Marenalley Constr., LLC v. Zurich American Ins. Co. and Nason Constr. Inc., 2015 U.S. Dist. LEXIS 30968 (E.D. Pa. March 13, 2015)

This payment dispute case arises out of a Veterans Affairs (“VA”) construction project located in Philadelphia. Nason was the general contractor, Zurich was Nason’s surety, and Marenalley was Nason’s subcontractor. Marenalley’s subcontract required it to pursue any claim related to the project through the administrative disputes resolution process provided by Nason’s prime contract with the VA before bringing suit against the project’s bond.  The prime contract’s administrative dispute resolution process clause incorporated the terms of the Contract Disputes Act (the “CDA”).

Over the course of the project the VA added work for Marenalley, and Marenalley encountered conditions that it did not expect.  This additional work added to Marenalley’s costs, so Marenalley submitted proposed change orders and requests for equitable adjustment to Nason.  Nason, in turn, filed a certified CDA claim pursuant the prime contract’s administrative dispute resolution clause against the VA.  Nason’s CDA claim, in part, sought to pass through Marenalley’s claims for compensation for the additional work.

While Nason’s CDA claim remained pending, Marenalley filed a claim in the United States District Court for the Eastern District of Pennsylvania to recover for the additional work under the Miller Act against Zurich’s surety bond.  Nason and Zurich sought to dismiss or stay the bond claim, arguing that Marenalley’s subcontract required it to await the resolution of the administrative dispute resolution process described in Nason’s prime contract with the VA.

The Court denied Nason and Zurich’s motion to dismiss.  It concluded that Marenalley’s subcontract did not waive Marenalley’s Miller Act rights, and thus Marenalley did not have to wait until the administrative dispute resolution process resolved before filing a bond claim.  In reaching its conclusion, the Court discussed the interplay between clauses providing for pass through claims and the Miller Act.

The Court noted that since Marenalley had no privity of contract with the VA, there was no procedure by which Marenalley could present a claim against the VA, except as a pass through claim of Nason.  It also noted that Marenalley’s subcontract did not contain any provision requiring Nason to include Marenalley’s claim for payment in its CDA claim against the VA, and that the CDA process provides no remedy to a subcontractor for any claim it may have against a prime contractor for failing to include, or properly present, its claim.  The Court recognized that the Miller Act’s purpose was to remedy the “resultant hardships” on subcontractors by requiring the prime contractor to post performance and payment bonds, and by eliminating any requirement that the subcontractor wait until completion of the entire project to file suit against the contractor.

According to the Court, under section 3133(c)(3) of the Miller Act a subcontractor can waive its Miller Act rights “only after it has furnished labor or material for use in the performance of the contract.”  The Court concluded that even if Marenalley’s subcontract contained a provision attempting to waive Marenalley’s Miller Act rights, that provision would be void because Marenalley entered into its subcontract before it began work on the project.

As such, the Court held that conditioning Marenalley’s right to pursue a bond claim on the completion of Nason’s CDA claim process would be inconsistent with the purpose and express terms of the Miller Act.

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