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Inside This Issue:

  • Risk Management Workshop to be held in Atlanta
  • Surety Fails to Pay on Bond for Default Termination
  • Government Warranty of Performance-Type Specifications

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Risk Management Workshops Planned – ATLANTA-Feb 14,
Phoenix- Feb 28 – Sponsored by Zurich Insurance and ConstructionRisk.com

In response to our readers’ response to the Feedback request that we did a couple months ago, we are scheduling a series of risk management workshops in several cities.  The first of these will held in Atlanta on February 14.  It will cover risk management topics such as design professional liability, documentation management (particularly electronic), project management (including web-based project management systems), a discussion of contractor claims management.  Three (3) AIA continuing education learning units will be earned.  A nominal charge of $39.00 will cover course materials and light refreshments.  Workshops are being planned for Denver, CO, Parsipanny, NJ, New York City, and San Francisco.   If interested, send an e-mail inquiry to webmaster@constructionrisk.com for additional information.

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Surety Fails to Pay on Bond for Default Termination

By:  J. Kent Holland, Jr.

When the U.S. Government terminated a contractor for failure to perform in accordance with the contract provisions, the contractor’s surety asserted that the termination was wrongful and refused to pay on the performance bond.  After much litigation it was held that the contractor was properly terminated.  When the surety still did not pay on the bond, the Government sued the surety firm.  In reversing the trial court’s entry of summary judgment on behalf of the Government, the appellate court held that the Government action was barred by the statute of limitations.

In the case of United States v. American States Insurance Company, 252 F.3d. 1268 (11th Cir. 2001), SKI, Inc., the Government’s contractor  was default terminated. After investigating the termination, the surety, American States, advised the Government that it had concluded the termination was wrongful, and that the surety would, therefore, not pay on the performance bond.  The Government initiated litigation against the surety and prevailed, with the Federal Circuit Court of Appeals upholding the termination.  That decision was rendered in 1991. While the litigation was pending, the Government contracted with a replacement contractor to complete the work. After the work was completed, the Government’s contracting officer in 1992 demanded that SKI and its surety reimburse the Government for the excess costs incurred in the re-procurement.

SKI and the surety refused to pay, and they challenged the propriety of the demand.  For reasons not explained by the court, the contracting officer waited three years (1995) before issuing a final decision demanding payment.  When the surety still refused to pay, the Government sued it to recover the excess costs under the terms of the payment bond.  The surety filed a motion requesting the court to dismiss the case as untimely and barred by the statute of limitations.  The district court denied the surety’s motion and instead granted summary judgment to the Government, holding that the surety was bound by the contracting officer’s final decision.  That decision was reversed on appeal, with the appellate court holding that under the facts of the case, the six year statute of limitations began to run no later than on July 20, 1992, that being the date that the contracting officer made demand upon the surety for payment.

The fact that the contracting officer issued a formal decision three years later had no impact on when the statute of limitations began to run, said the court.  This is because the surety’s obligation to the Government matured when the contractor breached its contract.  From that point forward, the Government could properly demand payment on the bond.  “Thus, American States’ obligation to fulfill the bond arose as soon as SKI breached its contract.”   Once American States’ announced that it would not honor that obligation, the Government had the right to sue for breach of contract.”

EDITOR’S NOTE:  The decision does not explain why the surety refused to pay its obligation in the face of so many demands and judgments in favor of the Government.  Nor does it explain why the Government sat on its rights for so long.  An interesting point to note, however, is that if this had been a private party contract in which the Zurich Subguard ™ product was used instead of surety bonds, the speed in which the obligation was paid to the insured party (project owner) would likely have been much quicker.  Please look for an in-depth article (Point-Counterpoint) discussing Subguard™ in the next issue of the ABA Construction Lawyer.

