Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 2002

Academic journal article Defense Counsel Journal

Annual Survey of Fidelity and Surety Law, 2002

Article excerpt

I. PUBLIC CONSTRUCTION BONDS

A. Bonds under Federal Laws

Performance bond surety on defaulted federal government contract not entitled to contract funds withheld for violations of David-Bacon Act.

Surety that did not give notice of potential bond default did not have claim since government's disbursement of funds not in derogation of contract.

Only performance bond surety that enters into takeover agreement with government can sue in Court of Federal Claims under Contract Disputes Act.

In Weschester Fire Insurance Co. v. United States, (1) Weschester was surety for a contractor who defaulted on a contract to rehabilitate the U.S. Coast Guard waterfront facility at Baton's Neck, New York. The contract incorporated the Davis-Bacon Act, 40 U.S.C. [section] 276a, which requires laborers to be paid no less than rates specified by the U.S. Department of Labor. The act also mandates that these rates be a part of the contract. After the default, the surety claimed entitlement to the entire unpaid contract balance, including $60,216.58 that the government, finding the contractor had violated the act, had earmarked as restitution for wages and fringe benefits to underpaid workers.

The contracting officer disagreed, and Weschester sued to reverse of the contracting officer's decision. Ruling on a motion for summary judgment, the Court of Federal Claims affirmed the decision of the contracting officer, finding the central and controlling fact to be the incorporation of the act in the contract with its provision that the Coast Guard was to withhold payments to the contractor if any Davis-Bacon violations were committed. Not surprisingly, the court found the workers' rights to the contract funds to be superior to those of the Coast Guard, the contractor and the surety.

Weschester also asserted entitlement to $32,000, the amount of the last progress payment to the contractor, on the ground that at the time it made the payment, the Coast Guard already had decided to terminate the contract. The Coast Guard responded that the surety had failed to give requisite notice of the default and had not requested that further progress payments be withheld. The court agreed, holding that the government, as obligee, owes only an equitable duty to a surety when the latter notifies the former that there has been a default under the bond. In this case, the court found that the government had kept Westchester informed by copying it on cure and show cause notices, thus giving the surety opportunity to give notice of the contractor's potential default on the bonds and to request that future progress payments be withheld. Even so, the court stated that the government had a duty to Westchester, in the absence of valid notice by the surety of a default, if the government's progress payment was not in accordance with the contract provisions. In this instance, the Coast Guard's payment was held to be proper.

The parties asserted that the court had jurisdiction over the matter under the Contract Disputes Act, 41 U.S.C. [section] 609(a). The court disagreed. Only a performance bond surety that enters into a takeover agreement with the government and thereby establishes privity with it can maintain an action under the act. This had not occurred in this case.

Surety could not avoid liability on payment bond based on unsatisfied "pay when and if paid" clause in settlement agreement.

Weststar Engineering was prime contractor on a federal project to repaint a Navy crane in Bremerton, Washington. In compliance with the Miller Act, Weststar obtained a payment bond from Reliance Opinion Insurance Co. Weststar and a subcontractor, Walton Technology Inc., entered into a settlement agreement providing that Weststar would be obligated to pay Walton for rental equipment only "when and if paid" by the government. Walton then sued Reliance and the contractor for the amount owed.

The Miller Act creates an obligation on the part of a surety to pay workers and materialmen for "sums justly due. …

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