B-175222, APR 4, 1973, 52 COMP GEN 633

B-175222: Apr 4, 1973

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A SURETY WHO REQUESTED THE GOVERNMENT TO WITHHOLD THE FUNDS DUE A DEFAULTING CONTRACTOR UNDER A JANITORIAL SERVICE CONTRACT AND WHO MET ITS OBLIGATIONS UNDER THE PERFORMANCE BOND FOR THE EXCESS COSTS TO THE CONTRACTING AGENCY TO COMPLETE THE CONTRACT IS NOT LIABLE IN AN AMOUNT THAT EXCEEDS ITS OBLIGATION UNDER THE PAYMENT BOND FOR THE WITHHELD FUNDS THAT WERE TURNED OVER BY THE AGENCY TO THE LABOR DEPARTMENT TO COVER WAGE DEFICIENCIES UNDER THE DEFAULTED CONTRACT AS WELL AS ANOTHER CONTRACT. IT IS NOT LIABLE FOR THE WAGE UNDERPAYMENTS THAT IT DID NOT GUARANTEE. 1973: REFERENCE IS MADE TO YOUR TRANSMITTAL LETTER DATED MARCH 16. THE CONTRACT WAS AWARDED TO WESTERN ON JUNE 27. FORMAL NOTICE OF DEFAULT TERMINATION WAS DATED APRIL 1.

B-175222, APR 4, 1973, 52 COMP GEN 633

BONDS - PERFORMANCE - SURETY - LIABILITY, OBLIGATION, ETC. A SURETY WHO REQUESTED THE GOVERNMENT TO WITHHOLD THE FUNDS DUE A DEFAULTING CONTRACTOR UNDER A JANITORIAL SERVICE CONTRACT AND WHO MET ITS OBLIGATIONS UNDER THE PERFORMANCE BOND FOR THE EXCESS COSTS TO THE CONTRACTING AGENCY TO COMPLETE THE CONTRACT IS NOT LIABLE IN AN AMOUNT THAT EXCEEDS ITS OBLIGATION UNDER THE PAYMENT BOND FOR THE WITHHELD FUNDS THAT WERE TURNED OVER BY THE AGENCY TO THE LABOR DEPARTMENT TO COVER WAGE DEFICIENCIES UNDER THE DEFAULTED CONTRACT AS WELL AS ANOTHER CONTRACT. THE SURETY DID NOT COMPLETE THE CONTRACT ITSELF AND HAVING ONLY GUARANTEED CONTRACT PERFORMANCE AT A SPECIFIED PRICE, IT IS NOT LIABLE FOR THE WAGE UNDERPAYMENTS THAT IT DID NOT GUARANTEE. TO HOLD THE SURETY LIABLE FOR OBLIGATIONS NOT CONTEMPLATED BY THE PERFORMANCE BOND WOULD VIOLATE THE GENERAL RULE OF THE LAW OF SURETYSHIP THAT NO ONE INCURS A LIABILITY FOR ANOTHER UNLESS EXPRESSLY AGREEING TO BE BOUND.

TO THE SECRETARY OF THE AIR FORCE, APRIL 4, 1973:

REFERENCE IS MADE TO YOUR TRANSMITTAL LETTER DATED MARCH 16, 1972, WITH ENCLOSURES, FROM THE CHIEF, CONTRACT SUPPORT BRANCH, CONTRACT MANAGEMENT DIVISION, DIR/PROCUREMENT POLICY (LGPMB), CONCERNING THE CLAIM OF UNITED STATES FIDELITY AND GUARANTY COMPANY (USF&G), SURETY FOR WESTERN JANITORIAL SERVICE, INCORPORATED (WESTERN), TO CERTAIN FUNDS DISBURSED UNDER CONTRACT NO. F04666-69-C-0260, WITH THE UNITED STATES AIR FORCE.

