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Miller Act Payment Liability Trumps Pay-When-Paid Clause

Wednesday, August 30, 2017 05:27 am

 

Miller Act-- Subcontractor

U.S. f/u/b/o VT Milcom, Inc. v. PAT USA, Inc., 2017 U.S. Dist. Lexis 109572 (W.D. Va. July 14, 2017)

A subcontract clause that limited the timing of payment recovery relieved a contractor from having to pay the subcontractor sums that it didn’t receive from the project owner. The project’s Miller Act surety didn’t get the same reprieve.

PAT USA, Inc. (PAT) was the general contractor on multiple U.S. Army Corps of Engineers (Corps) construction projects at U.S. facilities in Qatar. Subcontractor VT Milcom, Inc. (VT) provided labor and materials to install telecommunication systems for the projects. However, VT didn’t get to complete its subcontract performance because the Corps terminated PAT’s prime contract for default. By that point, VT had supplied materials and performed work totaling $208,727 and invoiced PAT for that amount. PAT paid just $91,617---or 20 percent of the total fixed subcontract price, because that was the payment milestone for purchase of materials. VT sued to recover the remaining $117,110.

First, VT argued that PAT breached the contract by failing to pay costs incurred and "hiding behind" the payment milestones. However, the parties’ subcontract contained a "Termination by Owner" provision that stated: "In the event of Owner termination, the contractor’s liability to the Subcontractor shall be limited to the extent of the Contractor’s recovery on the Subcontractor’s behalf." And there was no evidence that PAT received $117,110 from the Corps. Therefore, VT wasn’t entitled to recover those funds from the contractor.

Pay if or when? The answer matters to Miller Act recovery

VT had more luck seeking recovery under the Miller Act payment bond PAT furnished on the project. VT alleged that, unlike PAT, the bond surety couldn’t use the "pay-when-paid provision" in the subcontract to avoid payment liability.

The court undertook an examination of the Ninth Circuit Court of Appeals’ ruling in U.S. ex rel. Walton Tech., Inc. v. Weststar Eng’g, Inc., 290 F.3d 1207 (9th Cir. 2002), which determined that "[w]here subcontract terms effect [sic] the timing of recovery or the right of recovery under the Miller Act, enforcement of such terms to preclude Miller Act liability contradict [sic] the express terms of the Miller Act." In that case, the court disagreed that no sum was justly due to a sub under[...]

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