Federal District Court in Virginia Holds That Prime Contractor’s Payment Bond Surety Cannot Rely on No-Damages-For-Delay Clause in Subcontract to Limit Liability to Subcontractor Under Miller Act

United States v. John C. Grimberg Co., Case No. 1:16-cv-991, 2017 U.S. Dist. LEXIS 173362 (E.D. Virginia, October 19, 2017)

John C. Grimberg (“Prime Contractor”) was awarded a contract (the “Prime Contract”) to design and complete certain improvements at the FBI Academy in Quantico, Virginia (the “Project”).  Hartford Accident and Indemnity Company (“Surety”) issued payment and performance bonds for the Project pursuant to the Miller Act.  The Prime Contractor thereafter entered into a subcontract (the “Subcontract”) with Kitchens-to-Go (“Subcontractor”) to furnish, install, lease and remove a temporary kitchen facility for the Project.  The Subcontract contained a “no-damages-for-delay” clause, which provided that the Prime Contractor shall not be liable for delays beyond its control and that the Subcontractor is “entitled only to reimbursement for damages for delay actually recovered from the Owner.”  The Subcontract also incorporated the dispute resolution procedures in the Prime Contract, which required that all “disputes arising out of Owner acts, omissions or responsibilities” be submitted through an administrative process with the government’s contracting officer under 41 U.S.C. §§7101 et. seq.

The Subcontract originally contemplated a Project duration of approximately 13 months, ending on April 5, 2014, but was ultimately extended until June 27, 2015.  The Subcontractor submitted its Application for Payment to the Prime Contractor, which included $607,221 for extended rental of the kitchen facilities.  Although the Prime Contractor submitted a payment request to US Department of the Navy (“Owner”), for the extended rental and use of Subcontractor’s temporary kitchen facilities, this request was rejected by the Owner.  The Prime Contractor refused to pay Subcontractor’s Application for Payment and the Subcontractor filed a complaint against the Surety under the Miller Act. 

This issue came before the Court on the Subcontractor’s Motion for Summary Judgment on its Miller Act payment bond claim.  The Surety opposed the motion arguing that the no-damages-for-delay provision in the Subcontract limits the Subcontractor to reimbursement only for delay costs actually recovered from the Owner.  Since a surety can only enforce contract terms to limit its Miller Act liability if those terms are consistent with the Act, the District Court rejected the Surety’s argument and held that the no-damages-for- delay clause was unenforceable because it contravened both the text and the purpose of the Miller Act.

First, the Court found that the only condition to a claimant’s cause of action under the Miller Act is the passage of time – specifically, 90 days after claimant provides labor or materials to the project.  The Court determined that the no-damages-for-delay clause improperly added an additional condition to a cause of action on the bond, prohibiting the Subcontractor from bringing a claim unless the Prime Contractor was paid by the Owner.

Second, the very purpose of a surety bond under the Miller Act is to ensure that claimants are promptly paid for their work in the event that the principal does not pay.  The Court referenced analogous “pay-when-paid” and “pay-if-paid” clauses in construction contracts, finding that courts have unanimously refused to allow sureties to enforce such clauses in an attempt to avoid liability under the Miller Act.  The Court noted that the Surety’s attempt to condition recovery frustrated the purpose of ensuring that subcontractors receive prompt payment.  The Court also noted that other courts have recognized that “where subcontract terms effect timing or right of recovery under the Miller Act, enforcement of such terms to preclude Miller Act liability contradict the express terms of the Miller Act …”, which was precisely what the Surety was attempting to do.

Finally, the Court rejected the argument that the no-damages-for-delay provision was a waiver of the Subcontractor’s right to bring a Miller Act claim, since such claims can only be waived after the claimant has performed its subcontract.

For all of these reasons the Court refused to allow the Surety to invoke the no-damage-for-delay clause as an additional condition precedent to Miller Act liability.

For these same reasons, the Court also rejected the Surety’s argument that the case should be stayed pending the outcome of the ongoing dispute resolution proceedings between the Owner and Prime Contractor, since the Subcontractor’s delay claim was a dispute “arising out of Owner acts, omissions or responsibilities.”  The Court found that the enforcement of the dispute resolution provision in the Subcontract, which would impose an additional condition on the Subcontractor’s claim, was also inconsistent with the text and purpose of the Miller Act.

The Court granted summary judgment to the Subcontractor on liability but ordered that discovery be conducted with respect to the amount of damages.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Luke Nicholas Eaton

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