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Federal court holds miller act rights are unaffected by contingent payment clause absent an express waiver.

Federal court holds miller act rights are unaffected by contingent payment clause absent an express waiver.
November 21, 2016 dominick

In United States f/u/b/o Tusco, Inc. v. Clark Constr. Group, LLC, 2016 U.S. Dist. Lexis 107571 (D. Md. Aug. 15, 2016), the Court re-affirmed the general principle that courts will, if possible, ensure proper claimants receive the full benefit of the federal Miller Act.

Tusco, Inc. (“Tusco”) was a subcontractor to Clark Construction Group, LLC (“Clark”) on a federal project in Maryland known as the Intelligence Community Campus-B Project (“the Project”). Clark secured a payment bond from Travelers Casualty and Surety Company (“Travelers”).   The Subcontract contained a general pay-if-paid clause making payment from the Owner to Clark a condition precedent to Clark’s obligation to pay Tusco, and further provided that payment from any surety was subject to the same condition precedent. Significantly, the Subcontract also contained payment clauses applicable to changes. One clause (Article 9(c)) provided a pay-if-paid condition precedent to payment for changes caused by the Owner, while the other clause (Article 9(d)) simply stated that the subcontractor would be entitled to an equitable adjustment for changes ordered by Clark. Finally, the Subcontract contained the following provision (Article 11(b)) regarding disputes:

In any case of any dispute between Clark and the Subcontractor, in any way relating to or arising from any act or mission [sic] of the Owner or involving the Contract Documents, Subcontractor agrees to be bound to Clark to the same extent that Clark is bound to the Owner, by the terms of the Contract Documents, and by any and all preliminary and final decisions or determinations made thereunder by the party . . . whether or not Subcontractor is a party to such proceedings. In case of such dispute, Subcontractor will comply with all provisions of the Contract Documents allowing a reasonable time for Clark to analyze and forward to the Owner any required communications or documentation. Clark will, at its option, (1) present to the Owner, in Clark’s name, or (2) authorize Subcontractor to present to the Owner, in Clark’s name, all of Subcontractor’s claims and answer the Owner’s claims involving Subcontractor’s work, whenever Clark is permitted to do so by the terms of the Contract Documents. . . . The Subcontractor [sic] price shall be adjusted by Subcontractor’s allocable share determined in accordance with [the Changes provisions].

Tusco performed changed work at the direction of Clark, but Clark never paid for it because, Clark alleged, it had no obligation to do so until and unless it was paid by the Government pursuant to Article 9(c) (Owner directed changes). Since Clark was in the process of attempting to resolve its dispute with the Government, no payment was due. Tusco eventually brought suit against Clark for breach of contract and quantum meruit, and brought a Miller Act claim against the Travelers’ bond. Clark moved to dismiss the Complaint pursuant to Article 9(c). Travelers moved the stay the matter pursuant to Article 11(b), contending the suit was premature pending the resolution of the dispute between Clark and the Government.

In addressing Clark’s motion, the Court first engaged in a lengthy, and quite instructional, recitation of the law pertaining to pay-if-paid and pay-when-paid clauses. It then pointed out, among other things, that the pay-if-paid provision in Article 9(c) only applied to Owner directed changes. Here, Tusco alleged that Clark directed it to perform the extra work, and that it could have done so independently of the Government. The Court noted that under those circumstances Article 9(d) would apply, which did not contain a pay-if-paid provision. Therefore, the Court denied Clark’s motion. (Note that since the Court was deciding a motion to dismiss its analysis was based on the pleadings alone – subsequently developed facts could certainly tip the scales in Clark’s favor).

In addressing Travelers’ motion, the Court first presented an overview of the Miller Act and applicable law. Then, before addressing the Traveler’s motion directly (which was based on Article 11(b)), the Court pointed out that conditional payment clauses, such as Article 9(c), do not preclude Miller Act claims unless there is a “clear and explicit” waiver by the subcontractor of its Miller Act rights. If the rule were otherwise, a subcontractor could unwilling lose its Miller Act rights if the Government failed to pay the general contractor during the applicable one-year statute of limitations period, because the subcontractor would be contractually precluded from bringing its claim during that period. Similarly, the Court concluded that a provision in a contract requiring a subcontractor to wait an indefinite length of time until the general contractor resolves its dispute with the Government before bringing a Miller Act claim contravenes the rights afforded under the Miller Act and is unenforceable. Consequently, the Court denied Travelers’ motion.

Interestingly, the Court was relatively unconcerned with the fact that Travelers was not asking that Tusco’s claim be dismissed, but only that it be stayed stayed pending the outcome of the dispute been Clark and the Government. Nor was it concerned with the risk of inconsistent results between the parallel proceedings of the Tusco/Clark matter and the Clark/Government dispute, which apparently involved at least some of the same issues:

The Court is not “overly troubled” by Travelers’ arguments that allowing the litigation to proceed could lead to inconsistent decisions and duplicative, costly litigation. There is no reason why a dispute resolution process between Clark and the Government should delay Tusco’s ability to litigate its statutory entitlement to seek payment. The risk of inconsistent results between that process and this litigation is a risk that the prime contractor must bear — transferring the risk of nonpayment for work performed from the subcontractor to the prime contractor is one of the purposes of the Miller Act.

Tusco at 32-34 (internal citation omitted). The Court was more concerned with “the potential of a lengthy dispute resolution process on Tusco’s right to reimbursement for the change order work.” Id. at 35.

The takeaway from Tusco, and the cases cited therein, is that if a general contractor on a federal project wants to ensure it receives the full protection of any pay-if-paid and dispute provisions in its subcontract, then it must require the subcontractor to clearly and explicitly waive its Miller Act rights – which means a waiver that specifically mentions the Miller Act and unambiguously expresses an intention to waive the rights provided by it. On the other hand, a subcontractor presented with such contract language should carefully evaluate the risk it will assume by waiving such rights.