Authored by attorney Megan B. Caramore
The Miller Act requires that a contractor who is awarded a government construction contract worth $100,000 or more must furnish a payment bond. It also limits the potential claimants on the bond to persons who provide labor and materials directly to the prime contractor or persons with direct contractual relationship with a first-tiered subcontractor, but no relationship with the prime contractor. For practical purposes, this means that a second-tier subcontractor would be able to bring a claim on the payment bond, but that a third-tier contractor or lower would not because they too far removed from the prime contractor.
A recent decision from the 10th Circuit Court of Appeals demonstrates the problems faced by third-tier and lower subcontractors when trying to gain access to the payment bond. In United States v.
Southwind Construction Services, LLC, No. 12-6132 (10th Cir. Feb. 7, 2013), a third-tier subcontractor tried to skirt the Miller Act’s payment bond cut-off by arguing that the court should view the prime contractor and first-tier subcontractor as a single entity because of a substantial overlap in the functions that the two entities performed on the project. This would have bumped the third-tier subcontractor up one spot in status and allowed it access to the payment bond. The argument was ultimately unsuccessful and the court noted that the third-tier subcontractor had failed to establish a basis for disregarding the separate corporate existence of the prime contractor and first-tier subcontractor.
The Fourth Circuit has reached a similar conclusion in U.S. ex rel. Global Bldg. Supply, Inc. v. WNH Ltd. P’ship, 995 F.2d 515, 519 (4th Cir. 1993). In that case, the court also declined to treat the prime contractor and first-tiered contractor as a single entity but also noted that it might consider doing so where corporate law principles would allow the court to pierce the corporate veil. While this opinion leaves open the possibility that a third-tiered subcontractor might be able to bring a claim against a payment bond in very limited circumstances, as a general rule, the Miller Act’s payment bond protections will not be extended to third-tier and lower subcontractors.
These articles are meant to bring awareness to these topics and are not intended to be used as legal advice.
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