Most prime contractors include pay-if-paid (or pay-when-paid) language in their subcontract as a means to shift the risk of the owner’s nonpayment to the subcontractor. However, on federal construction projects, the prime contractor furnishes the government with a Miller Act payment bond. Can the Miller Act payment bond surety benefit from the pay-if-paid language in the subcontract and assert this language as an affirmative defense to a claim against the payment bond? The answer is typically an emphatic NO!
“When a surety attempts to enforce its principal’s (the prime contractor’s) conditional payment clause, federal courts that have addressed the issue have unanimously held that a surety is not entitled to the benefits of its principal’s pay-when-paid or pay-if-paid clause.” U.S. f/u/b/o Tusco, Inc. v. Clark Construction Group, LLC, 2016 WL 4269078, *9 (D.Md. 2016). A surety’s liability is coextensive with that of its prime contractor-bond principal and the surety can raise the defenses of its bond-principal only to the extent permitted under the Miller Act. Id. at *10 quoting U.S. v. Zurich Am. Ins. Co., 99 F.Supp.3d 543, 550 (E.D.Pa. 2015). Thus, a surety can raise defenses belonging to its prime contractor-bond principal so long as those defenses do not contradict the terms of the Miller Act. Id.
A subcontractor’s right of recovery on a Miller Act payment bond accrues ninety days after the subcontractor has completed its work, not “when and if” the prime contractor is paid by the government. Permitting a Miller Act surety to avoid liability on the payment bond based on an unsatisfied “pay when and if paid” clause in the subcontract would, for all practical purposes, prohibit a subcontractor from exercising its Miller Act rights until the prime contractor has been paid by the government. In cases where the government does not pay the prime contractor within the one year statute of limitations period, the subcontractor would be barred from asserting its Miller Act rights.
Id. at *9 quoting U.S. f/u/b/o Walton Tech, Inc. v. Webstar Engineering, Inc., 290 F.3d 1199, 1208 (9th Cir. 2002).
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