B-135509, APR. 28, 1958

B-135509: Apr 28, 1958

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THE MOTIVE UNDERLYING THE CONTRACTOR'S ACTION WAS LACK OF SUFFICIENT "FINANCES OR RESOURCES OF ANY KIND" TO MEET THE COMPANY'S PAYROLL AND THE "OTHER EXPENSES INCIDENT TO THE JOB.'. WHICH WAS GRANTED IN THE CONTRACTING OFFICER'S LETTER OF AUGUST 8. THE TERMINATED PORTION OF THE CONTRACT WORK WAS PERFORMED BY A CONSTRUCTION FIRM DESIGNATED MURPHY BROTHERS. IS INCLUDED IN THE RECORD. IT IS UNDERSTOOD THE SURETY HAS SATISFIED ALL CLAIMS FOR WAGES. THE LAW IS WELL SETTLED THAT IN CIRCUMSTANCES SUCH AS THESE. WHERE IT IS ESTABLISHED THAT THE SURETY HAS EXPENDED MORE MONEY IN THE COMPLETION OF THE CONTRACT WORK THAN REMAINS DUE UNDER THE CONTRACT. THE RIGHTS OF THE SURETY ARE SUBROGATED TO THOSE OF ITS PRINCIPAL.

B-135509, APR. 28, 1958

TO MR. J. J. HANAGAN, AUTHORIZED CERTIFYING OFFICER, BUREAU OF PUBLIC ROADS:

YOUR LETTER OF MARCH 10, 1958, FILE NO. 24-22.1, REQUESTS AN ADVANCE DECISION AS TO THE CORRECT BASIS FOR DISTRIBUTING THE PROCEEDS OF FINAL ESTIMATE NO. 5, FOR $8,288.26, UNDER CONTRACT NO. CPR 8-9145, DATED AUGUST 18, 1954.

BY THE TERMS OF THE CONTRACT, THE J.S. ANDERSON COMPANY, SPOKANE, WASHINGTON, UNDERTOOK CONSTRUCTION OF THE ENAVILLE-MURRAY HIGHWAY, IDAHO FOREST HIGHWAY PROJECT 9-C3, D4, SHOSHONE COUNTY, IDAHO, FOR THE TOTAL CONSIDERATION OF $224,832, BASED UPON THE ESTIMATED QUANTITIES AND TYPES OF CONSTRUCTION WORK SPECIFIED THEREIN. THE FIDELITY AND CASUALTY COMPANY OF NEW YORK FURNISHED THE REQUIRED PERFORMANCE AND PAYMENT BONDS UNDER THE CONTRACT, EACH FOR $112,416.

ON JULY 28, 1955, THE CONTRACTOR DEFAULTED AFTER COMPLETING WORK OF A DETERMINED VALUE OF $36,552.04, OF WHICH $28,263.78 HAS BEEN PAID. THE PRESENT CLAIM FOR $8,288.26 REPRESENTS THE PERCENTAGE RETAINED BY THE GOVERNMENT PRIOR TO THE DEFAULT. THE MOTIVE UNDERLYING THE CONTRACTOR'S ACTION WAS LACK OF SUFFICIENT "FINANCES OR RESOURCES OF ANY KIND" TO MEET THE COMPANY'S PAYROLL AND THE "OTHER EXPENSES INCIDENT TO THE JOB.'

BY LETTER DATED JULY 28, 1955, THE SURETY PETITIONED THE CONTRACTING OFFICER FOR PERMISSION TO COMPLETE THE WORK, WHICH WAS GRANTED IN THE CONTRACTING OFFICER'S LETTER OF AUGUST 8, 1955, TO THE SURETY. THE WORK OF THE CONTRACT HAS SINCE BEEN SATISFACTORILY COMPLETED BY THE SURETY, WHICH HAS BEEN PAID BY THE GOVERNMENT A TOTAL OF $191,617.24, OR ALL BUT $2,036.76 OF THE AMOUNTS CLAIMED TO BE DUE FOR ITS SERVICES.

