B-120952, SEPTEMBER 27, 1954, 34 COMP. GEN. 143

B-120952: Sep 27, 1954

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

SURETIES WHILE THE PERFORMANCE BOND SURETIES OF A DEFAULTING CONTRACTOR ARE UNDER OBLIGATION TO PAY ANY EXCESS COMPLETION COSTS INCURRED BY THE GOVERNMENT. THEY ARE NOT REQUIRED TO COMPLETE THE CONTRACT WORK FOR PURPOSES OF ENABLING THE ASSIGNEE OF THE CONTRACTOR TO BE PAID RETAINED PERCENTAGES AND UNPAID PROGRESS PAYMENTS WHICH WERE EARNED BY THE CONTRACTOR PRIOR TO DEFAULT. 1954: REFERENCE IS MADE TO YOUR LETTER OF AUGUST 7. ALL THREE OF THE CONTRACTS MENTIONED HAVE BEEN TERMINATED BY THE NAVY DEPARTMENT BECAUSE OF THE CONTRACTOR'S DEFAULT AFTER PARTIAL PERFORMANCE. PERFORMANCE AND PAYMENT BONDS WERE FURNISHED UNDER EACH OF THE CONTRACTS AT THE TIME OF THEIR EXECUTION AND SHORTLY THEREAFTER ALL MONEYS DUE UNDER EACH CONTRACT WERE ASSIGNED TO YOU.

B-120952, SEPTEMBER 27, 1954, 34 COMP. GEN. 143

CONTRACTS - DEFAULT - LIABILITY FOR EXCESS COSTS - ASSIGNEE V. SURETIES WHILE THE PERFORMANCE BOND SURETIES OF A DEFAULTING CONTRACTOR ARE UNDER OBLIGATION TO PAY ANY EXCESS COMPLETION COSTS INCURRED BY THE GOVERNMENT, THEY ARE NOT REQUIRED TO COMPLETE THE CONTRACT WORK FOR PURPOSES OF ENABLING THE ASSIGNEE OF THE CONTRACTOR TO BE PAID RETAINED PERCENTAGES AND UNPAID PROGRESS PAYMENTS WHICH WERE EARNED BY THE CONTRACTOR PRIOR TO DEFAULT.

ACTING COMPTROLLER GENERAL WEITZEL TO THE NATIONAL CITY BANK OF EVANSVILLE, SEPTEMBER 27, 1954:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 7, 1954, REGARDING YOUR RIGHTS AS ASSIGNEE UNDER CONTRACTS NOS. NOY-74886, NOY-75695, AND NOY 74835 BETWEEN REGENT CONTRACTING COMPANY OR REGENT CONSTRUCTING COMPANY, INC., AND THE NAVY DEPARTMENT.

ALL THREE OF THE CONTRACTS MENTIONED HAVE BEEN TERMINATED BY THE NAVY DEPARTMENT BECAUSE OF THE CONTRACTOR'S DEFAULT AFTER PARTIAL PERFORMANCE. PERFORMANCE AND PAYMENT BONDS WERE FURNISHED UNDER EACH OF THE CONTRACTS AT THE TIME OF THEIR EXECUTION AND SHORTLY THEREAFTER ALL MONEYS DUE UNDER EACH CONTRACT WERE ASSIGNED TO YOU. BY REASON OF THE CONTRACTOR'S PARTIAL PERFORMANCE CERTAIN AMOUNTS WERE EARNED BY IT UNDER EACH CONTRACT AND WERE PAID EITHER TO YOU OR THE CONTRACTOR. HOWEVER, THE CONTRACTS PROVIDED FOR RETENTION BY THE NAVY DEPARTMENT OF A PERCENTAGE OF SUCH PROGRESS PAYMENTS UNTIL COMPLETION OF THE CONTRACT WORK. YOUR CLAIM IS FOR THESE RETAINED PERCENTAGES IN THE AGGREGATE AMOUNT OF $115,375.94, PLUS THE LAST MONTHLY PROGRESS PAYMENT OF APPROXIMATELY $40,000 EARNED BY THE CONTRACTOR UNDER CONTRACT NO. NOY 74886 BUT UNPAID PRIOR TO TERMINATION.

THE PENALTY OF THE PERFORMANCE BOND UNDER EACH OF THE CONTRACTS IS ALLEGEDLY IN EXCESS OF THE AMOUNT NECESSARY TO COMPLETE THE CONTRACT WORK, AND IT IS YOUR POSITION THAT THE THREE CONTRACTS SHOULD BE COMPLETED BY THE PERFORMANCE BOND SURETIES SO THAT ALL UNPAID CONTRACT BALANCES IN THE HANDS OF THE GOVERNMENT MAY BE PAID TO YOU AS ASSIGNEE UNDER THE CONTRACTS. THE CONTRACTS ALL PROVIDE, IN ARTICLE 25 THEREOF, THAT UPON TERMINATION FOR DEFAULT THE GOVERNMENT HAS THE RIGHT TO COMPLETE THE WORK AND UPON COMPLETION,

* * * IF THE COST OF SUCH COMPLETION, PLUS ALL PAYMENTS OTHERWISE MADE TO THE CONTRACTOR, EXCEEDS THE CONTRACT PRICE, THE EXCESS COST SHALL BE CHARGED TO THE CONTRACTOR AND THE CONTRACTOR OR HIS SURETY, IF ANY, SHALL PAY SUCH AMOUNT TO THE GOVERNMENT UPON DEMAND.

