XII. Bond Claims

Private Payment Bonds

A payment bond is a contract whereby the Contractor and a Surety jointly agree to ensure that all construction bills will be paid.

1. Notice Requirement

   Most private payment bonds require that all claimants that do not have a direct contract with the Contractor must give the Contractor and the Surety notice of the fact that their construction bill has not been paid within 90 days of the date of last work or materials supplied to the job.

2. Filing Suit

   Most private payment bonds provide that suit to enforce the payment bond must be brought within one year of the last day of work of the General Contractor.

Bonds On Public Works Projects

The law does not allow any person to file a lien on any Federal, State, County or Municipality owned property. In such instances, the General Contractor is required to obtain a Labor and Materials Payment Bond to protect Subcontractors and suppliers.

The Miller Act

Most federal works bonds are governed by the Miller Act, 40 U.S.C. §§ 270a-270d (1982), which pertains to any contract for the construction, alteration or repair of any public building or public work of the United States with a value exceeding $25,000.00. The Miller Act applies only when contracts are made by or for the United States and the United States is the named obligee of the bond. The Miller Act does not otherwise apply, even where the United States provides funds or retains some measure of control over the project. See United States ex rel. Mississippi Road Supply Co. v. H.R. Morgan, Inc., 542 F. 2d 262, 266 (5th Cir. 1976), cert. denied, 434 U.S. 828 (1977). For instance, when a state enters a construction contract and the underlying bond names the state as obligee, the Miller Act does not apply, even if the United States contributes ninety percent of the funding. United States ex rel. Miller v. Mattingly Bridge Co., 344 F Supp 459, 461 (W.D. Ky. 1972). To encourage private parties to contract with the federal government, and to avoid the harshness that would result from the unavailability of mechanics’ liens, Congress requires prime contractors to procure payments bonds for the protection of subcontractors and material suppliers. However, a subcontractor or supplier has no cause of action against the government for failure to require a payment bond. Shore Contractors, Inc. v. Heatherly, 705 F. Supp. 293 (E.D. Va. 1989). The Miller Act also requires performance bonds for the protection of the government. Performance bonds provide no protection to subcontractors or suppliers. Morrison Assurance Co. v. United States, 3 Cl. Ct. 626, 632 (1933). In F.D. Rich Co. v. United States ex rel. Industrial Lumber Co., 417 U.S. 116 (1974), the Supreme Court explained the purpose of the Miller Act payment bond as follows:

Section 270a (a) (2) of the Miller Act establishes the general requirement of the payment bond to protect those who supply labor or material to a contractor on a federal project. Ordinarily, a supplier of labor or material on a private construction project can secure a mechanics’ lien against the improved property under state law. But a lien cannot attach to government property, see Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 380 (1917), so suppliers on government projects are deprived of their usual security interest. The Miller Act was intended to provide an alternative remedy to protect the rights of these suppliers.

1. Who is Protected by the Miller Act Bond?

   The Miller Act is designed to benefit those who supply material or labor that are called for in the prime contract and who have not been paid in full. The Miller Act, 40 U.S.C. § 270d defines “person” to include any individual, partnership, corporation or other legal entity. While the Miller Act’s express language suggests that its scope is broad, its coverage extends only to those parties who supply labor or material directly to the prime contractor, and those who supply labor or material directly to a subcontractor (rather than a supplier) of the prime contractor. Consequently, a third-tier subcontractor – a person who supplies to a supplier of the prime contractor – has no protection under the Miller Act.

   1. FIRST TIER SUBCONTRACTORS.

      A subcontractor performs for or takes from the prime contractor a specific part of the labor or material requirements of the prime contract. On the first tier, there is no need to distinguish between subcontractors and suppliers who deal with the prime contractor directly.

   2. SECOND TIER – SUB-SUBCONTRACTORS AND SUPPLIERS.

      A sub-subcontractor, like an ordinary materialman of a subcontractor, may avail itself of the protection of a payment bond by giving the required statutory notice, but those in more remote positions may not. The necessity of a contractual relationship between the prime contractor and the first-tier subcontractor cannot be overemphasized where the issue is the protection afforded to the second-tier parties. The distinction is critical because suppliers and subcontractors of a subcontractor of the prime contractor are covered by the Miller Act, while suppliers and subcontractors of a first-tier supplier are not protected. The Supreme Court has held that the payment bond does not protect the materialman who supplies material to another materialman, based on the practical difficulties that would be encountered by the prime contractor in protecting himself against claims of remote suppliers with whom he has no contractual relationship. F. D. Rich, Inc. v. Industrial Lumber Co., Inc., 417 U.S 16 (1974); Clifford E. MacEvoy Co. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 110 (1944).

