REQUESTING LIABILITY INSURANCE INFORMATION FROM RESPONSIBLE PARTIES FOR CONSTRUCTION OR DESIGN DEFECTS (FLA. STAT. s. 627.4137)

images-1If you are an owner and discover construction or design defects, you are going to want consult with a lawyer to make sure you know your rights under Florida Statutes Chapter 558.  This includes sending a written notice of the construction or design defects identifying the defects with sufficient detail to the potentially responsible parties.  Likewise, if you are a contractor and receive this written notice, you are going to want to make sure you forward that letter to potentially responsible parties (subcontractors or suppliers). 

 

Coupled with this written notice of defects letter should be a written request on the parties and their known insurance agents and insurers for their liability insurance information.  Start with culling Certificates of Insurance you have on these parties to obtain (some) of this information as to whom to send the request to.  This request can be in a separate letter or the same letter (as the notice of defects letter) and should reference Florida Statute s. 627.4137 and request the information in the below statutory language:

 

(1) Each insurer which does or may provide liability insurance coverage to pay all or a portion of any claim which might be made shall provide, within 30 days of the written request of the claimant, a statement, under oath, of a corporate officer or the insurer’s claims manager or superintendent setting forth the following information with regard to each known policy of insurance, including excess or umbrella insurance:

(a) The name of the insurer.

(b) The name of each insured.

(c) The limits of the liability coverage.

(d) A statement of any policy or coverage defense which such insurer reasonably believes is available to such insurer at the time of filing such statement.

(e) A copy of the policy.

In addition, the insured, or her or his insurance agent, upon written request of the claimant or the claimant’s attorney, shall disclose the name and coverage of each known insurer to the claimant and shall forward such request for information as required by this subsection to all affected insurers. The insurer shall then supply the information required in this subsection to the claimant within 30 days of receipt of such request.

 

As discussed in prior articles, insurance is an important aspect of construction and design defect disputes. 

 

If you are an owner, you want to understand potential insurance coverage so that you know how to best maximize any claim for insurance coverage against potentially liable parties.  This includes knowing the limits of liability in any commercial general liability (CGL) or professional liability / errors & omissions policy, as applicable, and whether there is any umbrella / excess policy.  This also includes understanding the exclusions in the policies and whether there are endorsements that add or modify exclusions in the policy.

 

If you are a general contractor, you also want to understand potential insurance coverage from subcontractors and other entities you are looking to flow-down an owner’s defect claims (ideally, through contractual indemnification language in your subcontract).  Also, you are going to want to make sure you have additional insured status under these parties’ liability policies so that they contribute to the fees and costs incurred in your defense.  For this reason, you also want to obtain copies of subcontractor insurance polices including all endorsements.  Besides the limits of liability, you want to see the additional insured endorsement in the policy, and any endorsements that add or modify exclusions in the policy. 

 

If you are a subcontractor, if you subcontracted aspects of your scope of work or there is a claim associated with deficient material you furnished, you also want to obtain this insurance information from these potentially liable entities because you are also going to try to flow-down liability (ideally, through contractual indemnification language in your subcontract).

 

And, if you are a manufacturer, if a claim is asserted against you arising out of the installation of that product, you also want to obtain insurance information from any authorized dealer or installer (perhaps through any agreement you have with that dealer or installer that would require this entity to indemnify you and name you as an additional insured).  

