Public/Private Construction Projects - Part III

For the 2010 ABA Forum on the Construction Industry MidWinter Meeting, held January 27-29, 2010 in San Francisco, Guest-bloggers Bob Carney and Lisa Sparks prepared a paper on hybrid public/private construction projects. The paper, Is It Public or Not? was presented by Bob Carney at the MidWinter Meeting on Thursday, January 28. Over the course of three posts, the two of them are guest-blogging here on the BRAC Blog, reviewing the hybrid public/private projects covered in their paper and discussing the relevance of such hybrids to BRAC initiatives.

The remedies available to the unpaid contractor or subcontractor on a hybrid project and the procedures by which those remedies can be enforced unfortunately remain unclear and unsettled. In many situations, it is uncertain whether mechanic’s liens, prompt payment acts, or construction trust laws will apply to hybrid projects. Payment bonds on a federal hybrid project may be governed by the Miller Act, but they might instead be treated as private project bonds, governed by applicable state law, and there is no bright line test for making this determination. Presumably, as hybrids grow more prevalent, court decisions providing clarity will be handed down. Until then, it is imperative that construction contractors proceed with caution and ensure compliance with all potentially applicable notice and claims bar dates.

Mechanic’s Liens

Whether a contractor can get a mechanic’s lien on a hybrid project remains murky and will likely vary from case to case, depending on the specific nature of the project and, where the project is on a federal installation, whether and how the state in which the property lies consented to the purchase of such property by the federal government. The mechanic’s lien is an important asset in the arsenal of a construction contractor who wants to get paid, making the real property underlying the project security for the debt owed to the contractor for his work on the property. The government’s interest in real property is generally not lienable. However, where a contactor performs work on a project lying on land leased from the federal government (as in an Enhanced Use Leasing (“EUL”) project), the contractor conceivably could obtain a lien on the leasehold held by the developer/lessee; most states permit such liens where the work is performed pursuant to a contract with a lessee.

But state mechanic’s lien laws may not apply on federal enclaves. The application of state laws on federal enclaves within a given state is a complex issue. What follows is an oversimplification for present purposes. Article I, Section 8, Clause 17 of the U.S. Constitution provides that federal law exclusively applies on land held by the federal government for military installations “and other needful buildings” where the state legislature has consented to the purchase of such lands. Without the consent of the state legislature, in contrast, all state laws apply, provided such state laws do not intrude upon the federal government’s sovereignty. States are permitted to condition their consent to the federal purchase of land, and they often do, seeking concurrent jurisdiction over the property. The states’ conditions are far from uniform, and the conditions imposed by a state typically change over time (Maryland has enacted at least four different consent statutes over the last century or so, each with differing terms; the consent in effect at the time of the purchase is determinative as to application of state laws on the purchased land), so the applicability of state law on a federal installation is generally dependent upon where and when the federal government acquires the land. The bottom line is that a contractor on a hybrid project on a federal installation cannot be sure it has any mechanic’s lien rights.

The contractor on a project not lying on federally owned land that will be leased to the government may have slightly better lien rights, though it can lien only the reversionary interest held by the fee simple owner; the government’s leasehold cannot be liened. Moreover, where disputes arise, the subcontractor seeking to claim a lien will likely be dragged into the federal claims process under the Contract Disputes Act before it can obtain a final lien.

Contract Disputes Act

The federal Contract Disputes Act (“CDA”) channels federal procurement claims through contracting officers and boards of contract appeals or the Court of Federal Claims, rather than through federal district or state courts of general jursidiction. Its procedures are mandatory and apply to all claims by the contractor – meaning the person with a direct contract with the federal government -- on federal construction and lease contracts entered into by executive agencies. Most states have claims procedures on government contracts that bear some similarity to the CDA. Subcontracts on such governmental projects typically require the subcontractor to assist in preparation by the contractor of any claim to the government where the government is responsible for the basis of the claim, and often mandate that any other dispute resolution not be undertaken until the claim to the government is complete. This effectively drags the subcontractors into governmental dispute resolution scheme.

While the CDA could conceivably apply to the in-kind goods and services provided by a developer of an EUL project, the CDA will not typically apply to the EUL construction project itself, as that project will be undertaken pursuant to private contracts between the developer and contractors. The CDA will apply to those projects where new projects are constructed through governmental lease of real property, whether the contract is characterized as a lease of real property or as a construction contract.

Payment Bonds

Due to the cost and complexity involved, most hybrid projects will require payment and performance bonds of the construction contractor. It is not clear, however, whether such bonds will be treated as public works bonds (under the federal Miller Act or the applicable state Little Miller Act) or as private bonds. This will likely vary, depending on the specific facts involved in a given project. Whether a bond is a public works bond or a private bond determines when and how a claimant must give notice to the surety, the limitations period for a suit on the bond, what sort of damages the claimant may recover, how many tiers of subcontractors are protected by the payment bond, and in which court the suit must be brought.

The cases are not consistent as to whether a hybrid project involving the federal government is governed by the Miller Act. The Miller Act mandates the provision of payment and performance bonds “before any contract of more than $100,000 is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government.” Some cases, including this one decided last year by a Georgia federal court, hold that the United States must be a party to the construction contract to bring bonds issued therewith within the Miller Act. Others focus on whether the end use of the project constitutes a “public work.” There is a line of cases, for example, holding that military housing projects built by contractors under construction contracts with private developers funded by private financing are nonetheless “public works” because they are intended to house American soldiers. The second approach is more likely to result in Miller Act coverage.

Prompt Payment Acts and Construction Trust Fund Statutes

For the reasons discussed in the applicability of mechanic’s liens section, above, prompt payment acts and construction trust laws may or may not apply to a hybrid project. Courts are increasingly comfortable applying state prompt payment act statutes to subcontracts on a traditional federal construction project; such subcontractors have been permitted relief under the Louisiana, California, and Pennsylvania prompt payment acts, for instance. However, state remedial acts vary in scope and state legislatures may not have intended them to apply to projects on federal enclaves. A Maryland federal court, for example, has ruled that Maryland’s General Assembly did not intend that its construction trust law apply to traditional federal projects on federal land.

- Bob Carney and Lisa Sparks