Case in Maryland asks if suppliers need a go-between to file claims

July 7, 2021

This column published as "Pass-through" in July/August 2021 issue

Most heavy highway projects are constructed by teams of contractors with each team member specializing in various disciplines.

The prime contractor is responsible to the owner. In turn, subs and suppliers are obligated to the prime to the same extent the prime is obligated to the owner. In federal contracts and in many states—though not all—certain exceptions to the Severin doctrine allow prime contractors to submit claims on behalf of subs and suppliers seeking costs for which the owner is or may be liable (i.e., so-called Pass-Through Claims).

In the recent story summarized below, which is currently on appeal to the Maryland State Supreme Court, a supplier has already been through multiple rounds with differing results as to whether it can claim directly against the Maryland State Highway Administration (SHA) or pass its claims through the prime to the SHA.

In August 2011, the SHA issued a Highway Noise Policy with requirements and procedures for approval of suppliers producing precast concrete products. Pre-approval, subject to annual review, was required before a supplier could be used in a bid on SHA highway projects. SHA charged an annual inspection fee.

Later, on a project for construction of a 0.38-mile noise barrier wall along a stretch of I-95 in Howard County, Maryland, the prime contractor entered into a purchase order with a supplier for nearly 41,000 precast concrete noise wall panels and three access doors. Subsequently, the supplier furnished and SHA approved a sample panel. As usual, SHA stationed its inspector at the supplier’s plant and no panels could be shipped without the inspector’s approval. Eventually, SHA dismissed the inspector for alleged failures to properly perform. Thereafter, SHA separately determined that all panels manufactured after a certain date contained aggregate from an unapproved source in violation of the noise barrier standards, which prevented the determination of the panels’ required strength.

When the supplier sued the contractor in federal court, the contractor submitted to the SHA a “claim,” which was actually a copy of the supplier’s complaint against the contractor in the federal lawsuit. The lawsuit was eventually settled. Although the SHA acknowledged the complaint was at least a notice of claim, the SHA never rendered a decision on the claim.

The supplier and contractor jointly appealed the “deemed denial” of the claim to the Maryland State Board of Contract Appeals (MSBCA). In the MSBCA appeal, the SHA argued that only a person having a contract with the SHA may file a claim. The supplier argued it had a contract with SHA, because of SHA’s pre-approval of the supplier’s operations and the SHA’s separate approvals (both before production and by the inspector during production) of the supplier’s products for use in SHA projects. The board concluded the SHA approvals did not create a contract between supplier and SHA, so the supplier could not directly claim against the SHA.

After round one with the contractor in the federal lawsuit, round two with the SHA, and round three with the MSBCA, round four was judicial review in the Circuit Court. In looking more closely at the relationship between SHA and supplier, the Circuit Court determined there was a procurement contract between them. The Circuit Court reasoned that the pre-approval to be potentially selected for use in a SHA contract created a procurement relationship between the SHA and supplier.

In the fifth round, the SHA petitioned the Maryland Court of Special Appeals (one level below the State Supreme Court) to review the MSBCA’s decision. Understandably, the supplier argued that under the Maryland State Finance and Procurement Code, the process of “obtaining supplies [by] an agreement in any form [with] a unit for procurement” was enough to allow it to claim directly against the SHA. The Appeals Court held, however, that pre-approval of eligibility to provide materials for a SHA project is not the type of contract that would allow the approved supplier to claim directly against the SHA. Although not expressed by the Appeals Court, it is generally true that the mere regulation, licensing, and/or policing by any state agency does not waive the state’s sovereign immunity. Accordingly, subcontractors and suppliers with pass-through claims should be cognizant of the deadlines and requirements between the prime and owner and strive to “partner,” when possible, for pass-through claims.

This decision in the case of Maryland State Highway Administration v. Brawner Builders, Inc., 248 Md. App. 646 (Dec. 18, 2020) is now on appeal to the Maryland State Supreme Court. Stay tuned for the sixth and final round.

About The Author: Straw is a partner with Kraftson Caudle, PLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Straw can be contacted via e-mail at [email protected].

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