 

One of the underlying reasons for s. 627.4137 is so that parties can obtain insurance coverage information and make reasonably informed decisions about settling a matter.  In other words, you don’t want to settle a dispute for policy limits if you have damages that may exceed policy limits and find out the responsible party has additional or excess insurance to cover the excess damages. See, e.g., Schlosser v. Perez, 832 So.2d 179 (Fla. 2d DCA 2002) (in non-construction case, noncompliance with s. 627.4137 rendered settlement unenforceable). But, this statute does not create a private cause of action by a third-party if an insurer fails to timely provide this information. Any potential recourse the third-party would have, if any, against the insurer would have to be after the third-party obtains a judgment against the underlying insured. Lucente v. State Farm Mut. Auto. Ins. Co., 591 So.2d 1126, 1127-28 (4th DCA 1992) (“[T]he statute does not contain an implicit cause of action for a third-party against an insurance company.”);  see also Brannan v. Geico Indemnity Co., 569 Fed.Appx. 724, 728 (11th Cir. 2014)  (“But Brannan fails to point to any legal authority to show that s. 627.4137 creates a first-party private cause of action against an insurer [for failure to comply with the statute.]”).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

A DAVIS BACON SNACK – PREVAILING MINIMUM WAGE RATES ON CONSTRUCTION PROJECTS

UnknownContractors working on federal projects should be familiar with the Davis Bacon Act (40 USC s. 3142 and formerly cited as 40 U.S.C. 276a).  This Act requires contractors to pay, at a minimum, prevailing wage rates including fringe benefits for labor as determined by the Secretary of Labor.  The wage rate for select workers is oftentimes an exhibit to the contract.  To confirm parties are complying with the Act and paying prevailing wage rates including fringe benefits, parties are responsible for submitting certified payroll certifying the rates they are paying labor.   For more information on the Davis Bacon Act and submitting certified payroll, please click here and here.

 

Violations of the Davis Bacon Act are bad!  Violations can include contract termination, fines in the form of liquidated damages, debarment from federal projects for a period of time, claims by improperly paid laborers, potential violations of the False Claims Act, and potential criminal prosecution.

 

Many local jurisdictions also have their form of prevailing wage rates that they require for the labor working on their projects.

 

By way of example, Miami-Dade County has what it refers to as “Responsible Wages and Benefits” embodied in Section 2-11.16 of its Code.  You will see minimum wage rates  for labor (e.g., glazers, carpenters, drywall finishers, electrical workers, plumbers, roofers, etc.).  Any failure to pay these minimum rates can result in fines/ penalties and the County withholding payment to cover the required payment and penalties/ fines.

 

In Broward County, Section 26-5 of the County’s Code contains “Rate of Wages, fringe benefits on county construction contracts.”   It requires minimum wages pursuant to the wages promulgated by the United States Department of Labor in the Federal Register.

 

If you are working on a federal or state or local government public construction project, make sure you know what the minimum prevailing wage rates are for labor.  Not only will this help you in accurately projecting the costs of the work, but will help to avoid harsh consequences if that labor is not paid the minimum wage rates or, worse, there is a false certification of wage rates.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONFLICT BETWEEN A SUBCONTRACTOR’S MILLER ACT PAYMENT BOND CLAIM AND A PRIME CONTRACTOR’S CONTRACT DISPUTES ACT CLAIM

Unknown-1The recent opinion in U.S. f/u/b/o Marenalley Construction, LLC v. Zurich American Insurance Co., 2015 WL 1137053 (E.D.Pa. 2015) is a great example as to what could happen when a prime contractor submits a Contract Disputes Act claim to the federal government that includes subcontractor amounts and then a subcontractor simultaneously pursues the same amounts from the prime contractor’s Miller Act payment bond surety. The question becomes should the subcontractor’s lawsuit against the Miller Act payment surety be dismissed or stayed pending the outcome of the resolution of the prime contractor’s Contract Disputes Act claim.  The ruling in this case held that the subcontractor’s Miller Act claim could proceed, and would not be dismissed or stayed, pending the outcome of the prime contractor’s Contract Disputes Act claim.  This was a great ruling for the subcontractor and obviously puts the prime contractor in an uncomfortable position, to say the least, since it becomes hard to dispute a subcontractor’s claim when the merits of that claim have been packaged (or passed through) to the federal government in a certified Contract Disputes Act claim.

