Opinion ID: 4537740
Heading Depth: 2
Heading Rank: 1

Heading: Government Contracting Law

Text: The CDA regulates how the federal government may contract with non-governmental entities. See 41 U.S.C. §§ 7101–7109. The CDA provides the statutory framework for contract dispute resolution. See id. §§ 7104–7107. Under the CDA, “[a] contractor . . . may appeal the decision [by a government contracting officer] to an agency board[,]” id. § 7104(a)—here, the Armed Services Board of Contract Appeals (“ASBCA”), see id. § 7105(a). Limiting such appeals to the contractor is based on the policy rationale of winnowing down all claims to a “single point of contact”; this prevents a deluge of duplicative claims—with their associated costs—against the government for any given contract. See S. REP. No. 95-1118, at 16 (1978), reprinted in 1978 U.S.C.C.A.N. 5235, 5250 (“the Senate Report”). Where a surety takes over the contract, we have held that the surety assumes the liabilities of the original contractor and so is a “contractor” with the government, albeit solely with respect to the contract’s outstanding performance. See Fireman’s Fund, 313 F.3d at 1351 (determining that, Case: 18-1394 Document: 71 Page: 6 Filed: 05/29/2020 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC 3 as the surety “was not a party to any contract with the government prior to the takeover agreement,” the surety was not a “contractor” under the CDA and so could not bring claims against the government). A suretyship is a contractual relationship “where one person,” the obligator, “has undertaken an obligation [to an obligee] and another person[,]” the surety, “is also under an obligation or other duty to the obligee” to perform that obligator’s duty “rather than the [obligator].” Restatement (First) of Security § 82 (Am. Law Inst. 1941). Where an obligator, such as a contractor, enters a contractual relationship, the surety agrees to assume the contractor’s obligations—such as the performance and debts—of the contractor in the event of default. See Restatement (Third) of Suretyship & Guaranty § 1 (Am. Law Inst. 1996); see also Couch on Ins. §§ 1:14–15. Under the doctrine of equitable subrogation, a surety, as a subrogee, can assert the claims of a defaulted obligator. See Restatement (Second) of Contracts § 317 (1981); id. § 340, cmt. a. We have held that “Congress had not intended for the Anti-Assignment Act to cover subrogation claims,” and therefore that “the Tucker Act’s waiver of sovereign immunity extends to a subrogee.” Ins. Co. of the W. v. United States, 243 F.3d 1367, 1373–74 (Fed. Cir. 2001); see 28 U.S.C. § 1491(a) (Tucker Act); 31 U.S.C. § 3727 (Anti-Assignment Act). A surety benefits both the contractor and the party seeking performance, here the government, because the surety’s agreement with the contractor ensures that, in the event of default, the contracted performance is executed without significant delay (a “performance” bond) and subcontractors’ valid costs are paid in a timely manner (a “payment” bond), while the cause of the default can be litigated. See 40 U.S.C. § 3131(b) (requiring government contractors to possess both performance and payment bonds); see also Couch on Ins. §§ 1:15, 163:10. If a surety fails to execute its obligations under either bond, the government may sue Case: 18-1394 Document: 71 Page: 7 Filed: 05/29/2020 4 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC the surety. See Balboa Ins. Co. v. United States, 775 F.2d 1158, 1160 (Fed. Cir. 1985) (concluding that “a surety, as [a] bondholder is as much a party to the [g]overnment contract as the contractor” and so may be sued by the government). If a contractor defaults on its performance, the surety may discharge the performance bond in several ways. The surety “is not obligated to perform the contract of the contractor though it may do so[,]” such that it “may discharge its obligations by taking over the contract and completing performance, assuming liability for the government’s costs in completing the contract that exceed the contract price, or . . . provid[e] funds to an insolvent contractor to complete the performance.” Couch on Ins. § 164:14. The payment bond is discharged through negotiation or possibly litigation with subcontractors. See id. § 164:16. Under the doctrine of equitable subrogation, the general rule is that a surety can assert the claims of a defaulted contractor. See Restatement (Second) of Contracts § 317 (1981); id. § 340, cmt. a; Prairie State Nat. Bank v. United States, 164 U.S. 227, 231 (1896). In that connection, we have held that “Congress had not intended for the AntiAssignment Act to cover subrogation claims,” and therefore that “the Tucker Act’s waiver of sovereign immunity extends to a subrogee.” Ins. Co. of the W., 243 F.3d at 1373– 74; see also United States v. Aetna Cas. & Sur. Co., 338 U.S. 366 (1949). The anomaly presented by this case is that the doctrine of equitable subrogation is not recognized for claims under the CDA. Before the surety steps into the shoes of the contractor—or in situations where the surety never executes a takeover agreement with the government and instead ensures the contract is carried out by other means—we have concluded that the surety is not a “contractor” with the government and is not permitted to bring claims under the CDA. See Admiralty, 156 F.3d at 1220–21, Fireman’s Case: 18-1394 Document: 71 Page: 8 Filed: 05/29/2020 GUARANTEE COMPANY OF NORTH AMERICA v. IKHANA, LLC 5 Fund, 313 F.3d at 1351–52. As a result, a surety can assert a claim at the Court of Federal Claims, but not at a Board of Contract Appeals. This is contrary to the purpose of the CDA: channeling contract disputes through a single, efficient process. See generally S.Rep. No. 95–1118, reprinted in 1978 U.S.C.C.A.N. at 5250. Admiralty and Fireman’s Fund were wrongly decided; they unnecessarily create inconsistency between cases in the Court of Federal Claims and the Boards of Contract Appeals and create a conflict between government contracting law and fundamental principles of suretyship and contract law.