Is a Surety Liable under Miller Act Bonds Only to the Extent Its Principal Is Liable on the Underlying Subcontract?

The short answer is “Not necessarily.” . . . That was the conclusion of the federal district court in U.S. for the Use and Benefit of Source Helicopters, Division of Rogers Helicopters, Inc. v. Sayers Construction, LLC, et al., 2022 U.S. Dist. LEXIS 44361 (D. Nev. Mar. 14, 2022). Yes, it is concerning, I know. The following is a summary of the case background and the court’s analysis.

In November 2017, prime contractor Sayers Construction LLC (Sayers) executed a subcontract with subcontractor Source Helicopters, Division of Rogers Helicopters (Rogers) for Rogers to perform work for Sayers on a federal government electrical construction project. The subcontract contained a “time is of the essence” clause and a progress schedule that provided Rogers was required to mobilize on the project no later than December 4, 2017, and to complete its work no later than July 20, 2018. Rogers failed to meet both deadlines: it did not mobilize until January 9, 2018; and it did not finish until November 20, 2018.

After Rogers completed its work, it submitted five invoices to Sayers detailing the costs of the work and requesting payment under the subcontract. Sayers refused to pay because Rogers commenced and completed its work after the contractually agreed upon dates.

Rogers sued the prime contractor and its Miller Act surety, Philadelphia Indemnity Insurance Company (Philadelphia Indemnity); and the prime contractor counterclaimed against the subcontractor. Both parties sought summary judgment on the breach of contract actions and on Rogers’ Miller Act claim.

The court first addressed the two “dueling breach of contract claims.” Rogers’ position was that Sayers failed to pay for the invoices Rogers submitted between November 2018 and July 2019. Sayers admits it did not remit payment to Rogers but argued that Rogers failed to mobilize on the project by December 4, 2017, and failed to complete the project by July 20, 2018, both of which were material breaches that excused Sayers from any obligation to perform.

The court held that Rogers materially breached its obligations under the subcontract’s time-is-of-the-essence clause by failing to strictly adhere to the progress schedule. Sauers argued and the court agreed that the time-is-of-the-essence clause was material to the subcontract. The subcontract provided as follows: “[Rogers] shall perform and provide Contract Work for the Project strictly in accordance with the Progress Schedule prepared or to be prepared by Contractor after consultation with Subcontractor, and as it may change from time to time.” While the subcontract provided that Rogers “shall revise and update the Progress Schedule, as necessary, as [Rogers’] work progresses,” it also provided that Rogers “shall be bound by the Progress Schedule, as revised by [Sayers].”

The court observed the significance of the subcontract’s change order clause: “No adjustment in the Contract Amount, Progress Schedule, or time/schedule of or for performance and completion of Contract Work shall be permitted, except as expressly authorized by a final, fully executed Change Order in a form acceptable to [Sayers], and then only if and to the extent of a final, fully executed change order between [Sayers] and [Rogers] pertaining to the Contract Work.” Noting that Rogers failed to provide any change orders reflecting start and end dates modifying the dates reflected by the original progress schedule, the court found that Rogers’ failure to strictly adhere to the progress schedule constituted a breach of its obligation to timely perform under the subcontract’s time-is-of-the-essence clause.

In summarizing that Sayers prevailed on its breach of contract counterclaim, the court stated that Rogers breached the subcontract by failing to complete its works until four months after the date it was required to “strictly adhere to” under the subcontract. Furthermore, Rogers’ material breach excused Sayers from paying for Rogers’ invoices. The court accordingly granted summary judgement in favor of Sayers on its breach of contract claim.

However . . . . The court held for the subcontractor on its Miller Act payment bond claim, in spite of the court’s holding in favor of the prime contractor on its breach of contract counterclaim. The court quoted an oft-quoted Supreme court case, Clifford F. MacEvoy Co. v. U.S. for the Use and Benefit of Calvin Tomkins Co., 322 U.S. 102, 107 (1944): “The Miller Act is highly remedial in nature and is entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.” The court agreed with Rogers that all the elements of the Miller Act had been satisfied: it supplied labor and material in the prosecution of the work provided for in the subcontract, it had not been paid for some of its labor and material, it had a good faith belief that the labor and materials were intended for the project, and it met the jurisdictional requirements.

Sayers and the surety argued that a surety is liable under the Miller Act only to the extent the principal is liable on the underlying subcontract. The court disagreed with that argument and held that Rogers was entitled to unpaid costs for the labor and materials it provided for the project. In reaching this decision, the court reviewed decisions from other federal district courts and several federal circuit courts, which held that the liability of a surety and its principal on a Miller Act payment bond is coextensive with the contractual liability of the principal only to the extent that it is consistent with the rights and obligations created under the Miller Act.

The court stated: “While this circuit has not expressly decided the issue of whether a subcontractor can recover for labor and material costs when it caused the delayed performance, the express terms of the Miller Act do not preclude recovery of labor and material costs incurred by a subcontractor whose materials and labor are adequate in all aspects other than timeliness.” Relying on “the Miller Act’s express purpose” and the cases reviewed, the court held that “a breach of a ‘time is of the essence’ clause does not necessarily preclude a subcontractor from prevailing on its Miller Act claim to recover the costs of labor and materials” on otherwise satisfactory work.

Granting the subcontractor’s motion as to its Miller Act claim, the court concluded as follows: “[W]hile Sayers’ duty to remit payments to Rogers was excused in a contractual sense, it—and its surety Philadelphia Indemnity—remain liable to Rogers for the unpaid costs of materials and labor Rogers supplied in prosecution of the work provided for in the contract—i.e., all unpaid labor and material costs Rogers accrued while working on the project.”

Takeaway:

While we have always heard that a surety’s liability on a bond is co-extensive with that of its principal, take note that the Miller Act’s “highly remedial nature” may trump well-known tenets of surety law.

The author of this article is Martha Perkins, General Counsel at NASBP. She can be reached at mperkins@nasbp.org or 240.200.1270.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels and should not act upon any information contained in this article without such advice.