LAW: THE CONTRACTOR'S SIDE: Taking it to the extreme

Aug. 5, 2014

Court rules in favor of subcontractor due to rare circumstances

Subcontractors working on federal construction projects are afforded protection from nonpayment by payment bonds the prime contractor posts with the government agency pursuant to the Miller Act.

Payment bonds were developed as an alternative to mechanic’s liens, which cannot be filed against publicly owned property. States have enacted similar laws, which are commonly referred to as Little Miller Acts. A subcontractor’s right to sue a surety under a payment bond is governed by fairly strict written notice requirements, and bond lawsuits are often dismissed when subcontractors fail to adhere strictly to those requirements. A recent case illustrates a rare instance in which a court was willing to excuse a subcontractor’s late notice to the surety.

AMEC Environment & Infrastructure, Inc. v. Structural Associates, Inc., 2014 WL 1379519 (E.D. N.C. April 8, 2014) involved a federal contract at a Marine Corps base in North Carolina. Structural Associates was a first-tier subcontractor that contracted with Talon Industries to perform excavation. During construction, Talon apparently cracked an existing oil pipeline, which spilled 9,000 gal of jet fuel. The prime withheld $100,000 from Structural’s progress payment to fund the cleanup, and Structural did the same to Talon. Talon provided written notice to the surety of its claim against the payment bond and filed suit. The surety sought dismissal of the case on the grounds Talon’s notice was untimely.

The Miller Act provides that a person who has a direct contractual relationship with a subcontractor, but no contractual relationship with the contractor furnishing the bond, may bring a civil action on the payment bond upon giving notice to the contractor and surety within 90 days from the date on which the person did or performed the last of the labor or supplied the last of the material for which the claim is made. A lawsuit must be filed no later than a year after the day on which the last of the labor was performed or materials supplied. The question before the court was whether Talon’s written notice to the surety of its claim was within 90 days following the date on which Talon performed the last of the labor or supplied the last of the material for which it was claiming nonpayment. 

The evidence revealed that Talon gave its written notice to the surety on March 22, 2012—nearly six weeks after it first learned from Structural that $100,000 would be withheld from its October 2011 invoice. The last of Talon’s work that was covered by the October 2011 invoice was performed on Oct. 28, 2011. Accordingly, Talon’s notice was clearly beyond the 90-day time period. Talon argued, however, that it could not have provided notice any earlier than Feb. 3, 2012—the day on which Structural first informed it of the planned withholding—and therefore, the 90-day period must be “tolled,” or placed on hold and its notice deemed timely. The court agreed and deemed Talon’s notice timely under a line of cases that recognize “extreme circumstances.” Rather than providing an in-depth explanation of how the facts and circumstances constituted “extreme circumstances,” the court simply concluded that “[b]ecause Talon has sufficiently alleged that it did not know of any withholding on its October 2011 invoice until February 3, 2012, it should gain the benefit of this date when calculating the ninety-day notice period.”

The facts of this case may or may not hold up in another court elsewhere. Indeed, the facts clearly showed that although Talon received its first notice of the withholding from Structural on Feb. 3, 2012, Structural learned from the prime contractor of its withholding by a letter dated Oct. 26, 2011. The court went as far as to note that a reasonably prudent subcontractor like Talon should have learned that it would not be paid on its October invoice before February, but it decided—again, without explanation—that “extreme circumstances” existed. More troubling to this author is the fact that on Feb. 3, 2012, when Talon apparently first learned of the withholding, the 90-day period for giving notice of the payment bond had already expired. Accordingly, had Structural simply not paid Talon at all, it would have been too late for Talon to provide timely notice to the surety. Under the Miller Act, subcontractors who have not received payment must not permit the 90-day period to elapse before giving written notice to the surety. R&B

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