THE CONTRACT WAS AWARDED TO WESTERN ON JUNE 27, 1969, AND PROVIDED FOR CUSTODIAL SERVICES AT BEALE AIR FORCE BASE, CALIFORNIA, USF&G FURNISHED PAYMENT AND PERFORMANCE BONDS ON THE CONTRACT. WESTERN ABANDONED THE CONTRACT EFFECTIVE FEBRUARY 27, 1970, AND ON MARCH 2, 1970, THE CONTRACTING OFFICER NOTIFIED THE SURETY THAT WESTERN HAD DEFAULTED ON ITS CONTRACT AND DEMANDED THAT USF&G SATISFY ITS PERFORMANCE BOND OBLIGATION. USF&G IMMEDIATELY (MARCH 2, 1970) SENT A TELEFAX TO THE CONTRACTING OFFICER DIRECTING THE CONTRACTING OFFICER TO RETAIN ANY AND ALL FUNDS DUE ON THE CONTRACT, AND BY LETTER DATED MARCH 16, 1970, IT TENDERED THE SERVICES OF MURCOLE, INCORPORATED, TO COMPLETE THE DEFAULTED CONTRACT AND AGREED TO REIMBURSE THE AIR FORCE FOR EXCESS COSTS RESULTING FROM THE DEFAULT. FORMAL NOTICE OF DEFAULT TERMINATION WAS DATED APRIL 1, 1970, AT WHICH TIME WESTERN WAS NOTIFIED THAT IT WOULD BE HELD LIABLE FOR ANY EXCESS COSTS INCURRED BY THE GOVERNMENT IN THE REPROCUREMENT OF THE TERMINATED SERVICES. AT THE TIME OF DEFAULT BY WESTERN THE GOVERNMENT HAD IN ITS POSSESSION THE SUM OF $1,326.29, WITHHELD FROM WESTERN FOR WORK PERFORMED PRIOR TO ITS ABANDONMENT OF WORK UNDER THIS CONTRACT.

REPROCUREMENT OF THE TERMINATED SERVICES WAS ACCOMPLISHED AS FOLLOWS:

A. COST INCURRED FOR GOVERNMENT LABOR TO PERFORM

SERVICES, FEB. 27 THROUGH MARCH 5, 1970. $ 438.42

B. REPROCUREMENT:

(1) INTERIM SERVICES MARCH 6-19, 1970, FROM MURCOLE,

INCORPORATED.

1,600.00 (2) INTERIM SERVICES, MARCH 20-27, 1970, FROM

MURCOLE, INCORPORATED.

800.00 (3) CONTRACT WITH MURCOLE, INCORPORATED, FOR

PERIOD MARCH 28 THROUGH JUNE 30, 1970. $ 9,306.62

TOTAL COST OF COMPLETION OF DEFAULTED CONTRACT $12,145.04

HAD WESTERN COMPLETED THE CONTRACT IT WOULD HAVE EARNED FOR 4 MONTHS AND 2 DAYS (FEBRUARY 27 THROUGH JUNE 30, 1970), AT $2,062.36 PER MONTH, THE SUM OF $8,386.94 LESS $20.97 DISCOUNT OR A NET AMOUNT OF $8,365.97. THEREFORE, THE NET EXCESS COSTS WERE $3,779.07.

ON JUNE 17, 1970, THE SURETY WAS NOTIFIED BY THE CONTRACTING OFFICER THAT THE WITHHELD SUM ($1,326.29) WAS BEING CONTESTED PENDING A HEARING BY THE DEPARTMENT OF LABOR REGARDING CLAIMS FOR UNPAID WAGES BY EMPLOYEES OF WESTERN. THE HEARING EXAMINER DETERMINED THAT $40,526.14 WAS DUE WESTERN EMPLOYEES FOR WORK PERFORMED ON A NUMBER OF CONTRACTS WITH THE UNITED STATES. HOWEVER, OF THE TOTAL AMOUNT OWED, ONLY $668.51 WAS ATTRIBUTABLE TO THE BEALE AIR FORCE BASE WORK.