 

In this case, both the prime contractor and subcontractor agreed that the United States Department of Veterans Affairs (VA) caused additional work that increased the cost of the work.  As a result, the prime contractor submitted a Contract Disputes Act claim to the VA that included claims and amounts from subcontractors.  While the prime contractor’s claim was pending with the VA, a subcontractor sued the prime contractor’s Miller Act payment bond surety. This was a subcontractor that also had its claims and amounts packaged (or passed through) to the VA in the prime contractor’s Contract Disputes Act claim.

 

The prime contractor argued that the subcontractor’s Miller Act payment bond claim should be dismissed or stayed pending the resolution of the Contract Disputes Act claim.  In particular, the prime contractor argued that because the subcontract incorporated a dispute resolution clause (that incorporated the requirements of the Contract Disputes Act), the subcontractor was required to exhaust this administrative process before proceeding with a Miller Act payment bond claim.

 

Dismissal of  Miller Act Payment Bond Claim?

 

The ruling to deny the prime contractor and surety’s motion to dismiss the Miller Act payment bond claim was an easy decision.  To begin with, a Miller Act payment bond claim needs to be instituted within a year from the subcontractor’s last furnishing so if the court dismissed the claim it would potentially be depriving the subcontractor of its rights under the law without any certainty as to if the subcontractor re-filed the lawsuit it would be within the statute of limitations or the statute of limitations would otherwise be tolled.  And, pursuant to the Miller Act, a subcontractor cannot contractually agree to waive its Miller Act rights before the subcontractor performed any work.  A waiver of Miller Act payment bond rights is only enforceable if the waiver is: 1) in writing, 2) signed by the party waiving its payment bond rights, and 3) “executed after the person whose right is waived has furnished labor or material for use in the performance of the contract.  See 40 U.S.C. s. 3133.

 

Stay of Miller Act Payment Bond Claim?

 

The real determination was whether the subcontractor’s Miller Act payment bond lawsuit should be stayed until the completion of the prime contractor’s dispute resolution with the VA. The court held No!:

 

“The Miller Act entitles Marenalley [subcontractor] to bring suit ninety days after the completion of its work…not when and if Nason [prime contractor] recovers from the VA. Conditioning Marenalley’s right to recover from the [Miller Act] Payment Bond on the completion of Nason’s CDA [Contract Disputes Act] process would be inconsistent with the terms of the Miller Act.

***

Nason and Zurich [surety] protest that they will be prejudiced in the absence of a stay due to the costs of dual litigation and the risk of inconsistent decisions.  The Court is not overly troubled by these arguments.  Ordinarily the fact that a prime contractor has a claim for the same amount pending under the disputes clause of the [incorporated] prime contract, does not affect Miller Act cases.

***

The CDA process will determine the VA’s liability to Nason.  The VA, however, has no jurisdiction over the amount that Nason must pay Marenalley and no interest in how that amount is determined. Thus, a stay would subject Marenalley to a substantial, indefinite delay as Nason’s claim passes through the administrative process and court review, only to be left at the end of that process to begin again here to litigate its rights against Nason.”

 

Marenalley, supra, at *6 (internal citations and quotations omitted).

 

UnknownHow Does a Prime Contractor Account for this Risk?

 

So, based on this ruling, how does a prime contractor account for this business risk? And, this is a business risk because there may be value to a subcontractor to pursue the Miller Act payment bond claim rather than wait an indefinite period of time for the Contract Disputes Act process to resolve itself and then hope that the prime contractor pays the subcontractor the portion of the subcontractor’s claim that was passed through to the federal government.

 

Well, there is authority that would entitle the prime contractor to a stay of a subcontractor’s Miller Act payment bond lawsuit.  But, this authority is predicated on language in the subcontract that any action filed by the subcontractor will be stayed pending the exhaustion of administrative remedies.

