Fourth Circuit Affirms Dismissal of Contractor’s Complaint, Declining to Create ‘Ultra Vires’ or ‘Bias’ Exceptions to the Requirement That Contractors Exhaust Their Administrative Remedies Under Maryland Law Before Suing a Government Agency

by Pepper Hamilton LLP
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Balfour Beatty Infrastructure, Inc. v. Mayor and City Council of Baltimore, 2017 U.S. App. Lexis 7252 (4th Cir., April 25, 2017)

The United States Court of Appeals for the Fourth Circuit recently addressed whether the City of Baltimore (the “City”) had abandoned a contractually required administrative dispute resolution process and relieved Balfour Beatty Infrastructure, Inc. (the “Contractor”) of any obligation to use the administrative dispute resolution process before seeking judicial review of the Contractor’s claims.

The City and the Contractor entered into two contracts (the “Contracts”) whereby the Contractor agreed to build certain parts of a wastewater treatment plant servicing the Chesapeake Bay. The Contracts stipulated that time was of the essence and permitted the City to assess liquidated damages if the Contractor failed to meet the specified completion date.  The Contracts also incorporated by reference the administrative dispute resolution process set forth in the City’s “Department of Public Works Specifications – Materials, Highways, Bridges, Utilities and Incidental Structures 2006,” known as the “Green Book,” which requires contractors engaged by the City in connection with public works projects to seek administrative review by the City’s Department of Public Works of any dispute related to their contracts before suing in court. 

The Contractor claimed that due to the City’s design errors, the Contractor was unable to finish the project by the completion date specified by the Contracts. Two days after the completion date had passed and before addressing several pending extension requests from the Contractor, the City began deducting liquidated damages at the rate of $40,000 per day from its monthly payments to the Contractor without first initiating a delay claim through the administrative dispute resolution process required by the Contracts.

Rather than initiate an administrative claim, the Contractor sued in federal court alleging that the City materially breached its contracts with the Contractor by assessing liquidated damages without first pursuing its claim through the administrative dispute resolution process and the City’s actions amounted to an illegal and ultra vires abandonment of the administrative dispute resolution process relieving the Contractor from any obligation to use that process as well.

The Fourth Circuit affirmed the District Court’s dismissal of the Contractor’s lawsuit for lack of subject matter jurisdiction, holding that whether the City acted unlawfully by assessing liquidated damages without first engaging in the administrative dispute resolution process is a regulatory interpretation issue that should be decided administratively before proceeding to judicial review, and the Contractor was not excused from exhausting its administrative remedies even if the City acted improperly because Maryland courts have not adopted an exception for ultra vires or illegal action of an administrative agency to the requirement that administrative remedies be exhausted before initiating a lawsuit.

The only exception to the exhaustion requirement is when the reviewing administrative agency does not have jurisdiction to adjudicate the claim and the complaining party would suffer irreparable injury by postponing litigation until the completion of administrative review. The Court held that the exception did not apply because the Department of Public Works had jurisdiction; no one disputed that the Contracts were public works contracts governed by the dispute resolution process set forth in the Green Book, and the Green Book clearly charges the Department of Public Works with authority to hear and resolve claims involving public works contracts.  The Court declined to address whether the Contractor would suffer irreparable injury by engaging in the administrative dispute resolution process because the Contractor would have to first show that the Department of Public Works lacked jurisdiction over the claim, which the Contractor failed to do.

To the extent the Contractor argued that jurisdiction exception applied because the City lacked authority to deduct the liquidated damages from its payments to the Contractor without first engaging in the administrative dispute resolution process, the Contractor’s position reflected a fundamental misunderstanding of the exception and is an entirely different issue going to the merits of the underlying dispute.

The Court further declined to create a “bias” exception to the exhaustion requirement due to the Contractor’s claim that the Department of Public Works was predisposed to favor the City’s position, because such an exception would swallow the rule of administrative exhaustion and a government agency could never then require its own officials or tribunals be given the first opportunity to address a claim against it.

To view the full text of the court’s decision, courtesy of Lexis®,  click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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