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.

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 4, No. 1 (Jan 2002).

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