ON AUGUST 12, 1970, THE AIR FORCE SENT TO THE SURETY A "NOTICE OF ASSESSMENT OF EXCESS COST (DAMAGES)" ON THE BEALE CONTRACT. THE SURETY WAS NOTIFIED THAT THE TOTAL EXCESS COSTS AND DAMAGES INCURRED IN COMPLETING PERFORMANCE WERE $3,779.07 AND THAT, AFTER SUBTRACTING THE $1,326.29 OF WITHHELD FUNDS, THE SURETY OWED $2,452.78 ON THE PERFORMANCE BOND. ON AUGUST 20, 1970, THE SURETY SENT ITS DRAFTS FOR $2,452.78(THE EXCESS COSTS OF COMPLETING THE CONTRACT AFTER APPLICATION OF THE WITHHELD BALANCE) UNDER ITS PERFORMANCE BOND AND FOR $668.51(THE AMOUNT OF THE WAGE CLAIMS ATTRIBUTABLE TO THE CONTRACT) UNDER ITS PAYMENT BOND TO THE AIR FORCE AND TO THE DEPARTMENT OF LABOR, RESPECTIVELY.

ON SEPTEMBER 4, 1970, THE AIR FORCE NOTIFIED THE SURETY THAT IT HAD TRANSMITTED $1,326.29, THE UNDISBURSED CONTRACT BALANCE, TO THE DEPARTMENT OF LABOR AT ITS REQUEST TO SATISFY WAGE CLAIMS AGAINST WESTERN AND DEMANDED PAYMENT OF THAT AMOUNT AS IT HAD BEEN ERRONEOUSLY CREDITED TO THE EXCESS COSTS OF COMPLETING THE BEALE CONTRACT. ON SEPTEMBER 16, 1970, THE SURETY OBJECTED TO THIS ACTION IN A LETTER TO THE AIR FORCE. ON THE SAME DATE IT CALLED THE DEPARTMENT OF LABOR'S ATTENTION TO ITS DRAFT IN THE AMOUNT OF $668.51 AND ADVISED OF ITS INTENTION TO MEET ALL ITS OBLIGATIONS ON WESTERN PAYMENT BONDS. IN ITS REPLY THE DEPARTMENT OF LABOR RETURNED THE USF&G DRAFT OF AUGUST 20, 1970, STATING THAT THE FUNDS WITHHELD BY THE AIR FORCE WERE SUFFICIENT TO SATISFY THE AMOUNT DUE TO WESTERN'S EMPLOYEES UNDER THE BEALE CONTRACT.

IN RESPONSE TO OUR REQUEST, THE DEPARTMENT OF LABOR ALSO ADVISED US THAT OF THE $1,326.29, TRANSMITTED BY THE AIR FORCE, $668.51 WAS PAID TO WESTERN'S UNDERPAID EMPLOYEES UNDER THE BEALE AIR FORCE BASE CONTRACT, AND THAT THE BALANCE OF $657.78 WAS USED TO HELP PAY BACK WAGES FOUND DUE EMPLOYEES ON ANOTHER WESTERN CONTRACT ON WHICH THERE WAS NO SURETY. IT IS LABOR'S POSITION THAT THE FOREGOING DISTRIBUTION WAS IN ACCORDANCE WITH THE FOLLOWING PERTINENT PROVISIONS OF SECTION 3(A) OF THE SERVICE CONTRACT ACT OF 1965(41 U.S.C. 352(A)), AND THE IMPLEMENTATION THEREOF IN ARMED SERVICES PROCUREMENT REGULATION 12 1004, RESPECTIVELY.

41 U.S.C. 352(A)

SO MUCH OF THE ACCRUED PAYMENT DUE ON THE CONTRACT OR ANY OTHER CONTRACT BETWEEN THE SAME CONTRACTOR AND THE FEDERAL GOVERNMENT MAY BE WITHHELD AS IS NECESSARY TO PAY SUCH EMPLOYEES. SUCH WITHHELD SUMS SHALL BE HELD IN A DEPOSIT FUND. ON ORDER OF THE SECRETARY, ANY COMPENSATION WHICH THE HEAD OF THE FEDERAL AGENCY OR THE SECRETARY HAS FOUND TO BE DUE PURSUANT TO THIS ACT SHALL BE PAID DIRECTLY TO THE UNDERPAID EMPLOYEES FROM ANY ACCRUED PAYMENTS WITHHELD UNDER THIS ACT.

