Strang Scott partner, Chris Strang, co-authored and article with Brendan Carter from the Associated General Contractors of Massachusetts that was published recently on the cover of the American Bar Association’s “Under Construction” quarterly newsletter. The article details a case where Strang Scott prevailed against the Commonwealth of Massachusetts, successfully arguing that the awarding authority has a duty to ensure the validity of payment bonds provided by general contractors on public construction projects in Massachusetts. The case was a matter of first impression in Massachusetts courts.
Subcontractors commonly inquire as to what they can do to ensure they receive payment on a project. For federally-owned construction projects, subcontractors can look to the Miller Act as a source of security. The Miller Act, codified as 40 U.S.C. §§ 3131-3134, requires general contractors on federal projects to provide performance bonds and payment bonds to the awarding authority where the prime contract exceeds $100,000. The general contractor’s payment bond must list a “satisfactory” surety and cover the total amount of prime contract. 40 U.S.C. § 3131(b)(2).
The primary purpose behind the Miller Act is to provide security to subcontractors. Because federal projects are immune from lien claims, the Miller Act provides an alternative to a traditional lien, which instead calls for subcontractors to file claims against the general contractor and its surety under the payment bond. See U.S. ex rel. Metric Electric, Inc. v. Enviroserve, Inc., 301 F.Supp.2d 56, 66 (D.Mass. 2003). As with any claim for payment, the subcontractor must establish that it is owed payment in order to establish an enforceable claim under the bond. In addition to establishing a basic right to payment, subcontractors must meet other specific requirements to secure the benefits of the Act.
Who is Protected Under Miller Act Payment Bonds?
The Miller Act requires payment bonds to secure the claims of “all persons supplying labor and material in carrying out the work provided for in the contract.” 40 U.S.C. § 3131(b)(2). “All persons,” for purposes of the Miller Act, applies to (1) first-tier subcontractors, which are contractors who directly contract with the general contractor; (2) second-tier subcontractors, those contractors with a subcontract with a first-tier subcontractor; (3) first-tier suppliers, which are suppliers who contract with the general contractor; and (4) second-tier suppliers that have a contract with a first-tier subcontractor but not a first-tier supplier. See U.S. ex rel. Water Works Supply Corp. v. George Hyman Constr. Co., 131 F.3d 28, 31 (1st Cir. 1997).
Third-tier and more remote subcontractors and suppliers cannot recover under the Miller Act. Subcontractors and suppliers too remote to file a claim under the Miller Act can file ordinary claims for nonpayment for breach of contract or quasi-contract. The Miller Act does not alter contractors’ rights in connection with claims for nonpayment, but rather provides security for payment to the “persons” covered by the Act.
What Must a Subcontractor Do to Obtain Security Under the Miller Act?
Much like comparable statutes for state-owned construction projects, subcontractors must wait the requisite time to file a Miller Act bond claim and may need to provide initial notice to the general contractor. All subcontractors must wait 90 days after they last furnished labor or material to the project before they may file a claim under a Miller Act payment bond. 40 U.S.C. § 3113(b)(2). The wait period serves the purpose of setting aside a reasonable amount of time for the subcontractor to receive payment for completed work. Bond claims filed before expiration of the notice period will be considered premature.
Second-tier contractors must comply with the 90 day wait period and must also provide written notice of its claim to the general contractor. The notice must be in writing; it must be received by the general contractor within the first 90 days after the second-tier subcontractor last furnished labor or material on the project; it must state “with substantial accuracy” the amount claimed unpaid and due and the name of the party to whom the material or labor was supplied or performed (i.e. the first-tier subcontractor); and it must be delivered by a method that provides verification of delivery (i.e. certified or registered mail) or served by a U.S. marshal. 40 U.S.C. § 3133(b)(2). The required notice must specifically demand payment from the general contractor. See U.S. ex rel. John D. Ahern Co., Inc. v. J.F. White Contracting Co., 649 F.2d 29, 31-32 (1st Cir. 1981). The notice requirement is strictly construed, and failure to fully comply will bar the subcontractor from raising a recoverable bond claim.
