US Court of Appeals for Third Circuit Holds “Subcontractor” Status Under Miller Act Turns on Substantiality and Importance of Relationship With Prime Contractor

United States ex rel E & H Steel Corp. v. C. Pyramid Enterprises, Inc
Civil Action No. 06-4209, 2007 U.S. App. LEXIS 27347 (3d Cir. Nov. 27, 2007)

The Court of Appeals for the Third Circuit reviewed a decision of the United States District Court for the District of New Jersey in which the primary question was whether a particular project participant, responsible for supplying structural steel, was a “subcontractor” for purposes of the Miller Act, 40 U.S.C. § 3131, et seq. Reviewing the Supreme Court interpretations and the intent of the Miller Act, the Third Circuit reversed the District Court’s decision and held that the project participant at issue was a “subcontractor” under the Miller Act, because it had a substantial and important relationship with the prime contractor. Accordingly, a fabricator which had contracted to furnish steel to it could sue on the bond.

The United States Army Corps of Engineers awarded a contract for the design and construction of a maintenance hanger and ancillary facilities at the McGuire Air Force Base to C. Pyramid Enterprises (the “Prime Contractor”). The Prime Contractor in turn contracted with various parties including Havens Design-Build (“Havens”). Havens was hired to prepare certain shop and erection drawings, design steel connectors and assist with material substitution. Havens then contracted with E&H Steel Company (“E&H”). E&H was hired to fabricate the steel and deliver it to the Project site. Thereafter, Havens filed for bankruptcy. At the time of its bankruptcy, Havens still owed E&H more than $565,000 for steel previously delivered to the Project site.

E&H filed suit, seeking to collect on the payment bond furnished by the Prime Contractor in accordance with the Miller Act. Because E&H did not have a direct relationship with the Prime Contractor, in order to successfully collect on the bond, E&H was required to demonstrate that that Havens was a “subcontractor” under the Miller Act. The District Court concluded that Havens was a material supplier and not a “subcontractor” as defined by the Miller Act.

On appeal, the Third Circuit , principally relying on F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116 (1974), held that under the Miller Act, whether one is a subcontractor does not hinge on the customized or unique features of the material being supplied, as had been assumed under the criteria applied by the district court. Rather, the Court held that “subcontractor status applies to one who performs a specific part of the original contract and has a substantial and important relationship with the prime contractor”.

The Third Circuit concluded that Havens was a subcontractor under the Miller Act because it was tasked with the job of providing a specific and crucial part of the work and material which the Prime Contractor was required to perform under its contract with the Owner and because Havens and the Prime Contractor had a substantial and important relationship. Havens arranged for the fabrication and delivery to the site of a substantial amount of structural steel necessary for the skeleton of the hangar building, prepared shop drawings and erection drawings, designed the connectors, and performed some “design-assist engineering.” The work and material Havens supplied for the framework required Pyramid to exercise substantial attention and oversight. The shop drawings were submitted to Pyramid for approval and the parties communicated about the connectors design and design-assist work. The steel that Havens supplied had to be carefully manufactured so that Pyramid could efficiently erect the framework. Delivery of the steel to the site had to be arranged to comply with Pyramid’s construction schedule. Further, a large number of subcontracts were not awarded and none were as large as that with Havens.

The Third Circuit’s holding is significant in that it clarifies which parties are considered “subcontractors” for purposes of the Miller Act. Specifically, in the Third Circuit, the supplier does not need to deal with specialty items in order to obtain subcontractor status. Rather in the Third Circuit, the status of a subcontractor will be determined based up the nature of the relationship with the prime contractor, the significance of the work performed by the subcontractor in connection with the overall work of the prime, and, in part, whether a bond could have been obtained for the “subcontractor.”

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