Look out, suppliers and subcontractors. A new ruling out of the U.S. District Court for Nevada allows a surety to expressly limit the duration of a payment bond issued under the Miller Act. This means that subcontractors and suppliers on federal construction projects can no longer assume that payment protection under a Miller Act payment [...]
Look out, suppliers and subcontractors.
A new ruling out of the U.S. District Court for Nevada allows a surety to expressly limit the duration of a payment bond issued under the Miller Act. This means that subcontractors and suppliers on federal construction projects can no longer assume that payment protection under a Miller Act payment bond will remain in effect throughout the duration of the project.
In U.S. ex rel Russel Sigler, Inc. v. Associated Mechanical, et al., the court held that Sigler, a supplier, had no legitimate claim on a bond because the bond had expired before Sigler’s work on the project began. The bond clearly stated that it terminated at the end of the project or 12 months after its effective date, whichever came first.
“Previously, as long as you claimed within 90 days of last furnishing, you were protected,” said Greg Powelson, director of NACM’s Mechanic’s Lien & Bond Services (MLBS). “Now, a bond can expire prior to a trade completing that trade.”
This, said Powelson, makes it extremely important for subcontractors and suppliers to acquire the payment bond beforehand to see how far payment protection extends into the project. “It now has become critically important for credit managers to make sure that they’re not only confirming that the Miller Act bond exists, but they also need to get a copy of that bond and they need to read that bond to see they have protection,” he noted.
The parties most likely to be affected by the ruling are suppliers and subcontractors whose work is typically performed later in a project’s lifespan. “It would primarily affect those who were later in the cycle,” said Powelson. “Assuming that the project lasts longer than the duration expressed in the bond, their rights could be limited under the ruling.”
In addition to the ramifications the ruling has for subcontractors and suppliers, the shift in payment protection rights could have a broader effect on credit extension, according to Powelson. “It increases risk and obviously if you’re increasing risk, you’re decreasing the likelihood that a manufacturer can provide a line of credit,” he said, adding that the ruling currently only affects federal projects, but could eventually trickle down to states and municipalities. “The federal Miller Act has been a model for state bond claims statutes,” said Powelson. “Does this mean that it could eventually affect state and municipal projects? It’s going to make it very, very difficult for later trades to determine if they’re covered under the bond.”
Whether or not the ruling seeps into state construction laws will be seen in time, but until then suppliers and subcontractors, if they haven’t already been doing so, need to start seeking and reading a copy of their bonds. “The folks toward the end now have some jeopardy and the only way they can determine if they have jeopardy is to get a copy of the bond and see if it has an expiration date,” said Powelson. “It’s a whole new ballgame.”