2. What is Covered by a Miller Act Bond?

   In resolving questions of Miller Act bond coverage and liability to the intended class of beneficiaries, the Act is to be construed liberally in order to effectuate the Congressional intent to protect suppliers of labor and materials on public projects. See MacEvoy v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 107 (1944). The same rule applies to the notice provisions of the Act. See United States ex rel. Kelly Mahrhusen Co. v. Merle A. Patnode Co, 457 F. 2d 116, 118 (7th Cir. 1972) (Miller Act provisions relating to written notice are to be liberally and not literally construed).

   1. Labor and Materials.

      The Miller Act allows recovery for “labor or material.” Questions arise with regard to rented equipment, purchased equipment, equipment repairs, items supplied for but diverted from use in the bonded project, delay damages, attorneys’ fees and lost profits.

   2. Equipment.

      Equipment is essential to the performance of most construction contracts. Despite the generally prevailing rule which excludes equipment from the definition of labor and material, claims of parties supplying the Miller Act contractor with needed equipment under lease or rental contracts consistently have been allowed in actions on the payment of bonds. See Illinois Surety Co. v. John Davis Co., 244 U.S. 376, 383 (1916) (rental for cars, truck and equipment used for loading was recoverable under payment bond); Massachusetts Bonding & Insurance Co. v. United States ex rel. Clarksdale Machinery Co., 88 F. 2d 388, 290 (5th Cir. 1937) (truck rental was recoverable under payment bond).

      Equipment purchased for performance on a project subject to the Miller Act is not covered by the payment bond unless the equipment is “substantially consumed” by use on the project Therefore, equipment purchased for use on a project which has a substantial useful life after completion of the project is not covered. Ibex Industries, Inc. v. Coast Line Waterproofing, 563 F. Supp. 1142 (D.D.C. 1983) (cost of reusable wheelbarrows, axes, hammers, roofing tar burner and other tools not recoverable as they are not “labor or materials” consumed on the job) (citing United States for the Use and Benefit of J.P. Byrne & Co., Inc. v. Fire Association of Philadelphia, 260 F.2d 541, 544 (2d Cir.1958)). The same rules apply to repairs to the contractor’s purchased equipment which add materially to its value and amount to capital improvements, as distinguished from incidental replacement or operating repairs. See Continental Casualty Co. v. Clarence L. Boyd Co., 140 F. 2d 15, 116-17 (10th Cir. 1944) (repair parts and accessories which added materially to value of equipment and render it suitable for other work was not covered).

   3. Delay Damages.

      The question of the recoverability of delay damages is somewhat unsettled. Some cases hold that delay damages are not recoverable (see, e.g., McDaniel v. Ashton-Mardian Co., 357 F. 2d 511 (9th Cir. 1966), Lite Air Products, Inc. v. Fidelity & Deposit Co. of Md, 437 F. Supp: 801, 803 (E.D. Pa. 1977) (surety not liable for delay damages); L.P. Friestedt Co. v. U.S. Fireproofing Co., 125 F.2d 1010 (10th Cir.1942) (deciding delay damage issue under the Heard Act which was predecessor to the Miller Act,); U.S. v. P.J. Carlin Construction Co., 254 F. Supp. 1001 (E.D.N.Y.1965); U.S. v. Guy H. James Constr. Co., 390 F. Supp. 1193 (M.D. Tenn.1972), aff’d 489 F.2d 756 (6th Cir.1973); U.S. v. Santa Fe Engineers, 515 F. Supp. 512 (D. Co.1981); W.S.A. Inc. v. Stratton, 680 F. Supp. 375, 377 (S.D. Fla. 1988) (“Cases construing the Miller Act with regard to delay damages have held that damages stemming from delay are not recoverable under the statutory payment bond.”). The District of Columbia courts have reached the opposite conclusion where the subcontract specifically provided for such recovery, and in one instance on public policy grounds alone. In United States ex rel. Mariana v. Piracci Construction Co., Inc., 405 F Supp. 904 (D.D.C. 1975), the subcontractor sought recovery of damages for delay, asserting that the delay increased his materials cost due to purchase at a later time, increased labor cost for the same reason, increased labor cost attributable to inefficiencies, increased overhead due to extended performance time and indirect costs. The court permitted recovery of the delay costs, stating that to deny relief would remit the plaintiff to his remedy for breach of contract, and it was the inadequacy of such a remedy in the context of federal construction projects that prompted the enactment of the Miller Act. Moreover, the court reasoned that there was a public interest in the smooth completion of government projects which is promoted by reducing the possibility that delay will frustrate the governmental objective due to disputes between the general contractor and its subcontractors. See also, U.S. v. William S. Klingensmith, Inc., 670 F.2d 1227 (D.C. Cir.1982); U.S. for the Use and Benefit of Otis Elevator Co. v. Piracci Constr. Co., Inc., 405 F. Supp. 908 (D.D.C.1975).

