Payment Bond Surety Cannot Use Payment Milestone to Avoid Liability on Miller Act Claim

United States ex rel. VT Milcom, Inc. v. PAT USA, Inc., Civil Action No. 5:16-cv-00007, 2017 U.S. Dist. LEXIS 109572, at *20 (W.D. Va. July 14, 2017).

The disputes in this case stem from a United States Army Corps of Engineers (“USACE”) award to PAT USA, Inc., (“PAT”) to perform minor military upgrades to U.S. facilities in Qatar. PAT provided a payment bond naming an individual as the surety. As further security, PAT also provided an Irrevocable Trust Receipt by a bank. PAT soon entered into a subcontract with VT Milcom, Inc. (“Milcom”), for the installation of telecommunications systems at the project for an adjusted contract value of $485,684. During the Project, PAT informed Milcom that the prime contract was on hold and that USACE was halting work. The following day, USACE terminated for default PAT’s contract for reasons unrelated to Milcom. Without Milcom knowing of the termination, PAT arranged for the delivery of the balance of materials due under Milcom’s subcontract. PAT subsequently informed Milcom of the USACE’s termination and wrongly asserted that Milcom had somehow defaulted in its performance obligations.

Milcom invoiced PAT a total of $202,727.48 for the work it completed; however, PAT only paid $91,617.16, which constituted 20% of the fixed price. Milcom sued PAT along with its sureties for breach of contract (under which Michigan law applied), breach of surety obligation, and a claim for quantum meruit. After the parties engaged in discovery, Milcom moved for summary judgment against both the general contractor and the sureties.

As to the breach of contract claim against PAT, the court was constrained to apply the express terms of the termination provision of the Subcontract, which stated: “[i]n the event of Owner termination, the contractor’s liability to the Subcontractor shall be limited to the extent of the Contractor’s recovery on the Subcontractor’s behalf.” The court was loathed to enforce the contract as written, suggesting that PAT acted unprofessionally, and misled Milcom. However, it noted that Milcom was bound by the terms of the contract it signed, and was not entitled to recovery against PAT because PAT had not recovered the full subcontract amount from USACE.

As to the Miller Act claims, Milcom fared much better and was entitled to summary judgment in the full amount in question. Interestingly, the court dove into an analysis of whether a surety and its principal could rely on pay-when-paid or pay-if-paid provisions to avoid liability under the Miller Act. Based on the terms of the Milcom’s subcontract, the Court determined that a 20% payment milestone was more of a timing provision (i.e., pay-when-paid) and not a measure of recovery (i.e., pay-if-paid) provision. This meant that the payment milestone schedule could not be used by the surety as a shield to avoid liability under the payment bond and Miller Act.