Federal Circuit Round-Up
 
June 27, 2001
 
David Scott "Dave" Black- Northern Virginia

Sureties Still May Assert Claims Against Government

In a major victory for sureties of Miller Act performance bonds, the Federal Circuit reaffirmed that sureties may assert claims against the government that originally belonged to a defaulting prime contractor. More specifically, the court held that the government has waived its sovereign immunity from such claims.

The Miller Act requires contractors to post performance bonds on all federal construction contracts. 40 U.S.C. § 270a. Sureties that supply these bonds guaranty that the contract will be completed in the event that the contractor defaults. When a defaulting prime contractor has outstanding monetary claims against the government, such as for the retainage under the contract, the surety will want to sue the government for the prime contractor's claims.

Recently, there had been some uncertainty about a surety's ability to sue. A surety lacks a direct contractual relationship with the government, which the courts require for a party to bring a contract claim against the government under the Tucker Act, 28 U.S.C. § 1491. (Surety bonds do not create the requisite "privity of contract" between the surety and the government.) For over a century, the courts, relying upon Supreme Court decisions dating from 1896, have allowed sureties to assert the claims of insured prime contractors against the government under the "equitable doctrine of subrogation," - the legal fiction that a surety who discharges a defaulting contractor's obligations is substituted to the rights of the contractor. However, a 1999 U.S. Supreme Court case, Dep't of the Army v. Blue Fox, Inc., 525 U.S. 255, 265 (1999), called into question whether those earlier cases really addressed the issue of the government's waiver of its sovereign immunity with respect to subrogated claims.

The government pounced on the uncertainty created by Blue Fox and took the position that sureties could not pursue subrogated claims against the government because Congress had not unequivocally waived the government's sovereign immunity from such claims. The issue came to a head in Insurance Co. of the West, in which a surety of a Miller Act bond sued the government for payments the government made to the contractor after the government was notified of the default by the contractor under the bond.

The Federal Circuit acknowledged that the Supreme Court's prior subrogation cases did not provide a basis to conclude that Congress had waived sovereign immunity to subrogated claims. However, addressing the issue anew, the Federal Circuit concluded that the Tucker Act constituted a waiver of sovereign immunity to subrogated claims brought by sureties under Miller Act bonds, not because of the language Congress put in the Act, but rather because of what Congress didn't do. The court stated that the "common law" rule is that contractual rights can be assigned by a contracting party to a third party, subject to certain limited exceptions that had no application in the present case. The subrogation of a surety to the rights of a prime contractor is such an assignment. The court reasoned that if Congress intended to change the common law, it would have done so expressly. Because the Tucker Act did not expressly limit "the right of subrogees to bring suit against the government," the court concluded that "sovereign immunity presents no barrier to such an action."

Insurance Company of the West v. United States, No. 00-5039 (Fed. Cir. March 23, 2001)

Government Must Pay Market Value When Contract Price Deemed Unenforceable

On rare occasions, a clause in a government contract setting the price to be paid for goods and services will be deemed unenforceable. When this happens, a dispute may arise between the government and the contractor regarding the government's payment obligation under the contract. The Federal Circuit recently provided guidance on how to resolve such disputes.

Barrett Refining Corporation (Barrett) entered into four contracts with the Defense Energy Support Center to supply military jet fuel. Each contract contained a then-standard price adjustment clause. After the government made some payments to Barrett, the Court of Federal Claims declared, in an unrelated case, that the price adjustment clause was unenforceable because it violated the Federal Acquisition Regulation (FAR).

After the price adjustment clause was effectively stricken from the contract, Barrett brought a claim under the doctrine of quantum valebant claiming that it was still entitled to receive at least fair market value for the jet fuel delivered. The government counterclaimed against Barrett, contending that it was entitled to recoup any payments made to Barrett while the price adjustment clause was still in effect that exceeded the fair market value of the jet fuel delivered under the contracts. The Court of Federal Claims (COFC) agreed that Barrett could recover under an "implied-in-fact" contract with the government to pay the market value of the jet fuel, but dismissed the government's counterclaim for failing to state a valid legal claim.

On appeal, the Federal Circuit affirmed the COFC's award to Barrett. The court noted that the Tucker Act provides the COFC with jurisdiction to hear claims based on the theory of quantum valebant, or an "implied-in-fact" promise by the government to pay a supplier for goods sold and delivered as much as the goods are reasonably worth. The Federal Circuit reasoned that, once the unauthorized clause was struck, the express contract simply incorporates an implied-in-fact promise by the government to pay at least fair market value for the fuel. The Federal Circuit found evidence of all four elements of an implied-in-fact contract: (1) mutuality of intent to contract; (2) consideration; (3) lack of ambiguity in offer and acceptance, and (4) actual authority in the government representative to bind the government.

The Federal Circuit then reversed the COFC's dismissal of the government's counterclaim. The Federal Circuit concluded that the Tucker Act provides the COFC with jurisdiction over counterclaims by the government to recover unauthorized payments. The Federal Circuit held that the government could recover the payments it made to Barrett while the illegal price clause was still in effect to the extent that such payments exceeded the fair market value of the jet fuel supplied by Barrett. The case was then sent back to the lower court to determine the amount of the government's recovery, if any.

Barrett Refining Corporation v. United States, No. 00-5036 (Fed. Cir. March 13, 2001).