Beware of Side Deals To Get Paid

Builders and Contractors Exchange
Weekly Bulletin: 4 May 2010

Beware of Side Deals To Get Paid
By: Megan Caramore

Suppliers & materialmen who enter into side-deals to get paid may find themselves out of luck when it comes to payment bond claims. A recent court opinion issued by the Court of Appeals for the Fourth Circuit held exactly that. US ex rel. Damuth Services v. Western Surety Co., No. 09-1170 (4th Cir. 2010). The case involved a Miller Act payment bond claim by a HVAC supplier. The supplier learned that the subcontractor had been paid by the general contractor but had diverted the funds to cover other debts rather than turning around and paying the HVAC supplier as required. The supplier agreed not to inform the general contractor of the improper use of the funds in exchange for future payments from the subcontractor. No payments were ever made between the parties, however, and the subcontractor went out of business shortly afterward. The supplier then sought to recover on the payment bond.

The court said that the side agreement made by the supplier not to “tell” on the subcontractor in exchange for payment was essentially the same as assisting the subcontractor in making misrepresentations about payments to the general contractor. In doing so, the HVAC supplier lost its ability to recover under the payment bond. Suppliers should be aware that the consequences of these types of side agreements could be the loss of their right of recovery under the payment bond.

In order to protect the right to recover under a payment bond, suppliers and subcontractors should be sure to avoid making any type of misrepresentations to the general contractor that help the subcontractor receive payment. This includes falsified receipts to the subcontractor to allow him to obtain progress payments from the general contractor. It also includes misrepresentations that payments due to the supplier have already been received or that the subcontractor is the supplier or fabricator where that is not the case. The point to remember is that the supplier may not intentionally or negligently represent to the general contractor that no problems exist and then turn around and pursue his normal statutory remedy under the payment bond when it becomes apparent that the state of affairs represented is inaccurate or false.