The Consequences of Failing to Exhaust Administrative Remedies Prior To Filing Suit

Construction and Procurement Law News, Q3 2017

Client Alert


The Fourth Circuit Court of Appeals, the federal appeals court covering Maryland, Virginia, West Virginia, North Carolina, and South Carolina, affirmed the trial court’s decision to dismiss a contractor’s breach of contract claim against the City of Baltimore (“City”) due to the contractor’s failure to first exhaust its contractual administrative remedies prior to filing its lawsuit. The dispute in Balfour Beatty Infrastructure, Inc. v. Mayor, et al. stemmed from a contract to build a wastewater treatment center to help combat pollution in the Chesapeake Bay.

The contract contained a “time is of the essence” provision and a liquidated damages provision that applied a daily-liquidated damages rate if the contractor completed the project late. The contract also incorporated the dispute resolution process set forth in the City’s Department of Public Works Specifications, more commonly known as the Green Book. The contract’s multi-tiered dispute resolution process required the contractor to give “prompt notice of any claim or dispute to the Department of Public Works engineer assigned to [the] project.” That engineer, along with the project’s inspector and division head, provide the initial review of the claim. If the contractor appealed their decision, the bureau head of the Department of Public Works would review the claim. If the contractor appealed the decision of the bureau head of the Department of Public Works, the Director of Public Works would review the contractor’s claim and issue a final decision. The contract provided that only after the Director of Public Works issued its final decision could the contractor “bring its claim to a ‘court of competent jurisdiction.’”

The contractor alleged that it encountered a number of delays throughout the project resulting from the City’s “design errors, omissions and inconsistencies” which interfered with its completing the project as originally agreed. Nonetheless, after the contractor missed the contractually required substantial completion date, the City notified the contractor that it would begin assessing liquidated damages at the rate of $20,000 per day until the contractor completed the project. In response, the contractor bypassed the contract’s administrative dispute resolution process and filed a lawsuit in federal court for breach of contract. The contractor alleged that the City had breached the contract by declaring it in default and assessing liquidated damages without first pursuing its claim through the contract’s dispute resolution procedures. The contractor contended that the City’s actions “amounted to an illegal and ultra vires ‘abandonment’ of the Green Book administrative process, relieving [the contractor] of any obligation to use that process itself.”

The trial court disagreed with the contractor and held that the contractor was required to exhaust the administrative remedies set forth in its contract with the City. The trial court emphasized Maryland’s “strong preference for administrative exhaustion,” a preference that is consistent with federal law. It explained that, under Maryland law, “it is well established that ‘[w]here an administrative agency has primary or exclusive jurisdiction over a controversy, the parties to the controversy must ordinarily await a final administrative decision before resorting to the courts for resolution of the controversy.’” However, the trial court recognized that an exception to the exhaustion requirement was warranted when the “reviewing agency is ‘palpably without jurisdiction’ to adjudicate a party’s claim,” and the complaining party pleads that it will suffer an “irreparable injury” if it is forced to comply with the contractual administrative process. The trial court reasoned that such an exception did not apply to the facts of this case.

The trial court further explained that the contractor’s question regarding the unlawfulness of the City’s assessing liquidated damages without first engaging in the contract’s prescribed dispute resolution process is the type of “regulatory interpretation issues that ‘should be decided administratively before proceeding to judicial review.’” The trial court stated that even if the City “acted without authority in taking liquidated damages absent administrative review, that would not excuse [the contractor] from exhausting its administrative remedies.” The trial court also rejected the contractor’s argument that submitting its claim through the administrative dispute resolution process would be futile because the City employees that would review its claims were biased in favor of the City.

On appeal, the Fourth Circuit affirmed the trial court’s decision and agreed that the contractor “was required to exhaust its contractual administrative remedies before filing [its] action in federal court.” The Fourth Circuit further explained that the “palpably without jurisdiction” exception to the exhaustion requirement applied “when the agency charged with administrative review is not empowered to adjudicate the issue presented or to grant effective relief,” a situation that was not present based on the facts of this case.

This case is a reminder of the importance of complying with contractual dispute resolution provisions. Work with your lawyer to make sure you have a thorough understanding of the contractual requirements concerning claims or disputes and that you follow the process stipulated by your contract before filing a lawsuit that may be deemed premature. By engaging in the contractually required dispute resolution process, you may be able to resolve the dispute without incurring the high costs and unpredictability usually associated with litigation. Regardless, even if unsuccessful, the administrative process may be required for pursuit of a valid claim in court.