YOU ARE ADVISED THAT UNDER THE TERMS OF THE PERFORMANCE BONDS THERE IS NO OBLIGATION ON THE PART OF THE SURETIES TO COMPLETE THE CONTRACT WORK; THE SURETIES' OBLIGATION UNDER SUCH BONDS IS ONLY TO PAY ANY EXCESS COMPLETION COSTS INCURRED BY THE GOVERNMENT. THE NAVY DEPARTMENT HAS ADVISED THAT THE SURETIES HAVE REFUSED TO COMPLETE THE WORK AND THAT COMPLETION OF THE WORK UNDER EACH CONTRACT BY A REPLACING CONTRACTOR WILL COST MORE THAN THE CONTRACT BALANCE REMAINING IN THE HANDS OF THE GOVERNMENT. IF, AS YOU REQUEST, SOME OR ALL OF THESE CONTRACT BALANCES WERE PAID TO YOU INSTEAD OF BEING APPLIED IN REDUCTION OF THE COMPLETION COSTS, THE PERFORMANCE BOND SURETIES WOULD BE RELEASED FROM LIABILITY FOR EXCESS COMPLETION COSTS TO THAT EXTENT.

A SITUATION VERY SIMILAR TO THAT IN THE INSTANT MATTER WAS INVOLVED IN THE CASE OF MODERN INDUSTRIAL BANK V. UNITED STATES, 101 C.1CLS. 808. IN DISCUSSING THAT DECISION IN A SIMILAR LATER CASE THE COURT OF CLAIMS SAID ( HARDIN COUNTY SAVINGS BANK V. UNITED STATES, 106 C.1CLS. 577, 596; 65 F.1SUPP. 1017):

THE INDUSTRIAL BANK CLAIMED, AS PLAINTIFF HARDIN COUNTY SAVINGS BANK HERE CLAIMS, THAT AS ASSIGNEE OF ALL AMOUNTS PAYABLE UNDER THE CONTRACT IT WAS ENTITLED UNDER SUCH ASSIGNMENT AND THE ASSIGNMENT OF CLAIMS ACT OF 1940 TO BE REPAID THE AMOUNT OF ITS LOANS OUT OF THE CONTRACT PRICE; THAT THE GOVERNMENT SHOULD HAVE LOOKED TO THE SURETY ON THE CONTRACTOR'S BOND FOR THE COST OF COMPLETION; THAT THE BANK'S RIGHTS AS ASSIGNEE WERE SUPERIOR TO THOSE OF THE SURETY AND THAT THE GOVERNMENT DID NOT HAVE THE RIGHT TO USE THE AMOUNT OF THE CONTRACT PRICE EARNED BY THE CONTRACTOR AND REMAINING UNPAID UPON THE CONTRACTOR'S DEFAULT IN SUCH A WAY AS TO CAUSE SUCH FUND TO ENURE TO THE BENEFIT OF THE SURETY. IN DENYING THIS CLAIM WE HELD THAT THE BANK, AS ASSIGNEE, ACQUIRED NO GREATER RIGHTS IN RESPECT OF AMOUNTS DUE UNDER THE CONTRACT THAN ITS ASSIGNOR, THE CONTRACTOR, HAD AND THAT THE RIGHT OF THE ASSIGNEE TO DEMAND PAYMENT BY THE GOVERNMENT OF AN AMOUNT DUE FROM IT FOR WORK'S PERFORMED UNDER THE CONTRACT WAS SUBJECT TO PERFORMANCE BY THE CONTRACTOR OF HIS CONTRACTUAL OBLIGATIONS.

THE DECISION IN THE MODERN INDUSTRIAL BANK CASE IS APPLICABLE ON THE FACTS OF THE CASE AT BAR AND THE SURETY, MASSACHUSETTS BONDING AND INSURANCE CO., HAVING STEPPED IN AND COMPLETED THE CONTRACT WORK UPON DEFAULT OF THE ORIGINAL CONTRACTOR, IS ENTITLED, AS AGAINST THE PLAINTIFF HARDIN COUNTY SAVINGS BANK, AS ASSIGNEE OF THE CONTRACTOR, TO RECOVER THE BALANCE DUE FROM THE GOVERNMENT UNDER THE CONTRACT FOR PERFORMANCE OF THE WORK CALLED FOR THEREBY. SINCE THE GOVERNMENT MIGHT HAVE USED AND APPLIED THE EARNED AS WELL AS THE UNEARNED PORTION OF THE CONTRACT PRICE TOWARD COMPLETION, THE SURETY HAVING COMPLETED THE WORK CALLED FOR BY THE CONTRACT IS ENTITLED TO THE BALANCE OF THE CONTRACT PRICE DUE.

SEE ALSO RHODE ISLAND DISCOUNT COMPANY V. UNITED STATES, 118 C.1CLS. 262, 94 F.1SUPP. 669.

I AM NOT UNMINDFUL OF THE FACT THAT A SUBROGATION OR SUBORDINATION AGREEMENT ALLEGEDLY WAS ENTERED INTO BETWEEN YOU AND THE SURETIES UNDER CONTRACT NO. NOY-74886. HOWEVER, IT IS UNDERSTOOD THAT THE SURETIES NOW QUESTION THE VALIDITY OF THIS AGREEMENT. IN SUCH CIRCUMSTANCES, I AM SURE YOU WILL REALIZE THAT THIS OFFICE COULD NOT ASSUME THE RISK OF AUTHORIZING PAYMENT TO YOU OF GOVERNMENT FUNDS ON THE BASIS OF AN AGREEMENT OF QUESTIONED VALIDITY.

ACCORDINGLY, YOU ARE ADVISED THAT YOUR CLAIM TO THE CONTRACT BALANCES IS DENIED TO THE EXTENT THAT SUCH BALANCES ARE NECESSARY TO DEFRAY EXCESS COMPLETION COSTS.