Subcontractors must file their claim on the bond within 1 year after the day of last furnishing labor or material on the project, 40 U.S.C. § 3133(b)(4), in the federal court in the district in which the project is located. 40 U.S.C. § 3133(b)(3)(B). Failure to file within the 1 year period will result in an absolute bar against the subcontractor’s bond claim. While a claim will be filed “in the name of the United States for the use of the person bringing the action,” 40 U.S.C. § 3133(b)(3)(A), the claim is a private one brought by the subcontractor and the federal government is explicitly exempt from liability to the subcontractor.
The above summary covers the general parameters for subcontractors to file a bond claim on federally-owned public construction projects. Because each project presents a different set of facts, the process and outcome to recover for nonpayment and filing under the Miller Act will vary. If you are uncertain regarding your company’s ability to recover payment for its work on a federal construction project, or if your company has complied with the regulations or process governing Miller Act claims, you should contact a Massachusetts construction attorney to achieve the best possible outcome.
 For more information about “last date of work” and how it is calculated, read Payment Bonds on Federal Construction Projects – Last Date of Work.
In an opinion issued this week in N-Tek Construction Services, Inc. v. Hartford Fire Insurance Company, the Massachusetts Appeals Court ruled that a sub-subcontractor’s e-mail to a general contractor on a public construction project failed to clearly present a claim that would satisfy the notice requirements of M.G.L. c. 149, s. 29.
The unpaid sub-subcontractor on a public bridge painting project sent an e-mail to the general contractor that stated the following. “Enclosed is the January 15, 2010 Statement to [subcontractor] for services through that date by [sub-subcontractor] for the [project] that are still unpaid. Please give me a call at [telephone number] when you have a chance.” The attached Statement listed ten invoices. The general contractor’s project manager testified to having never heard of this sub-subcontractor prior to the e-mail, and did not understand the e-mail to be some form of claim.
M.G.L. c. 149, s. 29, requires parties that do not have a direct contractual relationship with the general contractor to provide written notice to that general contractor of any claims of non-payment within 65 days of last providing labor or material on the project. The statue merely requires that the notice state “with substantial accuracy the amount claimed, [and] the name of the party for whom such labor was performed.”
The Court’s opinion included a nuanced analysis of the purpose of this notice requirement. It held that the implied purpose is to give general contractors a clear, timely understanding that a claim is being directed against them. This is to allow an opportunity to attempt to resolve the claim prior to litigation and involvement of the payment bond surety.
In ruling against the sub-subcontractor, the Court looked at all of the circumstances surrounding the e-mail and deemed it inadequate, for failing to state “explicitly or implicitly” that the e-mail constituted a claim for an unpaid balance due on the project.
Sub-subcontractors and material suppliers on public construction projects in Massachusetts should consult with a construction attorney prior to sending 65-day notices to general contractors to insure the preservation of their payment bond rights.
In a case of first impression, the court in Kapiloff’s Glass, Inc. et.al. v. University of Massachusetts (UMASS), et.al., MICV2014-08766 will consider whether the public awarding authority has a duty under M.G.L. c. 149, §29 to ensure that the payment bond provided by the general contractor on public construction projects is valid.
On the University of Massachusetts at Lowell Dry Lab Renovations construction project, several subcontractors brought claims on the general contractor’s payment bond, for nonpayment by the general contractor. The subcontractors obtained favorable judgments, but the payment bond surety failed to pay. The payment bond proved to be fake, and the surety was not registered to do business with the Massachusetts Division of Insurance.
Strang Scott brought claims against the University of Massachusetts on behalf of four of the subcontractors for the awarding authority’s failure to ensure that the payment bond provided at the time of bid was valid. The University of Massachusetts filed a motion to dismiss, arguing that it had no duty to ensure the authenticity of either the payment bond itself, or the surety issuing it. Strang Scott opposed the motion, arguing that the statute imposes such a duty, without which security on public projects would not exist for the subcontractors that rely upon the payment bonds.
In November, the Middlesex Superior Court heard oral arguments on the dispute, and a decision is expected in the near future. The impact of that decision will be far reaching, as it will ultimately determine whether subcontractors submitting bids on public construction projects in Massachusetts can rely upon the legitimacy of the general contractor’s payment bond.
When did you last work, for the purposes of filing a timely payment bond claim on a federal public construction project?