   4. Attorney’s Fees and Other Costs.

      Attorneys’ fees and lost profits are not recoverable absent an express provision in the contract. Arthur N. Olive Co., Inc. v. United States ex rel. Marino, 297 F. 2d 70, 72 (1st Cir. 1961); Lite Air Products, Inc. v. F&D, 437 F. Supp. 801, 804 (E.D. Pa. 1977). However, a contract provision permitting recovery of attorneys’ fees may be enforceable by a supplier when liability under the contract is established United States ex rel. Carter Equipment Co., Inc. v. H.R. Morgan Inc., 554 F. 2d 164 (5th Cir. 1977). Furthermore, prejudgment interest is allowed by some courts. Clove Corp. v. Metro Pipeline Co., Inc., 442 F. Supp. 583 (D.C. Ga. 1977); Cf. Can Tex Industries v. Safeco Inc. Co. of America, 460 F. Supp. 1022 (W.D. Pa, .978) (finance charges not recoverable).

3. The Meaning of “Labor and Materials in the Prosecution of the Work.”

   The Miller Act provides bond coverage for materials purchased for, but not actually used in, the performance of the contract for which the payment bond was given. Coverage applies in favor of every person who has furnished material “in the prosecution of the work.” The Act does not state the material must be used in the prosecution of the work. Therefore, it is sufficient for purposes of the Act that the supplier has sold the material to the contractor for use in the project. Diversion of materials by the contractor is not a valid defense if the supplier acted in good faith. United States ex rel. Carlson v. Continental Casualty Co., 414 F. 2d 431, 433 (5th Cir. 1969)

   Once the supplier proves that he supplied the materials at issue for prosecution of the work, he is entitled to a judgment on the bond, unless the bonding company demonstrates that the supplier knew or should have known that the materials were to be used elsewhere, and therefore the claim was made in bad faith. Moreover, while a delivery to the job site is presumptive evidence that the materials were used in the project, proof of delivery is not necessary for recovery on the Miller Act bond.

4. Statutes of Limitation.

   The Miller Act states that:

   . . . no such suit shall be commenced after the expiration of one year after the day on which the last of the labor was performed or material was supplied by him …. 40 U.S. C. § 270b(b).

   Additionally, the claimant must provide notice within ninety days of completion of the work of his intention to file a claim. 40 U.S.C. § 270(b). Failure to provide timely notice results in forfeiture of the claim and courts have no discretion to waive the notice requirement. Id. Final inspections to prepare a final bill do not extend the notice and filing deadlines. General Insurance Co. v. United States ex rel. Audley Moore & Son, 409 F. 2d 1326 (5th Cir.), cent. denied, 396 U.S. 902 (1969). Repair to work performed under the original contract, and replacement of the same, do not change the controlling dates. United States ex rel. McGregor Architectural Iron Co., Inc. v. Merrit Chapman & Scott Corp., 185 F. Supp. 3 81 (E.D. Pa. 1960); United States ex rel. T Square Equipment Corp. v. Gregor J. Schaefer Sons, Inc., 272 F. Supp. 962, 964 (E.D.N.Y. 1967); United States v. J. T. Constr., 415 F. Supp. 1328 (D. Del. 1978) (re-seeding of areas washed away does not extend time). Similarly, inspection of work done under the original contract does not affect the applicable deadlines. Id.

5. Making a Miller Act claim.

   Under the Miller Act suit must be brought in the United States District Court for the district in which the contract was to be performed and executed regardless of the amount in controversy.

The “Little Miller” Act

1. Application.

   The Little Miller Act is Alabama’s version of the Miller Act. Ala Code § 39-1-1 (1975); Headley v. Housing Auth., 347 So. 2d 532 (Ala. Civ. App. 1977). The Alabama Little Miller Act requires any person or entity entering into a contract with the state or any county or municipal corporation or subdivision thereof for the performance of any public work to provide, before commencing work, a performance bond with a penal amount equal to 100% of the contract price and a payment bond in an amount not less than 50% of the contract price.

