Surety Bonds 101: Fundamentals in Miller Act Protections

Understanding state Little Miller Acts regarding bond coverage will help contractors estimate risk.

by Timothy R. Hughes, Esq., principal of the Virginia law firm of Hughes & Associates, P.L.L.C., and Bradley J. Hansen, Esq., an attorney with the firm. Tim and Brad specializes in construction, franchise and business related matters, as well as complex civil litigation.

As most contractors and subcontractors know, payment and performance bonds must generally be secured before commencing work on federal or state public projects. The federal law embodying the requirement that bonds be in place on public projects is known as the Miller Act of 1935. Most state and local governments have adopted similar legislation, often referred to as "Little Miller Acts."

The Miller Act requires that all general contractors post a performance and a payment bond on projects that exceed $100,000. The performance bond, in theory, is issued to protect the owner to ensure completion of the project. In the event a claim is made against the bond, a surety may have various defenses that permit it to avoid finishing the project. In contrast, a payment bond is issued by a surety to protect unpaid subcontractors and suppliers.

Who Is Protected by the Miller Act? The Miller Act, provides that the payment bond protection applies to "first tier" subcontractors. Subcontractors and suppliers who contract directly with a general contractor are entitled to the bond's protection. In addition, certain second tier parties who supply labor or materials directly to a subcontractor performing work are also likely protected under the bond. Second tier parties who contract with a material supplier rather than with the subcontractor, however, do not receive protection. Similarly, third tier subcontractors or suppliers receive no protection whatsoever. The question of whether a party is a subcontractor or a materialman has naturally been litigated and continues to be debated across the country.

Subcontractors should also familiarize themselves with the extent of payment bond protection in their specific states in relation to the Little Miller Acts. The same question of exactly how far the payment bond protection extends is also an issue on state projects and can vary greatly from state to state.

Notice and Limitations Periods Under the Miller Act, first tier subcontractors and suppliers are not required to provide notice of a claim to the prime contractor. Second tier claimants must give written notice of the claim within 90 days after the last labor or materials were furnished. The notice must contain both the amount claimed and the name of the party to whom the material or labor was provided. These requirements must be adhered to strictly. As a practical matter, it is prudent to send the notice even if you believe it is not required.

In addition to notice requirements, the Miller Act obligates that a payment bond claimant cannot file suit until the expiration of 90 days after the last material or labor was provided to the project. As a further limitation, a claimant must file its lawsuit to perfect its claim within one year of the last labor or material being provided to the project or the claimant risks losing its bond claim.

Under the various Little Miller Acts, you can also expect to have state specific notice and limitations provisions. You may also have contractual notice and limitations periods contained in the individual bonds that were issued on the project. It is always important to be familiar with the laws and rules that apply in your state to the particular bonds on your project.

Conclusion In the world of contracting, it is extremely important to understand the basics of bonds and bond claims. After all, if you meet certain requirements under the bonds, you may be presented with an opportunity to get paid where you otherwise would not.

It is critical to know and understand the terms of the applicable bonds on your project and whether the bond coverage extends to you and your work. Indeed, knowing exactly how far bond protections extend and what obligations are imposed on you under a bond is extremely valuable in assessing the risks associated with a particular project and deciding whether the opportunity is right for you.

This article is not intended to provide legal advice, but to raise issues on legal matters. You should consult with an attorney regarding your legal issues, as the advice you may receive will depend upon your facts and the laws of your jurisdiction.