Unlicensed contractors on federal construction projects are entitled to payment under the Miller Act

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In a recent case involving the intersection of state and federal law – Technica LLC v. Carolina Casualty Insurance Company (U. S. Court of Appeals, 9`11 Circuit, April 29, 2014)  – a federal court held that a California law restricting the right of unlicensed contractors to obtain payment did not apply to actions under the Miller Act.

Historically, unpaid contractors, material suppliers and laborers could place a mechanic’s lien against property where they worked. Mechanic’s liens are a creature of statute and form an encumbrance on the owner’s property. However, the doctrine of sovereign immunity, which stems from the English principle that the king can do no wrong, prevented liens against property of the federal government.

As a result, the U.S. Congress passed the Heard Act in 1894 and the Miller Act in 1935, which require contractors on federal construction projects to obtain performance and payment bonds. Bonds act to ensure the contractor’s performance and payment for subcontractors, material suppliers and laborers. The states have similar statutes through so–called “Little Miller Acts.”

Many states have enacted contractor-licensing statutes that prevent unlicensed contractors from seeking payment. These statutes are enforceable under state law. However, a conflict sometimes arises between state and federal law regarding the application of these statutes.

The Technica matter involved a conflict between a California contractor licensing statute and the Miller Act. The dispute stemmed from a fence project for the U.S. Department of Homeland Security, Immigration and Customs Enforcement regarding a detention facility in El Centro, California. The prime contractor, Candelaria Corporation, obtained a payment bond from its surety, Carolina Casualty Insurance Company (CCIC), as required by the Miller Act. Candelaria subcontracted with Otay Group, Inc. to perform a portion of the work. Otay contracted with Technica LLC to act as a sub-subcontractor.

Between late 2007 and June 2008, Technica provided labor, material and services to the project worth $893,697.77. Technica submitted invoices to Otay and Candelaria for its work but was paid only $287,861.81. This left Technica with an unpaid amount of more than $600,000. In June 2008, Candelaria terminated Otay’s subcontract. In September 2008, Technica filed a complaint in federal court against CCIC, Candelaria and Otay, claiming rights under the Miller Act to recover against the payment bond for outstanding amounts owed and breach of contract.

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Candelaria and CCIC filed a motion for summary judgment against Technica. They argued California’s contractor licensing statute, California Business and Professions Code section 7031(a), provided a complete defense to Technica’s claim under the Miller Act. Section 7031(a) precludes a contractor from bringing or maintaining an action to collect amounts owed if the contractor was not licensed during the performance of its work. Candelaria and CC1C argued that because Technica was not a licensed California contractor, it could not maintain its Miller Act claim. The district court found that Technica lacked a contractor’s license, concluded that California’s contractor license law applied and ruled Technica could not pursue its Miller Act claim for payment. Technica appealed.

The court of appeal reviewed the history and background of the Miller Act. The Miller Act requires general contractors on federal construction projects to furnish a payment bond for the protection of all persons supplying labor and materials in performing the work. The court stated the Miller Act “represents a congressional effort to protect persons supplying labor and material for the construction of federal public buildings in lieu of the protections they might receive under state statutes with respect to the construction of nonfederal buildings.”

The court noted the Miller Act is entitled to a liberal construction and application to affect the Congressional intent of protecting those who provide labor and materials for federal projects.

Candelaria and CCIC argued state law, such as Section 7031(a), could be applied along with the Miller Act. However, the court found enforcement of state licensing requirements against Miller Act claims would wreak havoc on application of the Miller Act. The court examined prior cases by the U.S. Supreme Court and other courts of appeal. These prior cases held that rights and remedies under the Miller Act may not be conditioned by state law.

Brian MorrowBrian Morrow

The court noted federal subcontractors routinely bid on projects throughout the nation and often perform contracts that span multiple states. The court found requiring federal contractors to comply with contractor licensing requirements in any given state would be contrary to Congress’s intent in enacting the Miller Act, which was meant to reduce the hurdles placed on federal subcontractors, labor providers and materialmen in seeking payment. As a result, the court of appeal held that California’s licensing requirement is not a defense to a Miller Act claim, and reversed the judgment of the district court.

The Technica matter highlights an important distinction between state and federal construction projects regarding contractor licensing laws and the right to seek payment under the Miller Act. In non-federal construction projects in California, contractors are barred from seeking payment if they are unlicensed at any time while performing the work. In contrast, in federal construction projects in California, unlicensed contractors are allowed to seek payment pursuant to the Miller Act.

Contractors should be sure to understand their contract terms, conditions and applicable laws, including allowable remedies and defenses to payment in the venue where they are working Without such an understanding, they might find themselves in the unenviable position of having a claim or defense to payment barred by a legal issue, as set forth in the Technica decision.