When a subcontractor goes unpaid on a public project, the subcontractor will almost always demand to be paid by the surety that issued the payment bond for the project. Sureties have many defenses to bond claims.
One of their favorite defenses is that the surety’s liability is coextensive with that of its principal’s (i.e., prime contractor’s) liability under the subcontract. In other words, sureties like to argue that unless the prime contractor is liable under the subcontract, the surety has no liability to the subcontractor for unpaid work.
Many courts have addressed the above “coextensive liability” argument and at least some have generally agreed that the surety’s liability is coextensive with the prime contractor’s liability. But there are courts that have found exceptions to that general rule under the federal law governing performance and payment bonds on most federal projects–the Miller Act.
For example, in United States ex rel. Rogers Helicopters, Inc. v. Sayers Construction, LLC , a federal district court noted that the United States Court of Appeals for the Ninth Circuit has held “the liability of a surety and its principal on a Miller Act payment bond is coextensive with the contractual liability of the principal only to the extent that it is consistent with the rights and obligations created under the Miller Act.” The court also noted that the Miller Act is “highly remedial” and should be construed liberally. Translation–the Miller Act should be interpreted to make sure that subcontractors that provide labor and materials for a project are paid.
Based on the Miller Act’s remedial nature, the court held that the subcontractor was entitled to be paid for labor and materials it provided on a project. This is an interesting holding because earlier in the opinion, the court held that the subcontractor materially breached the subcontract first by failing to complete its work by the deadlines included in the subcontract.
The court found that even though the prime contractor was excused from paying the subcontractor under the subcontract, the prime contractor and its surety remained liable to the subcontractor for the unpaid costs of labor and material the subcontractor accrued while working on the project.
As a result, there would only be two issues decided at trial. The first issue would be the amount of the prime contractor’s damages due to the subcontractor’s failure to timely complete its work. And the second issue would be the amount of the subcontractor’s damages for unpaid labor and materials.
Bottom Line: While sureties like to argue that they are not liable under payment bonds unless the prime contractor is liable to the subcontractor, this is not always the case. This issue will likely turn on applicable case law in the jurisdiction where the project is located.