ASPR 12-1004

THIS CONTRACT, TO THE EXTENT THAT IT IS OF THE CHARACTER TO WHICH THE SERVICE CONTRACT ACT OF 1965 *** APPLIES, IS SUBJECT TO THE FOLLOWING PROVISIONS AND TO ALL OTHER APPLICABLE PROVISIONS OF THE ACT AND THE REGULATIONS OF THE SECRETARY OF LABOR THEREUNDER.***

(G) WITHHOLDING OF PAYMENTS AND TERMINATION OF CONTRACT. THE CONTRACTING OFFICER SHALL WITHHOLD OR CAUSE TO BE WITHHELD FROM THE GOVERNMENT PRIME CONTRACTOR UNDER THIS OR ANY OTHER GOVERNMENT CONTRACT WITH THE PRIME CONTRACTOR SUCH SUMS AS HE, OR AN APPROPRIATE OFFICER OF THE LABOR DEPARTMENT, DECIDES MAY BE NECESSARY TO PAY UNDERPAID EMPLOYEES. ADDITIONALLY, ANY FAILURE TO COMPLY WITH THE REQUIREMENTS OF THIS CLAUSE RELATING TO THE SERVICE CONTRACT ACT OF 1965 MAY BE GROUNDS FOR TERMINATION OF THE RIGHT TO PROCEED WITH THE CONTRACT WORK. IN SUCH EVENT, THE GOVERNMENT MAY ENTER INTO OTHER CONTRACTS OR ARRANGEMENTS FOR COMPLETION OF WORK, CHARGING THE CONTRACTOR IN DEFAULT WITH ANY ADDITIONAL COST.

THE SURETY CONTENDS THAT UNDER WELL-ESTABLISHED LEGAL PRINCIPLES THE MONEY RETAINED BY THE GOVERNMENT AT THE TIME OF WESTERN'S DEFAULT WAS PROPERLY FOR APPLICATION TOWARD COMPLETION OF THE CONTRACT AND, THEREFORE, USF&G'S PAYMENT OF THE DIFFERENCE BETWEEN THAT AMOUNT AND THE TOTAL EXCESS COMPLETION COSTS ABSOLVED IT OF LIABILITY UNDER ITS PERFORMANCE BOND. ITS RATIONALE IS TO THE EFFECT THAT THE GOVERNMENT HOLDS THE UNDISBURSED FUNDS IN TRUST FOR COMPLETION OF THE CONTRACT AND THE COMPLETING SURETY IS SUBROGATED TO THE GOVERNMENT'S RIGHT TO APPLY THE RETAINED FUNDS TO THE EXCESS COMPLETION COSTS IN PREFERENCE TO ANY OTHER CLAIMS. IT IS THE SURETY'S POSITION THAT WHILE THE SERVICE CONTRACT ACT OF 1965 AUTHORIZES THE WITHHOLDING OF FUNDS DUE THE CONTRACTOR TO SATISFY WAGE CLAIMS UNDER THAT OR OTHER CONTRACTS, IT IS NOT APPLICABLE TO THE SITUATION WHERE, AS HERE, THE CONTRACTOR DEFAULTS AND THE RETAINED FUNDS ARE HELD IN TRUST FOR COMPLETION OF PERFORMANCE.

THE RIGHT OF A SURETY TO A WITHHELD FUND WHEN THE SURETY COMPLETES PERFORMANCE OF A CONTRACT UPON DEFAULT BY THE CONTRACTOR HAS LONG BEEN RECOGNIZED. IN PRAIRIE STATE BANK V. UNITED STATES, 164 U.S. 227(1896), THE COURT HELD THAT A RETAINED FUND UNDER A GOVERNMENT CONTRACT WAS FOR THE PROTECTION OF THE UNITED STATES AND THAT A COMPLETING SURETY WAS SUBROGATED TO THE RIGHTS OF THE GOVERNMENT IN THE FUND AND THEREFORE HAD AN EQUITABLE INTEREST IN IT. THIS "FIRMLY ESTABLISHED RULE" WAS REAFFIRMED BY THE SUPREME COURT IN PEARLMAN V. RELIANCE INSURANCE CO., 371 U.S. 132(1962) AND HAS BEEN APPLIED IN TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317(5TH CIR. 1967), CERT, DEN. 390 U.S. 906(1968), AND SECURITY INSURANCE CO. V. UNITED STATES, 192 CT. CL. 754, 428 F.2D 838(1970). IN THE LATTER CASE, THE COURT QUOTED APPROVINGLY THE FOLLOWING LANGUAGE FROM TRINITY, SUPRA:

