Originally posted 2014-07-09 09:44:02.
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 lawyer before 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.
As always, I welcome your comments below. Please subscribe to keep up with this and other Construction Law Musings.
Excellent post Christopher!
It is somewhat ironic, as many sureties and the agencies that represent require payment of bond premium prior to issuance. In a recent surety group discussion on the LinkedIn network, most agents agreed that unless the contractor is a long time client that premium is always collected up front.
Thanks for sharing, this is an interesting case. The fact that it takes 13 pages to get a reference to the Moore Brothers case says this is less about “pay when/if paid” and more about the risk of walking off the job. In the end, this is yet another case standing for the proposition that a sub walking off the job, even for good reason, had better be sure they are right (and even then, they usually are not).
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Thanks for the comment Tim! I think you’re right. The pay whn paid only made the walk off by the sub “cause” for the GC’s actions. Walking for non-payment only works if you are entitled to payment as a sub.
Interesting case. While this really accentuates the importance of getting counsel to help on a dispute, it also makes me think that sometimes that’s not enough, and sometimes you’re just on the wrong side of the law.
Cool case, and good review.
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Thanks Scott
Excellent article and informative for any contractor doing business in the public works arena.
Very interesting, but I find this so complex that I imagine early day advice to Aarow by various construction attorneys would not be consistent. Do you agree? Maybe I’m wrong, but do you believe the chain of events that took place would or could have been predicted by counsel, let alone Aarow management, with any degree of certainty?
Bob