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Harrison Law Group Secures Victory For Subcontractor in Fourth Circuit Court of Appeals

By December 23, 2020 Construction Law

Our client, a subcontractor, filed a Miller Act complaint against a surety in the United States District Court for the Eastern District of Virginia to recover compensation for damages incurred on the Basic School Student Officer Quarters project at Marine Corps Base Quantico in Virginia.  The surety moved to dismiss the complaint on the grounds that the subcontractor did not allege in its complaint that the general contractor (and bond principal) breached its subcontract with the subcontractor.  The surety asserted that its liability to the subcontractor under the bond was derivative of the general contractor’s liability to the subcontractor under the subcontract.  Absent any allegations in the complaint that the general contractor was liable to the subcontractor, the surety argued that the subcontractor could not maintain a claim against the surety.

The subcontractor responded with case law supporting its position that the Miller Act provides subcontractors with an independent cause of action against the surety regardless of the bond principal’s liability to the subcontractor.  As such, the subcontractor was not required to allege in its complaint that the general contractor was liable to it under the subcontract.  Following oral argument on the motion to dismiss, the District Court took the matter under advisement.

In the interim, the subcontractor sought and was granted leave to file an amended complaint.  In the amended complaint, it alleged that the general contractor was liable to it under the subcontract and, in addition to its Miller Act claim against the surety, asserted claims against the general contractor.  Although the surety moved to dismiss the original complaint, it opted to answer the amended complaint.

The general contractor, however, moved to dismiss the amended complaint.  It argued that the subcontractor’s claim was a delay—as opposed to a disruption—claim that was barred by the subcontract no damages for delay clause; that an exhibit attached to the amended complaint supported that the claim was a delay—and not a disruption—claim and, under Goines v. Valley Cmty. Servs. Bd., 822 F.3d 159, 166 (4th Cir. 2016), the exhibit prevailed over any contrary allegations in the complaint; that, even if the claim was a disruption claim, it was still barred under the subcontract; and that the subcontractor did not provide the general contractor with notice of its claim in accordance with the subcontract requirements.

The subcontractor countered that it properly alleged a disruption—and not a delay—claim; that the exhibit did not contradict the allegations in the amended complaint; that the subcontract did not bar disruption claims; and that it adequately alleged that it complied with the notice condition precedent requirements in the subcontract.

At the hearing on the motion to dismiss, the District Court found that the subcontractor’s claim was, in fact, a delay—and not a disruption—claim; that the exhibit attached to the amended complaint supported that conclusion; and that the subcontractor failed to adequately allege that it provided sufficient notice to the general contractor in compliance with the requirements of the subcontract.  Accordingly, the District Court dismissed the amended complaint against the general contractor.

The District Court went further and dismissed the amended complaint against the surety, even though the surety did not seek dismissal of the amended Miller Act claim, on the grounds that the surety’s liability to the subcontractor is derivative of the general contractor’s liability to the subcontractor and, because the subcontractor’s claims against the general contractor were being dismissed, the Miller Act claim against the surety had to be dismissed as well.

In its opinion vacating and remanding the District Court’s dismissal of the amended complaint, the Fourth Circuit Court of Appeals held that the District Court erred by relying on the exhibit prevails rule to determine that the subcontractor was asserting a delay claim which was barred by the subcontract no damages for delay clause.  With respect to the notices to the general contractor, the Fourth Circuit held that the District Court erred by disregarding the subcontractor’s allegations in the amended complaint that it provided numerous notices to the general contractor throughout the course of the project as well as the general allegation that all conditions precedent under the subcontract to bringing its claim were satisfied.  Accordingly, the Fourth Circuit Court of Appeals reversed the dismissal and remanded the case for further proceedings.  Because of the District Court’s error in dismissing the amended complaint against the general contractor, the Fourth Circuit Court of Appeals concluded that the District Court’s dismissal of the Miller Act claim against the surety was in error, reversed that dismissal, and remanded the Miller Act claim for further proceedings in the District Court.  The Fourth Circuit Court of Appeals’ opinion can be accessed by clicking here.

It is noted that the manner in which the Fourth Circuit determined to address the issues on appeal meant that it did not address the substantive issues of importance to construction subcontractors that were front and center in this case: (1) whether there is a distinction between delay claims and disruption claims as a matter of law and (2) whether a Miller Act surety is entitled to rely on a no damages for delay clause in its principal’s subcontract.  As noted in the briefs filed in this appeal, there presently exists a split among the district courts in the Fourth Circuit (and around the country) with respect to whether a Miller Act surety can defend against a Miller Act claim based on a no damages for delay clause in its principal’s subcontract.  This issue remains unaddressed and unsettled at the federal circuit court level.

Eli Robbins

Author Eli Robbins

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