Home | |
The Miller Act: Turning Logic on Its Head in Construction Law
Navigating the world of small business is tough enough. If your client is also involved in construction, they will be the first to tell you that small construction companies and contractors have been in a particularly tight spot over the past few years, due to the economy-driven decrease in demand for new construction projects. In addition, even if a construction company or contractor takes a job, there are risks that a landowner who may lack financial stability will not pay. For construction companies or contractors fortunate enough to land a coveted “government contract,” while they do not have to worry about their client going bankrupt in the middle of the job, they do have to worry about some seemingly illogical, and potentially very costly, statutory requirements.
In simple terms, when a contractor receives a state or federal construction project large enough that the contractor cannot complete every aspect of the work itself, the contractor becomes the “general contractor,” which is responsible for the overall completion of the project, and engages subcontractors to complete specific portions of work on the project. The subcontractors then engage suppliers for materials. When a project is awarded to a general contractor, the government requires that the general contractor and its subcontractors and suppliers each be bound by certain statutory provisions. For federal contracts, these statutory requirements are known as the Miller Act. A majority of States, including Maryland, have enacted their own statutes to govern state contracts. For example, Maryland has enacted the “Little Miller Act,” which is patterned after the federal Miller Act’s requirements.
Rather than bore you with the technicalities of the Little Miller Act, I will refer you to Title 17, Subtitle 1, of the State Finance and Procurement Article. In general terms, however, one of the primary purposes of both the Miller Act and the Little Miller Act is to ensure that subcontractors and suppliers are paid for all labor and materials provided for use on the project. While this sounds like a reasonable goal, given the reality of the general contractor, subcontractor, and supplier financial and contractual dynamics, it can cause some practical problems.
Putting the government contracting scenario into practice, if a general contractor enters into a contract with a plumbing company (subcontractor) to install all plumbing in a building for which the general contractor is responsible for under a government contract, that plumbing subcontractor will most likely contract to buy pipe and other supplies from a supplier, which may have no relationship, contractual or otherwise, with the general contractor. Because of the economics of the government contract lifecycle, the subcontractor will not likely pay the supplier for the pipe when it is purchased. Instead, the supplier will extend credit to the plumbing subcontractor for the pipe, and that credit may significantly exceed what the subcontractor would actually be able to pay at the time. Importantly, the general contractor has no independent right to control or have any input on the terms of this subcontractor/supplier agreement (unless, of course, the general contractor had a preexisting agreement with the subcontractor to the contrary).
Now, say you have a plumber subcontractor that entered into a contract under which the supplier will provide pipes under a line of credit, personally guaranteed by the owner of the plumbing company, and to which the general contractor is not a party. The plumber subcontractor then orders pipe, installs it in the building, and receives a check from the general contractor to pay for the installation and materials, which the plumbing subcontractor is supposed to use to pay the supplier. This seems like a reasonable business model, but, what happens when the plumbing subcontractor goes out of business without paying the supplier its rightful portion of the check? In a simplified scenario, the Miller and Little Miller Acts make the general contractor responsible for ensuring that all parties that provide goods or services for the project are paid. Indeed, it would appear the general contractor fulfilled this obligation, and that because the plumbing subcontractor withheld payment, the supplier’s recourse should be against the plumbing subcontractor, especially because of the line of credit and personal guarantee.
Normally, it is perfectly reasonable for the general contractor to pay the subcontractor for all services rendered, so in turn the subcontractor will pay all suppliers that it used. But, if the subcontractor has gone out of business and the supplier falls within the guidelines of the Acts, the Miller and Little Miller Acts make the general contractor responsible for ensuring that the supplier is paid for all goods that it supplied in furtherance of the contract, regardless of the fact that the general contract is not a party to the contract under which the goods were supplied, whether the general contractor has already paid the subcontractor, or whether excessive and unused goods were supplied.
Now, there are defenses to a supplier’s claim for payment under the Miller and Little Miller Acts, and not every supplier of materials is entitled to payment by the general contractor. However, it surprised me to discover that standard contract and tort law principles are not among the defenses available to Miller and Little Miller Act defendants. In fact, I recently learned about this first-hand when defending against a complaint filed by a supplier against a general contractor.
The moral of this story is that, while logic and common sense—and what you learned in law school—may often be a good place to start in analyzing a problem, there are some exceptions. In dealing with this case as a new attorney, I discovered that it is never good to assume the general rules apply. Specifically, cases involving the federal Miller Act, Maryland’s Little Miller Act, or any other similar state Acts governing the government contracting arena require digging deeper into statutory law to discover these exceptions and ensure your client is properly protected.