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Oles Morrison

When is a Surety a “Contractor” with the Government at the Boards Of Contract Appeals?

By on May 2, 2018 | Posted in Claims and Disputes

When do agency Boards of Contract Appeals have jurisdiction to hear a federal contract dispute under the Contract Disputes Act (CDA) when the dispute is with a surety that issued a bond on the project?  Answering this question is key to avoiding a government motion to dismiss for lack of jurisdiction.

Typically, if a surety is forced to step in to take over for a contractor, both the terms of the bond and principles of equity allow the surety subrogation rights, which entitle the surety to the contract rights of the obligor (contractor). This includes the right to pursue payment from the government for work performed, and for overpayments to the contractor.

The Court of Federal Claims (COFC) has held that the Tucker Act allows sureties to pursue equitable subrogation claims against the government in that forum.  See Transamerica Ins., Co. v. United States, 31 Fed. Cl. 602 (1994).  Thus, the answer appears to be that when a surety is pursuing a subrogation claim on a government contract, a Board would have jurisdiction under the CDA, since in broad terms the claim arises out of the contractor’s claims against the government.

However, if a surety takes over a project for a defaulting contractor under a federal contract, it does not automatically vest to all the rights of the bondholder. Specifically, sureties do not subrogate to the contractor’s rights under the CDA.  Boards, COFC, and the Court of Appeals for the Federal Circuit have held that CDA jurisdiction requires privity of contract, i.e., claims by a “contractor,” and a surety is not a “contractor” by way of the original contract with the government.

Sureties should be aware that stepping into the shoes of a defaulting contractor does not afford the surety the same rights as the contractor when it comes to pursuing the contractor’s claims under the CDA.  It is possible that a surety could find itself limited to pursuing equitable subrogation before the COFC for pre-takeover claims, and to be limited to an appeal before the Board for post-takeover claims unless the surety overcomes hurdles required by the CDA.  Understanding these jurisdictional restrictions is necessary to efficiently address claims on projects that are already in turmoil due to contractor default.Sureties do have options if they prefer to pursue claims before a Board under the CDA.  First, the surety may have the option of appealing to the Board as representative of the principal/contractor with the contractor’s consent and sponsorship of the claim.  This may be easier said than done depending on the financial status of the defaulted contractor.

Second, a surety can sign a “takeover agreement” with the government, which essentially adopts the surety in place of the defaulted contractor in order to complete the project.  The takeover agreement gives the surety CDA rights as a “contractor” for all claims under the takeover agreement, thus affording it the right to Board jurisdiction.

Even with the takeover agreement, however, pre-takeover equitable subrogation claims are still prohibited from CDA jurisdiction.

The bottom line is that navigating these jurisdictional restrictions requires caution in order to resolve claims on projects that already have serious problems due to contractor default.

Image courtesy of Flickr (licensed) by bikoy