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For an excellent conference addressing insurance, surety and construction risk management issues be sure to check out:

2002 Winter Meeting, January 24, 2002

The ABA Forum on the Construction Industry
and TIPS Fidelity & Surety Law Committee
Jointly Present:
PASSING THE BUCK:
LEGAL LIMITATIONS ON
TRANSFERRING CONSTRUCTION RISKS

The Waldorf-Astoria
New York, NY

For more information see http://www.abanet.org/forums/construction/html/programs.html

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Government Warranty of Performance-Type Specifications

By:  Seyfarth Shaw Law Firm

Two recent Board of Contract Appeals decisions addressed the conflict between the Government’s implied warranty of its design and its attempt to disclaim that warranty through the use of performance specifications.  In both cases, the Boards allowed the contractors to recover damages.

In Edsall Construction, Inc., ASBCA No. 51,787, 01-1 BCA 31,425, the Government awarded a contract to Edsall for the construction of two aircraft hangars.  The drawings provided Edsall showed three lift points to be used to distribute the weight of each hangar door.  A note on the drawings stated that the door details and loads were to be verified by Edsall prior to bidding.  The specifications stated that the weight of each door must be evenly distributed among the lift points.  Edsall submitted shop drawings showing a fourth lift point, which was approved by the Government.  The Government refused, however, to approve the extra costs associated with the extra point.

The Government claimed that the specifications were performance specifications and that the note on the drawings shifted the risk of the design to the contractor.  While the Board agreed that the specification was of the performance type, it found that, as the designer of how the door would be installed, the Government warranted that the load could be adequately distributed to the three specified lift points.  The Government’s drawing details were defective in that regard because the contractor could not achieve the performance standards while adhering to the design requirements.

In another Board decision, Trateros Construction, Inc., GSBCA No. 14,875, 01-BCA 31,306, the contractor’s scope of work included the fabrication and installation of certain fiberglass panels, which were to be mounted on a building by a steel support system.  The contractor submitted engineered shop drawings revising the Government’s design of the support system because the contractor’s engineer determined that the support system shown in the Government’s design was inadequate.  The contractor then submitted a claim for the increased costs associated with its revised design.  The Government rejected the claim on the basis that it furnished only performance-type specifications, and argued that the purpose of the engineered shop drawing requirement was to allow the contractor to design an appropriate system.  The Board, however, found that the contractor was entitled to recover its increased costs associated with the revised support system.  According to the Board, the Government gave the contractor specific requirements for how the system should be designed, and the contractor was not given the discretion to ignore those requirements.
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** Article Copyright: 2001 – Seyfarth Shaw. This article was written and originally published in the Fall Issue of the Seyfarth Shaw law firm’s Construction Practice Group newsletter, “Construction Law Report.”  The firm has a national and international practice with emphasis on construction and governmental contracting.  For further information: 815 Connecticut Ave., N.W., Suite 500, Washington, D.C. 20006, phone: 202-463-2400.  Visit http://www.seyfarth.com.   The firm also has offices in Atlanta, Boston, Chicago, Houston, Los Angeles, New York, Sacramento, San Francisco and Brussels.

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ABOUT THIS NEWSLETTER & A DISCLAIMER

This newsletter Report is published and edited by J. Kent Holland, Jr., J.D., a construction lawyer and risk management consultant for environmental and design professional liability.  The Report is independent of any insurance company, law firm, or other entity, and is distributed with the understanding that ConstructionRisk.com, LLC, and the editor and writers, are not hereby engaged in rendering legal services or the practice of law.  Further, the content and comments in this newsletter are provided for educational purposes and for general distribution only, and cannot apply to any single set of specific circumstances. If you have a legal issue to which you believe this newsletter relates, we urge you to consult your own legal counsel. ConstructionRisk.com, LLC, and its writers and editors, expressly disclaim any responsibility for damages arising from the use, application, or reliance upon the information contained herein.

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Copyright 2002, ConstructionRisk.com, LLC

Publisher & Editor: J. Kent Holland, Jr., Esq.

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