 

For example, in U.S. f/u/b/o Trans Coastal Roofing Co. v. David Boland, Inc., 922 F.Supp. 597, 598 (S.D.Fla. 1996), the subcontract contained the following language:

 

“[s]ubcontractor shall first pursue and fully exhaust [the procedures set forth in the standard disputes clause of the primary contract] before commencing any other action against Contractor for any claims it may have arising out of its performance of the Work herein.”

***

“[Contractor shall] prosecute all claims submitted by Subcontractor under the contractual remedial procedure of the Prime Contract on behalf of and to the extent required by the Subcontractor.”

***

 “[Subcontractor] agree[d] to stay an action or claim against [the prime contractor’s Miller Act bond] pending the complete and final resolution of the Prime Contract’s contractual remedial procedure.”

 

Because the subcontractor failed to exhaust its administrative remedies, the court dismissed the subcontractor’s Miller Act payment bond claim.  Importantly, this case was decided before there were amendments to the Miller Act that now prevents a subcontractor from waiving a Miller Act payment bond claim prior to performing work.  Thus, if this case were decided today, the court likely would have stayed the Miller Act payment bond claim instead of dismissing it unless, of course, it was clear that the statute of limitations for pursuing a Miller Act payment bond claim would be tolled pending the exhaustion of the administrative remedies.

 

Similarly, in U.S. v. Dick/Morganti, 2007 WL 3231717 (N.D.Cal. 2007), the prime contractor and surety moved to stay a subcontractor’s payment bond claim based on the following subcontract language:

 

“If the Owner [GSA] and the Contractor [Dick/Morganti], pursuant to the General Contract or by agreement, submit any dispute, controversy, or claim between them to arbitration or some other dispute resolution procedure specified in the General Contract and such a matter involves or relates to a dispute, controversy, or claim between the Contractor and the Subcontractor, Subcontractor agrees …to stay any action filed by the Subcontractor until the dispute resolution and appeals process between the Contractor and the Owner is exhausted.”

 

The prime contractor argued it “intended” to submit a claim to the federal government [GSA] that will include the subcontractor’s amounts and, as such, the provision should operate to stay the subcontractor’s Miller Act payment bond claim.  The court agreed provided that the prime contractor did actually submit the claim.

 

Thus, a prime contractor should absolutely incorporate language in a subcontract consistent with the language in these decisions that reflects that any action filed by the subcontractor, including an action against the prime contractor’s Miller Act payment bond surety, will be stayed pending the complete resolution of any dispute resolution between the prime contractor and federal government that involves or includes the claims and amounts sought by the subcontractor. 

 

And a subcontractor, even if this language is included in the subcontract, should still move forward and timely file any Miller Act payment bond lawsuit.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

WORKERS COMPENSATION (PART TWO) — STATUTORY EMPLOYER AND CONTRACTORS

imagesTo follow-up on the article Workers Compensation—Tidbits on Construction Projects, the recent opinion in Roof Painting By Hartzell, Inc./Summit Holdings-Claims Center v. Hernandez, 2015 WL 641199 (Fla. 1st DCA 2015) touches upon the application of a statutory employer in the construction context.

 

Here, a contractor was hired to provide pressure cleaning and related services.  The contractor, in turn, subcontracted the labor to perform the services through another company (e.g., subcontractor).   Both the contractor and subcontractor that provided the labor had workers compensation insurance.  A laborer (retained by the subcontractor) was injured in performing the pressure cleaning services.   The issue was which workers compensation carrier should be responsible: the subcontractor’s carrier or the contractor’s carrier.

 

Florida Statute s. 440.10(1)(b) provides:

 

In case a contractor sublets any part or parts of his or her contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment, and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

Since the injured laborer was hired by the subcontractor, the subcontractor’s workers compensation carrier should cover the injured laborer’s claim.

 

Section 440.10 forms what is referred to as the “statutory employer” concept.  For instance, if the subcontractor does not obtain applicable workers compensation insurance, then under this section, the general contractor is liable (as the general contractor is the statutory employer). It is this reason that contractors that subcontract a portion of their services to others need workers compensation coverage!

