Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law
In this economy, even the companies that provide bonding for construction companies may have financial difficulties, and even go into receivership. Recently, the U. S. District Court in Norfolk, VA decided an interesting case relating to an interestingly named project. In U.S. v. Western Ins. Co., the court considered the default of one such company, Western Ins. Co..
For this week’s Guest Post Friday here at Musings, we welcome back Scott Wolfe. Scott is the CEO of Zlien, a company that provides software and services to help building material supply and construction companies reduce their credit risk and default receivables through the management of mechanics lien and bond claim compliance. He is also the founding author of the Lien Blog, a leading online publication about liens, security instruments and getting paid on every account. Scott is a licensed attorney in six states with extensive experience in corporate credit management and collections law, with a specific emphasis on utilizing mechanic liens, UCC filings and other security instruments to protect and manage receivables. You can connect with him via Twitter, LinkedIn and Google+.
Managing account receivables in the construction and building material supply industries presents unique challenges and unique solutions. This post reviews the industry-specific reasons why accounts will age and go unpaid, as well as the industry-specific credit and collections solutions available to controllers and credit managers.
Musings is back! And a great case for subcontractors on federal projects came out of the U. S. District Court for the Eastern District of Virginia last month.
This is clearly good news for subcontractors on federal projects. The Eastern District ruling essentially states that the Miller Act and the standard Miller Act bond form trumps any private contractual language as it relates to non-federal projects. The Court did not go further and expand its ruling beyond non federal projects, but the Acoustical Concepts ruling adds another layer of protection on federal projects for subcontractors and suppliers that do not have the protection of mechanic’s lien rights because of the nature of the project.
I’d love to hear from sureties, subcontractors and general contractors for their perspective on this ruling.
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The Federal Miller Act is a great tool that subcontractors and suppliers on Federal projects can use for collection of wrongfully withheld amounts due. However, as a recent federal case from the Eastern District of Virginia points out, the construction contract’s terms affect when a subcontractor or supplier can use this great collection tool and how much it can recover.
In Aarow v Travelers the Court looked at the interaction between a typical termination clause, a “pay when paid” clause, and the Miller Act. The key facts are these. The general contractor on the project at issue, Syska, did not get paid some disputed amounts by the owner and subsequently did not pay Aarow, the plaintiff and a subcontractor on the project. Aarow then refused to continue work and was terminated by Syska who then took over the completion of the work. Aarow sued, seeking damages for the value of its work prior to the termination. Travellers, the surety defended stating that, if Aarow was properly terminated for cause by Syska, then Aarow was not entitled to payment under the contract until such time as the work was completed and accepted by the owner. The termination clauses are set out in the linked opinion.
The Court agreed with Travelers, stating that the pay when paid clause created a situation whereby Aarow could not stop work merely because of a non-payment by Syska attributed to non-payment by the owner. The Court was clear in stating that the Miller Act trumps “pay when paid” in instances where the only cause for non-payment is non-payment by an owner. The Court then reasoned that it is the interaction between the termination and “pay when paid” provisions, and not the “pay when paid” clause itself, that exonerated Travelers because it created the default by Aarow due to its refusal to continue work. In short, Aarow was properly terminated for cause because it left the job without justification and therefore Travelers was not liable.
What can we learn from this? 1. A “pay when paid” clause, on its own, does not create a defense to a Miller Act claim; 2. Read every line of a construction contract before you, as a subcontractor, leave a job site and refuse to come back; and 3. The Miller Act does not completely absolve parties to a contract from the terms of that contract.
In sum, the careful reading of your construction documents and the advice of a construction lawyerbefore making a big decision like leaving a job site can go a long way toward a successful collection action under the Miller Act.
Update: The 4th Circuit reversed this ruling and gave some more insight into the interaction between the “pay if paid” and the “prevention doctrine.” I “muse” about it in my November 28, 2011 post.
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