Subcontractors Performing Federal Contract Work Need to Appreciate Risk of Miller Act Payment Bond Claim Being Stayed

Federal projects come with certain risks to subcontractors. One such risk is that a subcontractor may be required to stay a Miller Act payment bond claim pending the outcome of the Contract Disputes Act resolution process. Many prime contractors that perform federal contract work include clauses in their subcontracts that require a subcontractor to stay claims attributable to the government pending the outcome of that claim (between the prime contractor and government) or a subcontractor agrees to stay or not maintain such claims against the prime contractor until the complete resolution of that claim per the Contract Disputes Act.  Such clauses can have a harsh effect on a subcontractor owed money because they may force the subcontractor to wait until the completion of the Contract Disputes Act resolution process (which could take time when factoring in an appeal of the contracting officer’s decision of a claim).  Subcontractors that perform federal contract work need to be aware of such provisions and the risk of waiting until the completion of the Contract Disputes Act resolution process before proceeding with their claims.  Moreover, as it relates to the Miller Act, subcontractors still need to timely pursue their claim to avoid it from being time-barred; however, such claim may be stayed pending the outcome of the Contract Disputes Act resolution process.

For example, a subcontractor filed a Miller Act payment bond lawsuit for additional work it performed. The subcontractor argued that its additional costs were unrelated to the government in order to avoid clauses in its subcontract (similar to the clauses discussed above requiring the subcontractor to stay such lawsuit). The payment bond surety and prime contractor argued that the subcontractor’s costs were related to a government-caused issue and that the subcontractor’s lawsuit should be stayed pending the outcome of the prime contractor submitting a claim under the Contract Disputes Act. Of course, the prime contractor had not yet submitted such a formal claim. Nonetheless, the court agreed that the subcontractor’s Miller Act payment bond claim should be stayed pending the outcome of the Contract Disputes Act resolution process. Indeed, the court further held that staying the action made sense since it prevented the contractor from raising inconsistent arguments while defending the subcontractor’s claim and simultaneously pursuing a claim against the government pursuant to the Contract Disputes Act.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

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