BNUMBER: B-230871.4
DATE: June 19, 1996
TITLE: [Letter]
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B-230871.4
June 19, 1996
Mr. Brad J. Hutchinson
18386 Carob Street
Hesperia, California 92345
Dear Mr. Hutchinson:
This responds to your request on behalf of Mark Steel Corporation,
Fire Engineering Co., Inc., Insulated Building Products, Inc., J. W.
Thompson Co., Peterson & Associates, Inc., and Data Air, Inc., that
our Office consider referring their claims to the Congress under the
Meritorious Claims Act, 31 U.S.C. sec. 3702(d).
These firms were subcontractors of Continental Construction
Corporation (CCC) under National Aeronautics and Space Administration
(NASA) contract No. NAS2-12863 for the construction of a 112,000
square foot aircraft testing facility at NASA's Dryden Flight Research
Center in Edwards, California. The claimants are among a number of
CCC's subcontractors who remained unpaid when NASA terminated the
contract with CCC for default on March 2, 1989. Some weeks later,
when CCC's performance and payment sureties also defaulted on their
obligations, the subcontractors and NASA were left without recourse to
recover their losses. A report issued on February 22, 1991, by NASA's
Office of Inspector General (IG) recounted the many problems NASA
experienced with the contract, highlighting in particular problems
with the sureties. Citing the IG report and the Meritorious Claims
Act you request that we recommend to the Congress that the firms be
fully compensated. For the reasons set forth below, we cannot make
such a recommendation.
Facts
At $16,184,800, CCC was the low bidder on the test facility
construction contract. NASA conducted a preaward survey of CCC and
found it to be responsible. The preaward survey uncovered the
problems that later plagued the contract: CCC's inexperience and cash
flow. However, in the judgment of the contracting officer, these
problems were not sufficient at the time of the survey to affect the
firm's overall responsibility.[1]
The contract was awarded on October 23, 1987. CCC offered individual
sureties for the performance and payment bonds mandated by the Miller
Act, 40 U.S.C. sec. 270a. As required by the regulations in effect at
the time, each surety submitted a sworn statement listing the property
offered as security for the obligations. See Federal Acquisition
Regulation (FAR) sec. 28.202-2 (1987). In addition, those statements
were certified by bank officers who stated that they had personal
knowledge of the individuals and the assets pledged. NASA reviewed
the documentation evidencing the sureties' net worth, but the
contracting officer did not independently verify the existence and
value of the sureties' property.[2] The contracting officer accepted
the sureties offered on the bonds and on November 2, issued CCC a
notice to proceed.
Between November 1987 and February 1989, CCC completed about half of
the project and was paid over $10 million in progress payments. In
late February 1989, CCC abandoned the project and advised NASA that it
was unable to complete the contract. NASA then terminated the
contract for default. Thereafter, one of the performance sureties
briefly and unsuccessfully attempted to complete the construction
project, but that contract, too, was terminated for default on April
19, 1989. The other surety denied responsibility on June 12. NASA
subsequently completed the construction of the test facility at
considerable additional cost.
After the sureties' default, the government attempted to take
possession of the assets they pledged as security for their
performance and payment obligations. It was then that NASA learned
that the assets were either nonexistent or otherwise unavailable to
meet the sureties' obligations. As a result, no recovery was obtained
for either the government or the unpaid subcontractors. The two
individual sureties were later convicted on criminal charges relating
to false statements in connection with the bonds.
There exist a number of unpaid subcontractors including the six
claimants in this case. While it appears that they had causes of
action against CCC, the letter to our Office does not indicate whether
any of them pursued their rights under the contract. If they did,
apparently, they did not recover any money. We are unaware of actions
taken, if any, by those who did not join the request to our Office.
The six claimants in this case and amount of the claims they submitted
to our Office are listed below:
Mark Steel $506,221
Fire Engineering $234,432
Peterson Associates $264,477
Data Air $ 49,713
J.W. Thompson $ 69,800
Insulated Building Products $250,612
Miller Act
The Miller Act requires contractors performing government construction
contracts to post acceptable surety bonds to insure completion of the
work and the payment of subcontractors. A performance bond protects
the government's interest by providing a source of funds to complete
the contract in the event of default. A payment bond assures payment
to all persons supplying labor or materials. The bond is provided in
lieu of mechanics' liens, which are not recognized on government
contracts. For contracts valued over $5 million, the amount of the
payment bond is set by the statute at $2,500,000. 40 U.S.C. sec.
