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The distinction between a subcontractor and supplier is not
always clear, though the distinction can be important in
determining parties' rights. This is especially true with regard to
asserting a claim under a payment bond. In U.S. ex rel. Md.
Minerals & Cranseville Stone Co. v. U.S. Fid. Guar. Co.,
2007 U.S. Dist. LEXIS 41893 (N.D. W. Va. June 8, 2007),
the court looked beyond the contracts and applied a balancing
test to determine whether a concrete company was a
subcontractor or a supplier for the purpose of determining
whether it could make a claim on a payment bond.
The Federal Government contracted with P.J. Dick
("Contractor") to build a Federal penitentiary in West
Virginia (the "Project"). The Contractor obtained a bond
("Bond") issued by USF&G ("Surety") for the project
as required by the Miller Act. The Contractor selected
Kimberly Concrete ("Kimberly") to supply concrete for the
penitentiary's construction and the two entered into a
purchase order agreement on February 7, 2001. Kimberly
entered into a series of contracts with Maryland Minerals,
Cranseville Stone Co., and Essroc, Inc. ("Plaintiffs") to
obtain the necessary materials to produce concrete for the
project. In late November of 2002, before the project was
completed, Kimberly began having financial difficulties and
ceased its business operations, leaving unpaid balances for
materials delivered by the Plaintiffs.
Plaintiffs filed actions against Surety to collect on the Bond.
Under the Miller Act, only suppliers of a subcontractor are
able to recover under such a bond. As such, the issue before
the court was whether Kimberly, the party with which Plaintiffs
contracted, was a subcontractor or a supplier to Contractor.
Surety argued that Kimberly was a supplier, not a subcontractor,
and that Plaintiffs, as second-tier suppliers, were
not entitled to recover under the Bond.
Plaintiffs relied on the language used in the contract between
Contractor and Kimberly and in the contracts between
Kimberly and Plaintiffs. Specifically, the contract between
Contractor and Kimberly described Kimberly as
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a "subcontractor".
Moreover, Plaintiffs' contracts with Kimberly
referred to Kimberly as "contractor". The court looked
past the contractual language, and, instead, applied a balancing
test to determine whether Kimberly was a subcontractor or supplier.
The court found persuasive the balancing test applied in U.S.
for the Use and Benefit of Conveyor Rental & Sales Co. v.
Aetna Cas. & Sur. Co., 981 F.2d 448 (9th Cir. 1992).
This balancing test considers certain factors as indicative of a
subcontract and certain factors as indicative of a supply contract.
The factors suggesting a subcontractor relationship include
whether the product suplied is custom-fabricated; whether the
product supplied is a complex integrated system; whether
a close financial interrelationship exists with the prime
contractor as evidenced by the requirement of shop drawing
approval by the prime contrator; whether the supplier is
required to perform on-site; whether there is a contract for
labor in addition to materials; whether the term subcontract
is used in the agreement; whether the materials supplied do
not come from existing inventory; whether the supplier's
contract constitutes a substantial portion of the prime contract;
whether the supplier is required to furnish all the material
of a particular type; whether the supplier is required to post
a perofrmance bond; whether there is a backcharge for cost of
correcting supplier's mistakes; and whether there is a system
of progressive or proportionate fee payment.
The factors suggesting a supplier relationship include
whether a purchase order form is used by the parties; whether
the materials come from pre-existing inventory; whether the
item supplied is relatively simple in nature; whether the
contract is a small percentage of the total construction
costs; and whether sales tax is included in the contract price.
The court, after applying the factors of the balancing test,
found that Kimberly was a supplier. The court relied on the
facts that Kimberly issued purchase orders, Kimberly included
the sales tax in the contract price, Kimberly was not
the sole provider of concrete for the Project, the concrete
came from a pre-existing inventory, and Kimberly did not
have to provide labor for the Project. Therefore, pursuant to
the Miller Act, Plaintiffs, who were second-tier suppliers,
were denied recovery from USF&G's surety bond because
Kimberly was a supplier, not a subcontractor.
This case demonstrates that courts will not be bound strictly
by the language of contracts in their determination of subcontractor
or supplier status, but will closely examine the
relationship of the parties considering a variety of factors.
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