A DIFFERENT SITUATION OCCURS WHEN THE SURETY COMPLETES THE PERFORMANCE OF A CONTRACT. THE SURETY IS NOT ONLY A SUBROGEE OF THE CONTRACTOR, AND THEREFORE A CREDITOR, BUT ALSO A SUBROGEE OF THE GOVERNMENT AND ENTITLED TO ANY RIGHTS THE GOVERNMENT HAS TO THE RETAINED FUNDS. IF THE CONTRACTOR FAILS TO COMPLETE THE JOB, THE GOVERNMENT CAN APPLY THE RETAINED FUNDS AND ANY REMAINING PROGRESS MONEY TO COSTS OF COMPLETING THE JOB. THE SURETY IS LIABLE UNDER THE PERFORMANCE BOND FOR ANY DAMAGE INCURRED BY THE GOVERNMENT IN COMPLETING THE JOB. ON THE OTHER HAND, THE SURETY MAY UNDERTAKE TO COMPLETE THE JOB ITSELF. IN SO DOING, IT PERFORMS A BENEFIT FOR THE GOVERNMENT, AND HAS A RIGHT TO THE RETAINED FUNDS AND REMAINING PROGRESS MONEY TO DEFRAY ITS COSTS. THE SURETY WHO UNDERTAKES TO COMPLETE THE PROJECT IS ENTITLED TO THE FUNDS IN THE HANDS OF THE GOVERNMENT NOT AS A CREDITOR AND SUBJECT TO SETOFF, BUT AS A SUBROGEE HAVING THE SAME RIGHTS TO THE FUNDS AS THE GOVERNMENT. (382 F.2D AT 320.)

ESSENTIALLY, THE CONCLUSION REACHED IN THESE CASES IS THAT A COMPLETING SURETY IS NO WORSE OFF THAN ONE THAT ELECTS TO PAY EXCESS COST DAMAGES. SINCE IN THE INSTANT CASE THE SURETY DID NOT COMPLETE THE CONTRACT, THE EXCESS COST DAMAGES FOR WHICH THE SURETY IS LIABLE MUST BE DETERMINED.

THE LEGISLATIVE HISTORY OF THE SERVICE CONTRACT ACT OF 1965 INDICATES THAT THE ACT'S PURPOSE WAS TO GIVE THE SAME PROTECTION AND BENEFITS TO SERVICE EMPLOYEES THAT WAS AFFORDED CONSTRUCTION WORKERS UNDER THE DAVIS- BACON ACT, 40 U.S.C. 276A. FOR EXAMPLE, PAGE 11 OF THE HEARINGS BEFORE THE SUBCOMMITTEE ON LABOR AND PUBLIC WELFARE, 89TH CONGRESS, 1ST SESSION, ON H.R. 10238, WHICH WAS SUBSEQUENTLY ENACTED AS PUBLIC LAW 89 286(SERVICE CONTRACT ACT OF 1965), CONTAINS THE FOLLOWING TESTIMONY OF THE SOLICITOR OF LABOR:

AT THE THRESHOLD I HAVE BEEN TOLD THAT THERE IS SOME CURIOSITY AS TO WHY WE DID NOT SIMPLY TAKE THE DAVIS-BACON ACT AND EXTEND IT SO THAT IT WOULD COVER SERVICE CONTRACTS AS WELL AS CONSTRUCTION CONTRACTS.

