Government Contracts Law360 - July 12, 2011
By: Edward DeLisle
It is not easy to sue the federal government. From a contractual standpoint, the Contract Disputes Act generally limits the pool of potential litigants to those with whom the government is in contractual privity. See 41 U.S. 7101-09. Moreover, under the Tucker Act, contractually-based claims against the government can only be brought in the Court of Federal Claims. (citation). This legal and jurisdictional limitation has made it very difficult for sureties to take part in actions against the government, despite being vital to the completion of construction projects of all types and sizes for a vast array of federal agencies.
The problem is as follows: Under the Miller Act, any construction contractor that wishes to perform for the federal government must provide the government with payment and performance bonds. Those bonds are designed to protect subcontractors in the event of non-payment and the government in the event of default by the prime contractor. See 40 U.S.C. 3131. But, given the limitations of the Contract Disputes and Tucker Acts, it has historically been very difficult for a surety to fully protect itself in the event of default. In fact, until last week, there were generally only two ways in which a surety could independently avail itself of the jurisdiction provided by the Court of Federal Claims.
In Preferred Nat'l Ins. Co. v. United States, the Court of Federal Claims stated that "[o]nly two means have been identified through which...a surety can bring itself within the ambit of the Tucker Act. First, a surety may assert contract rights of its own arising out of a specific agreement to take over for a defaulting contractor. Second, a surety may establish a right of equitable subrogation to one of the parties to the bonded contract.". 54 Fed. Cl. 600, 603 (Fed. Cl. 2002). Last week, in what appears to be a case of first impression, the court expanded the ability of a surety to protect its interests in the Court of Federal Claims.
In M.E.S., Inc. v. The United States, the prime contractor was pursuing claims against the government for additional work performed during the course of a construction project. The project involved the construction of a new post office facility. The government filed a counterclaim alleging that it was owed money for excess reprocurement costs, which were incurred following its termination of the prime contractor for default. In a related action filed by the government in federal district court, the government was pursuing excess reprocurement costs from the prime contractor's surety. In an attempt to protect its interest in the Court of Federal Claims action, the surety intervened, arguing that it was permitted to do so as a matter of right pursuant to Rule 24(a)(2) of the United States Court of Federal Claims. Rule 24(a)(2) permits intervention as of right where a party (1) claims an interest in the subject matter of the action; (2) is so situated that disposing of the action may, as a practical matter, impair or impede the party's ability to protect that interest; and (3) the existing parties cannot adequately protect the interest of the party seeking to intervene.
In response to the surety's request, the government took the position that the Court of Federal Claims did not have jurisdiction over the surety's claims and, therefore, that the surety had no legally protectable interest in that action. The court disagreed.
First, the court held that based upon the surety's potential obligation to the government for excess reprocurement costs, which the government was pursuing in a separate federal district court matter, the surety did, in fact, have a an interest in the Court of Federal Claims matter. With respect to the jurisdictional issue, the court acknowledged that "the United States Court of Appeals for the Federal Circuit has not directly addressed whether this court must have independent jurisdiction over the claims of a would be intervenor under RCFC 24(a)(2)". Citing to the court's ancillary jurisdiction, "which rests on considerations of judicial economy and fairness," the court determined that Rule 24(a)(2) should be read broadly, thereby permitting the surety to intervene as a matter of right.
Based upon this decision, sureties have been provided with an important tool in protecting their legal interests. They have been given the right to intercede in an action pending before the Court of Federal Claims, despite the lack of any independent jurisdictional basis to do so. In instances where principal and surety are engaged in separate, but related litigation, which was the case in M.E.S., this development may help in avoiding inconsistent results by placing all interested parties in one action, thereby allowing the parties to better dictate how the proceedings will unfold. In any event, it is an important decision for both surety and principal.
Edward T. DeLisle is a Partner at Cohen Seglias Pallas Greenhall & Furman, PC. A member of the Federal Contracting Group, Ed concentrates his practice in the areas of construction law, construction litigation and small business procurement and litigation. He is also a frequent contributor to the Firm’s Federal Construction Contracting blog. Ed can be reached at 215.564.1700 or firstname.lastname@example.org.