The Miller Act requires contractors on federal construction projects over a certain threshold to furnish performance and payment bonds, providing a remedy to subcontractors and suppliers on the project to seek recovery for nonpayment.
Because subcontractors and suppliers cannot assert a lien on federal property, the Miller Act payment bond is their sole remedy.
Therefore, the Miller Act is highly remedial in nature and “entitled to a liberal construction and application in order to properly effectuate the congressional intent to protect those whose labor and materials go into public projects,” according to Clifford F. MacEvoy Co. v. United States (1944.)
However, there are limits embedded in the statute, such as time limitations, notice requirements and identification of eligible claimants.
In addition, the operation of the Miller Act may be affected by the operation of other federal statutes. Recent cases illustrate the interplay between the Miller Act and the Federal Arbitration Act, which establishes a framework for the enforceability of arbitration that was agreed to by the parties and is an expression of strong federal preference for arbitration.
So what happens when the contractor and subcontractor are arbitrating a payment dispute pursuant to the arbitration clause in the subcontract, and the subcontractor also has sued the surety under the Miller Act? Can the Miller Act action be stayed until the resolution of the arbitration, even in light of the liberal construction of the Miller Act?
Recent cases addressing this issue reflect the prioritization of the Federal Arbitration Act over the Miller Act.
Recent Cases
In United States ex rel. Debra’s Glass, Inc. v. The Insurance Company of the State of Pennsylvania (June 13, 2018), a payment dispute arose between the prime contractor and subcontractor on a federal project. The prime contractor invoked the arbitration clause in the subcontract and filed a demand for arbitration. Subsequently, the subcontractor commenced an action against the payment bond surety seeking recovery under the Miller Act. The surety filed a motion to stay pending arbitration.
The court noted the long history of cases in which arbitration (under the Federal Arbitration Act) was prioritized over the Miller Act and stays were granted.
The court also noted the common questions of fact between the Miller Act suit and the arbitration and the risk of inconsistent outcomes. The court granted the stay through the completion of the arbitration.
In United States ex rel. Red Hawk Contracting, Inc. v. MSK Construction, Inc. (May 8, 2018), a subcontractor on a federal project in North Carolina brought claims against the prime contractor and Miller Act surety, alleging that it had not been paid in full. The prime contractor moved to stay the action pending arbitration in South Carolina pursuant to the subcontract’s arbitration clause.
After determining that the Federal Arbitration Act was applicable, the court concluded that the dispute fell within the scope of the arbitration clause and granted a stay pending arbitration.
With respect to the Miller Act claim, the court concluded that determining the surety’s liability would rely on common issues of fact to be settled during arbitration. Therefore, the court concluded that the stay applied to the Miller Act claim as well.
In the 2018 case United States ex rel. Harbor Construction Company, Inc. v. T.H.R. Enterprises, Inc., a subcontractor on a federal project claimed that it was not paid in full. It commenced an action against the prime contractor and Miller Act surety. The prime contractor moved to compel arbitration pursuant to the dispute resolution provision in the subcontract and to stay the action pending arbitration.
The court granted the motion to compel arbitration. In considering the motion to stay, the court considered whether the Miller Act claim weighed against it and noted the long line of decisions that stayed Miller Act claims pending arbitration.
The court granted the motion to stay. However, concerned that in apparently trying to balance the remedial nature of the Miller Act and the policy preference for arbitration, the court limited the stay for a period of six months so that arbitration could not be used as a delay tactic.
A final example is United States ex rel. Bay South Limited, Inc. v. International Fidelity Insurance Company. In this 2017 case, a subcontractor on a federal project sued the prime contractor and Miller Act surety alleging that it had not been paid in full. The contractor and surety moved to stay the claims, pending arbitration.
The subcontractor argued that the arbitration provision in the subcontract operated as an improper waiver to bring a civil action under the Miller Act.
The court disagreed and concluded that the applicable Miller Act provision regarding the enforceability of a waiver does not restrict arbitration of Miller Act claims once a suit is filed.
The court also noted that the legislative history of the provision was clear that it was not intended to be a statutory preclusion of arbitration.
As to whether the Miller Act claims were within the scope of the subcontract’s arbitration provisions, the court concluded that reference to arbitration being conducted in accordance with Construction Industry Arbitration Rules indicated that the arbitrator would decide the scope or the arbitration agreement. (The rules give the arbitrator power to determine his or her jurisdiction.)
The court granted the motion to stay the Miller Act claims, pending arbitration.
Thus, an arbitration clause in the subcontract will be enforced in light of the policy preference for arbitration under the Federal Arbitration Act. The Miller Act is for the protection of subcontractors and supplier and is construed liberally.
However, there are limits. With respect to arbitration, courts typically stay a Miller Act lawsuit pending the outcome of arbitration.
Note, this is not a waiver of Miller Act rights, but merely a means for the parties that agreed to arbitrate their disputes to do so, before taking what are often the same issues regarding payment to court.
