It is common practice for construction contractors to assign their rights in a project to sureties in the event of default, vesting in the surety all necessary contract rights and powers to settle outstanding disputes and facilitate timely completion of the project. However, a recent decision by the United States Armed Services Board of Contract Appeals (Board) demonstrates the limits to a surety’s ability to step into the shoes of the contractor under contracts with the United States government.
Ikhana, LLC, ASBCA No. 60462 (Oct. 18, 2017) involved a contract for construction of secure access lanes and remote screening facilities at the Pentagon. Pursuant to the contract, Ikhana, LLC (Ikhana) executed performance and payment bonds with The Guarantee Company of North America (surety). As part of the bonding agreement, Ikhana entered into an indemnification agreement with the surety, which provided the surety with certain rights—including contract rights and the explicit authority to prosecute and settle contract claims—in the event Ikhana defaulted on the contract. After extended performance problems, Ikhana filed a series of claims against the government for increased costs and additional time. Rather than issuing a final decision on these claims, however, the contracting officer instead terminated Ikhana for default and entered into a settlement agreement with the surety to secure completion of the project. As part of the settlement, the surety agreed to resolve all outstanding claims against the government pursuant to the contract rights assigned to the surety under its indemnification agreement.
In response to Ikhana’s appeal from the termination for default and the deemed denials of its other claims, the Government moved to dismiss, arguing that Ikhana had assigned its contract rights to the surety, and, therefore, lacked standing to pursue any contract appeals. The surety, pursuant to the terms of its settlement with the government, also moved to intervene in support of the government’s motion. The Board rejected these arguments, relying on a line of decisions holding that a contractor’s appeal rights under the Contract Disputes Act are “unwaivable.”
The Ikhana decision is notable for expanding that line of decisions. Whereas previous decisions involved agreements in which a contractor explicitly waived its right of appeal to the Board, Ikhana expanded this precedent to contractual agreements whose indirect effect would be to waive the contractor’s appeal rights. Sureties must account for this new limitation on their ability to step into the shoes of a contractor in default, both when negotiating with contractors at the outset of a project, as well as when settling claims with the government after a default.
This article is co-written by W. Barron A. Avery and William B. O'Reilly of the law firm of Baker & Hostetler, LLP. Avery is the chair of the Government Contracts practice at Baker & Hostetler, LLP where he specializes in federal government contract law, including bid protests, claims litigation, regulatory compliance counseling, and investigative matters. He also serves on the NASBP Attorney Advisory Council. Avery can be reached at 202.861.1705 or firstname.lastname@example.org.
William B. O’Reilly is an associate at the firm and can be reached at email@example.com or 202.861.1745. Avery and O’Reilly’s government contracts practice includes the representation of contractors in bid protests, claims litigation, investigations, and regulatory compliance matters.