 

Importantly, contractors that comply with the requirements of section 440.10 are protected by the exclusiveness of liability provisions in Florida Statute s. 440.11. This means the contractor is immune from lawsuits (such as tort-related lawsuits) from injured workers with workers compensation being the exclusive form of liability absent any intentional tort committed by the contractorSee Fla.Stat. s. 440.11.  “Because section 440.11(1) of the Florida Statutes makes the liability to secure [workers] compensation imposed by section 440.10(1) the exclusive form of liability imposed by Chapter 440 on an employer, once an employer acquires and maintains workers’ compensation insurance for the benefit of its employees, it becomes immune from suit.” VMS, Inc. v. Alfonso, 147 So.3d 1071, 1073 (Fla. 3d DCA 2014).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

 

 

WORKERS COMPENSATION — TIDBITS ON CONSTRUCTION PROJECTS

imagesWorkers compensation is a “must have” insurance in the construction industry. 

 

Certain officers are entitled to be statutorily exempt from workers compensation (pursuant to Florida Statutes Chapter 440).  See Fla.Stat. s. 440.02(15).  But, if exempt, these officers are not entitled to receive workers compensation benefits.  The reason to obtain an exemption is to avoid paying premium for these officers.

 

For an applicant to receive a statutory exemption for a corporation:

-The corporation must be registered as an active Florida company (with Florida’s Division of Corporations).

-The applicant must be identified as an officer (with Florida’s Division of Corporations).

-The officer must own at least 10% of the corporation.

-No more than three officers can be exempt.

-The exemption is valid for 2 years.

 

For an applicant to receive a statutory exemption for a limited liability company, the above requirements pertaining to a corporation are applicable except for the applicant being required to be identified as an officer.

 

An applicant that satisfies the exemption requirements will receive a Certificate of Election to be Exempt that will identify the dates the exemption is in effect.

 

Notably, sole proprietors, independent contractors, and partners may also receive a Certificate of Election to be Exempt and not recover workers compensation benefits. See Fla.Stat. s. 440.05.

 

While there is a statutory exemption for the officer/owner-employee, there is not one for the nonofficer/nonowner-employee.  Thus, if the construction company relies on full time or part time nonofficer-employees, workers compensation is required for these employees.

 

Additionally, general contractors need to ensure that every subcontractor it hires has workers compensation or a valid Certificate of Election to be Exempt.

 

Florida Statute s. 440.10(1)(b) states:

 

In case a contractor sublets any part or parts of his contract work to a subcontractor or subcontractors, all of the employees of such contractor and subcontractor or subcontractors engaged on such contract work shall be deemed to be employed in one and the same business or establishment; and the contractor shall be liable for, and shall secure, the payment of compensation to all such employees, except to employees of a subcontractor who has secured such payment.

 

As also explained in Barrs v. LMF Construction, OJCC Case No. 10-002222KAS, 2010 WL 4270050 (Fl.Off.Judge Comp.Cl. 2010):

 

Under a statutory employer analysis a contractor is protected from workers’ compensation liability for the employees of a subcontractor, an independent contractor, or sole proprietor if an officer of a corporation or the subcontractor validly elects exemption from coverage by filing a written notice pursuant to Section 440.05 Fla. Statutes, 2009; or has otherwise secured the payment of compensation coverage as a subcontractor for the work performed by the subcontractor. This is a vertical analysis starting with the general contractor on top. The general is responsible unless those in the vertical chain below have either secured workers’ compensation coverage or are under a valid exemption.

