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Oles Morrison

Assignment of Claims to a Surety Cannot Waive A Contractor’s CDA Appeal Rights

By on January 29, 2018 | Posted in Claims and Disputes

It is a common principle of contract interpretation that a court will not set aside the clear intent of the parties particularly when it comes to assignments or releases of claims. However, the unique legislative history of the Contract Disputes Act (“CDA”) grants the agency boards of contract appeals the power to set aside an assignment of a claim, if that assignment would waive the contractor’s right to appeal a Contracting Officer’s decision to the boards. A recent Armed Services Board of Contract Appeals (ASBCA) decision highlights this power, which is of great importance to contractors because they keep their right to file affirmative monetary contractor claims against the government and appeal government claims, such as a termination for default.

In Ikhana, LLC, the Armed Services Board of Contract Appeals held that an assignment of all claims to a surety in an indemnity agreement for a performance and payment bond in the event of a default did not prevent the contractor from bringing claims and an appeal of that default to the Board.  ASBCA No. 60462.  Ikhana entered into a contract with the Army Corps of Engineers to provide secured access lanes and remote screening facilities at the Pentagon.  In October 2015, Ikhana filed four claims with the Contracting Officer.  In December 2015, the Contracting Officer terminated the contract for default.  On February 25, 2016, Ikhana appealed the termination for default as well as its four affirmative claims.  The government then made a claim against Ikhana’s performance bond.

The surety and the government eventually agreed that the surety would tender a completion contractor.  The surety also agreed that it would cause the dismissal of Ikhana’s appeals and release the government from any claims regarding the contract.  The government subsequently moved to dismiss Ikhana’s appeals and the surety moved to intervene in the case and withdraw the appeals.  The Board denied both motions.

The Board relied on Federal Circuit precedent to hold that Ikhana could not indirectly waive its rights to appeal a Contracting Officer’s decision to the Board.  The CDA was enacted in part to equalize the bargaining power between the contractor and the government.  Minesen Co. v. McHugh, 671 F.3d 1332, 1340-41 (Fed. Cir. 2012).  In Burnside-Ott Aviation Training Ctr. v. Dalton, the Federal Circuit held that:

[p]ermitting parties to contract away Board review entirely would subvert this purpose. … any attempt to deprive the Board of power to hear a contract dispute that otherwise falls under the CDA conflicts with the normal de novo review mandated by the CDA and subverts the purpose of the CDA. … Congress commanded that the CO’s decision on any matter cannot be denied Board review.

107 F.3d 854, 859 (Fed. Cir. 1997).

In Ikhana’s appeal, the Board held:

Ikhana indirectly waived its right to appeal to the Board by assigning the claims subject to these appeals to the surety, which then agreed with the government to withdraw these appeals. … However, that is a distinction without a difference.  Regardless of the particular manner in which the contractor waived its CDA right to Board review, the end result is the same – the contractor impermissibly has contract away its unwaivable CDA right to impartial review of the CO’s decisions.

ASBCA No. 60462.

In Maharaj Construction Inc., the Department of Labor Board of Contract Appeals (“LBCA”) came to the opposition conclusion.  LBCA No. 2001-BCA-3.  Maharaj Construction had been terminated for default and, in the terms of the General Indemnity Agreement, Maharaj had assigned its rights to settle claims to the surety.  Similarly, the surety sought to dismiss the pre-termination claims as part of a global settlement with the government.  The Board did not address Burnside-Ott but instead looked to a 2nd Circuit decision, Hutton Construction Co. v. County of Rockland, to support its decision that the surety could settle the claims on behalf of the contractor.  52 F.3d 1191 (2d. Cir. 1995).  The ASBCA declined to follow Maharaj because the decision did not address Burnside-Ott and its language prohibiting a contractor from contracting away its right to a de novo review at the Board.

It is unclear what impacts the Ikhana decision may have on performance and payment bonds going forward.  Assignments of contractual rights, including the right to settle claims, is a common practice across suretyship.  However, the ASBCA has made it clear that giving sureties the right to settle a contractor’s CDA claims is not allowed under the terms of the CDA.  Even if a surety’s right to assignment comes into effect subsequent to the submission of claims, contractors still have the right to have an agency board of contract appeals review their denied claims.