District Courts in California and Colorado Hold Subcontract References to Prime Contract Disputes Procedures Do Not Waive Miller Act Rights

United States ex rel. Heggem-Lundquist Paint Co. v. Centerre Gov’t Contracting Grp., LLC, 2014 U.S. Dist. LEXIS 66161 (D. Colo. Apr. 23, 2014) 

 Am. Constr. & Envtl. Servs. v. Total Team Constr. Servs., Inc., 2014 U.S. Dist. LEXIS 57467 (E.D. Cal. Apr. 23, 2014)

Federal district courts for the District of Colorado and the Eastern District of California have ruled  subcontract provisions that disputes will be resolved in accordance with the dispute resolution provisions in a prime contract are insufficient to waive or postpone a subcontractor’s Miller Act rights.

These cases involved claims asserted by subcontractors (collectively “Plaintiffs”) against the upstream contractors and their sureties (collectively “Defendants”) for work performed on federal government projects.  The plaintiff in Haggem-Lundquist performed as a sub-subcontractor on a Department of Veterans Affairs renovation project at a medical center in Denver, Colorado.  The plaintiff in Am. Constr. & Envtl. Servs. performed as a subcontractor in support of a contract with the Army Corps of Engineers to replace emergency generators at a Veterans Administration Care Facility in Fresno, California.  In both actions, Plaintiffs filed claims against the bonds issued for the projects pursuant to the Miller Act to recover money allegedly owed for changed and additional work performed.

Defendants moved to dismiss for lack of subject matter jurisdiction on the grounds that the Plaintiffs’ Miller Act claims were contractually barred.  Defendants’ arguments centered on the change order and dispute procedures in the Plaintiffs’ subcontracts, which referenced the prime contract and provided that disputes “flow-up” to the government for evaluation and resolution.  Defendants contended that these procedures required that claims for additional compensation be submitted in accordance with the Federal Acquisition Regulations and decided under the Contract Disputes Act (the “CDA”).  By agreeing to the dispute resolution procedures referenced in the subcontracts at issue, Defendants argued that Plaintiffs waived their Miller Act rights.

In response, Plaintiffs argued that they were not obligated to follow the CDA procedures because of their status as subcontracting parties.  Plaintiffs countered that they properly asserted their rights under the Miller Act, and furthermore, that the subcontracts Plaintiffs entered into did not contain a waiver of rights to prompt payment under the Miller Act.

The issue before the courts, therefore, was whether the Plaintiffs were contractually obligated to follow the CDA procedures, or whether the Plaintiffs could properly bring their claims pursuant to the Miller Act.  Both courts resolved this issue in favor of Plaintiffs and denied the motions to dismiss.

In the Haggem-Lundquist case, the District Court of Colorado held that, absent an express reference to the Miller Act or an express statement of intention to waive Miller Act rights.  the sub-subcontractor could not be held to have waived its Miller Act rights.  Similarly, absent a specific reference to deferral of Miller Act Rights pending CDA procedures, the court could not find that the parties intended the sub-subcontractor to comply with the CDA before it could assert its Miller Act rights.  Accordingly, the court concluded that the sub-subcontractor had not waived its Miller Act rights and was entitled to pursue its remedies through the Miller Act rather than proceeding against the government directly.

Similarly, in the Am. Constr. & Envtl. Servs. case, the Eastern District of California held that establishment of a waiver of Miller Act rights requires a clear and explicit waiver of rights executed after  a claimant  has furnished labor or material for use in performance of the contract.  The court found that the subcontract was executed before the subcontractor performed its obligations and contained no language that could be construed as such a waiver.  In addition, the subcontract expressly reserved the subcontractor’s rights under “Federal or State mechanics lien laws” and “applicable labor and material payment bonds.” The court found that the intention of this provision reserving the subcontractor’s rights was to preserve remedies so the subcontractor was not solely reliant on the prime contractor’s prosecution of a CDA claim for recovery.  Accordingly, the court concluded that the dispute resolution provision was intended to provide the general mechanism for resolving disputes that arise under the subcontract, but did not preclude the subcontractor’s Miller Act claim.

To view the full text of these decisions, courtesy of Lexis ®, click here for Heggem-Lundquist or for American Construction.

– Jeffery R. Mullen

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