Thoughts on construction law from Christopher G. Hill, Virginia construction lawyer, LEED AP, mediator, and member of the Virginia Legal Elite in Construction Law
English: Alexandria, Virginia U.S. Custom House and Post Office (1900)
Here at Construction Law Musings, we often discuss the Federal Miller Act and its Virginia equivalent (the “Little Miller Act“). These two statutes provide subcontractors on government projects (on which no mechanic’s lien can attach) the protection of payment and performance bonds.
One question that often arises in this context is which subs can claim against the payment bond. Recently, the Eastern District of Virginia District Court affirmed that a second tier subcontractor has the right to claim against a payment bond under the Federal Miller Act. In U.S. ex rel IGW Electric LLC v. Scarborough, the Virginia federal court considered the claim of an electrical “sub-subcontractor” which held a contract with the subcontractor to build cottages in Norfolk, Virginia for the U. S. Navy.
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.
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Map of Virginia highlighting Hanover County (Photo credit: Wikipedia)
You may have thought that a Virginia “Little Miller Act” bond claim, like a mechanic’s lien, could only be brought by those that provide materials and labor incorporated into the construction project. If you did, you aren’t alone.
USPS service delivery truck in a residential area of San Francisco, California (Photo credit: Wikipedia)
It’s been a while since I posted something new relating to Virginia’s “Little Miller Act” and its various notice requirements for a subcontractor to make a payment bond claim.
I have posted on the basics of a Virginia payment bond claim previously here at Musings. One of these basics is the 90 day notice requirement for suppliers or second tier subcontractors with no direct contractual relationship to the general contractor. A recent case from the Norfolk, Virginia Circuit Court examined when notice is “given” under the Little Miller Act.
The basic facts are these. My client, Environmental Staffing (En-Staff) filed a Little Miller Act claim and a claim for breach of contract for Beamon’s failure to pay for temporary staffing that En-Staff provided it at the Jeffry Wilson housing project demolition in Portsmouth, VA. Beamon then counterclaimed for fraud and breach of contract claiming that some statements to the effect that a particular supervisor was qualified along with presentation of the individual’s resume constituted fraud. My client demurred to the two fraud counts (actual and constructive).
The Circuit Court agreed with En-Staff and adopted a couple of my arguments. Aside from the argument that works in most contexts (i. e. that where the duty to act a certain way is based in contract, there can be no fraud), the Court stated that statements like those made by the employee of En-Staff (see the opinion for specifics) were merely sales talk. Additionally, the Court set forth a test for the difference between statements of opinion (not fraud) and statements of fact (possibly fraud). The Court also discussed how the ability to investigate the claimed fraudulent statements may impact the analysis. The Court then concluded that no fraud occurred and that, as expected, Beamon had to proceed under a contract theory.
In short, I recommend the opinion as a good discussion of the interaction between fraud and contract (and not just because the Court sided with me). The nuances discussed show why contractors and other construction professionals should discuss their claims with an experienced Virginia construction lawyer prior to deciding how to proceed.
As always, I welcome and encourage your comments below, please share your thoughts. Also, please subscribe to keep up with the latest Construction Law Musings.