   A Little Miller Act bond is not required to secure contracts of less than $5,000.00.

2. Who is Protected

   The Little Miller Act is to be liberally construed to effect the purpose of the statute. E.g., Headley, supra; Sparks Constr. Co. v. Newman Bros., 51 Ala. App. 690, 288 So. 2d 749 (1974). In Sumlin v. Hagan Storm Fence Co. of Mobile, 409 So. 2d 818 (Ala. 1982), the Alabama Supreme Court reiterated its liberal construction of the statute. The plaintiff, Hagan, was a supplier to a subcontractor on a public works project. Hagan had several dealings with the subcontractor on various jobs. The subcontractor made several payments to Hagan but did not specify the jobs to which the payments should be credited. Hagan applied the payments to the oldest outstanding jobs The general contractor fully paid the subcontractor on the job at issue but Hagans books reflected an additional $9,000.00 due on that particular job The court allowed recovery on the bond, noting that to do otherwise would “ignore the underlying purpose of… § 39-1-1(b): to insure that a materialman receives full payment for labor or materials which he supplies to a public; works project.” Id. at 820.

   From these cases, and the language of the Act, many Alabama practitioners believe that the Alabama act, unlike its federal counterpart, will be interpreted to afford protection to any tier supplier or subcontractor.

3. What is Covered?

   1. Labor and Materials.

      Labor and material incorporated into the work, or reasonably expected to be incorporated into work, are protected. See Riley-Stabler Const. Co. v. Westinghouse Elec. Corp., 396 F. 2d 274 (5th Cir. 1968).

   2. Equipment and Repairs.

      Items normally consumed in the project, such as small tools should be covered. Singer v. Anniston Hardware Co., 222 Ala. 620, 133 So. 910 (1931) Rental of necessary equipment is covered. John E. Ballenger Const. Co. v. Joe F. Walter Const. Co., 236 Ala. 548, 184 So. 275 (1938). Repairs incidental in nature and made necessary by the prosecution of the work, are protected by the statute. U.S.F. & G. v. Benson Hdwe. Co., 222 Ala. 429, 132 So. 622 (1931).

   3. Freight and Storage Costs.

      If one can establish such costs as reasonable and necessary in the prosecution of the work, then they may also be recovered. Central of Georgia R.R. Co. v. UST. & G., 223 Ala. 458, 137 So. 36 (1931)

   4. Services of Architects and Engineers.

      These items have been found to be “labor” and are thus recoverable. Price v. H.L. Cable Const. Co., 317 F. 2d 312 (5th Cir. 1963).

4. Statute of Limitations.

   First, the Alabama Little Miller Act requires notice prior to instituting any action thereunder. No action can be instituted on a bond until after 45 days written notice to the surety of the amount and nature of the claim. This notice is a condition precedent to the bringing of an action. Lloyd Wood Const. Co. v. Conn-Serve, Inc., 285 Ala. 409, 232 50 2d 649 (1970).

   All actions under the Little Miller Act must be instituted within one year of the date of final settlement of the general contract. Note that Section 39-1-1 requires certain notice and publication provisions prior to final settlement of a public works contract.

5. Bringing a Little Miller Act Claim.

   A civil action on a Little Miller Act bond may be brought in the county where the work is performed, or in any county where the contractor or his surety does business. The claim can be prosecuted against both the contractor and his surety, or either of them.

6. Defending a Little Miller Act Claim.

   The provisions of the bond itself are critical. The provisions of Section 39-1-1, however, will be read into the bond even if they do not otherwise appear. U.S.F. & G. v. Couch, Inc., 472 So. 2d 614 (Ala. 1985). Typical defenses include the argument that payment is not due, that the items claimed are not covered by the statute, lack of notice, and any contractual defenses exculpating the contractor.

7. Attorneys’ Fees and Interest.

   The Act provides that, in the event the contractor or surety fails to pay the claim in full within 45 days after the date the claimant mailed its requisite notice, [then] the claimant may recover a reasonable attorney’s fee plus interest from the date of the provision. This provision for attorneys’ fees applies only to payment bonds, not performance bonds. Cincinnati Ins. Co. v. City of Talladega, 342 So. 2d 331 (Ala. 1977). To recover attorney’s fees, the claimant must ultimately be found entitled to substantially the same amount claimed in his notice to the surety Columbus Rock Co. v. Alabama Gen. Ins. Co., 153 F. Supp. 827 (M.D. Ala. 1957)