In a recent decision, the federal appellate court encompassing nine western states and two Pacific island jurisdictions held that a California law restricting the right of non-licensed contractors to recover for unpaid services did not apply to actions brought under the Miller Act, federal legislation that requires prime contractors on certain government contracts to post payment and performance bonds.

In Technica LLC ex rel. U.S. v. Carolina Casualty Insurance Co., Candelaria Corporation (“Candelaria”) was the prime contractor on a federal project in California in which it purchased a payment bond provided by Carolina Casualty Insurance Company (“CCIC”). Candelaria entered into a subcontract with Otay Group, Inc. (“Otay”), which, in turn, subcontracted with Technica, Inc. (“Technica”). Technica received only partial payments from Otay for the labor, materials, and services it provided. Candelaria at some point terminated Otay’s subcontract, prompting Technica to file a complaint invoking its Miller Act rights to recover outstanding amounts under the contract and payment bond.

The Miller Act provides that a person who has provided labor or materials in performing work on a federal project and who has not been paid within 90 days after the work was performed may bring an action on the payment bond for the amounts unpaid. The Miller Act extends this right to subcontractors as well as sub-subcontractors. The scope of the remedy and the substance of the rights under the Miller Act are, in general, considered matters of federal, not state, law.

Candelaria and CCIC argued that California Business and Professions Code § 7031(a) provided a defense to Technica’s Miller Act claim in that it precludes contractors who are not licensed in California from maintaining an action for compensation for services under the contract. Candelaria and CCIC argued that because Technica did not hold a valid California contractor license, it could not assert a Miller Act claim. The lower court sided with Candelaria and CCIC, concluding that because Technica was not licensed, as required by a California law, it was precluded from pursuing its Miller Act claim.

Upon review, however, the federal appellate court reversed and held that the limitation in § 7031(a) did not apply to a Miller Act claim, and that, therefore, Technica’s Miller Act claim was not barred. The appellate court reasoned that the application of a state statute as a defense to a Miller Act claim could result in the nullification of those rights. Additionally, as a practical effect, enforcing a state licensing requirement against Miller Act claims would cause inconsistent applications of the Miller Act, as federal subcontractors should not be required to comply with licensing requirements in every state in which they may perform work on a federal project.

Those performing work on government projects should take heed of the Technica decision in the event of future disputes regarding non-payment. State laws restricting non-licensed contractors from collecting for unpaid services may be poor defenses to Miller Act claims. As with any other law, however, it may be prudent to comply with licensing statutes in a given state before undertaking to perform work there. For example, had this suit been filed by a sub-subcontractor against Technica, Technica’s lack of a license might have precluded Technica from asserting a counterclaim.