Partial Releases Can Sink Miller Act Claim

Construction and Procurement Law News, Q4 2017

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In United States for the Use and Benefit of Chasney and Co., Inc. v. Hartford Acc. & Indem. Co., the U.S. Federal District Court for the District of Maryland held that partial releases waived a subcontractor’s right to recover damages under the Miller Act.

During the construction of an Army Reserve Center in Baltimore for the U.S. Army Corps of Engineers (the “Corps”), the prime contractor, James W. Ancel, Inc. (“JWA”), and its HVAC and plumbing subcontractor, Chasney and Company, Inc. (“Chasney”), encountered numerous design defects and other issues attributable to the Corps that caused extended delays and additional costs. JWA submitted numerous claims to the Corps, including Chasney’s delay claim. After the claims ripened into proceedings before the Armed Services Board of Contract Appeals, JWA and the Corps reached a settlement and the Corps made a substantial payment to JWA. However, JWA refused to pass through to Chasney any amounts that had been paid by the Corps. JWA maintained that the Corps had determined that Chasney’s claims had no merit, and further, that the “lump sum” settlement between JWA and the Corps included no money for Chasney. Chasney then filed suit against JWA’s surety (the “Surety”) under the payment bond that had been issued for the project pursuant to the Miller Act.

In response to the lawsuit, the Surety asserted that Chasney’s recovery was limited by certain “Subcontractor’s Partial Release, Waiver of Lien and Affidavit” (“Partial Release”) documents that Chasney had signed during the project. The Partial Releases stated that Chasney “waived and released 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 … pursuant or furnished … in connection with the project, through the period covered by the current payment and all previous payments.” The documents expressly carved out “extra work which ha[d] been authorized in writing by [JWA], but for which the payment ha[d] not been made.” They also included a space for Chasney to list exceptions; but nothing was written in these spaces on any of the documents. Further, the documents included a representation that Chasney was “aware of no claims nor any circumstances that could give rise to any future claims[.]” The Partial Releases extended through claims arising on or before October 31, 2013.

Based on the Partial Releases, the Surety filed a summary judgment motion seeking to deny any recovery by Chasney for work performed or delays encountered through October 31, 2013. As an initial matter, the Court determined that the surety was entitled to assert defenses based on the Partial Releases. The Court recognized: “[I]n general, the surety’s liability on the payment bond is ‘defined by the liability of the underlying contract’ …. In other words: with narrow exceptions not applicable here, the surety on a Miller Act payment bond is liable only to the extent that the general contractor would be liable – and the surety may avail itself of most contract defenses, including the doctrines of release and waiver.”

Next, the Court considered, and rejected, Chasney’s arguments that the Partial Releases were invalid and inapplicable. The Court determined that Chasney’s release of its claims was made voluntarily and knowingly, that the unambiguous language of the releases evidenced a “meeting of the minds,” and that because the subcontract agreement expressly authorized the Partial Releases, no additional consideration was necessary to support them. The Court also rejected Chasney’s arguments that the releases did not apply to Chasney’s delay claim. Accordingly, the Court granted the Surety’s motion, rejecting any recovery for claims arising on or before October 31, 2013. The Court explained: “In summary, the Court’s analysis begins and ends – as it must – with the unambiguous language of the Partial Releases. By signing each release, Chasney waived all claims relating to work performed through the covered period: no reasonable factfinder could conclude otherwise.”

The lesson of this decision is clear: Subcontractors should be wary of signing broad releases; prime contractors should solicit broad releases to mitigate their risk; and, when faced with a payment bond claim by a subcontractor, prime contractors and their sureties should carefully review subcontractor releases for potential defenses.