Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 2002, Part II: This Roundup of Recent Cases Covers Public and Private Construction Bonds and Financial Institution Bonds

Edited by Charles W. Linder Jr.


A. Bonds under Federal Laws

Miller Act claims generally arbitrable under Federal Arbitration Act, but terms of standard AIA contract expressed parties' intent to exclude it from arbitration.

In American Sheet Metal v. Travelers Insurance Co., (1) the U.S. District Court for the Eastern District of Virginia ruled that the parties to a subcontract had expressed their intention to exclude Miller Act claims from arbitration.

American Sheet Metal, a subcontractor that provided labor and materials to replace a roof on a building at the Norfolk Naval Shipyard, asserted a Miller Act claim for $180,545 against Travelers and the general contractor, Mary K. Shah Inc. They counterclaimed for liquidated damages of $480,000, alleging that the subcontractor had delayed completion of the project. In addition, they moved to stay the proceedings and asked the court to require the parties to arbitrate, relying on an arbitration clause in the AIA contractor-subcontractor standard agreement form, Article 6.1 of which stated that the parties had agreed that any "controversy or claim between the contractor and the subcontractor arising out of or related to this subcontract, or the breach thereof, shall be settled by arbitration."

While noting that the Federal Arbitration Act generally makes a Miller Act claim arbitrable, the court said the question before it was whether other language in the subcontract expressed the parties' intent to exclude Miller Act claims from arbitration. The court found that Article 6.5 specifically excluded from arbitration all rights and remedies arising from federal law. Article 6.5 stated: "This Article 6 shall not be deemed a limitation of rights or remedies which the subcontractor may have under federal law ... unless such rights or remedies are expressly waived by the subcontractor." The Miller Act, which is federal legislation, was thus excluded unless expressly waived.

The court found that American Sheet had not expressly waived its right to seek redress in federal court, and the motion to compel arbitration and stay was denied.

Subcontractor denied recovery under Miller Act and Little Miller Acts. Even though project was international airport, party contracting with general contractor was not federal or state agency and therefore subcontractor not involved with public work.

In Blumenthal-Kahb Electric v. American Home Assurance, (2) Blumenthal, an electrical subcontractor on a project to build a pedestrian tunnel at Washington Reagan Airport in Virginia, invoked both the Miller Act and Virginia's Little Miller Act in suing on the general contractor's payment bond to recover payment for work done and materials used on the job. The surety moved to dismiss the lawsuit on the basis that neither the Miller Act nor the Virginia statute applied because the manager of the airport, the Metropolitan Washington Airport Authority, which was the contracting party with the general contractor, San Jose Construction Co., was not a part of the federal or Virginia state governments.

The U.S. District Court for the Eastern District of Virginia agreed, granting the surety's motion to dismiss, and further ruled that the tunnel was not a public work of either the United States or Virginia and therefore not eligible for Miller Act or Little Miller Act protection. In addition, the court found that the Virginia statute specifically exempted the airport authority from the requirement for contractors to furnish a bond pursuant to the Little Miller Act.

B. State and Local Bonds

1. Procedural

Claimant under Connecticut's Little Miller Act did not comply with statute's 180-day notice requirement.

Millgard Corp. v. White Oak Corp., (3) involved Connecticut's Little Miller Act payment bond statute, C.G.S.A. [section] 49-42(b), and its requirements concerning written notice. The case arose from a dispute over payment for excavation subcontract work Millgard performed at a state highway construction project in New Haven, Connecticut. Millgard sought to collect payment under the bond National Union Fire Insurance Co. of Pittsburgh had issued on behalf of White Oak, the general contractor. National Union, in response, moved for summary judgment, which the U.S. District Court for the District of Connecticut granted.

Millgard began work on the project October 31, 1997. It met with the Connecticut Department of Transportation and White Oak in September 1998 and alerted them that differing site conditions entitled it to suspend work. After several months, White Oak terminated Millgard, in part because of the latter's refusal to return to work. Millgard admitted that it last worked on the project no later than September 7, 1999. National Union received written notice of Millgard's claim on the bond on May 10, 2000.

National Union denied the claim as untimely under the Connecticut statute, which requires written notice within 180 days of when the claimant last performed labor or furnished material on a project. Millgard admitted that it failed to meet the statutory time limit, but it contended that National Union should be estopped from asserting lack of notice as a defense because it had actual notice of Millgard's claim and because White Oak, acting in concert with National Union, misled Millgard into believing that disputes over contract payments would be resolved and that it would be returning to work.

Relying on decisions involving the federal Miller Act, the court rejected Millgard's arguments, finding that National Union had not communicated with Millgard and that White Oak's representations could not be attributed to National Union. Therefore, there was no evidence that the surety had misled Millgard. Even assuming that White Oak's statements could be attributed to National Union, there was a lack of specific representation directed at preventing Millgard from filing proper timely notice. Finally, the court determined that any alleged misrepresentation by White Oak was not made after September 7, 1999, so there was no indication that Millgard relied on such misrepresentation to its detriment.

2. Substantive

Second Circuit certifies to New York Court of Appeals question whether professional provider of employee leasing services is proper claimant under labor and materials bond.

In an opinion applying New York law after a choice-of-law analysis, the Second Circuit overruled the decision of the lower court granting summary judgment for the surety and certified to the New York Court of Appeals the question of whether Tri-State Employment Services Inc., a professional provider of employee leasing services, was a proper claimant under labor and materials surety bonds. Before throwing the matter into the lap of the state court, however, the court in Tri-State Employment Services Inc. v. Mountbatten Surety Co. (4) engaged in a lengthy discussion of Tri-State's role and considered all possible views of its status under the bonds.

Team Star Contractors Inc., a New York construction company, entered into a contract with O'Ahlborg & Sons Inc. to perform work at a site in Quincy, Massachusetts. Mountbatten issued two labor and material bonds, one for $5 million and a second for $1,309 million. The bonds defined a claimant as "one having a direct contract with the principal for labor, material, or both, used or reasonably required for use in the performance of the contract. …

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