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
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