Federal Circuit Court—Miller Act Performance and Payment Bond Requirements Are “Deeply Ingrained” in Public Procurement Policy

The federal Miller Act lives, at least to some extent, in the minds of all folks who have the privilege of working in the surety industry. It is, therefore, particularly gratifying that the United States Court of Appeals for the Federal Circuit recently concluded in an important decision that “the payment and performance bond requirements [of the Miller Act] are ‘deeply ingrained’ in procurement policy.” In K-Con, Inc. v. Secretary of the Army, the three-judge panel held that the bonding requirements under the Miller Act apply to federal government construction contracts, even if the solicitation or contract does not expressly require bonds.

Factual Background

K-Con and the Army entered into two contracts for pre-engineered metal buildings. Neither solicitation included an express requirement that K-Con provide performance and payment bonds or FAR 52.228-15, the standard language for bonds included in government construction contracts.

After the contracts were awarded, the Army directed K-Con to provide performance and payment bonds before the Army could issue a notice to proceed with the contracts. After nearly two years, K-Con provided the required bonds and submitted a request for equitable adjustment (REA) under each contract to recover for increases in costs and labor over the two-year period.

The Army denied both claims, on the basis that the bond requirements set forth in FAR 58.228-15 were incorporated into the contracts at the time they were awarded. On appeal, the Armed Services Board of Contract Appeals denied the contractor’s claims. K-Con appealed to the Federal Circuit, which agreed with the CO.

Analysis

The court considered whether the bond requirements at issue are read into construction contracts regardless of whether the requirements are expressly included in the contracts. The court found that the bonding requirements of FAR 52.228-15 are read into all government construction contracts pursuant to the Christian doctrine. In 1963 in G.L. Christian & Associates v. United States, the Court of Claims, the Federal Circuit’s predecessor court, found the mandatory termination for convenience clause applied to a federal construction contract even though the agency failed to include it in the contract. Under the Christian doctrine a court may insert a clause into a government contract by operation of law if (1) the clause is mandatory, and (2) it “expresses a significant or deeply ingrained strand of public procurement policy.”

The court concluded that the first prong of the Christian doctrine was satisfied: because the Miller Act explicitly states that the performance and payment bonds “must” be furnished and the FAR both requires the bonds and directs insertion of the relevant clause, the bond requirements are mandatory.

Regarding the second prong of the Christian doctrine, the court found that the bonding requirements “‘express a significant or deeply ingrained strand of public procurement policy.’” The court based this conclusion on the long-standing statute (citing both the Miller Act and its predecessor, the Heard Act) and lengthy legislative history and the remedial and protective nature of the performance and payment bonds. “Performance bonds protect the government by ensuring that a contract will be completed with no further cost to the government even if the contractor defaults.” The court observed that, because government property is not subject to mechanic’s liens, payment bonds offer an alternative remedy to ensure payment to subcontractors and suppliers: “Payment bonds are intended to provide security for those who furnish labor and materials in the performance of government contracts.”

Advocacy Document

The K-Con decision is a powerful statement by a powerful court. Surety professionals should put this decision in their advocacy arsenal of documents to confirm for owners, design professionals, lenders, public officials, legislators, and the general public that the Miller Act (and implementing regulations) performance and payment bond requirements express a “deeply ingrained strand of public procurement policy” to protect the government (and its taxpayers) and subcontractors and suppliers on public projects.

Lessons Learned

What lessons should surety professionals and their contractors/subcontractors take away from the K-Con decision?

Postscript

The K-Con court also found that the contracts at issue were for construction, even though the agency had designated the procurement as one for commercial items and used the GSA eBuy system using Standard Form 1449, Solicitation/Contract/Order for Commercial Items. The contract line items specified delivery terms of “FOB: Destination,” which is typically used for commercial item contracts. On the other hand, there were indications that the contracts were for construction, not commercial items. For example, the contracts included many construction-related tasks and terms and required compliance with the Davis-Bacon Act, which is applicable only to construction contracts.

While K-Con argued that these were contracts for commercial items, the government responded that both contracts were patently ambiguous as to whether they were construction contracts and that it was K-Con’s responsibility to inquire whether the contracts were for construction or commercial items. Because K-Con did not inquire about the contract type when it discovered the patent ambiguities, the government contended that K-Con was barred from arguing on appeal the contracts were for commercial items–and the court agreed.

This case highlights the need for contractors to seek pre-bid clarification as to the type of contract on which they are bidding if any possible ambiguities are present. A contractor’s failure to inquire initially about a patently ambiguous clause will likely foreclose its ability to argue later for an interpretation of the clause favorable to its position.

Review the K-Con decision at http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/17-2254.Opinion.11-5-2018.pdf.