APPARENTLY, THE TERMINATED PORTION OF THE CONTRACT WORK WAS PERFORMED BY A CONSTRUCTION FIRM DESIGNATED MURPHY BROTHERS, INC., OF SPOKANE, UNDER AN INDEPENDENT CONTRACT WHEREBY THE SURETY AGREED TO REIMBURSE THE SAID FIRM AT THE CONTRACT RATES, AS APPLIED TO THE COMPLETED SERVICES, PLUS A FLAT BONUS OF $25,000. A COPY OF THIS AGREEMENT, DATED JULY 29, 1955, IS INCLUDED IN THE RECORD.

IT IS UNDERSTOOD THE SURETY HAS SATISFIED ALL CLAIMS FOR WAGES, AND THE CLAIMS OF SUBCONTRACTORS, ALLEGEDLY EXCEEDING $40,000, AS A PART OF ITS OBLIGATION UNDER THE PAYMENT BOND.

THE GOVERNMENT HAS ASSERTED TWO COUNTERCLAIMS, TOTALING $3,859.15, AGAINST THE CLAIMED BALANCE OF $8,288.26 ALLEGEDLY DUE UNDER CONTRACT NO. CPR 8-9145; ONE FOR $1,784.96, REPRESENTING THE COST OF REMEASUREMENT AND RECOMPUTATIONS OF THE WORK COMPLETED BY THE DEFAULTING CONTRACTOR ON THIS PROJECT, AND THE OTHER FOR $2,074.19, REPRESENTING AN OVERPAYMENT ALLEGEDLY MADE TO THE J. S. ANDERSON COMPANY ON AN INDEPENDENT CONTRACT NO. CPR 8-9072. THE VALIDITY OF THESE COUNTERCLAIMS NEED NOT NOW BE FINALLY DETERMINED SINCE THE SURETY HAS AGREED IN ITS LETTER OF JANUARY 2, 1958, TO YOUR GENERAL COUNSEL, TO TEMPORARILY ABANDON THEM IN THE EXPECTATION OF RECEIVING EARLY PAYMENT OF THE BALANCE OF $4,429.11. HOWEVER, IN VIEW OF THE RULINGS OF THE COURT IN THE CASES OF UNITED STATES V. MUNSEY TRUST COMPANY, 332 U.S. 234, 239-240, AND STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, 119 C.CLS. 749, 769, THERE CAN BE NO SERIOUS CHALLENGE TO THE GOVERNMENT'S RIGHT TO SET-OFF THESE CLAIMS ONCE THEIR VALIDITY HAS BEEN DEFINITELY ESTABLISHED.

CONCERNING THE SURETY'S CLAIM FOR $4,429.11, REPRESENTING A PORTION OF THE RETAINED PERCENTAGES UNDER THE DEFAULTED CONTRACT, THE LAW IS WELL SETTLED THAT IN CIRCUMSTANCES SUCH AS THESE, WHERE IT IS ESTABLISHED THAT THE SURETY HAS EXPENDED MORE MONEY IN THE COMPLETION OF THE CONTRACT WORK THAN REMAINS DUE UNDER THE CONTRACT, THE RIGHTS OF THE SURETY ARE SUBROGATED TO THOSE OF ITS PRINCIPAL. SEE STANDARD ACCIDENT INSURANCE COMPANY V. UNITED STATES, SUPRA, P. 765; 31 COMP. GEN. 103.

HOWEVER, SINCE THE PRINCIPAL HAS THE RIGHT TO DISPUTE THE SURETY'S STATEMENT OF THE FACTS, NO PAYMENT MAY BE MADE TO THE SURETY IN EXCESS OF ITS ACTUAL EARNINGS UNDER THE CONTRACT UNTIL RECEIPT FROM THE CONTRACTOR, OR ITS TRUSTEE OR RECEIVER IN BANKRUPTCY, OF A DULY EXECUTED RELEASE OF ALL CLAIMS AGAINST THE UNITED STATES UNDER THE CONTRACT IN CONSIDERATION OF PAYMENT TO THE SURETY OF ANY BALANCE FOUND DUE UNDER THE CONTRACT, OR IN THE ALTERNATIVE AN INDEMNITY AGREEMENT EXECUTED UNDER SEAL BY THE SURETY UNDERTAKING TO SAVE THE UNITED STATES HARMLESS AGAINST ALL CLAIMS OF ANY PERSONS UNDER THE CONTRACT.