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The Construction Advantage

Asha Echeverria, Conor Shankman

Court Reaffirms that Pre-Construction Miller Act Waivers are Unenforceable

By: Asha Echeverria

In Pinnacle Crushing & Construction, LLC v. Hartford Fire Insurance Co., No. C17-1908JLR, 2018 WL 1907569 (W.D. Wash. 2018), the court reaffirmed that federal law does not recognize pre-construction waivers of rights under the Miller Act (40 U.S.C. § 3131 et seq.).

Here, the plaintiffs completed work on a U.S. Army Corps of Engineers construction project to repair an airstrip in Yakima, Washington. As this was a federal project, the general contractor procured a Miller Act payment bond from the defendant surety for the benefit of subcontractors and sub-subcontractors.

In its agreement with the defendant general contractor, the subcontractor agreed to be bound to the dispute resolution provisions of the federal contract between the general contractor and the Corps and to be “bound to the procedure and final determinations as specified in any such Disputes clause.”

Similarly, in its agreement with the subcontractor, they agreed to be bound to the “decisions, findings, determinations, or awards made thereunder by the person so authorized in the Main Contract” and further, the sub-subcontractor agreed that “it will not take, or will suspend, any other actions” – including Miller Act claims – “and will pursue no independent litigation with respect thereto, pending final determination of any dispute resolution procedure between” the general contractor and the Corps.

On June 7, 2017, the Corps terminated the general contractor and withheld payment. As a result, both plaintiffs brought suit against the payment bond under the Miller Act, with the sub-subcontractor contending that it was owed over $1 million and the subcontractor demanding over $2.5 million.

The defendant’s general contractor and surety attempted to dismiss the Miller Act claims, asserting that the plaintiffs’ agreement to follow the dispute resolution provisions of the federal contract constituted a waiver of rights under the Miller Act. The court disagreed and reaffirmed that a waiver of the Miller Act rights must be clear and explicit, in writing and signed by the person who is waiving its rights, and can only be executed after the person has furnished the work and materials. Given this, the court held that the provisions in the subcontract and sub-subcontract were not valid waivers of Miller Act rights and permitted the matter to proceed through litigation.

So just remember, if you are in a dispute with an owner, general contractor, subcontractor, or surety the contract usually will be enforced as written, unless the law says it will not. We are always happy to talk to you about those very special circumstances when the law trumps contract language.

Do We Have an Understanding? Memorandums of Understanding are Enforceable as Contracts

By: Conor Shankman

In Hi-Tech Elec., Inc. of Delaware v. T&B Constr. & Elec. Servs., Inc., No. CV 15-3034, 2018 WL 2268168 (E.D. La. May 17, 2018), a breach of a memorandum of understanding (MOU) resulted in a finding of damages, after the teaming of two subcontractors imploded.

Here, the plaintiff Hi-Tech Inc. Electric, Inc. (“HTE”) brought suit against the defendant T&B Construction and Electric Services, Inc. (“T&B”) for breach of contract resulting from violations of a memorandum of understanding the two subcontractors had executed with regard to their team effort to provide electrical services in support of construction of a Veterans Affairs project in New Orleans (the “VA Project”).

T&B, a small business owned by a disabled veteran, teamed up with the larger HTE to submit a competitive bid for the VA Project. They entered into two successive teaming agreements, and were eventually awarded the bid, and began work on the VA Project in early 2012. While HTE was responsible for the costs of the work performed, including T&B’s labor costs, T&B was the party that requested and received payments from the general contractor for the VA Project.

Over a year after commencing work, HTE and T&B entered into the MOU which detailed the parties’ relationship and respective duties. Among other things, the MOU provided that:

  1. “Payments for costs associated with the Work shall be reimbursed within 7 (seven) business days,” and;
  2. “Upon receipt of final payment for the Work, any profit or loss arising therefore shall be allocated seventy percent (70%) to HTE and thirty percent (30%) to T&B.”

In early 2015, the parties’ relationship grew “acrimonious,” and they attempted to negotiate a tiered subcontract to replace the MOU. After negotiations failed, T&B notified HTE that it considered the MOU invalid and unenforceable. Shortly thereafter, the general contractor found that T&B had defaulted on a portion of the work, and HTE took over that scope of work. T&B withheld any further payments to HTE, and HTE brought suit for breach of the MOU.

In response, T&B argued that the MOU was unenforceable for five distinct reasons, each of which was dismissed by the court.

  • First, T&B argued that the MOU was unenforceable for failure to include a stipulated price. The court rejected this argument, holding that a contract based on costs and percentages is equally valid to one based upon a lump sum.
  • Second, T&B alleged that the MOU lacked a “lawful purpose” after the general contractor determined that the affiliation between T&B and HTE precluded T&B from qualifying as a disabled-veteran-owned small business. Regardless, the MOU retained legal purpose – it set forth the business relationship between the parties on the VA Project.
  • Third, T&B argued that the MOU is unenforceable because it deviated from T&B’s proposal to the general contractor without the latter’s approval. The court reasoned that even if the MOU did deviate in some manner, the deviation would lead to a contractual issue between T&B and the general contractor, not between T&B and HTE.
  • Fourth, T&B argued that the MOU was unenforceable because it violated federal rule 13 C.R.F. § 121.103. The court dismissed this argument, reasoning that the statute cited did not provide grounds for the invalidation of a contract.
  • Fifth and finally, T&B argued that it signed the MOU under duress, but then it failed to demonstrate the requisite elements to support this claim.

Entering into agreements, even on napkins or through handshakes, can have lasting effects on you and your business. For agreements or contracts of any importance, please give us a call. We would be happy to review them to make sure that you are getting what you expect, and not agreeing to more than you should.