  

For instance, in Smith v. Larry Rice Construction, 730 So.2d 336 (Fla. 1st DCA 1999), a general contractor was building a Taco Bell.  The general contractor subcontracted the framing to a subcontractor.  The subcontractor did not independently secure workers compensation benefits; rather, it leased employees from a labor leasing company that secured workers compensation for these laborers.  The subcontractor then engaged a sub-subcontractor –really, a sole proprietor and his crew as additional labor–to perform a portion of its framing scope of work. The sole proprietor / sub-subcontractor was injured on the project. While the sole proprietor / sub-subcontractor had a Certificate of Election to be Exempt, the exemption had expired at the time he was hurt. The sole proprietor sought workers compensation benefits but these benefits were denied. He argued that the general contractor constituted his statutory employer (per Fla.Stat. s. 440.10) and is liable for his workers compensation benefits.  The First District Court of Appeal agreed and found that the injured sole proprietor was a statutory employee of the general contractor and entitled to receive workers compensation benefits.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

STAYING MILLER ACT PAYMENT BOND LAWSUIT PENDING ARBITRATION

imagesIn a prior posting, I discussed how federal courts have discretion to stay a subcontractor’s lawsuit against a payment bond surety pending an arbitration between the subcontractor and general contractor.  This posting did not pertain to a Miller Act payment bond.  However, low and behold, this same rationale would apply to a subcontractor’s lawsuit against a Miller Act payment bond.

 

In U.S. f/u/b/o John Jamar Construction Services v. Travelers Casualty and Surety Co. of America, 2015 WL 757858 (S.D.Tex. 2015), a subcontractor sued the prime contractor’s Miller Act payment bond.  The prime contractor countered that the subcontractor materially breached the subcontract causing it to terminate the subcontractor for default. 

 

The subcontract contained an arbitration provision and the prime contractor served an arbitration demand on the prime contractor.  The surety was not bound by the arbitration provision (as it was not a party to the subcontract) but moved to stay the Miller Act lawsuit pending the outcome of the arbitration between the prime contrator and subcontractor.  The federal district court agreed with the surety and stayed the litigation because the factual and legal issues between the prime contractor and subcontractor substantially overlapped with the subcontractor’s claims against the Miller Act payment bond surety.

 

Accordingly, if you are a prime contractor and involved in a dispute with a subcontractor where your subcontract contains an arbitration provision–such as in this case where the prime contractor terminated the subcontractor for default–there is little downside in demanding arbitration pursuant to the subcontract.  If the subcontractor initiates a Miller Act lawsuit, there is authority that the lawsuit will be stayed pending the outcome of the arbitration.

 

Conversely, if you are a subcontractor and involved in a dispute with a prime contractor where your subcontract contains an arbitration provision, there is upside in moving forward with the Miller Act lawsuit to ensure the lawsuit is filed within the one-year limitations period.  However, if there is concern the prime contractor will move to demand arbitration under the subcontract (as a means to stay the Miller Act litigation), you may want to consider simultaneously moving to demand arbitration against the prime contractor to preserve your status as the claimant (plaintiff) in the arbitration.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

GOVERNMENT CONTRACTS AND TERMINATION FOR DEFAULTS: SURETY TAKEOVER AGREEMENTS, TENDER AGREEMENTS, ETC.

163On federal government construction projects, the prime contractor provides the government with a performance bond (pursuant to the Miller Act) guarantying the prime contractor’s performance under the prime contract.   Under normal course and in accordance with the Federal Acquisition Regulations (“FAR”), the performance bond is triggered when the government terminates the prime contractor for default and then looks to the performance bond surety to remedy the default by completing the defaulting prime contractor’s contractual obligations.  (See FAR 49.402-3 regarding the government’s procedure to terminate the prime contractor for default and put the contractor and surety on notice.) 

 

Subpart 49.4 of FAR deals with termination for defaults.  Prime contractors as well as sureties should familiarze themselves with this subpart especially if they received notification from the contracting officer of the possibility of a terminatin for default or the notices seem to indicate that the terminatiion for default is imminent.

