Note: This article appears in the April 2016 edition of Barnes & Thornburg LLP's Construction Law Update e-newsletter.
The recent case of U.S. ex rel. Pileco, Inc. v. Slurry Systems, Inc., 804 F.3d 889 (2015) addressed the reach of the Miller Act in a dispute arising from an Army Corps of Engineers reservoir project. Pileco, Inc., a wholly owned subsidiary of Bauer Maschinen GMBH, sells and leases trench cutters manufactured by Bauer. This huge steel machine, which weighs approximately 40 tons and is approximately 40 feet high, is designed to cut into bedrock. Pileco leased a trench cutter to Slurry Systems, Inc., the general contractor on the project. Slurry posted performance and payment bonds. After Slurry claimed that the trench cutter was defective and refused to pay the agreed upon rental price, Pileco sued Slurry and the payment bond surety. Slurry filed a counterclaim for breach of contract and fraud, alleging that Pileco breached the lease and supplied defective equipment. Slurry also filed a third party breach of contract claim against Bauer.
A jury trial resulted in a net verdict of $3 million in Slurry’s favor, plus a $20 million punitive damages award. The United States Magistrate Judge who presided over the trial set aside the verdict because it was inconsistent with controlling Illinois law and the constitutional limits on the ratio of punitive to compensatory damages. The second trial yielded a dramatically different result. Pileco’s second bite at the apple resulted in its recovery of a net verdict of $2.23 million against Slurry for breach of contract, and against the surety under the Miller Act. Pileco not only saw its judgment affirmed on appeal, but its cross-appeal resulted in a reversal of the trial court’s denial of an award of prejudgment interest and certain litigation costs.
On appeal, the surety argued that Pileco did not have a valid claim under the Miller Act because the trench cutter was built and delivered by Bauer, Pileco’s parent company. In the surety’s view, Pileco had not “furnished” anything to the project as required under the Miller Act. The Court disagreed, rejecting the limited meaning of the word “furnishing” advocated by the surety. The rental agreement was entered into between Pileco, as the agent of Bauer, and Slurry. Although Pileco was the intermediary between Bauer and Slurry, Pileco provided the trench cutter under the contract between those parties. The Court observed that the word “furnish” is a common synonym for “provide” or “outfit,” which is what Pileco did in this situation.
The Court also addressed a dispute about whether the trench cutter was new, as apparently was required by the contract, though the opinion does not quote a specific contract provision. Pileco contended that although both parties knew that the GS500 unit (a component of the desander, which is a device used to separate solids from fluids when drilling into the ground) had been used before, the cutter was otherwise new. Slurry asserted that software data showed that the cutter had been used two years before the delivery, but the “use” consisted of only rapid start-stop time entries during which only the software was in use. The Court did not disturb the jury’s acceptance of Pileco’s explanation that software and equipment testing did not “age” the trench cutter in a way relevant to use on the reservoir project.
There was no evidence that the problems Slurry claimed to have had with the cutter related to its age or prior use. As the Court elaborated, “In Isaiah we read that ‘The grass withers, the flower fades, but the word of our God will stand forever.’ A 40-ton hunk of steel will not stand forever, but neither will it wither like the grass or fade like the flower.” 804 F.3d at 893-94.