The Miller Act[1] requires any general contractor awarded a federal government contract for more than $100,000 to secure two bonds: a performance bond to protect the government and a payment bond “for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.”[2] The purpose of the Miller Act is to ensure payment to these subcontractors that the prime contractor fails to pay. A subcontractor working on a project for which a payment bond is issued may bring suit if it has not been paid in full within 90 days of completing its work, and may collect judgment on the bond for the amount due.[3]

The Miller Act provides an exclusive federal cause of action for subcontractors to recover from a prime contractor’s insurer in the event that the prime contractor fails to pay the subcontractor. The statute allows wavier of that right if the waiver is: (1) in writing; (2) signed by the person whose right is waived; and (3) executed after the person whose rights are waived has furnished labor or material for use in the performance of the contract.[4] Courts have held that a waiver of the Miller Act right of action may only be made in “clear and explicit” terms.[5]  

Clarifying the Act

In U.S. ex rel. McKenney’s Inc. v. Government Technical Services,[6] a Federal District Court in Georgia was confronted with a conflict between the Miller Act policy concerns favoring payment to subcontractors and suppliers and the clear meaning of a pay-when-paid clause. The dilemma confronted by the Court in the McKenney case was that if the government was to delay paying for more than a year, and the pay-when-paid clause was to be enforced, the one-year Miller Act statute of limitations would expire, thus denying the availability of a Miller Act action to the subcontractor. The court refused to interpret the interruption between the pay-when-paid clauses and the Miller Act in a way that would frustrate the remedial nature of the Miller Act. The court declined to turn a pay-when-paid contract provision into an implicit waiver of the subcontractor’s Miller Act rights.[7]

In U.S. ex rel. A&R Supply of Mississippi v. Travelers Casualty & Surety Co.,[8] the surety asserted an estoppel defense to the subcontractor’s payment bond claim. While estoppel is a proper defense to a Miller Act claim, a party asserting an estoppel defense must show that it was misled to its detriment. The surety alleged that the sub-subcontractor misled the general contractor into believing that the sub-subcontractor would retain payment from the general contractor through the creation of a joint check agreement. The surety asserted that since the subcontractor prepared a joint check agreement, the sub-subcontractor assured the general contract that it would be paid.

However, the Court held that a request for a joint payment procedure did not constitute a waiver of Miller Act rights, but was actually a request for and acceptance of additional security. Thus, the sub-subcontractor’s endorsement of joint checks was not a representation by the sub-subcontractor that it had been paid. Critically, a request for a joint payment procedure will only limit Miller Act rights if it includes a “clear expression of an intent to waive the protection afforded by the Miller Act.”[9]

The Ninth Circuit has held that a pay-when-paid clause generally may not be relied upon by a Miller Act surety to excuse payment. Under the Miller Act, the surety’s liability is not measured by the liability of the contractor, but is instead determined exclusively by the Miller Act. A subcontractor can only waive the protections provided by the Miller Act if it has done so voluntarily, knowingly, clearly and explicitly; a difficult standard that is not satisfied by a pay-when-paid provision.[10]

When to Demand Payment

In Walton Technology, Inc. v. Westar Engineering, Inc., the subcontractor filed a lawsuit against a prime contractor and its surety under the Miller Act, claiming unjust enrichment and conversion based on the subcontractor’s belief that it was entitled to a pro rata portion of the prime contractor’s insurance recovery for rental fees. The prime contractor stated that with regard to the Miller Act claim it was not liable to the subcontractor because the pay-when-paid clause had not been satisfied. The court disagreed, holding that the clause did not constitute a “clear and explicit waiver of its Miller Act rights.”[11]

However, in Fixture Specialists, Inc. v. Global Construction, LLC,[12] the court held that if a condition precedent has not been satisfied pursuant to a valid pay-when-paid clause, a surety may use such clause as a defense against the subcontractor for demand of payment, because the prime contractor’s duty to pay has not accrued.

In Fixture, the subcontractor filed a lawsuit against a prime contractor and its surety under the Miller Act seeking payment for completion of work. The prime contractor stated that with regard to the Miller Act claim, it was not liable to the subcontractor because the pay-when-paid clause had not been satisfied. The court agreed holding that the language of the clause clearly and unambiguously created a condition precedent to any obligation of the prime contractor.[13]

[2]  40 U .S.C. § 3131(b)

[3] Id § 3131(b). U.S. ex Rel. McKenney’s, Inc. v. Government Technical Services, LLC, 531 F. Supp. 2d 1375, 1376, 1377 (N.D. Ga. 2008).

[4] 40 U.S.C. § 3131(c)

[5] Lee & Rua Co. v. Great American Insurance Co., 2008 U.S. Dist. Lexis 36317 (W.D. Wa.); United States ex rel. Walton Tech., Inc. v. Weststar Eng’g Inc., 290 F.3d 1199, 1209 (9th Cir. 2002).

[6] 531 F. Supp 2d 1375 (N.D. Ga. 2008)

[7] U.S. ex reI. McKenney’s Inc., supra., 53I F. Supp. 2d at 1379, 1380.