 

Let’s presume the contracting officer moves forward and terminates the prime contractor for default or the termination is imminent.  Now what?   Clearly, the contracting officer will be looking to the prime contractor’s performance bond surety to remedy the default.    Below are considertaions that will be explored and are the reasons why prime contractors and sureties in this situation should absolutely ensure they are consulting with counsel.

 

A. Takeover Agreements

 

One common option under FAR  49.404 that can be implemented is a surety-takeover agreement with the government (see below).  This is when the surety takes over the contractual obligations of the prime contract.  Typically, the surety will enter into a takeover agreement with the government that outlines the obligations of the takeover and will enter into a separate contract with the completion contractor the surety engages to complete its defaulting prime contractor’s scope of work.  While FAR ideally prefers a tripartite takeover agreement with the government, surety, and defaulted prime contractor, this generally does not happen with a prime contractor that challenges the termination for default and looks to convert the termination into one for convenience

 

49.404  Surety-takeover agreements.

(a) The procedures in this section apply primarily, but not solely, to fixed-price construction contracts terminated for default.

(b) Since the surety is liable for damages resulting from the contractor’s default, the surety has certain rights and interests in the completion of the contract work and application of any undisbursed funds. Therefore, the contracting officer must consider carefully the surety’s proposals for completing the contract. The contracting officer must take action on the basis of the Government’s interest, including the possible effect upon the Government’s rights against the surety.

(c) The contracting officer should permit surety offers to complete the contract, unless the contracting officer believes that the persons or firms proposed by the surety to complete the work are not competent and qualified or the proposal is not in the best interest of the Government.

(d) There may be conflicting demands for the defaulting contractor’s assets, including unpaid prior earnings (retained percentages and unpaid progress estimates). Therefore, the surety may include a “takeover” agreement in its proposal, fixing the surety’s rights to payment from those funds. The contracting officer may (but not before the effective date of termination) enter into a written agreement with the surety. The contracting officer should consider using a tripartite agreement among the Government, the surety, and the defaulting contractor to resolve the defaulting contractor’s residual rights, including assertions to unpaid prior earnings.

(e) Any takeover agreement must require the surety to complete the contract and the Government to pay the surety’s costs and expenses up to the balance of the contract price unpaid at the time of default, subject to the following conditions:

(1) Any unpaid earnings of the defaulting contractor, including retained percentages and progress estimates for work accomplished before termination, must be subject to debts due the Government by the contractor, except to the extent that the unpaid earnings may be used to pay the completing surety its actual costs and expenses incurred in the completion of the work, but not including its payments and obligations under the payment bond given in connection with the contract.

(2) The surety is bound by contract terms governing liquidated damages for delays in completion of the work, unless the delays are excusable under the contract.

(3) If the contract proceeds have been assigned to a financing institution, the surety must not be paid from unpaid earnings, unless the assignee provides written consent.

(4) The contracting officer must not pay the surety more than the amount it expended completing the work and discharging its liabilities under the defaulting contractor’s payment bond. Payments to the surety to reimburse it for discharging its liabilities under the payment bond of the defaulting contractor must be only on authority of—

(i) Mutual agreement among the Government, the defaulting contractor, and the surety;

(ii) Determination of the Comptroller General as to payee and amount; or

(iii) Order of a court of competent jurisdiction.

 

B.  Tender Agreements

 

Another option the surety can implement is by tendering a completion contractor to the government for the government to complete the work.  Oftentimes the surety will obtain pricing to complete the defaulting prime contractor’s scope of work.  The surety will then tender a completion contractor to the government so that the government can hire this contractor directly.  The surety will also tender the difference between the balance of the defaulted prime contractor’s contract amount and the completion contractor’s contract amount to complete the work.  (For example, if the balance of the defaulted prime contract is Twenty Million but it will cost a completion contractor Twenty Five Million to complete the defaulted prime contractor’s scope of work, the surety will tender the additional Five Million.)  A tender agreement is generally entered into between the surety and the government and outlines the parameters of the tender including monetary responsibilities of the surety. 