The Miller Act, which governs federal construction project payment bond claims, provides that suit be brought within one-year from the day on “which the last of the labor was performed or material was supplied by the person bringing the action.” 40 U.S.C. § 3133(b)(4). The same date is used to determine the 90-day notice requirement for sub-subcontractors and material suppliers. What constitutes labor or material supplied in the context of contract work is often not clear; work performed prior to a subcontractor’s substantial completion clearly counts. Warranty work that involves coming back to repair defects in the subcontractor’s own work generally does not. However, “punch list” items may sometimes include both incomplete contract work (which generally counts) and defective work performed that requires correction (which generally does not count). Sometimes the distinction is not entirely clear, and courts struggle to find a bright line rule on this point.
Massachusetts Federal Court Standard for “Last Date of Work” on a Miller Act Claim
The Massachusetts’ standard is that the one-year statute of limitations will begin to run on the last date on which materials or labor were supplied on the project for the purpose of completing subcontract work. U.S. for Use & Benefit of Lab. Furniture Co. v. Reliance Ins. Co., 274 F.Supp. 377, 379-80 (D.Mass. 1967) (emphasis added). Corrective work, which is performed for the purpose of making repairs following the inspection of the project, will not extend the statutory deadlines. D.D.S. Industries v. C.T.S., Inc., 2012 WL 2178962, *1 (Mass.Super. June 13, 2012) (making clear that the date of substantial completion is not the relevant date).
For material suppliers, the “date of last work” is the day of last supplying material on the project. The First Circuit, which encompasses Massachusetts federal courts, ruled that where a supplier provides material on a single, federally-owned project, all material supplied will be covered by that project bond. This is true regardless of whether the material supplier and general contractor treat each delivery of project material as part of one contract or under distinct and separate contracts. G.E. Supply v. C & G Enterprises, Inc., 212 F.3d 14, 18 (1st Cir. 2000).
Massachusetts considers punch list work provided as a requirement for completion of the project to be contract work; whereas punch list work provided as a correction, repair, or as clean up, is not contract work and will not prevent the statutory deadlines from running. U.S. for Use & Benefit of Lab. Furniture Co. citing U.S. for Use and Benefit of Austin v. Western Elec. Co., 337 F.2d 568, 572-75 (9th Cir. 1964). The value of materials supplied is not relevant in determining whether work was provided to complete the contract or as corrective work. Labor and materials supplied which are ultimately not used in the project still count as “work,” for statute of limitation purposes, so long as it is toward completion of the contract work. In U.S. for Use & Benefit of Lab. Furniture Co., the court considered replacement of plastic identification buttons on faucets and nozzles in a physics laboratory “corrective” punch-list work and could not extend statutory deadlines. The court weighed the following key factors in reaching this conclusion: (1) the buttons were supplied as replacements for buttons previously provided during the original performance of the subcontract; (2) seven months passed between when the subcontractor substantially completed work and the installation of replacement buttons; (3) four months elapsed after termination of the subcontractors’ contract until the button replacement; and (4) a demand letter sent to the subcontractor’s surety initiated the replacement work.
An Alternative Standard for Determining the “Last Date of Work” on a Miller Act Claim
The Fifth Circuit Court of Appeals created a test, which is not the law in Massachusetts at this time, to determine whether labor and material will be considered “contract work” or “corrective work.” The test involves weighing the following factors: (1) the value of the materials, (2) the original contract specifications, (3) the unexpected nature of the work, and (4) the importance of the materials to the operation of the system in which they are used. U.S. for Use of Georgia Elec. Supply Co., Inc. v. U.S. Fidelity & Guaranty Co., 656 F.2d 993, 996 (5th Cir. 1981).
This standard was adopted by the Eleventh Circuit Court of Appeals in Southern Steel Co, Inc. v. United Pacific Ins. Co., 935 F.2d 1201 (11th Cir. 1991). Based on the four above factors, the Court held that work to replace defective locks in a county jail were arguably “contract work” as repair or replacement of defective locks was called for under the original contract; replacement of the locks necessary due to circumstances outside the subcontractor’s control, and were therefore unexpected; that functional locks were deemed very important to operating the jail; and, given the circumstances of the case, the unclear value of the work was immaterial.
