Opinion ID: 4537740
Heading Depth: 2
Heading Rank: 2

Heading: Admiralty and Fireman’s Fund

Text: In Balboa, we first addressed the relationship between the government, a contractor, and a surety in the event of default, but we stopped short of determining whether a surety was a contractor or otherwise in privity with the government upon the default of the contractor. See Balboa, 775 F.2d at 1160–61 (“Although it is conceivable that under certain circumstances a surety could assert rights against the [g]overnment under the third-party beneficiary rule . . . or even as one in privity in contract with the [g]overnment . . . the traditional means of asserting a surety’s claim is under the equitable doctrine of subrogation.” (internal citations omitted)); see also Ins. Co. of the W., 243 F.3d at 1370 (“[I]n Balboa we reserved the question whether there was a contract or privity of contract between the government and a surety.”). We considered the unanswered question in Admiralty and decided a surety is not a “contractor” within the meaning of the CDA. See Admiralty, 156 F.3d at 1220–21. In doing so, we said that “the central issue in [that] case [wa]s whether the CDA permits [the surety] to bring [a] claim on behalf of [the contractor]” and concluded that both because a surety is not a “contractor” as defined by the CDA and because “[t]he CDA limits the eligibility to appeal to the Case: 18-1394 Document: 71 Page: 9 Filed: 05/29/2020 6 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC boards of contract appeals to contractors with claims on contracts entered by a [g]overnment agency,” which the surety had not done, the surety lacked the standing to bring such an appeal. Id. at 1220–21 (emphasis added). We then addressed “whether [the surety] can represent [the contractor] in an appeal to the [ASBCA]” and determined that, in the “limited circumstances” where the surety “take[s] over contract performance or finance[s] the completion of the defaulted contract under its performance bond,” the surety may be “entitl[ed] . . . to succeed to the contractual rights of the contractor against the government.” Id. at 1222 (internal quotation marks and citations omitted). In Fireman’s Fund, we clarified this determination, concluding that the surety could only raise claims against the government that arose from the work the surety itself did following the takeover of the contract and not any claims pertaining to the prior period. See 313 F.3d at 1351; see also id. (“[The surety] was not a party to any contract with the government prior to the takeover agreement it had with the government, and its pre-takeover claims did not arise under such a contract.”). Our analysis in Admiralty, and by extension Fireman’s Fund, gave little consideration to the argument that, because the surety and the contractor had agreed that the contractor would cede all legal rights to the surety in the event of default, the surety should assume all of the contractor’s legal rights—including those to appear before a board such as the ASBCA—with respect to the contract. See generally Admiralty, 156 F.3d at 1220–22. Instead, we focused primarily on the Senate Report that addresses the policy rationales supporting the creation of the CDA. See id. at 1221. Undergirding the rationale “for limiting the appeal right to a single ‘contractor’ [in] the Senate Report,” we noted, was the goal to narrow the claims to those between the government and “a ‘single point of contact’—the prime contractor.” Id. at 1220 (quoting S. REP. No. 951118, at 16). Limiting appeals to only a single contractor Case: 18-1394 Document: 71 Page: 10 Filed: 05/29/2020 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC 7 “would prevent multiple, duplicative claims and appeals by subcontractors.” Id. (citing S. REP. No. 95-1118, at 16). The CDA, therefore, “makes only a single ‘contractor’ eligible to appeal a contracting officer’s final decision.” Id. We explained that the Senate Report itself suggested the best system was one of a “single point of contact,” or ensuring that only the contractor could pursue claims against the Government before the ASBCA and all other claims would be litigated elsewhere, such as between the contractor and subcontractors in district court. Id.; see S. REP. No. 951118, at 16. Closer analysis of the Senate Report, however, demonstrates the portion relied upon by our precedent relates entirely to precluding subcontractors from the administrative remedies of the CDA, see S. REP. No. 95-1118, at 16–17, and speaks nothing of sureties, see generally id. See, e.g., S. REP. No. 95-1118, at 16 (explaining that “[t]he recommendations . . . specifically exclude bringing subcontractors under the provisions of” the CDA (emphasis added)), id. (“If direct access were allowed to all Government subcontractors, contracting officers might, without appropriate safeguards, be presented with numerous frivolous claims that the prime contractor would not have sponsored.” (emphasis added)), id. (explaining that “[b]y forcing the prime contractor to administer its subcontractor network, the Government permits prime contractors and subcontractors” to resolve contract disputes through “their familiar commercial procedures”), id. at 17 (concluding that “denying the subcontractors direct access” to the CDA would “forc[e] the prime contractor and the subcontractor to negotiate their disputes”); see also Admiralty, 156 F.3d at 1220 (citing S. REP. No. 95-1118, at 16), Fireman’s Fund, 313 F.3d at 1351–52 (same). Congress did not mention sureties when discussing the limits of the CDA’s administrative remedies jurisdiction. See generally S. Rep. No. 95-1118, at 16–17. In Admiralty and Fireman’s Fund, we