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USGNN Original StoryGeorgia Court Protects Subcontractor's Right of Recovery

A recent court case in the U.S. District for the Northern District of Georgia, Atlanta Division, McKenney's Inc. v. Government Technical Services LLC, found that a pay-when-paid clause in a subcontract does not interfere with a subcontractor's right of recovery under the Miller Act.

Upon completing work for the general contractor Government Technical Services LLC (GTS) in December 2006, McKenney's Inc. requested payment. When it had still not been paid in July 2007, the subcontractor notified Gray Insurance, the company that issued the payment bond for the project.

According to court documents, "The Miller Act requires any general contractor awarded a government contract for more than $100,000 to secure two bonds, a performance bond to protect the government, and a payment bond 'for the protection of all persons supplying labor and material in carrying out the work provided for in the contract.' The purpose of the Act is to ensure payment to subcontractors that the prime contractor fails to pay. A subcontractor working on a project for which a payment bond is issued may bring suit if it has not been paid in full within ninety days of completing its work, and may collect judgment on the bond for the amount due."

When the insurance company did not pay the subcontractor, McKenney's filed suit against both GTS and Gray Insurance under the Miller Act. Gray Insurance argued against its liability based on the pay-when-paid provision in the contract between McKenney's and GTS. As Judge Beverly Martin's summary states, "The pay-when-paid clause is a provision in the subcontract that specifies that McKenney's will be paid by GTS only when GTS is paid by the government. Gray Insurance argues that this clause precludes its liability to McKenney's under the payment bond as a matter of law."

Martin ultimately ruled that, "A surety's liability is governed by the obligations of the prime contractor under the contract, however not to the extent that a surety may avoid its obligations imposed by the Miller Act. A contract provision that would deny the subcontractor its federal remedy under the Act cannot be used as a defense by a surety."

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