Additionally, the Fifth Circuit’s test is applied in Miller Act claims before the District Court for New Jersey. In U.S. v. Fidelity & Deposit Co. of Maryland, the court held that operation and maintenance manuals, provided approximately one year after the other subcontract material and labor, were “contract work” within the meaning of the Miller Act, and therefore tolled the statute of limitations until the date upon which they were provided. 999 F.Supp. 734, 747 (D. NJ 1998). In applying the test from the Fifth Circuit, the court held that the value of the manuals ($5,000) was substantial, regardless of the overall subcontract value ($700,000); that contract specifications specifically provided for the provision of the manuals; that an item containing instructions for repairing equipment does not make that item itself a repair item; and that the manuals were sufficiently important to operating the equipment provided under the contract.
What This Means for Subcontractors and Material Suppliers on Federal Construction Projects in Massachusetts
While the Fifth Circuit’s standard is similar to the standard followed in Massachusetts, it arguably applies a more predictable standard for determining whether the work is “contract work.” The benefit of the four-factor test developed by the Fifth Circuit is that it allows courts to assess standard categories for the work and allows flexibility to value more persuasive factors at a higher value, as opposed to missing or unclear factors. The Fifth Circuit’s test could be adopted by the Massachusetts federal court, as there is currently some ambiguity about what constitutes a date last worked on federal projects remains.
The above information is only meant to provide a general summary regarding rights and obligations for recovering under payment bonds provided on federal public construction projects. Because each project presents a different set of facts, the process and outcome of attempting to recover under a project payment bond will vary depending on the circumstances. If you are uncertain about anything regarding your company’s ability to recover under a payment bond, you should contact Massachusetts construction attorney to ensure the necessary steps are taken to achieve the best possible outcome.
 In U.S. for Use of Georgia Elec. Supply Co., Inc. v. U.S. Fidelity & Guaranty Co. the Fifth Circuit Court of Appeals interpreted Georgia state law, the language of which mirrors the language of the Miller Act.
Massachusetts subcontractors securing work in New Hampshire will encounter an unfamiliar legal landscape containing more than one trap for the unwary. In order to strike a fair deal and to put your business in the best position to get paid for your work, every subcontractor should be aware of certain basic differences in laws of the Granite State.
Put Your Business in “Good Standing”
Before any foreign based entity can transact business in New Hampshire, it must be registered with the Secretary of State. The process for registering your business is relatively straightforward and requires that the entity file several basic documents, pay a filing fee and name a registered agent in New Hampshire to accept service of process on behalf of the foreign entity. After complying with the Secretary of State’s requirements, your business will be in Good Standing with the State of New Hampshire and ready to move forward with projects in New Hampshire.
Striking a Fair Deal
In order to reach an agreement with a general contractor or construction manager that your business can live with and live up to, you need to know the laws that govern your contract. New Hampshire law varies in important ways from its counterpart in Massachusetts. Being familiar with some of the basic and important distinctions in the law will put your business in a better position to compete and succeed on your subcontracts.
One of the more important distinctions of which to be mindful is that in New Hampshire a subcontractor can waive its right to assert a mechanic’s lien against a project by contract. Because many general contractors, construction managers and savvy owners in New Hampshire know this, these waiver provisions are found commonly in contracts provided to subcontractors. Because Massachusetts law prohibits these provisions, subcontractors agreeing to perform work in New Hampshire must devote full attention to this detail, in order to avoid extinguishing mechanic’s lien rights unknowingly. If any doubts linger about whether a particular provision in a contract will result in a waiver of lien rights, it is important to consult your attorney.
Another important distinction exists with respect to conditional payment provisions, often known as “pay-if-paid” or “pay-when-paid.” With the enactment of the Massachusetts Prompt Payment Act in 2010, subcontractors gained significant rights in private contracting that were formerly the subject of bargaining between the parties. One of the chief among those rights is that in private construction projects with a prime contract in excess of three million dollars, so-called pay-if-paid provisions are unenforceable except in two rare instances. Since the enactment of this statute, pay-if-paid provisions in Massachusetts rarely result in significant losses to subcontractors.
In New Hampshire, however, no prompt payment act or functional equivalent has been enacted, and the New Hampshire Supreme Court has not addressed the pay-if-paid issue directly. Accordingly, significant uncertainty remains regarding the enforceability of these provisions in all private construction contracts, and subcontractors are wise to avoid or limit these provisions when possible.
