New Federal Law Curbs Individual Surety Abuses, but Vigilance Is Still Necessary
The 2016 FY National Defense Authorization Act (NDAA), which authorizes the Congress to appropriate military funding for the Department of Defense, includes two provisions of great importance to the surety and construction industries. Those two provisions tighten controls over assets backing individual surety bonds on federal construction projects and increase the guarantee provided to surety companies that participate in the Small Business Administration’s (SBA) Surety Bond Guarantee Preferred Program.
Inclusion of those two provisions in the NDAA is an outstanding victory for sureties and small construction businesses. These provisions have been championed for years by NASBP CEO Mark McCallum and Director of Government Relations Larry LeClair, with support from other surety and trade associations and sponsorship by certain members of Congress. It is a cause for celebration. . . . But wait. Not so fast there.
The provision to require unregulated, non-corporate sureties to pledge specific and secure assets and place them in the care and custody of the federal government will not go into effect for another year. Furthermore, implementing regulations have to be drafted in the rulemaking process. NASBP has put the Department of Treasury on notice of the new law and looks forward to commenting on the proposed regulations.
Thus, there is still time for destructive mischief, if Contracting Officers (COs) and industry stakeholders are not vigilant against “nonresponsible” individual sureties. Fortunately, there are a number of vigilant COs, such as the one at the center of the facts in a recent decision issued by the United States Court of Federal Claims,
Anthem Builders, Inc. v. United States, 121 Fed. Cl. 24 (2015).
Click here to read the full decision.
In that case the Court of Federal Claims upheld the decision of a Department of Veterans Affairs CO who found an individual surety “nonresponsible” and rejected the bid of the contractor that submitted the bond. Under Federal Acquisition Regulation (FAR) 28.203, an individual surety may be accepted on a federal construction project, in lieu of a Treasury-listed corporate surety, provided certain requirements are met. FAR 28.203, however, also gives COs the right to find an individual surety “nonresponsible.”
The court considered a number of arguments urged by the rejected contractor, but it ultimately upheld the CO’s decision that the individual surety was “nonresponsible.” In its opinion, the court cited, among other reasons, the individual surety’s offer of an Irrevocable Trust Receipt issued by First Mountain Bancorp (FMB), which was unacceptable because FMB was not an FDIC-insured financial institution.
Click here to read the November 18, 2015 online
Engineering-News Record article about the case.
While the surety and construction industries, as well as governmental agencies, are awaiting final rulemaking of the implementing regulations for the provision to minimize individual surety abuses, all stakeholders involved in federal construction projects should be vigilant about “nonresponsible” individual sureties.
The author of this article is Martha Perkins, General Counsel at NASBP. Martha Perkins can be reached at mperkins@nasbp.org or 202.686-3700.
This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is 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 this article without such advice.