On February 4, 2019, the U.S. District Court for the District of Maryland in Hagen Constr. Inc. v. Whiting-Turner Contracting Co., No. JKB-18-1201, 2019 BL 36862 (D. Md. Feb. 4, 2019), held that written "expressions of frustration" and "general complaints" made by a subcontractor regarding alleged project mismanagement were insufficient to sustain a labor inefficiency claim for additional project costs against the general contractor.
Hagen Construction, Inc. ("Subcontractor") subcontracted with Whiting-Turner Contracting Co. ("General Contractor") for the construction of a pediatric medical center. The Subcontract provided the General Contractor was not responsible for costs related to additional work performed by the Subcontractor unless written notice of such additional work was provided to and approved by the General Contractor. The Subcontract also provided that, prior to approval of any payment application, the Subcontractor must provide executed lien waivers and partial releases for that pay period to the General Contractor.
Seeking reimbursement for additional costs allegedly incurred as a result of the General Contractor's mismanagement of the Project, the Subcontractor filed suit claiming its work was impeded from progressing in an orderly manner on the medical center. To support its claim, the Subcontractor produced written correspondences made to the General Contractor during the Project wherein the Subcontractor expressed its frustrations with the Project's inefficiency and general complaints regarding the General Contractor's mismanagement. The Subcontractor argued that these written correspondences satisfied the legal notice requirement to the General Contractor regarding additional work under the Subcontract. Notably, in light of these allegedly incurred additional costs, the Subcontractor executed lien waivers and partial releases with its payment applications which expressly stated the Subcontractor was waiving any future claims that arose during that pay period against the General Contractor. At the time the Subcontractor executed the lien waivers and partial releases, it did not believe that its inefficient labor claim would be affected in any way as such claim was not permitted under the state's lien laws.
In response to the Subcontractor's labor inefficiency claim, the General Contractor argued that the written complaints it received from the Subcontractor during the Project did not rise to the level of "written notice" as to additional work under the Subcontract. The General Contractor further argued that the labor inefficiency claim was barred due to the Subcontractor's execution of the partial releases which did not carve out exceptions for any future claims made against the General Contractor.
Even though the federal court noted that the Subcontractor did in fact make numerous written "expressions of frustration" and "general complaints" to the General Contractor throughout the Project, that these communications failed to constitute legal notice of a claim as required by the Subcontract because they lacked detailed information and substantiation by the General Contractor as required by the Subcontract. Furthermore, the federal court held that the partial releases executed by the Subcontractor were very broad and did not contain an exception for inefficient labor claims. Accordingly, the federal court dismissed the Subcontractor's inefficient labor claim on summary judgment.
So, as a subcontractor, what is the lesson from Hagen Contr., Inc.? To ensure subcontractors are protected in situations involving project mismanagement, it is best practice to review the language of the contractual agreement. Likely, as in Hagen Contr., Inc., such agreement will require written notice of any additional work to be provided to the general contractor, along with the written approval of the general contractor. Subcontractors must also correctly document the costs associated with additional work as opposed to just "venting" their dissatisfaction. If a project's mismanagement has resulted in additional costs, the subcontractor should prepare change orders describing these additional costs in detail. The change orders should be submitted along with pay applications to document the compensation sought by the subcontractor for such additional work. Importantly, subcontractors should never execute partial releases if such document does not contain an exception for the costs associated with the additional work incurred by the Subcontractor. Whether this additional work is related to mismanagement or otherwise, unless the subcontractor executes a partial release which carves out the appropriate exceptions, the subcontractor has waived any future claims against the general contractor for that pay period.
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