Mai Steel Service, Inc. v. Blake Const. Co.

• Citation: 981 F.2d 414
• Decision Date: 30 June 1992
• Docket Number: Nos. 88-6409,88-6410,s. 88-6409
• Parties: 38 Cont.Cas.Fed. (CCH) P 76,358 MAI STEEL SERVICE INC., a Kansas Corporation, Plaintiff-Appellee, v. BLAKE CONSTRUCTION COMPANY, Defendant, and Molnick's Inc., a Corporation, Defendant-Appellant. MAI STEEL SERVICE INC., a Kansas Corporation, Plaintiff-Appellee, and Blake Construction Company; and Aetna Casualty & Surety Company, Defendant-Appellee, and Commercial Union Insurance Company, Defendant-Appellee, v. MOLNICK'S INC., a Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 414

981 F.2d 414

38 Cont.Cas.Fed. (CCH) P 76,358

MAI STEEL SERVICE INC., a Kansas Corporation, Plaintiff-Appellee, v. BLAKE CONSTRUCTION COMPANY, Defendant, and Molnick's Inc., a Corporation, Defendant-Appellant.

MAI STEEL SERVICE INC., a Kansas Corporation, Plaintiff-Appellee,

and

Blake Construction Company; and Aetna Casualty & Surety Company, Defendant-Appellee, and Commercial Union Insurance Company, Defendant-Appellee, v. MOLNICK'S INC., a Corporation, Defendant-Appellant.

Nos. 88-6409, 88-6410.

United States Court of Appeals Ninth Circuit.

Argued and Submitted April 7, 1992.

Decided June 30, 1992.

Robert S. Kilborne, San Diego, CA, for defendant-appellant.

James L. Trachy, Anderson, McPharlin & Conners, Los Angeles, CA and Judah Lifschitz, Shapiro & Lifschitz, Washington, DC, for defendants-appellees.

Oscar Irwin, Hillyer & Irwin, San Diego, CA, for the plaintiff-appellee.

Appeal from the United States District Court for the Southern District of California.

Before: PREGERSON, D.W. NELSON and THOMPSON, Circuit Judges.

DAVID R. THOMPSON, Circuit Judge:

This appeal challenges a district court ruling that appellant Molnick's Inc., a steel installer on a federal construction project, cannot recover under either the prime contractor's Miller Act payment bond or the subcontractor's common law payment bond for its increased labor and material costs attributable to construction delays. We have jurisdiction under 28 U.S.C. § 1291 and we reverse. We also conclude that the prime contractor's surety is entitled to indemnification from the subcontractor's surety to the extent of its liability for Molnick's additional costs.

FACTUAL BACKGROUND

The Department of the Navy hired Blake Construction Company to build a naval hospital in San Diego, California. Pursuant to the Miller Act, 40 U.S.C. § 270a-270d, Blake obtained two Miller Act bonds from Aetna Casualty Insurance. One bond guaranteed Blake's performance under its contract with the United States government. The other bond guaranteed payment Blake subcontracted with Mai Steel Services to fabricate and install the hospital's steel framework. Mai furnished a performance bond for $6,940,000, guaranteeing the satisfactory completion of the framework. It also provided a payment bond for the same amount. Commercial Union Insurance was the surety on both bonds.

to all persons supplying labor or materials to the project. ¹

Blake also subcontracted with Molnick's to install the hospital's steel decking. Under the terms of this subcontract, Molnick's was required to finish the decking no more than six months after the framework was in place.

Mai entered into a sub-subcontract with Molnick's. This sub-subcontract obligated Molnick's to assume all responsibility for installing the hospital's framework. Molnick's was given five months to finish the task. Molnick's conditioned its performance on Mai's ability to supply it with steel and other materials according to a predetermined schedule.

Mai never lived up to its part of the sub-subcontract. Its steel shipments were routinely late and often included defective materials. As a result, Molnick's incurred sizeable cost overruns and failed to complete the framework on time. Mai's inability to deliver the materials as promised also prevented Molnick's from installing the steel decking on schedule.

Molnick's sued Mai in the district court for breach of the framework contract and for tortious interference with the decking contract. ² In these actions, Molnick's sought to recover the unpaid balance of the framework contract, ³ plus additional labor and material costs it incurred in completing both the framework and decking contracts.

A jury found in favor of Molnick's on its breach of contract claim against Mai, and awarded Molnick's damages for the unpaid balance of the framework contract, ⁴ plus $1,154,008 in additional labor and material costs Molnick's incurred in completing that contract. The jury also found that Mai had tortiously interfered with Molnick's performance of the decking contract with Blake, and awarded Molnick's an additional $758,818 for the increased labor and material costs Molnick's was forced to expend in completing the decking contract. Mai failed to satisfy either judgment and has since filed a petition in bankruptcy.

At a post-trial hearing, the district court concluded that neither Aetna nor Commercial Union was liable for the increased labor and material costs Molnick's was awarded against Mai. Molnick's appeals this ruling.

