November 07, 2005

The scenario is not uncommon. An unpaid subcontractor on a public construction project seeks to bring a claim against the general contractor’s statutorily mandated payment bond, only to realize that no such bond exists. Although many state “Little Miller Acts,” which are modeled on the Federal Miller Act,¹ contain provisions requiring general contractors to post payment and performance bonds for public projects exceeding a certain dollar threshold, oftentimes a municipality will fail to require the general contractor to post such a bond.

Sometimes the failure is due to a lack of vigilance on the part of the municipality, while other times it may be based upon an erroneous belief that the project is exempt from bonding requirements. As a result, the subcontractor, who cannot lien against public property, is deprived of the security envisioned by the statutory bonding scheme. Furthermore, any judgment obtained by the subcontractor against the defaulting general contractor, in the absence of the security provided by a mechanic’s lien or payment bond, may be worthless. Faced with such a scenario, some subcontractors have sought recourse against the municipality for failure to ensure that proper bonding is in place.

The issue of whether a municipality may be held liable to a subcontractor for failing to require proper bonding in accordance with a state Little Miller Act has long been a topic of interest. Although some state statutory schemes provide an express cause of action against the municipality for failure to require bonds, they are in the minority. In states not having an express right of action, the general rule is that the municipality may not be held liable for failing to ensure that proper bonds are in place. See, e.g., O & G Indus., Inc. v. Town of New Milford,² where the Connecticut Supreme Court held that a municipality could not be held liable to a subcontractor for damages arising from its failure to secure a statutorily required payment bond from the general contractor that it hired to perform a paving project. Rather, the court held that the general contractor was solely responsible under the statute for furnishing the bond.³

Recently, in a well-reasoned opinion, the Supreme Court of Alaska, in Imperial Mfg. Ice Cold Coolers, Inc. v. Shannon,⁴ followed the majority rule in holding that a subcontractor may not assert a cause of action against a municipality for failure to require the posting of bonds as required by Alaska’s Little Miller Act, when such a right of action is not expressly stated in the statute. In Imperial Mfg., the plaintiff, a subcontractor, supplied two panel houses to a general contractor for a public project owned by the Lower Kuskokwim School District, but was not paid. The contract between the School District and general contractor expressly stated that the general contractor would not be required to post a bond. Therefore, the failure to require bonding was based on the School District’s erroneous interpretation of the statute.

The subcontractor filed suit against the School District and others asserting claims for failure to require the posting of bonds by the general contractor in accordance with Alaska’s Little Miller Act. The matter came to the Supreme Court of Alaska on appeal from summary judgment entered against the subcontractor.

On appeal, the issue presented to the Supreme Court of Alaska was whether the state’s Little Miller Act provided a private right of action for subcontractors to sue municipalities for their failure to ensure a general contractor’s compliance with the statute’s bonding requirements. In addressing this issue, the court first took note of the fact that the purpose of the state’s Little Miller Act is to provide payment security to subcontractors on public projects who are not afforded the protection of mechanic’s liens. Nevertheless, the court upheld the Superior Court’s grant of summary judgment against the subcontractor, holding that accepting the subcontractor’s claim “would be contrary to the premise on which the Little Miller Act is based, which is that neither the government nor government property may be charged by those with whom the government has no contractual relationship.”⁵

In reaching this holding, the court conducted an informative survey of the case law from the various jurisdictions that have addressed the issue. The court also noted that, under the federal Miller Act, the government has not been held liable for its failure to obtain bonds from its contractors.⁶ The court stated that:

The purpose of the Miller Act is to ensure that subcontractors have some remedy if they are not paid, since on public projects they cannot protect themselves by filing a lien. The Act, however, creates no affirmative rights against the government. The government does not recognize or deal with the sub-contractor and has no obligation to him for work performed or materials furnished. A plaintiff’s sole remedy under the Miller Act is to institute suit against the prime contractor or the surety.⁷

Therefore, although the purpose of the Little Miller Act is to provide security to subcontractors who are unable to file a mechanic’s lien, the Supreme Court of Alaska followed the majority rule in concluding that the interest of the municipality in avoiding liability to those without direct contractual privity outweighs the goal of protecting subcontractors.

In conclusion, when municipalities neglect to require the posting of a payment bond, subcontractors and suppliers will very likely find themselves with no security for payment, and no recourse against the municipality. Under such circumstances, the subcontractor may only possess worthless claims against an insolvent general contractor.

¹ 40 U.S.C. § 3131.

² 229 Conn. 303, 640 A.2d 110 (1994).

³ Notably, the Connecticut Legislature has recently proposed a bill (Raised Bill No. HB-948, “An Act Concerning The Failure Of A Municipality To Obtain A Bond From Certain Contractors”) which would create an express cause of action by a subcontractor against a municipality for failure to secure the proper bonding. For a more detailed analysis of Raised Bill No. HB-948, please see the Legislative Update Section of this issue.

⁴ 101 P.3d 627 (Alaska Nov 19, 2004).

⁵ Id. at 630.

⁶ Id. at 630.

⁷ Id. at 630.