Originally posted 2014-04-09 16:16:54.
Here at Construction Law Musings, we are quite fond of the Federal Miller Act and it’s Virginia counterpart, the “Little” Miller Act. Both of these statutes allow a subcontractor or supplier on a government construction project the security to perform their work with the knowledge that a bonding company will back their claim for payment. These acts are necessary because a construction company cannot file a mechanic’s lien on a government owned piece of property.
As a general rule the Miller Acts impose almost strict liability on a contractor and its surety to pay for work performed by a downstream supplier or subcontractor. However, as a recent case out of the Fourth Circuit Court of Appeals makes clear, this rule is not without exceptions.
In US ex rel Damuth Services v. Western Surety, et al., the Virginia based federal appellate court examined a side deal between a mechanical contractor and its supplier regarding payment for equipment supplied to a project in Chesapeake, VA. In the Damuth case, the Plaintiff entered into an agreement with the mechanical subcontractor (H & L) for full payment for other work unrelated to the Chesapeake project and for payments over time until Damuth was paid in full after finding out that H & L used payments on the project to pay for work performed elsewhere. Furthermore (and this was the kicker), Dalmuth agreed not to inform the general contractor of the agreement. H & L reneged on its agreement and Damuth sued on the bond under the Miller Act.
The Court stated that, in failing to inform the general contractor and surety, Damuth participated in misleading the general and surety. The Court found that, in light of H & L’s contractual and statutory obligation to pay Damuth from funds paid to it on the project, Damuth essentially agreed to accept payment under other terms in exchange for a promise not to “rat out” H & L. This activity kept the General Contractor from being able to deal with the situation and therefore the surety did not have to pay.
The take away? Always be honest with everyone when making deals outside of the contractual chain. I would advise that you, as a subcontractor or supplier, don’t make such deals on bonded projects or at the very least keep the general contractor and surety in the loop. By keeping the general contractor and surety in the loop, you avoid looking like you are in on the scam and also give the surety a chance to protect itself by paying you or at worst having to pay you when you have to make a claim.
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
Very good advice for sure Chris, thanks for passing this along. Whenever a surety is potentially involved, the rule should be to tread lightly or risk losing your bond claim.
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Thanks for the comment Tim. I find that, often, contractors make these side deals in an innocent attempt to get the project done on time and can get in hot water for doing so.
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Great post, Chris. I have not read the opinion but it sounds like the doctrine of unclean hands was or could have been asserted in US ex rel Damuth Services v. Western Surety, et al.. Such was the case in Burton v. Sosinky(1988), 203 Cal App. 3d 569, a mechanics’ lien foreclosure case. In that case the prime marked up the sub’s pay request and the sub would pay back the difference to the prime. At trial the owner asserted unclean hands as a defense to the sub’s mechanics’ lien foreclosure action, and prevailed. The state court of appeal confirmed, holding the sub forfeited its lien rights by engaging in this pay-back scheme. One interesting note that contractors should remember: even though the sub received no direct benefit from the scheme, the trial court believed that long-term benefits could be inferred from the arrangement in that there was an ongoing business relationship between the sub and the prime. In addition to the application of the unclean hands doctrine to lien claims, Burton is an example of why trials can be so unpredictable. Courts often reach conclusions of fact by way of inference that take the parties by surprise.
Thanks for the comment Ron. I think that, as much as anything, the Court did not like the deal being kept from the surety. While “unclean hands” did not come up explicitly, I think your analysis is spot on.
.-= Christopher G. Hill´s last blog post ..Green Building and Jazz- What Could be Better? =-.
I have heard of stories of subcontractors who were unable to file claims from the contractors, either because the contractors were able to escape payment from some loophole, or that they made the agreement without a written contract. This statute would surely help these subcontractors get their payment, if they handled the administrative side properly.