equated a surety to a subcontractor with no supporting analysis. Case: 18-1394 Document: 71 Page: 11 Filed: 05/29/2020 8 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC A surety is different from a subcontractor in fundamental respects. Significantly, the surety is obligated to engage and negotiate with the party seeking performance to ensure that it is completed. See Dependable Ins. Co. v. United States, 846 F.2d 65, 66–67 (Fed. Cir. 1988) (determining that a performance bond guarantees that the surety will ensure that the contracted performance will be completed upon the default of the contractor). These differences are showcased in the appeal at hand, regarding the performance and payment bonds of Surety Guarantee Company of North America (“GCNA”) and Ikhana, LLC (“Ikhana”). Here, as in Fireman’s Fund, the terms of the bonds included an indemnity agreement in which the contractor assigned to its surety all rights under the contract and all legal actions and claims that the contractor may have had. J.A. 2 (quoting GCNA and Ikhana’s indemnity agreement as granting to GCNA, in the event of Ikhana’s default, the right to “assert and prosecute any right or claim hereby assigned, transferred or otherwise conveyed in the name of [Ikhana] and to compromise and settle any such right or claim on such terms as it considers reasonable . . . in its sole and absolute discretion”); see Fireman’s Fund, 313 F.3d at 1346 (explaining that the surety’s bond included the “General Indemnity Agreement” in which the contractor assigned “all of their rights under the contract . . . including . . . all actions, causes of actions, and claims and demands whatsoever which the [contractor] may have in . . . [the] contract covered by such [b]ond”). To engage in a business relationship with a contractor, a bonding insurer must be able to set its prices upon the assumption that the clauses of its contract are valid. Our court has repeatedly turned to these two cases and specifically to the two pages of the Senate Report to support the proposition that a surety does not become a “contractor” with the government upon a contractor’s default. See Lumbermens Mut. Cas. Co. v. United States, 654 F.3d 1305, 1321 (Fed. Cir. 2011) (relying on Admiralty and the Senate Case: 18-1394 Document: 71 Page: 12 Filed: 05/29/2020 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC 9 Report at pages 16 and 17 to support the assertion that “[t]his legislative history suggests that claims by third parties who are not in privity of contract with the government are not covered by the CDA”); Hardie v. United States, 19 F. App’x 899, 905 (Fed. Cir. 2001) (explaining that, in Admiralty, the court, in reliance on the Senate Report, determined that “[d]ue to the strong policy interest in maintaining a ‘single point of contact’ with the United States, there is a correspondingly strong resistance to extend the concept of ‘privity’ beyond the actual parties with which the United States originally contracted explicitly” (citation omitted)); Ins. Co. of the W., 243 F.3d at 1370–71 (relying on Admiralty to conclude that “there is no such [contractual] relationship” between the government and a surety). That proposition is erroneous as a matter of law. III. This Case Squarely Presented the Opportunity to Review Our Precedent The roles and responsibilities of sureties—including the assumption of all legal rights—are well-defined within insurance contract law and are applicable to both private and public contracts. See Alvin, Ltd. v. U.S. Postal Serv., 816 F.2d 1562, 1564 (Fed. Cir. 1987) (“The government enters into contracts as does a private person, and its contracts are governed by the common law.” (citation omitted)). They necessarily apply here. Because of Admiralty and Fireman’s Fund, however, a surety of a government contract has its hands tied when it comes to resolving ongoing litigation against the government and executing performance. Indeed, this is the issue presented in the instant case. Ikhana the contractor, filed claims against the government with the ASBCA upon its default termination. J.A. 2–3. The government sued GCNA on its performance bond and GCNA stepped in to ensure the contract was executed despite the default. J.A. 2–3. To do so, GCNA entered into a settlement agreement with the government to resolve the government’s claim on the performance bond. J.A. 3–4. GCNA tendered a new contractor to complete the Case: 18-1394 Document: 71 Page: 13 Filed: 05/29/2020 10 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC work. J.A. 4. At the same time, GCNA agreed to dismiss Ikhana’s appeal against the government and the government agreed to release GCNA from all liability relating to the performance and payment bonds. J.A. 4. This plan was stymied when GCNA was denied standing before the ASBCA, which held, based on erroneous authority, that it did not become a “contractor” with the government. J.A. 6. The facts of this case are representative of the nature of a surety’s role—bringing efficient resolution to contract disagreements, assuming financial risk, and ensuring performance—and of the necessity for granting sureties the legal rights they need to ensure speedy resolutions. The significance of this standard contractually based negotiating tool should not be understated. Lengthy delays in public projects are problematic, expensive, and potentially dangerous. Unfortunately, as our precedent now stands, sureties for government contracts must recognize the lurking ensnarement, and either cancel the service or actuarially charge a higher rate for their services. Whatever the outcome, the overall cost of doing business will be higher for all government contractors.