Maryland Subcontractor's Delay Damages Waived Through Lien Releases

In United States v. Hartford Accident & Indem. Co.,a federal court in Maryland recently held that partial lien releases, executed without exceptions, barred a mechanical subcontractor’s claim for delay damages.  Even though the subcontractor’s delay damages arguably had not yet fully ripened at the time the releases were executed, and were furnished in order to receive its progress payments, the Court ruled that nothing in the release language preserved the claim. 

In this case, James W. Ancel, Inc. (“JWA”), as general contractor, executed a contract with the United States Army Corps of Engineers (“USACE”) for the construction of an army reserve center in Baltimore, Maryland.  In August 2010, JWA entered into a subcontract agreement (“the Subcontract”) with Chasney and Company, Inc. (“Chasney”), for the HVAC and plumbing scope of work, valued at approximately $1,500,000.  JWA furnished a payment bond pursuant to the Federal Miller Act, with Hartford Accident and Indemnity Company as the surety.

During performance of the project, Chasney and JWA encountered numerous design defects and other deficiencies attributable to the government.  JWA submitted over two dozen claims, which eventually ripened into appeals before the Armed Services Board of Contract Appeals. While the appeals were pending, JWA entered into settlement negotiations with the USACE. Chasney apparently learned of these negotiations and submitted a $380,687.65 delay claim through JWA for further transmission to the government. Government officials allegedly dismissed Chasney’s claim as lacking merit.

On September 10, 2013, JWA and USACE reached a global settlement which purported to resolve all appeals then pending as well as “all outstanding disputes and claims relating to the contract.” USACE agreed to pay JWA a settlement sum of $3,300,000.  In exchange for the compromise payment, JWA released the government from any and all claims relating to the contract. The first $3,000,000 payment was made on November 4, 2013. On April 25, 2014, Chasney advised JWA that it understood Chasney’s delay claim had been paid as part of the settlement agreement and requested reimbursement of $380,687.65.  JWA informed Chasney that its understanding was “simply not correct,” that the settlement with the government was a lump sum amount and the parties did not assign any particular value to individual elements in reaching the settlement sum.

Chasney filed suit against the payment bond surety, Hartford, claiming $380,687.65 for its delay damages as well as $79,882.45 for labor and material, for a total of $460,570.10.

Article 5 of the Subcontract provided as a condition of payment that Chasney “shall furnish guarantees and all other documents required by the Prime Contract for [Chasney’s] work, including releases of all claims and liens as a condition precedent for final payment,” and that “[p]artial releases may be required at [JWA’s] option as a condition precedent to any partial payments for work completed.”

Article 11 of the Subcontract provided that JWA “shall not be liable to [Chasney] for delays caused by the [Government] or other subcontractors or suppliers” but that Chasney “shall be entitled to reimbursement only for damages for delays recovered from the [Government]” and that Chasney “shall have the right, at its expense, to exercise against the [Government] all provisions of the Prime Contract to recover said damages.”

Beginning in November 2010 and continuing through November 2013, Chasney executed a series of “Subcontractor’s Partial Release, Waiver of Lien and Affidavits” in order for Chasney to receive its progress payments.  By signing each partial release, Chasney agreed to “waive and release all liens and claims and demands against [JWA] and/or its sureties in any manner arising out of [Chasney’s] work, labor, services, equipment or materials performed or furnished in connection with the project, through the period covered by the current payment and all previous payments.”

The waiver language did not apply to “extra work which had been authorized in writing by [JWA], but for which the payment had not been made.” By signing, Chasney affirmed that it was “aware of no claims nor any circumstances that could give rise to any future claims” against JWA, Hartford, or others involved in the project. Each form included a space for Chasney to list claim exceptions. Chasney did not include any exceptions for delay damages on any of the forms. The last form, dated November 15, 2013, applied to claims arising on or before October 31, 2013.

The federal court, applying Maryland law, held that the partial lien releases were unambiguous on their face and waived all claims related to work performed through the covered period, thereby precluding the HVAC subcontractor’s delay claims arising out of the work it performed prior to October 31, 2013.

The Court held that in the construction industry, parties routinely enter into settlement agreements through which they waive all claims—present and future, known and unknown—arising from a particular set of circumstances.  The Court found that Chasney voluntarily relinquished a known right in executing the lien releases without noting an exception for its pending delay claim.

As is often the case with delay or disruption damages, it is difficult to assign a dollar value to these claims while the project is ongoing.  Damages often do not fully accrue until the end of the project, when the full impact of the disruption to the subcontractor may be calculated.  Many times, experts need to be retained in order to evaluate and assess the full impact of owner or contractor caused delays and disruptions.  Nevertheless, it is important to exempt these claims on lien releases by listing them as exempted and strike out language within the partial release that waives these claims.  This should be regardless of whether the general contractor has defenses to the claim, such as a pay when paid clause or defense.  This case is a reminder of how lien releases will override even the most solid set of facts.  Here, the court acknowledged that the subcontractor encountered delays through no fault of the subcontractor.  Additionally, the general contractor assisted the subcontractor in submitting the claims to the government, who ultimately paid a lump sum.  The subcontractor nevertheless was stymied in pursuing its claim, as the surety was able to enforce the lien releases that Chasney signed.

United States v. Hartford Accident & Indem. Co., No. CV JKB-14-2148, 2016 WL 852730 (D. Md. Mar. 4, 2016)

Categories: Legal Updates