After a general contractor on a federal government project allegedly terminated a subcontractor’s contract for convenience, the subcontractor sued the payment bond surety for the amounts owed to the subcontractor. In Maguire-O’Hara Construction, Inc. v. Cool Roofing Systems, Inc., the subcontractor claimed the surety was liable for the unpaid remaining balance on the subcontract of nearly $2.6 million, even though the subcontractor was only owed about $360,000 for completed work. The surety filed a motion for judgment on the pleadings seeking dismissal of the subcontractor’s $2.6 million claim, which asked the court to determine whether the subcontractor could assert a claim against the surety for unperformed work. The court’s answer? No way.
The court noted that there are two lines of cases regarding subcontractor Miller Act payment bond claims. Under the first line of cases, if a subcontractor does not complete performance of its work, it cannot obtain its expectation damages, including any damages for unperformed work.
The second line of cases involves situations where a subcontractor fully performs its work, but the general contractor fails to pay. Under that scenario, the surety is obligated to pay the subcontractor the full subcontract balance, even if that amount exceeds the actual cost of the subcontractor’s work. The key distinction between the two lines of cases is whether the subcontractor fully performed its work.
Since the subcontractor did not complete its work, the court concluded that the subcontractor’s claim against the surety fell under the first line of cases. That meant that the subcontractor could not maintain its $2.6 million claim against the surety for work it never performed. Thus, the court dismissed the subcontractor’s claim against surety for the full contract price.
Bottom Line: If you are a subcontractor who believes the general contractor breached the parties’ contract on a federal government project, do not expect the surety to pay for your lost profits unless you fully completed your work. Instead, the subcontractor should focus its efforts on obtaining lost profits on unperformed work from the general contractor that breached the contract.