DISCUSSION

A. Aetna's Liability to Molnick's

The Miller Act requires a general contractor on a federal construction project to furnish "[a] payment bond ... for the protection of all persons supplying labor and material in the prosecution of the work provided for in [the] contract." 40 U.S.C. § 270a(a)(2). The Act "represents a congressional effort to protect persons supplying labor and material for the construction of federal public buildings in lieu of the protection they might receive under state statutes with respect to the construction of Under the Act, "[e]very person who has furnished labor or material" used in a project may recover against a Miller Act surety. 40 U.S.C. § 270b(a). This includes any "subcontractor[ ] who deal[s] directly with the prime contractor," as well as any sub-subcontractor who has supplied labor or materials to a subcontractor. MacEvoy, 322 U.S. at 107-08, 64 S.Ct. at 893-94. Thus, Molnick's is entitled to recover against Aetna, the general contractor's surety, in its capacity as both a subcontractor and a sub-subcontractor, provided the costs it seeks to recover fall within the scope of the Miller Act.

                nonfederal buildings."  United States ex rel. Sherman v. Carter, 353 U.S. 210, 216, 77 S.Ct. 793, 797, 1 L.Ed.2d 776 (1957).   Because the Act is "highly remedial in nature," it must be liberally construed to effectuate Congress's intent.  Clifford F. MacEvoy Co. v. United States ex rel. Calvin Tomkins Co., 322 U.S. 102, 107, 64 S.Ct. 890, 893, 88 L.Ed. 1163 (1944)
                

In determining whether Molnick's may recover its increased costs under the Act, we must resolve two issues of first impression in this circuit: (1) can a subcontractor or supplier recover against a Miller Act surety for the subcontractor's increased labor and material costs caused by construction delays, ⁵ and if so, (2) is such recovery limited to situations in which the general contractor caused the delays?

1. Expenses Attributable to Delay

The appellees argue, and the district court agreed, that the Miller Act does not require a general contractor's surety to reimburse a subcontractor for its additional labor and material costs caused by construction delays. This argument has been rejected by at least three other circuits. See United States ex rel. Lochridge-Priest, Inc. v. Con-Real Support Group, Inc., 950 F.2d 284 (5th Cir. Jan. 10, 1992); United States ex rel. T.M.S. Mechanical Contractors, Inc. v. Millers Mutual Fire Ins. Co. of Texas, 942 F.2d 946 (5th Cir.1991); United States ex rel. Pertun Constr. Co. v. Harvesters Group, Inc., 918 F.2d 915 (11th Cir.1990); United States ex rel. Heller Elec. Co. v. William F. Klingensmith, Inc., 670 F.2d 1227 (D.C.Cir.1982). In each case, the surety was held liable for the subcontractor's increased labor and material costs, but not for the subcontractor's lost profits caused by the delay. Con-Real, 950 F.2d at 287; Millers Mutual, 942 F.2d at 952; Pertun, 918 F.2d at 916; Klingensmith, 670 F.2d at 1232. We find these cases persuasive.

In Millers Mutual, a subcontractor incurred increased labor and material costs due to a series of unexpected change orders by the federal government. 942 F.2d at 948. The Fifth Circuit allowed the subcontractor to recover from the general contractor's Miller Act surety

for [the] additional or increased costs actually expended in furnishing the labor or materials in the prosecution of the work provided for in the contract and attributable to the delay. [footnote omitted].

Id. at 952 (emphasis in original). In reaching this conclusion, the court held that the subcontractor's ability to recover did not hinge either on the cause of the delay or the terms of the underlying contract. Id. at 951. Rather, it depended entirely on whether the claim fell within "the language of [the Miller Act], interpreted in light of its protective purpose." Id.; accord Pertun, 918 F.2d at 918. We agree with this reasoning, and look to the language of the Miller Act to determine Aetna's liability.

The Miller Act requires a general contractor to furnish a bond "for the protection of all persons supplying labor and material in the prosecution of the work provided for in said contract for the use of To conclude otherwise would not only ignore the language of the Act, but also its underlying purpose. As the Eleventh Circuit stated in Pertun,

                each such person."  40 U.S.C. § 270a(a)(2) (emphasis added).   Molnick's was hired to install the hospital's steel framework and decking. 6  The additional out-of-pocket costs it incurred directly contributed to the completion of these tasks.   By definition, these expenses were incurred in the prosecution of the work provided for in the framework and decking contracts.   See Klingensmith, 670 F.2d at 1232 (delay damages fall within the express terms of the Miller Act)
                

Only by allowing a full recovery of [a subcontractor's] costs, including those portions caused by delay, can the purpose of the [Miller Act]--to afford the subcontractor the financial protection of an action against the surety--be achieved.

918 F.2d at 918. Accord Millers Mutual, 942 F.2d at 951 (similar).

We hold that increased out-of-pocket costs caused by construction delays fall within the intended coverage of the Miller Act. Thus, a subcontractor may recover these costs from a Miller Act surety. A subcontractor may not recover from the surety, however, any lost profits caused by the delay. "A claim...