4th Circuit Rules for Subcontractor on “Subcontract vs. Miller Act” Issue

In the recently decided case of Aarow/IET, LLC v Hartford Fire Insurance Company, No. 19-1710 (4th Cir. 2020), the U.S. Court of Appeals for the Fourth Circuit issued a victory for a subcontractor whose federal Miller Act (payment bond) claim had been preliminarily dismissed by the Eastern District of Virginia trial court after that court determined that the payment bond claim was barred by the Subcontract “no damages for delay” clause.

The American Subcontractors Association (“ASA”), for whom this firm is general counsel, filed an amicus (“friend of the court” brief) urging the appeals court to reverse the trial court decision. ASA’s primary concern was that the trial court decision impermissibly elevated a subcontract “no damage” provision above the federally required statutory protections of the Miller Act.

The Dispute

The underlying dispute arose out of a construction project to build School Student Officer Quarters at the Marine Corps base in Quantico, Virginia (the “Project”). The Naval Facilities Engineering Command (the “Owner”) hired Harper Construction Company (“Contractor”) as its general contractor. Harper hired Aarow/IET, LLC (“Subcontractor”) for the Project’s electrical work and those parties entered into a subcontract agreement (the “Subcontract”).

Because this was a federal project, the Miller Act required the Contractor to post performance and payment bonds, which it did through Hartford Fire Insurance Company (“Surety”).

Over the course of the Project, the parties encountered numerous changes, disruptions and delays, and the Subcontractor presented a Request for Equitable Adjustment (“REA”), which it, in a decision that later caused it many problems, titled as a claim for ‘delay’ damages. The claim was denied by the Contractor, principally on the basis that the claim was barred by the Subcontract’s ‘no damages for delay’ clause.

The Subcontractor sought relief under the payment bond, but the Surety also denied the claim. In the resulting lawsuit, although the Subcontractor argued, among other things, that (1) its damages were not delay, but included claims for disruption (i.e., impact, acceleration and other causes), and (2) that even if they were delay, and unrecoverable from the Contractor, its damages were recoverable under the payment bond given the Miller Act’s intent and purpose to provide security and payment for labor and materials supplied to federal projects. With regard to the Miller Act claim, the essence of the Subcontractor’s argument was that if there was a conflict between Subcontract language and the Miller Act, the Miller Act should prevail.

The Trial Court Decision

The trial court rejected the Subcontractor’s position and preliminarily dismissed both the Subcontract and Payment Bond claims largely on the basis that the claims were for “delay” damages and were unrecoverable under the Subcontract. Because, the trial court said, the Surety’s liability on the bond was co-extensive with that of its principal, the trial court likewise dismissed the payment bond claim.

The Appellate Court Reverses and Remands

The appeals court, in an unpublished opinion, reversed the trial court. In so doing, it did not opine on the ‘Subcontract vs Miller Act” issue of concern to the ASA. Instead, it ruled that granting the motion to dismiss was an error because the Subcontractor, in its amended complaint, had plead sufficiently for the claim to be prosecuted as disruption.

The appeals court thus remanded the case back to the trial court for further proceedings. While the case is not over and it remains to be seen how it will be resolved, the decision was a victory for the Subcontractor, and at the same time illustrates for contractors and counsel a number of important takeaways or “lessons learned.”

Key Takeaways

First, the best course of action is to presume that contract clauses will be interpreted as written and one should act accordingly in negotiations and not rely on statutory arguments to prevail over the contract language. Though contract clauses that are against public policy are subject to rejection and could impact the entire contract, there may be closer calls and it could be a very expensive endeavor for both sides to find out who is “right.”

Second, counsel should be involved or consulted early on when presenting or being presented with claims (particularly significant claims) in the first instance. Here, the trial court latched onto the Subcontractor’s titling of its Request for Equitable Adjustment as a ‘delay’ claim as the basis to dismiss both the contract and bond claims. Though the appeals court found that reliance to be in error, the simple decision to title the claim as something different (e.g., “Delay and Disruption,” “Impact,” etc.) may well have avoided the initial dismissal and the need to take the case through an appellate decision.

Finally, if a payment bond claim is at the point where litigation is needed, there are arguments on both sides as to whether statutory language prevails over inconsistent contract terms. Parties need to be aware of these arguments as both a strategic and practical matter.