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Since 1935, performance and payment bonds on federal construction projects have been required by the Miller Act, 40 U.S.C. 270a, et. seq. Other than increases in the contract value for which bonds are required, the Miller Act had not been amended in any substantive aspect until August 17, 1999, when President Clinton signed the Construction Industry Payment Protection Act of 1999.

The 1999 Act, which was the result of bargaining among many industry groups, makes three changes to the current law. First, it raises the amount of the payment bond to 100 percent of the contract amount unless the contracting officer finds that such a bond is unavailable. Prior law had a formula to set the minimum amount of the payment bond at four to five percent of the contract amount but with a cap of $2.5 million. In actual practice, the government had not exercised its authority to require more than this minimum, and for large projects $2.5 million could be inadequate.

The Miller Act requires a claimant not in privity of contract with the prime contractor furnishing the bond to give 90 days written notice by registered mail to the prime that it is looking to the bond for payment. The courts consistently held that any means that resulted in delivery was acceptable, and the registered mail requirement came into play only if the contractor denied receipt of the notice. With presumed knowledge of that interpretation of prior law, Congress amended the statute to require a written, third party verification of receipt.

On could argue that the 1999 Act has changed the law, and regular mail will no longer be sufficient even if receipt were admitted. On the other hand, the clear intent of the amendment is to increase protection for subcontractors and suppliers not to reduce it. When the issue reaches the courts, they will probably hold that the current rule continues in force and any method of delivery is sufficient if the contractor admits receipt.

The third change voids waivers of Miller Act rights unless made in writing after the claimant commences work on the project. A waiver clause in a subcontract is void unless the subcontract is signed after the subcontractor started work.

An interesting question is whether this provision voids arbitration clauses or provisions requiring that disputes be passed through to the government. That was not the intent, and the legislative history explicitly states that arbitration or other dispute resolution clauses are not voided. It also states, however, that issues arising under the Miller Act (timeliness, notice, etc.) are to be decided exclusively by the U.S. District Court. The claimant must sue the surety on the bond within the one year limitations period, and the court will then stay the suit pending resolution of the amount owed the subcontractor through the arbitration. The surety’s liability for that amount would still be decided by the U.S. District Court.

About the Author: Edward G. Gallagher, is an attorney is the Virginia office of the law firm of Wickwire Gavin, P.C.. His legal practice emphasizes fidelity and surety law and construction contracts. He may be reached at 8750 Boone Blvd., Vienna, VA 22181; Phone (703) 790-8750 or by e-mail at egallagher@wickwire.com. Copyright Ó 1999, Wickwire Gavin, P.C. Originally published in the Fall 1999 issue of the firm’s legal newsletter, “Legal Foundations,” and reprinted here at ConstructionRisk.com with permission.