ANOTHER ANSWER TO THAT QUESTION IS, THAT IN PRINCIPLE, WITHOUT MENTIONING IT, WE HAVE FOLLOWED THE DAVIS-BACON ACT.

THE DAVIS-BACON ACT AUTHORIZES THE WITHHOLDING OF FUNDS DUE UNDER A CONTRACT TO REIMBURSE WORKERS WHO WERE PAID LESS THAN THE REQUIRED MINIMUM WAGES WHILE WORKING ON THAT CONTRACT. THUS, THE TWO ACTS ARE SUBSTANTIALLY SIMILAR EXCEPT FOR THE PROVISION IN THE SERVICE CONTRACT ACT OF 1965 WHICH AUTHORIZES THE USE OF RETAINED FUNDS TO REIMBURSE WORKERS OWED MONEY UNDER OTHER CONTRACTS AS WELL AS THE CONTRACT UNDER WHICH THE MONEY IS RETAINED. NO EXPLANATION OF THIS DIFFERENCE APPEARS IN THE LEGISLATIVE HISTORY. WE NOTE, HOWEVER, THAT THE PROVISIONS OF THE WALSH- HEALEY ACT OF JUNE 30, 1936, 49 STAT. 2036, 41 U.S.C. 36, PROVIDING SIMILAR PROTECTION FOR EMPLOYEES UNDER SUPPLY CONTRACTS, HAVE ALSO BEEN HELD TO APPLY TO ALL CONTRACTS SUBJECT TO THAT ACT, READY-MIX CONCRETE COMPANY V. UNITED STATES, 131 CT. CL. 204(1955); CF. 19 COMP. GEN. 785(1940), AND THAT THE LANGUAGE OF THE SERVICE CONTRACT ACT EXPLICITLY PROVIDES FOR SIMILAR APPLICATION OF ITS PROVISIONS.

WE HAVE PREVIOUSLY HAD OCCASION TO CONSIDER A CLAIM TO RETAINED FUNDS ON BEHALF OF UNPAID WORKERS DUE UNDER A CONTRACT SUBJECT TO THE DAVIS BACON ACT. 46 COMP. GEN. 178(1966). IN THAT CASE WE REJECTED THE TRUST FUND CONCEPT EXPRESSED IN CERTAIN PRIOR CASES (33 COMP. GEN. 496(1954) AND 35 ID. 144(1955)) AS APPLIED TO WITHHELD PAYMENTS UNDER A CONTRACT. WE HELD THAT A TRUST AROSE IN FAVOR OF THE WORKMEN, IF AT ALL, ONLY WHEN "DETERMINATIONS ARE MADE AS TO THE EMPLOYEES ENTITLED, THE INDIVIDUAL AMOUNTS DUE, AND THE WITHHELD AMOUNTS TRANSFERRED TO AND ACCEPTED BY THE GENERAL ACCOUNTING OFFICE AS IMPRESSED MONIES." 46 COMP. GEN. 178, 182. WE NOTED THAT THE STATUTE PROVIDED THAT THE CONTRACTING OFFICER MAY WITHHOLD IN FAVOR OF UNDERPAID EMPLOYEES BUT THAT THE DAVIS-BACON ACT PROCEDURES APPEARED TO BE SUPPLEMENTAL TO OTHER RIGHTS AND REMEDIES AVAILABLE TO THE WORKERS, AND WE CONCLUDED THAT THE GOVERNMENT HAS PRIORITY FOR SETOFF OF ITS CLAIMS AGAINST AMOUNTS WITHHELD FROM A CONTRACTOR, LEAVING THE WORKERS TO OTHER REMEDIES IF THE RETAINAGE WAS INSUFFICIENT TO SATISFY THEIR CLAIMS ALSO. WE HAVE HELD THAT UNDER THE WALSH-HEALEY ACT, FUNDS WITHHELD FOR THE BENEFIT OF EMPLOYEES MUST BE USED ONLY FOR PAYMENT TO EMPLOYEES BECAUSE OF THE MANDATORY LANGUAGE OF THE ACT. 19 COMP. GEN. 565(1939); 46 ID. 178, 182, SUPRA. IN BOTH CASES, HOWEVER, IT IS CLEAR THAT UNPAID EMPLOYEES CAN HAVE A PARAMOUNT INTEREST IN THE WITHHELD FUNDS ONLY IF THE FUNDS WERE WITHHELD SPECIFICALLY FOR THE BENEFIT OF SUCH EMPLOYEES. SEE B-166264, JUNE 1, 1970. IN VIEW OF THESE DECISIONS AND THE LEGISLATIVE HISTORY OF THE SERVICE CONTRACT ACT, WE CANNOT CONCLUDE THAT EMPLOYEES COVERED BY THAT ACT HAVE ANY GREATER PROTECTION WITH RESPECT TO A SURETY'S CLAIM TO RETAINED FUNDS THAN THOSE COVERED BY THE DAVIS-BACON AND WALSH-HEALEY ACTS. FURTHERMORE, WHILE IT IS CLEAR THAT UNDER THE ACT A CONTRACTOR WHO FAILS TO PAY THE MINIMUM REQUIRED WAGES TO HIS EMPLOYEES MAY BE DEFAULTED FOR NONPERFORMANCE, THEREBY SUBJECTING THE PERFORMANCE BOND SURETY TO LIABILITY FOR EXCESS COSTS, IT IS EQUALLY CLEAR THAT SUCH EXCESS COSTS DO NOT ENCOMPASS THE AMOUNT BY WHICH THE EMPLOYEES WERE UNDERPAID. AS STATED IN UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234, 244(1947):

