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Suppliers of labor and materials for construction projects for
the Federal Government do not enjoy the protection of mechanics'
liens. A century ago, Congress responded to this
problem by enacting the Miller Act, 40 U.S.C. 3131, et seq.,
which, in relevant part, requires contractors to furnish a payment
bond to protect suppliers and subcontractors on Federal
Government projects. Such a payment bond protects
suppliers of labor and materials "having a direct contractual
relationship with a subcontractor but no contractual relationship…
with the contractor" against nonpayment. However,
only if a subcontractor qualifies as a "subcontractor" under
the Miller Act does the Miller Act bond protect the suppliers.
Consequently, general contractors faced with a bond
claim by a supplier may argue that the bond does not protect
their suppliers and other subcontractors.
In a recent case decided by the Third Circuit Court of Appeals,
United States ex rel. E & H Steel Corp. v. C. Pyramid
Enterprises, Inc., 509 F.3d 184 (3rd Cir. 2007), the Army
awarded the general contractor ("General Contractor") a
contract to build a facility for aircraft maintenance at a base
in New Jersey. General Contractor posted the requisite
Miller Act bond and contracted with Havens Design-Build
("Havens") to provide custom-fabricated steel, prepare shop
and erection drawings, design connectors for the steel, and
perform design-assist engineering. Havens, in turn, contracted
with E & H Steel Co. ("E&H") to fabricate and deliver
the steel directly to the job site. Upon delivery, General
Contractor erected the steel frame and self-performed most
of the remaining construction work.
General Contractor paid Havens, but before Havens paid
E&H, Havens filed for bankruptcy. E&H sued on the General
Contractor's Miller Act bond. General Contractor defended
on the grounds that Havens was not a
"subcontractor" under the Miller Act, and thus E&H, Havens'
steel fabricator, could not collect on the bond.
Although many owners and general contractors on a private
construction job would consider Havens a subcontractor,
the Miller Act provides a specific definition of
"subcontractor." Under the Miller Act a "subcontractor" is
"one who performs for and takes from the prime contractor
a specific part of the labor or materials requirements for the original contract." The Third Circuit explained that
"subcontractor" status applies to those (a) who perform specific
parts of the original contract and (b) who have a substantial
and important relationship with the contractor.
In E & H Steel, General Contractor argued that Havens did
not qualify as a "subcontractor"
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because its work was not
"substantial" in relation to the rest of the project and because
the general contractor, not Havens, performed most of the
erection work. Therefore, General Contractor reasoned that
Havens could not claim to have taken part of the labor or
materials requirements from General Contractor, thereby
precluding a claim by E&H, a mere supplier to Havens.
Nevertheless, the Third Circuit found that Havens was a
"subcontractor" for Miller Act purposes. Although Havens
did not construct the building or fabricate the steel, Havens
did arrange for its design and delivery. Moreover, Havens
prepared crucial shop and erection drawings, designed connectors,
and performed design-assist engineering. Havens' timely completion of its work affected the project's completion
time. The court found that, although Havens' work
amounted to less than 8% of the contract price, "total project
costs is not a weighty reason to deny recovery." Having
found that Havens qualified as a subcontractor under the
Miller Act, the Third Circuit concluded that E&H, as fabricator,
could recover under the Miller Act bond.
Though not every subcontractor on a Federal Government
project necessarily qualifies as a "subcontractor" under the
Miller Act, the Third Circuit's recent decision indicates that
the courts will extend the protection of the Act liberally to
protect subcontractors who perform work on a project, even
if little physical labor is involved. Thus, a subcontractor
who performs a small amount of work will be considered a
"subcontractor" if its work constitutes a "substantial" portion
of the work that the general contractor does not perform
itself. Consequently, contractors, subcontractors, and
sureties should be on notice that courts may treat subcontractors
performing comparatively minor work involving
little or no actual physical construction as protected by the
Miller Act.
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