Seaboard contends that Seyfer is nothing more than a subcontractor's guarantor and thus stands in too remote a position vis-a-vis Mellon Stuart to be entitled to Miller Act protection. Thus, the instant case presents what appears to be a question of first impression; namely, whether a performing guarantor who exercises its option to assume the duties and obligations of its defaulting subcontractor and completes the subcontractor's work on the construction project, can be considered a "subcontractor" entitled to the Act's protection. We hold that it can.
Under the Act, the relationship among parties to a federal construction contract must be decided by federal law. United States ex rel. Gold Bond Bldg. Prods. v. Blake Constr. Co., 820 F.2d 139, 141 (5th Cir. 1987). The Act is "highly remedial" and therefore "entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects." MacEvoy, 322 U.S. at 107.
In MacEvoy, the Supreme Court "adopted a functional rather than a technical definition for the term subcontractor," F.D. Rich Co. v. United States ex rel. Indus. Lumber Co., 417 U.S. 116, 123, 94 S. Ct. 2157, 40 L. Ed. 2d 703 (1974), and noted that, for purposes of the Act, a subcontractor is one who performs for and takes from the prime contractor a specific part of the labor or material requirements of the original contract." 322 U.S. at 109. In Rich, the Court repeated MacEvoy's definition, and added that it is proper, when determining whether an entity is a subcontractor, to look to "the substantiality and importance of [its] relationship with the prime contractor." 417 U.S. at 123. In J.W. Bateson Co. v. U.S. ex rel. Bd. of Trustees, 434 U.S. 586, 55 L. Ed. 2d 50, 98 S. Ct. 873 (1978), the Court indicated that the approach of looking to "functional" considerations such as the substantiality and importance of the relationship between the parties is particularly appropriate where a direct contractual relationship with the prime contractor is involved. See id. at 593-94.
We have no hesitation in finding that a contractual relationship existed between Mellon Stuart and Seyfer. The Tri-Party Agreement, entered into by Mellon Stuart, Seyfer, and Lockwood, for the explicit purpose of providing protection to Seyfer, expressly granted Seyfer the option of "assuming and taking control of the obligations and duties of Lockwood under its contract with Mellon Stuart, including but not limited to the right to complete the remainder of Lockwood's subcontract with Mellon Stuart." Upon Lockwood's default, Seyfer exercised this option. Subsequently, in the Letter of Understanding, Mellon Stuart and Seyfer memorialized their agreement that Seyfer would assume the obligations and duties of the Lockwood subcontract as was his right under the Tri-Party Agreement. Indeed, in a previous order, this court
determined that the Letter of Understanding unambiguously contractually bound Seyfer to complete "'All duties and responsibilities' of the Subcontract entered into by Lockwood." United States ex rel. CTI Ltd., Inc. v. Mellon Stuart Co., No. 92 C 1845, Memorandum Opinion and Order at 5 (N.D. Ill. Jan. 26, 1994). As was noted in that opinion, "Seyfer was not bound to make such an election under the Tri-Party Agreement, but once he did elect, he could not reverse his decision, for he received consideration from Mellon Stuart, forbearance on the letter of credit, for that election." Id. at 6. Accordingly, Seaboard cannot contend that no contractual relationship existed between Mellon Stuart and Seyfer.
Well aware of the contractual relationship between Mellon Stuart and Seyfer, Seaboard argues that neither the Letter of Understanding nor the Tri-Party Agreement is a Miller Act subcontract. Seaboard argues, for example, that "the Letter of Understanding instead defined how Mellon Stuart and Seyfer would proceed to liquidate Seyfer's guarantee obligations." Seaboard's Reply in Support of its Motion For Summary Judgment at 4.
Seaboard exalts form over substance here and ignores the commercial reality that the Tri-Party Agreement, upon which the Letter of Understanding is predicated, was a separately negotiated contract entered into by and between the three parties. That this Agreement may have purported, as Seaboard suggests, to define Seyfer's obligations as Lockwood's guarantor does not negate the fact that the Agreement provided Seyfer with the newly created option of stepping into Lockwood's shoes as Mellon Stuart's subcontractor. The Miller Act "looks to the protection of those who supply the labor or materials provided for in the contract, and not to the particular contract or engagement under which the labor or materials were supplied." Hill v. American Surety Co., 200 U.S. 197, 205, 50 L. Ed. 437, 26 S. Ct. 168 (1906).
Mellon Stuart, through its own contractual arrangement with Seyfer, opened the door for Seyfer to assume the position of subcontractor. We find no sound reason in law or logic to conclude that Seyfer is foreclosed from being afforded subcontractor status merely because he assumed the obligations and duties of the Lockwood subcontract and undertook the completion of the glazing subcontract as a means of avoiding forfeiture of his $ 75,000 Letter of Credit.
Examination of the substantiality and importance of the relationship between Mellon Stuart and Seyfer lends further support to our conclusion. Indeed, we find that the relationship between Mellon Stuart and Seyfer is, in all material respects, indistinguishable from that between Mellon Stuart and Lockwood - and, of course, there can be no dispute that Lockwood was a subcontractor. Seyfer assumed all of the obligations and duties of the Lockwood subcontract and he was to complete these obligations and duties in full cooperation with Mellon Stuart. Indeed, under the Letter of Understanding, all of Seyfer's actions were to be "carried out after having been reviewed and approved by [Mellon Stuart]." Plainly, Mellon Stuart envisioned that its relationship with Seyfer would be substantial and important.
Moreover, it is important to bear in mind that not only did Mellon Stuart contract directly with Seyfer providing him the option of stepping into Lockwood's shoes, but also Mellon Stuart initially approved Seyfer to be Lockwood's guarantor. The Lockwood subcontract explicitly provided that Lockwood was to provide performance and payment bonds "from such Surety or Sureties . . . satisfactory to Contractor and Owner." These are important considerations in determining whether Seyfer should be considered a remote stranger to Mellon Stuart who falls outside of the scope of Miller Act protection. In MacEvoy, the Supreme Court explained one of the "practical considerations" underlying the limitation on the scope of Miller Act protection as follows:
Congress cannot be presumed, in the absence of express statutory language, to have intended to impose liability on the payment bond in situations where it is difficult or impossible for the prime contractor to protect himself. The relatively few subcontractors who perform part of the original contract represent in a sense the prime contractor and are well known to him. It is easy for the prime contractor to secure himself against loss by requiring the subcontractors to give security by bond, or otherwise, for the payment of those who contract directly with subcontractors. But this method of protection is generally inadequate to cope with remote and undeterminable liabilities incurred by an ordinary materialman, who may be a manufacturer, a wholesaler or a retailer. To impose unlimited liability under the payment bond to those sub-materialman and laborers is to create precarious and perilous risk on the prime contractor and his surety.