[8] 2008 U.S. App. Lexis 2754, *5, 6, 7 (5th Cir. 2008)

[9] U.S. ex rel. A&R Supply of Mississippi, supra., at *5, 6.

[10] Walton Technology, Inc. v. Westar Engineering, Inc., 290 F.3d 1199 (9il Cir. 2002).

[11] Id. at 24.

[12] No. 075614,2009 WL 90403 I (D.N.J. March 30, 2009)

[13] Fixture Specialists, Inc., supra., at *6.

Taylor v. Ramsay – Gerding Constr. Co.[1] involved an issue that nearly every supplier of construction materials or regional or national contractor encounters—perhaps without its knowledge—on a weekly, if not daily, basis: promises made by its sales agents.

In Taylor, the owner of a hotel construction project became concerned that its new stucco system might rust. Therefore, the project’s contractor called a meeting that was attended by the stucco installer and the stucco manufacturer ChemRex’s territory manager for Oregon, who was brought to the meeting as a ChemRex representative. In response to concerns provided by the project owner during the meeting, the agent stated that the involved system was “bullet-proof” against rust, but that a corrosion inhibitor would provide further protection. When the owner still was not convinced, the agent asked, “Did you know you’re getting a five-year warranty?” By the end of the meeting the owner agreed to go forward with the addition of the corrosion inhibitor.

After all construction had been completed, but before all construction funds had been disbursed, the agent sent a letter on ChemRex letterhead, which stated in part, “This letter is to confirm that [ChemRex] will warrantee the Sonowall stucco system for five years covering the material and labor on the project staring in March of 1999.” The letter was signed “Mike McDonald, Territory Manager OR.”[2]

Eventually, the system rusted and ChemRex was sued for, among other things, breach of warranty of the stucco system. ChemRex argued in its defense that Mr. McDonald did not have authority to act for ChemRex when giving the warranty because Mr. McDonald’s role as a selling agent and his title of territory manager were insufficient to establish apparent authority to provide a warranty on ChemRex’s behalf.

Creating the Appearance of Authority

This issue was eventually resolved by the Supreme Court of Oregon, which stated that the key issue involved in this case was whether ChemRex, as the principal, took sufficient action to create the appearance of authority on the part of Mr. McDonald. Apparent authority is created when the principal engages in some conduct that the principal should realize is likely to cause another person to believe that the agent has authority to act on the principal’s behalf. The law provides that a principal can create the appearance of authority by written or spoken words or any other conduct. For example, when a principal gives an agent actual authority to perform certain tasks, the principal might create apparent authority to perform other related tasks.

Furthermore, by appointing an agent to a position that caries generally recognized duties, a principal can create apparent authority to perform these duties.

Most importantly, when a distant principal places an agent in charge of a geographically distinct unit or branch, such an appointment may lend weight to a finding of apparent authority. For example, if the principal structures its company so that a branch manager or territory manager makes decisions and directs activity without checking elsewhere in the organization, it may create apparent authority to commit the principal to similar transactions.[3]

Who’s In Charge?

In the Taylor case, the Court determined that there was sufficient evidence that Mr. McDonald acted with apparent authority for ChemRex when he warranted the stucco system. This conclusion was supported by the fact that ChemRex provided Mr. McDonald with actual authority to help in processing and communicating with customers about warranties using ChemRex letterhead. In this case, Mr. McDonald used this authority to confirm the existence of the five year warranty on ChemRex’s letterhead.

Furthermore, ChemRex provided Mr. McDonald with the title of “territory manager” and the actual authority to visit jobsites and to solve problems, such as the rust problem. Mr. McDonald also had the authority to sell an additional product intended to solve the subject performance issue and to answer questions about the system, which he did in response to the owners concerns.

A second issue concerned whether Mr. McDonald’s title as territory manager led the project owners to believe that he was authorized to provide the warranty because the owners were unaware of this title until construction had concluded. The Court was persuaded by the owner’s testimony that he believed that Mr. McDonald “was the person that was in charge of or supervising this area, the coastal area. He was the guy that you had to get your answers from along with the owners’ belief that Mr. McDonald represented ChemRex to be sufficient.” It was not necessary that the owners knew Mr. McDonald’s exact title at the time that the warranty representation was made because the owners knew he was in charge of the geographical area in which the project was located and that he represented ChemRex. Additionally, the owners relied on Mr. McDonald’s letter that he signed as the territory manager for Oregon in which he confirmed the five-year warranty.

ChemRex argued that Mr. McDonald’s position was irrelevant because ChemRex did not directly inform the owners of that position. However, it was not necessary for the owners to learn of Mr. McDonald’s position directly from ChemRex; receiving this information through the general contractor was sufficient.

This case vividly illustrates the critical need for employees throughout a company to know and follow the same set of rules and regulations regardless of their geographic location. As a result, conference calls should be held on a quarterly or annual basis to review company policies on matters such as acceptable contract and warranty procedures.

[2] Taylor, supra., 2008 Ore. Lexis 1006, *4.

[3] Taylor, supra., 2008 Ore. Lexis L006, *6, 7, 9,10,11, l2.