Opinion ID: 1318239
Heading Depth: 2
Heading Rank: 4

Heading: Fireman's Fund's Liability for Rental

Text: Another factual issue remains regarding Fireman's Fund's liability for rental and repair costs. As surety on the airport project, Fireman's Fund's liability derives from McGee's liability. Fireman's Fund argues that its status as a Little Miller Act surety should not automatically expose it to liability for the full amount of damages. We agree. The purpose of the Little Miller Act [9] is the protection of all persons who supply labor and material in the prosecution of the work provided for in the contract... . AS 36.25.010(a)(2). [10] As supplier of the crane used at the airport, McDonald is thus protected by the statute's express terms. Fireman's Fund contends that a factual issue exists as to McDonald's good faith belief that the crane was to be used at the airport project. This is relevant, Fireman's Fund argues, because the purpose of public project payment bonds is to provide an incentive for suppliers; suppliers must, therefore, prove that they had a good faith, reasonable belief that the materials would be used on the bonded project. If they lacked this good faith belief, then the incentive would be absent, and the surety should not be liable on the bond. Thus, Fireman's Fund concludes they would be absolved from liability if McDonald lacked a good faith belief. However, McDonald's good faith is not relevant in this case. A good faith determination is necessary only where materials are diverted; it is not necessary where no dispute exists regarding where the materials were used. Riley-Stabler Construction v. Westinghouse Electric, 401 F.2d 526, 527 (5th Cir.1968); see United States ex rel. Martin Steel Constructors v. Avanti Constructors, 750 F.2d 759, 761 (9th Cir.1984), cert. denied, ___ U.S. ___, 106 S.Ct. 60, 88 L.Ed.2d 49 (1985). [11] Courts do not require a showing of good faith when materials are actually used at the bonded site because the statute expressly protects those suppliers. AS 36.25.010. The issue of McDonald's state of mind in transferring the crane to McGee does not arise here because no one disputes that the crane was actually used at the airport project. Therefore, Fireman's Fund cannot be absolved from liability on this ground. The extent of Fireman's Fund's liability is, however, a factual issue. While it cannot be liable for rental costs in an amount greater than McGee, Fireman's Fund may owe less than McGee since it is only responsible for equipment substantially consumed on the airport job. See Ibex Industries v. Coast Line Waterproofing, 563 F. Supp. 1142, 1145-46 (D.D.C. 1983). Its liability for rental is limited to the time period McGee actually used the crane on the airport project. Fireman's Fund argues that if McGee purchased the crane instead of renting it, it would not be liable because a purchase is not within the purview of the Act. Since we have held that this transaction was a lease with an option to purchase, the critical question in terms of Fireman's Fund's liability is the extent to which the crane was substantially consumed on the job, not the distinction between sale and lease. Federal cases which interpret the Miller Act generally do distinguish a sale from a lease and also hold that equipment rentals are within the purview of a Miller Act payment bond because the value of the lease payment is substantially consumed in the project. See, e.g., United States ex rel. Eddies Sales and Leasing v. Federal Insurance, 634 F.2d 1050, 1052 (10th Cir.1980). However, those cases also hold that the purchase of equipment is not covered because the seller is not supplying materials for consumption only on the bonded project. Id., citing Continental Casualty v. Clarence L. Boyd Co., 140 F.2d 115 (10th Cir.1944). We agree with such reasoning. Unless an item is furnished for and used on the bonded project, the surety should not be liable. However, characterizing a transaction as a lease or sale does not always determine whether particular equipment was substantially consumed on a particular project. Although a lease term may be evidence of the degree to which equipment was consumed, it may bear little relationship to the extent of use on the bonded project. The record lacks evidence of the time McGee was to spend on the airport project after he rented the crane. Although this was a lease, Fireman's Fund's liability for the crane rental is limited to the amount that the crane would have been consumed on the project had it not failed. This can be determined by comparing the three month rental period to the duration of the airport project and ascertaining how long the crane was available for consumption. If, for example, the project terminated or McGee finished his subcontract three days into the three month term, then the crane was not available for use on the airport project for the full three months, and the full three months rental costs should not be borne by Fireman's Fund. We therefore remand for a determination of whether the crane's rental was substantially consumed on the project. In other words, whether the rental period was reasonably related to the time McGee would have used the crane on the airport project. That determination will govern the portion of McGee's potential damages for which Fireman's Fund is jointly liable.