Setoff by Payment Bond Surety Rejected by EDVA

05/25/2011

Many subcontracts contain setoff provisions, even respecting other projects. Those allow a contractor to setoff obligations it is owed on other projects by the same subcontractor on unrelated projects.

The Eastern District of Virginia, Alexandria Division, in U.S. ex rel. Acoustical Concepts, Inc. v. Travelers Cas. & Sur. Co. of Amer., 635 F.Supp.2d 434 (2009), recently looked at the question of whether the payment bond surety of a contractor who had included that kind of setoff clause in its subcontract could avail itself of the setoff right and not make payment for labor or materials that would otherwise be due under a project’s payment bond, and concluded the surety could not avail itself of such setoff right.

The court recognized that the subcontractor had agreed to the setoff right, but held that since the Miller Act does not reference such a setoff right, nor does the payment bond, then the surety was regardless liable for the full amount because that was the value of the labor and materials furnished for the bonded project. This makes for an interesting result by which the surety’s liability is greater than that of its principal, the contractor. Fairness regarding that result depends upon the eyes of the beholder, but the result is consistent with similar analysis regarding the affect of a subcontract’s pay if paid clause, so at least there’s consistency.

However, because the result seems to undermine the well established surety principle that a surety stands in its principal’s shoes, the implications on other cases, including state Little Miller Act cases, remains to be seen.

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