contract price, and therefore has not issued any payment to the general contractor for the extra work that the subcontractor performed.

The subcontractor demands payment from the general contractor. The general contractor has carefully prepared its subcontract to postpone payment to the subcontractor until the government approves and pays for the work. The general contractor responds to its subcontractor’s payment request citing to conditional payment language in the parties’ subcontract and reminding the subcontractor of its agreement that the general contractor has no obligation to pay until paid by the government. 

With the subcontractor’s effort to obtain payment from the general contractor stymied, the subcontractor seeks relief under the payment bond. However, the surety also denies the subcontractor’s claim as “premature,” citing to the same subcontract conditional-payment provisions. Can a surety rely on conditional payment language as a defense to a subcontractor’s Miller-Act payment bond claim?

Under the common law, a surety generally may rely on any defenses that are available to the principal on the payment bond. However, the Miller Act is a federal law that requires a general contractor on a public works project to furnish a payment bond guaranteeing payment to unpaid subcontractors and suppliers providing labor, services or materials on a federal project. A Miller Act payment bond is a creature of federal law—not state common law. 

Under the Miller Act, subcontractors have a right to pursue legal action against the surety if the contractor fails or refuses to pay for labor, services or materials provided for the bonded project. Any such action must be brought no later than one year after the date on which the claimant did or performed the last labor or furnished or supplied the last of material. 40 United States Code § 3133.

In United States of America for the Use and Benefit of McKenney’s Inc. v. Government Technical Services, LLC, 531 F. Supp. 2d 1375 (N.D. Ga. 2008), a surety, Gray Insurance, raised the argument that it could use the general contractor’s conditional payment clause to defend a subcontractor’s payment bond claim. The Northern District of Georgia disagreed. “A surety’s liability is governed by the obligations of the prime contractor under the contract, however not to the extent that a surety may avoid its obligations imposed by the Miller Act,” the court concluded. 

Other federal courts are in agreement that a general contractor’s surety cannot defend against a subcontractor’s claim on a payment bond by relying on conditional payment language. In U.S. for Use and Benefit of Walton Tech., Inc. v. Weststar Engr., Inc., 290 F.3d 1199, 1209 (9th Cir. 2002), the Ninth Circuit stated that “[o]nce the requisite ninety-day period has elapsed, the Miller Act permits a subcontractor to seek payment against the payment bond”—regardless of whether the Government has paid the general contractor. 

These court decisions do not mean that the general contractor and surety lack defenses to the subcontractor’s payment bond claim. These decisions only mean that the general contractor and surety cannot raise conditional payment defenses. A general contractor and surety have the right to raise other defenses to a subcontractor’s payment bond claim. For example, in U.S. For Use and Benefit of Walton Technology, Inc. v. Westar Engineering, Inc., 290 F.3d 1199, 1207 (9th Cir. 2002), the Ninth Circuit made a distinction between subcontract terms affecting the timing of payment, which a general contractor’s surety cannot rely on, versus subcontract terms affecting measure of payment which a general contractor’s surety can rely on. 

According to the Ninth Circuit, subcontract payment terms that affect a subcontractor’s measure of payment rather than timing of payment do not conflict with the Miller Act and may be raised by a general contractor’s surety. To illustrate this distinction, the Ninth Circuit cited a Fourth Circuit case where the court fixed a subcontractor's compensation under a payment bond by the subcontractor’s share of profits stated in the subcontract rather than the subcontractor’s costs of labor and materials. In the Fourth Circuit case cited by the Ninth Circuit, United States ex rel. Woodington Electric Co. v. United Pacific Insurance, 545 F.2d 1381 (4th Cir. 1976), the Fourth Circuit stated that “the surety is obligated to pay the compensation to which the parties have agreed.” 

This case demonstrates that a surety defending against a subcontractor’s claim against a Miller Act payment bond may rely on subcontract terms that limit recoverable damages even though the surety may not raise conditional payment language as a defense. 

For example, some courts have allowed sureties to utilize a “no damages for delay” provision as a defense. In U.S. v. Travelers Cas. And Sur. Co. of America, 55 F.Supp.3d 852, 860 (N.D. W.Va. 2014), the Northern District for West Virginia stated that “no damages for delay clauses does not contradict the Miller Act because they affect the measure of recovery, not the timing of it.” However, other courts have taken the opposite view. In U.S. on behalf of Kitchens To Go v. John C. Grimberg Co., Inc., 283 F.Supp.3d 476, 482-43 (E.D. Va. 2017), the Eastern District of Virginia stated that “the Surety is not entitled to rely on the Subcontract's no-damages-for-delay clause to avoid Miller Act liability to the Subcontractor for delay damages” because “[t]he no-damages-for-delay clause... not only contradicts the Miller Act's language but is also inconsistent with the purposes of the Act.” 

A general contractor’s surety cannot rely on a conditional payment clause to defend against a subcontractor’s payment bond claim. The majority of federal courts have determined that conditional payment language conflicts with the Miller Act’s timing provisions, which are interpreted broadly in light of the purpose of the Miller Act. The purpose of the Miller Act is to ensure timely payment to subcontractors that the prime contractor fails to pay. Sureties will need to look to other available defenses and must be mindful that courts in different jurisdictions are split on whether no-damages-for delay clauses are a valid defense to a Miller Act claim. A surety defending against a subcontractor’s Miller Act payment bond claim must take into consideration and carefully review the prevailing legal authority where each Miller Act dispute is filed. 

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