Subcontractor’s Challenge to Arbitration of Miller Act Claims Fails

Construction and Procurement Law News, Q4 2017

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In 1999, Congress amended the Miller Act to ensure subcontractors don’t unwittingly sign away their right to their “day in court,” but according to at least one federal court, a day in front of an arbitration panel will suffice.

In the recent case of U.S. v. International Fidelity Insurance Company out of the Federal trial court for the Southern District of Alabama, subcontractor Bay South sued general contractor Stephens for failure to pay all amounts owing under contracts to perform work on two federal construction projects. In addition to its claims for breach of contract and violation of the Alabama Prompt Pay Act, Bay South filed suit on the payment bond under the Miller Act. When Stephens sought to compel arbitration of all of Bay South’s claims pursuant to the arbitration clause contained in the subcontract, Bay South took an interesting stance: While it did not contest the arbitrability of its other claims, Bay South argued that the Miller Act “rejects arbitration,” requiring its suit on the payment bond to be resolved in federal court. The trial court disagreed.

Courts have widely held that the Federal Arbitration Act requires courts to enforce arbitration agreements just as they would any other contractual agreement, even when the claims in the suit are based on federal statutes. The exception to this rule is if Congress has overridden the mandate, which a plaintiff must show either by the plain language of the statute or evidence of congressional intent.

Since 1935, the Miller Act has required construction contractors seeking to perform work for the federal government to supply a payment bond and performance bond before any contract exceeding $100,000 is awarded. Congress amended the Act in 1999 to add a provision that states:

“[a] waiver of the right to bring a civil action on a payment bond [is] … void unless the waiver is—

(1) in writing;

(2) signed by the person whose right is waived; and

(3) executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.”

40 U.S.C. § 3133(c). Bay South argued that this provision – though hardly new to the Miller Act – forbids arbitration of its Miller Act claim because the agreement to arbitrate constitutes a waiver of Bay South’s “right to bring a civil action.”

The Court declined to read Section 3133(c) as an unequivocal ban on arbitration, noting that the provision did not mention arbitration specifically. (When considering similar provisions in the past, the United States Supreme Court has found only those statutes that expressly mention arbitration to prohibit arbitration.)

Digging deeper, the Court reviewed the amendment’s legislative history to determine if its purpose was – as the subcontractor asserted – “to protect sub-contractors from the greedy government contractors who insert unconscionable boilerplate arbitration clauses into their sub-contracts.” Unfortunately for Bay South, the House Committee on Government Reform’s report explicitly stated that the amendment would not void agreements to arbitrate.

Ultimately, the Court echoed the Supreme Court’s conclusion in similar statutory-claim cases that, as long as plaintiffs have a remedy at arbitration, the statute’s purpose has been met. For contractors working on government projects, this means that, unless you specifically exclude them from the scope of the arbitration clause, payment bond issues are arbitrable.