Case Law Redux: Update on the Tip Top Construction Case
My August/September 2008 column, accessed by clicking here, focused on a decision of the United States Court of Federal Claims interpreting the federal regulations governing the acceptability of assets pledged by individual sureties on federal public works projects. The Court of Federal Claims affirmed a decision of a federal contracting officer who rejected a construction contractor’s bid because it was submitted with a bid bond from an individual surety that, in the opinion of the contracting officer, was supported by assets that did not meet FAR requirements. In fact, the asset supporting the bid bond—“an allocated portion of $191,350,000.00 of previously mined, extracted, stockpiled and marketable coal”—which later turned out to be “coal refuse,” was considered by the contracting officer to be a speculative asset not acceptable under the applicable federal regulations. The disappointed bidder filed a protest with the Government Accountability Office (GAO), seeking a stay of the performance of the contract. The GAO denied the protest on the grounds that mined coal is an unacceptable asset because it cannot be placed in an escrow account, as required under the applicable federal regulations.

After the GAO denial, the disappointed bidder filed a protest suit in the Court of Federal Claims, which subsequently agreed with the GAO determination. The decision of the Court of Federal Claims then was appealed to the United States Court of Appeals for the Federal Circuit, which issued its decision upholding the decision of the Court of Federal Claims on April 29, 2009.

The US Court of Appeals for the Federal Circuit determined in Tip Top Construction, Inc. v. United States that the contracting officer correctly concluded that coal was an unacceptable asset. Noting that the purpose of bid bonds is “to protect the government in the event that the bidder withdraws its bid,” the Federal Circuit observed that the applicable federal regulations define the types of “acceptable bid bond assets as those that have an identifiable value and are readily marketable, so that they can easily be sold to cover any expenses incurred by the government as a result of the bidder’s failure to satisfy its obligation” and that the “distinction in the [regulations] between acceptable assets (such as cash, stocks, and bonds) and unacceptable assets (such as jewelry, antiques, and furs) reflects that concern with the discernible value and liquidity of pledged assets.” The Federal Circuit addressed the disappointed bidder’s argument that coal is readily marketable and therefore should be an acceptable asset as follows:

“But mined coal is clearly less liquid than cash, stocks, certificates of deposit, and bonds, which are highly liquid assets with readily identifiable values. Moreover, the fact that there is some market for a product does not mean that the product is readily marketable. It would obviously be permissible for a contracting officer to reject a proffer of frozen pork bellies, lean hogs, or oats on the ground that they are not readily marketable, even though those commodities—like coal—are routinely traded on commodities markets. Even stocks that are traded on the NASDAQ exchange are excluded from the [regulation’s] list of acceptable assets, despite the well-defined market for such stocks. Thus, the fact that coal has an identifiable spot price does not undercut the contracting officer’s conclusion that coal is not an acceptable asset.”

The Federal Circuit also commented on the negative impact that acceptance of such commodities would have on the government.

“…pledges of assets such as mined coal place a greater burden on the contracting officer and present a greater risk of loss to the government. The risks inherent in accepting speculative assets in support of a bid bond are illustrated by this case, as it became evident in the GAO proceedings that the pledged coal actually consisted of coal refuse that would have likely required further processing before it could be liquidated. The purpose of the [regulation] on bid bond assets is to prevent precisely that type of surprise. A contracting officer should not have to be an expert on the market for particular commodities in order to evaluate the value and liquidity of a pledged asset.”

Lastly, the Federal Circuit dismissed the disappointed bidder’s argument that the contracting officer acted improperly by not permitting a substitution of the bid bond asset, pointing out that the individual surety never made a proper written request of the contracting officer for such a substitution.

The Tip Top Construction decisions underscore the need for immediate review by the federal government of the current regulations governing the assets pledged by individual sureties on federal construction projects. NASBP has developed a position brief on this subject, available by clicking here, and is encouraging lawmakers to amend the applicable federal regulations to limit acceptable assets to cash, certificates of deposit, US government securities, and irrevocable letters of credit, among other measures. Such a regulatory change is needed to lessen the administrative burden of contracting officers; to expedite procurements; to avoid instances where bonds mistakenly have been accepted with assets that are insufficient, inappropriate or illusory; and to ensure that federal contracting agencies receive pledged assets that are in the control of the government and that can be timely and easily liquidated to pay valid bond claims. Clearly, government contractors would benefit from revised regulations that offer an exclusive list of cash or cash equivalent assets so that bidders have better certainty that their bid bonds pledge assets that uniformly are acceptable to federal contracting officers.
 
These materials are provided to NASBP members and affiliates solely for educational and informational purposes. They are not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in these materials without such advice.