270a(a)(2). While corporate sureties are more common, the regulations
permit individuals to act as sureties for Miller Act performance and
payment bonds. See FAR sec. 28.203.
In general, Miller Act payment bonds provide the sole fund available
for the satisfaction of debts to subcontractors on government
construction contracts. Thus, subcontractors under government
contracts may not proceed against the government. Farmington
Manufacturing Co., B-186817, Sept. 17, 1976, 76-2 CPD para. 255. The
reasoning behind the rule is that a subcontractor's direct contractual
relationship is with the prime contractor, not the government. In the
absence of a direct contractual relationship, known as "privity of
contract," a subcontractor may not attempt to enforce the prime
contract for its benefit. Vern Willard, B-210544, March 14, 1983,
83-1 CPD para. 277. Therefore, our Office has no legal basis upon which
to consider the claims. However, you request that we refer the claims
to the Congress under the Meritorious Claims Act.
Meritorious Claims Act
Under the Meritorious Claims Act we may refer to the Congress a claim
that deserves consideration because of substantial legal or equitable
reasons but would otherwise not be payable. John H. Teele, 65 Comp.
Gen. 679 (1986). The cases we have reported to Congress generally
have involved equitable circumstances of an unusual nature that are
unlikely to constitute a recurring problem. See Major Gerald A.
Lechliter, B-236008, May 7, 1991. The rationale for this practice is
that recurring problems are best dealt with by general remedial
legislation.
As you point out, we recently referred a claim concerning a similar
situation to Congress under the Meritorious Claims Act. B-203871.3,
August 19, 1993. That matter, like the one currently before us,
concerned the nonpayment of subcontractors under a federal
construction contract where both the prime contractor and the
individual Miller Act sureties failed to honor their obligations. As
in this case, the contracting agency's IG issued a report critical of
the agency's acceptance of the sureties' affidavits, its award of the
prime contract, and its reaction to poor performance by the prime
contractor.
While it is indeed unfortunate that the claimants here are involved in
a similar scenario, we do not believe that it would be appropriate for
our Office to report these claims to the Congress as meritorious
claims. As this case illustrates, such problems have occurred
numerous times in the past and may well occur in the future. The
continued referral to Congress of Miller Act bond claims such as these
could create a de facto privity of contract between subcontractors and
the government and result in liability on the part of the government
where there currently is none. See Naval Facilities Engineering
Command, 57 Comp. Gen. 176, 77-2 CPD para. 510 (1977), and Bob Bates,
B-204165, Jan. 8, 1982, 82-1 CPD para. 25, reconsideration denied,
B-205165.2, Mar. 8, 1982, 82-1 CPD para. 209, where our Office did not
report to the Congress claims of subcontractors who were left without
recourse because of faulty or nonexistent Miller Act bonds. If
Congress believes as a matter of public policy that this long standing
rule of law should be changed for federal construction contracts, it
may of course enact legislation amending the Miller Act to do so. We
do not think that it would be appropriate for our Office to assume a
policy role by referring to the Congress repetitive Miller Act bond
claims.
Accordingly, we decline to report the subcontractors' claims to the
Congress under the Meritorious Claims Act.
Sincerely yours,
Robert P. Murphy
General Counsel
B-230871.4
June 19, 1996
DIGEST
Claimants, subcontractors on defaulted construction contract, suffered
a loss when the prime contractor's individual sureties also defaulted
on Miller Act payment bonds. Claimants' request referral of their
claims to Congress for payment under the Meritorious Claims Act. We
decline to refer the claims. Defaults by individual sureties will
occur from time to time. Remedial legislation is the appropriate
vehicle for correcting recurrent problems such as defaulted sureties.
Repeated referrals of subcontractors' claims would establish a policy
that contravenes the Miller Act, which provides that surety bonds are
the sole source of funds for subcontractor payment claims. See
statutes and decisions cited.
1. Since CCC was a small business, had the contracting officer
concluded that CCC was not responsible, the matter would have been
referred to the Small Business Administration (SBA) for final
determination under the SBA's certificate of competency procedures.
See 15 U.S.C. sec. 673(b)(7).
2. The regulations did not require the contracting officer to verify
independently the information concerning the sureties' net worth. See
FAR sec. 28.202-2 (1987).