Construction Law

Miller Act Recovery Can Depend Upon Whether the Claimant is a “Subcontractor” or “Supplier”. (Federal Bond Claim)

By John P. Ahlers

The Miller Act provides recovery from the general contractor's bond for only first and second tier claimants.  A first-tier claimant is one who has a direct contract with the prime contractor, a second-tier claimant is a claimant who has a direct contract with the prime contractor's (first tier) subcontractor.  In a recent case, the Third Circuit provided some guidance as to whether a steel fabricator and supplier was a subcontractor or supplier.

The prime contractor, Pyramid Enterprises, Inc. ("Pyramid"), entered into a contract to perform the design and construction work of a C-17 hangar at the McGuire Air Force Base for the United States Army.  Pyramid purchased custom fabricated structural steel for the building's framework from Havens Design-Build ("Havens") utilizing a purchase order form.  Havens contracted with E&H Steel Corporation ("E&H") to fabricate the steel and deliver it to the site.  Under the Miller Act, Pyramid provided a project payment bond.  Havens declared bankruptcy and defaulted on its payment to E&H.  E&H sued Pyramid and its bonding company.  The issue before the court was whether Havens was a "subcontractor" or a "supplier".  If Havens was a subcontractor, then E&H was a second tier supplier and would be covered by the Miller Act bond.  On the other hand, if the court determined that Havens was a supplier, E&H was either a supplier or subcontractor to a supplier and therefore, not covered by the Miller Act bond.  The bonding company argued that Havens merely supplied commodity materials and did not perform services on the project to qualify as a subcontractor.

The U.S. Appeals Court held that Havens was indeed a subcontractor, even though the agreement between Pyramid and Havens was a "purchase order", that applying the following principles, Havens was a subcontractor:

• Substantiality to Project. A subcontractor is one who performs specific parts of the original contract and has a substantial and important relationship with the prime contractor. In this instance, since the materials that Havens supplied were a crucial part of the materials required by the original contract, the court found that Havens relationship with Pyramid was a substantial and important one.
• Relative Contribution. Since Pyramid's contract with Havens was one of the largest on the project, the court found that Havens' contribution to the project was substantial, weighing in favor of Havens being a "subcontractor".
• Supplier Role. The court rejected to find that a claimant is a "subcontractor" requires some sort of uniqueness and customization of the product. The court held that a supplier of a commodity product may still qualify as a subcontractor.
• Bond Qualification. The ability of the prime contractor whose required bond substantiates the relationship as one with a "subcontractor", it is not necessary that the prime contractor actually require a bond, as long as the prime contractor could have requested the bond of the claimant, that is enough to find a "subcontractor" relationship.

This case demonstrates the extent to which the court will go to ensure that unpaid claimants come within the protection of the public works bond.

United States of America for the use and benefit of E&H Steel Corporation v. C. Pyramid Enterprises, Inc., et al., 509 F.3d 184 (3^rd Circ. 2007)

Full post as published by Construction Law Blog on February 29, 2008 (boomark / email).