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United States District Court for the District of Maryland Extended Protection under the Miller Act to Second-Tier Subcontractors Although They Lacked Privity with the General Contractor
United States ex rel. Ariosa & Co., Inc. v. All State Constr., Inc.
In United States ex rel. Ariosa & Co., Inc. v. All State Constr., Inc., the District Court of Maryland held that a second-tier subcontractor had a right to recover labor and material costs incurred under a subsubcontract from the general contractor. Plaintiff Ariosa & Company, LLC (“Ariosa”), a second-tier subcontractor, brought an action under the Miller Act against All State Construction (“All State”), a first-tier subcontractor; SEI Group, Inc. (“SEI”), the general contractor; and the Guarantee Company of North America (“Guarantee”). In response, SEI filed a Motion to Dismiss which the court denied.
By way of background, SEI entered into a contract with the United States government to construct a helium recovery plant in Gaithersburg, Maryland. In compliance with the Miller Act, which applies in all contracts for improvement to public buildings owned by the Government, SEI provided performance and payment bonds to the government and listed Defendant Guarantee as the surety on the project. The bonds specified that both SEI and Guarantee would be liable jointly and severally for the sum of the bond.
In planning for the construction of the plant, SEI subcontracted with Defendant All State which subcontracted with Plaintiff Ariosa “for the performance of work and the furnishing of labor and materials for completion of the installation of [a] mechanical component structure.” Plaintiff alleged that he completed his obligations under the contract, but incurred additional debt when SEI caused delay by supplying the government with noncompliant equipment. Plaintiff contended that under the Miller Act, Defendant owed him payment for his performance and reimbursement of the additional funds expended to account for the delay caused by SEI. In response, SEI filed a Motion to Dismiss, arguing that Plaintiff had no basis of recovery against SEI under the Miller Act due to a lack of direct contractual privity.
First, the court considered the underlying purpose and elements of the Miller Act. It noted that the Miller Act applied on federal construction projects of more than $100,000.00 and required general contractors to provide payment bonds “for the protection of all persons supplying labor and materials in carrying out the work provided for in the contract.” 40 U.S.C. § 3131(b)(2). The Act provides a claim of relief for any person who furnishes labor or materials for a bonded project, but has not been paid upon the passage of ninety (90) days after giving notice to the general contractor that the labor or materials have been provided. Thus, the act offers an avenue by which first-tier and second-tier subcontractors may recover funds owed to them for services rendered. Specifically, the act affords an opportunity of relief for second-tier subcontractors who provide written notice to the general contractor within ninety (90) days of the date on which they completed performance. 40 U.S.C. § 3133(b)(2). To bring a claim under the Miller Act, the court notes that a plaintiff must set forth facts demonstrating that (1) “it has furnished labor or material in carrying out work provided for in a contract for which a payment bond [wa]s furnished [;] … and (2) it has not been paid in full within ninety (90) days.”
In light of the requirements and purpose of the act, the court concluded that Plaintiff qualified for recovery. The court rejected Defendant’s argument that a lack of direct contractual privity rendered Plaintiff ineligible for relief. In support of its conclusion, the court considered the language of the act. The act enables a party in contractual privity with a subcontractor, but not in such privity with the general contractor who provided the bond, to bring an action on the payment bond to the contractor so long as the party provided written notice to the contractor within ninety (90) days from the date of completion of the party’s performance. 40 U.S.C. § 3133(b)(2). The court reasoned that if the statute allowed an action on a payment bond where the moving party lacked privity, so too would it permit a party to bring an action against a surety. Thus, the court held that Ariosa, a party lacking contractual privity with the general contractor, SEI, could sue SEI in its capacity as a surety.
Next, the court acknowledged that although the specific basis of a general contractor’s liability to a second-tier subcontractor remained unclear, nothing within the Miller Act prohibited a second-tier subcontractor from suing a general contractor. It found support for this conclusion in other cases that cited language within the payment bond to allow a sub-subcontractor or second-tier subcontractor to sue a general contractor. For instance, courts have found a basis on which a second-tier subcontractor may sue the general contractor where the payment bond expressly states that the principal and the surety are jointly and severally liable for the sum. Applying this conclusion to the case at hand, the court found such a clause existed and as a result, concluded that Ariosa’s claim against SEI was proper and denied SEI’s Motion to Dismiss.
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