It is a relatively standard practice in the construction industry for a general contractor’s exposure to claims by its subcontractors arising from the acts of the project owner to be limited to the amount that the general contractor is able to collect from the owner for those claims. One of the most significant practical issues that can arise from such an arrangement is a subcontractor who files suit to collect on the claim before the general contractor has resolved the claim with the owner. This can put a general contractor in the unfortunate position of both advocating the claim to the owner and defending the claim against the subcontractor at the same time. In particular, this can be a problem on federal projects where a subcontractor is obligated to file suit within one year of its last work on the project if it wants to maintain its claim under the Miller Act. For projects that last many years, a lawsuit filed by a subcontractor can mean the general contractor has to fight the owner about a claim while the project is still ongoing. It is often not helpful to be in litigation while still trying to complete a project. A pair of decisions issued in December by two different federal courts show the importance of a general contractor’s subcontract language to avoiding this kind of premature claims litigation on federal projects.
In United States ex rel. Tsi Tri-State Painting, LLC v. Fed. Ins. Co., the United States District Court for the Southern District of Georgia was asked to stay Miller Act litigation between a painting subcontractor, and a general contractor and the general contractor’s surety [1] The painting subcontractor’s claim arose from allegations that lead paint was discovered on the project that was well beyond the extent of lead paint provided for in the subcontract. This allegedly caused the subcontractor to incur substantial additional costs in performing its work. The subcontractor filed suit to collect those costs and the surety filed a motion to stay the lawsuit filed by the subcontractor “pending renegotiation of the agreement between [the general contractor] and the Government.”
The subcontract in question contained the following relevant clause:
If [general contractor] and [subcontractor] have a dispute arising under or relating to the Agreement or its breach, which involves the correlative rights or duties of Owner, such dispute shall be decided in accordance with the General Contract . . . [subcontractor] and it surety, if any, shall be bound to [general contractor] to the same extent that [general contractor] is bound to Owner by the terms of the General Contract, and by any decisions or determinations made under the General Contract by any authorized person, board, court or other tribunal.
The general contractor’s surety argued that this clause entitled it to a stay of the subcontractor’s lawsuit. This position makes some sense because resolution of the claim between the general contractor and owner would arguably control the resolution of the claim between the subcontractor and the general contractor. The court denied the motion to stay the case. Specifically, while the court acknowledged the above-quoted language, it stated that it did not find in the contract “clear and unambiguous” language that the subcontractor’s action was to be stayed. In fact, the court specifically pointed out that the word “stay” did not appear in the relevant clause. The court also distinguished the contractual language in the case from the language in the case of United States ex rel. Trans Coastal Roofing Co. v. David Boland, Inc. where the subcontract in question provided that the subcontractor agreed “to stay” any actions until the dispute resolution process under the prime contract had been completed. [2]
Because the surety “provided no compelling reasons” why the subcontractor’s claim should be stayed and because the contractual language did not mandate a stay, the motion was denied and the case was to move forward. As a result, the general contractor’s negotiations with the owner were forced to occur at the same time, or perhaps after, the dispute with the subcontractor was being litigated.
In United States ex rel. MMC/PI v. Balfour-Walton, the United States District Court for the District of Kansas faced a similar request for a stay.[3] There, a subcontractor filed suit against the general contractor and the general contractor’s Miller Act surety. The general contractor sought to stay the action.
The subcontract bound the subcontractor to the general contractor to the same extent that the contractor was bound to the owner as to disputes “’in any way relating to or arising from’ any act or omission of the Owner or involving the Contract Documents provided by the Owner.” Similarly, the subcontractor was bound by “any and all preliminary and final decisions or determinations” relating to the contract between the owner and the general contractor. Importantly, the subcontract also provided that if the dispute between the subcontractor and the general contractor related to or arose from an act or omission of the Owner, the dispute process between the subcontractor and the contractor “will be stayed” until the dispute resolution process between the general contractor and the owner was completed.
The motion to stay was initially decided by a magistrate judge who denied the stay. In reaching this decision, the magistrate judge assessed the relative prejudices to the parties and determined that a stay was not appropriate. However, the magistrate judge did not consider the contractual language in its decision. Decisions of magistrate judges in federal court are subject to review by a federal district court judge and, in such review, the general contractor sought to have the magistrate judge’s decision vacated.
The district court judge vacated the magistrate judge’s decision and ordered that the issue be reconsidered by the magistrate judge specifically taking into account the statutory language that discussed a stay. While this does not mean that the stay will be granted (the parties are to file supplemental briefs on this issue by March 1, 2017), the language of the contract was at least sufficient to potentially provide the basis for a stay and had to be considered in determining whether to stay the case.
While the question of whether a court will stay a Miller Act claim remains somewhat uncertain and reliant on the individual facts, these cases show the importance to a general contractor of having contractual language in subcontracts that not only binds a subcontractor to the outcome between the owner and the general contractor, but that also specifically states that the subcontractor’s claims are stayed pending resolution of the claims between the owner and the general contractor. Failing to have such language might mean a general contractor ends up litigating claims with subcontractors before the same claims are resolved with the owner. This can mean substantial additional legal costs that might have been avoidable with a subcontract requiring a stay.