 

C.  Government Completion (if surety does not takeover or tender)

 

FAR 49.405 gives the government authority to engage a completion contractor if the surety does not arrange for the completion of the defaulted prime contractor’s scope of work (see below).  If the government moves forward with this option, it will certainly look to the surety for all costs it incurs associated with the prime contractor’s default and any delay associated with bringing a completion contractor on board.

 

49.405  Completion by another contractor.

If the surety does not arrange for completion of the contract, the contracting officer normally will arrange for completion of the work by awarding a new contract based on the same plans and specifications. The new contract may be the result of sealed bidding or any other appropriate contracting method or procedure. The contracting officer shall exercise reasonable diligence to obtain the lowest price available for completion.

  

D. Procedures Government Can Utilize Instead of Termination for Default

 

FAR 49.402-4 identifies certain procedures that the government can utilize instead of terminating the prime contractor for default, although these procedures are generally implemented after the prime contractor and surety are on notice of an impending termination for default (see below).   The government is probably not going to move forward with these procedures unless its rights are reserved against the prime contractor and performance bond for any resultant damages (see FAR 49.406 below) associated with defaults asserted by the government against the prime contractor (e.g., liquidated damages for delays,  correction of deficient work, etc.).  If these procedures are considered and utilized, there is a good chance the procedure was suggested by the prime contractor and surety as a protocol to best mitigate potential damages asserted by the government.   (By way of example, one option a surety can present is to agree to fund the prime contractor through completion in order to keep the project moving forward with the contractor most familiar with the scope of work.)

 

49.402-4  Procedure in lieu of termination for default.

The following courses of action, among others, are available to the contracting officer in lieu of termination for default when in the Government’s interest:

(a) Permit the contractor, the surety, or the guarantor, to continue performance of the contract under a revised delivery schedule.

(b) Permit the contractor to continue performance of the contract by means of a subcontract or other business arrangement with an acceptable third party, provided the rights of the Government are adequately preserved.

(c) If the requirement for the supplies and services in the contract no longer exists, and the contractor is not liable to the Government for damages as provided in 49.402-7, execute a no-cost termination settlement agreement using the formats in 49.603-6 and 49.603-7 as a guide.

 

49.406  Liquidation of liability.

(1) The contract provides that the contractor and the surety are liable to the Government for resultant damages. The contracting officer shall use all retained percentages of progress payments previously made to the contractor and any progress payments due for work completed before the termination to liquidate the contractor’s and the surety’s liability to the Government. If the retained and unpaid amounts are insufficient, the contracting officer shall take steps to recover the additional sum from the contractor and the surety.

 

E. Preservation of Surety’s Rights

 

When a surety takesover the completion of the work, tenders a completion contractor, or even funds the original prime contractor through completion, the surety will do so while preserving its rights.  In other words,  a surety will want to best preserve rights to pursue potential claims against the government while contemporaneously mitigating its exposure under the performance bond through the takeover, tender, or funding of the completion work.  See, e.g., Transamerica, Ins. v. U.S.,  31 Fed.Cl. 532 (1994) (finding surety can pursue equitable subrogation claim against government for funds held by government when surety tendered and paid completion contractor); see also In re Appeal of Fireman’s Fund Ins. Co., ASBCA No. 50657, 2000 WL 246620 (2000) (“When a terminated contractor assigns such [pre-takeover / tender] claims to the surety to which assignment the contracting officer consents, or incorporates such an assignment in novation or takeover [or tender] agreement executed by the contracting officer, the surety has standing to prosecute such claims before the Board.”); In re Hackney Group, ASBCA No. 51453, 2000 WL 655950 (2000) (surety’s argument that it has standing to assert defaulted prime contractor’s pre-takeover claims against government based on surety’s indemnity agreement with  prime contractor failed since government was not a party to indemnity agreement and never consented to prime contractor’s assignment of pre-takeover claims to surety).

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.