Working in tandem with the Prompt Payment Act, the recently enacted Massachusetts Retainage Act limits owners and general contractors withholding retainage to no more than five percent on each progress payment on private construction contracts of three million dollars or more. Like the Prompt Payment Act, New Hampshire has no equivalent law to the Retainage Act. As a result, retainage provisions in construction contracts are subject to bargaining, and general contractors and owners commonly propose withholding retainage of ten percent or more. Because these provisions are not subject to any maximum by law, subcontractors should endeavor to negotiate these provisions down or, at a minimum, negotiate a phased release of retainage over the course of a project. Reducing or phasing retainage is vitally important for subcontractors that perform work at the inception of a project, like site work contractors, because commercial contracts commonly direct that withheld retainage be released only after completion of the entire project, and not after completion of a particular subcontractor’s work. As a practical matter, this can mean months or years of delay until retainage is released if the retainage provision is not drafted or revised to avoid this result.
Subcontractors that avoid waiving lien rights, avoid pay-if-paid provisions, and negotiate fair retainage schedules have taken important steps toward getting paid for completed work. The job isn’t done completely, however, as important steps remain to secure payment. Most notably, subcontractors are well advised to take steps to preserve their mechanic’s lien rights at the outset of a project and during its duration as New Hampshire’s mechanic’s lien law and procedure are markedly different from that encountered in Massachusetts.
New Hampshire mechanic’s lien law draws an important distinction between those that have a direct contract with the project owner (usually the general contractor) and those that do not (subcontractors and suppliers). If you fall into the latter category, as a first or second tier subcontractor or supplier, you must have a contract with the general contractor or first tier subcontractor and provide the project owner written notice of your lien rights. Ostensibly, the law requires the written notice to prevent the owner from becoming subject to liability for claims asserted by parties that were unknown to the owner. As practical matter, providing written notice to the owner of lien rights is a matter of preserving a subcontractor’s ability to establish, perfect and maintain a mechanic’s lien on a project in the event that payments are late or aren’t coming at all.
In New Hampshire, a subcontractor’s right to assert and enforce a mechanic’s lien is directly tied to when the subcontractor provides the required notice of lien rights. In an ideal world, subcontractors would provide the required notice to the owner at the outset of the project, preserving the full value of their lien. More frequently than not, however, subcontractors fail to send the owner notice of lien rights until after beginning work and a problem has arisen. When that occurs, a subcontractor’s lien rights are limited to the amount remaining due from the owner or general contractor to the party upstream of the subcontractor. In other words, the subcontractor’s lien is good only to the extent of any payment remaining due to the party from which the subcontractor will be paid when notice is given to the owner. This can be problematic when payments slow down or stop completely toward the end of a project and the subcontractor failed to provide notice of its lien rights at the beginning of the project, because notice may arrive at a time when little or nothing remains due to the party from which the subcontractor seeks payment through its contract. In that instance, even if the subcontractor has complied in all other respects with its contractual obligations, no valid lien exists in connection with its work on the project. As a result, the importance of providing early notice of lien rights to the owner cannot be overstated.
The lien process has other pitfalls for uninitiated. In New Hampshire, mechanic’s lien rights are valid and enforceable for only 120 days following the subcontractor’s last date of work, or delivery of materials in the case of a supplier. Ordinarily, a subcontractor’s last date of work is calculated from the point of substantial completion of the subcontractor’s work, and closing punch list items or returning to the project to remedy deficient or defective work will not support an extension of the 120 day deadline to perfect the lien.
In order to perfect a mechanic’s lien, subcontractors must file suit in court, petition the court for a mechanic’s lien attachment and record the lien with the Registry of Deeds in the county in which the project is located within the 120 day period subsequent to substantial completion. Failure to do any of the foregoing is fatal to enforcing a mechanic’s lien.
So, given the complexities associated with establishing and perfecting a lien in a timely fashion, why do it when the general contractor or owner will simply “bond it off?” The simple answer is that in New Hampshire the prevailing law does not compel a subcontractor to accept alternate security for its perfected lien. As a result, owners and general contractors cannot force a valid mechanic’s lien to be discharged solely on the basis of providing alternate security for subcontractors’ claims. In many circumstances, there are very good reasons why subcontractors prefer to maintain mechanic’s liens rather than accepting bonds or other security. For a more detailed recitation of those reasons, or to understand mechanic’s lien law in New Hampshire in greater detail, please consult a New Hampshire construction attorney.