*** WHEN LABORERS AND MATERIALMEN *** ARE UNPAID AND THE WORK IS COMPLETE, THE GOVERNMENT SUFFERS NO DAMAGE. THE WORK HAS BEEN DONE AT THE CONTRACT PRICE. THE GOVERNMENT CANNOT SUFFER DAMAGE BECAUSE IT IS UNDER NO LEGAL OBLIGATION TO PAY THE LABORERS AND MATERIALMEN. IN THE CASE OF THE LABORERS' BOND, THE SURETY HAS PROMISED THAT THEY WILL BE PAID, NOT, AS IN THE CASE OF PERFORMANCE BOND, THAT WORK WILL BE DONE AT A CERTAIN PRICE.***.

HERE, THE SURETY, BY EXECUTING A PERFORMANCE BOND, GUARANTEED PERFORMANCE AT A SPECIFIED PRICE, BUT IT DOES NOT APPEAR THAT IT UNDERTOOK TO GUARANTEE PAYMENT OF CONTRACTOR EMPLOYEES ON THE SPECIFIC CONTRACT INVOLVED OR ON ANY OTHER CONTRACT. THUS, TO HOLD THE PERFORMANCE BOND SURETY FOR UNDERPAYMENT OF LABORERS WOULD MAKE THE SURETY LIABLE FOR OBLIGATIONS NOT CONTEMPLATED WHEN THE BOND WAS ISSUED. THIS WOULD VIOLATE THE "GENERAL RULE OF THE LAW OF SURETYSHIP THAT NO ONE INCURS A LIABILITY TO PAY A DEBT OR PERFORM A DUTY FOR ANOTHER UNLESS HE EXPRESSLY AGREES TO BE SO BOUND, FOR THE LAW DOES NOT CREATE RELATIONSHIPS OF THIS CHARACTER BY MERE IMPLICATION." 44 COMP. GEN. 495, 497(1965).

WE DO NOT BELIEVE THAT OUR HOLDING IN B-161460, MAY 25, 1967, IS IN CONFLICT WITH OUR HOLDING IN THE INSTANT CASE. THE PRIOR CASE INVOLVED THE PROPER DISTRIBUTION OF FUNDS REPRESENTING AMOUNTS EARNED BY THE CONTRACTOR, BUT UNPAID, UNDER CERTAIN DEFAULTED CONTRACTS. THERE WERE THREE CLAIMANTS TO THE FUNDS: THE CONTRACTING AGENCY FOR ITS EXCESS REPROCUREMENT COSTS, UNPAID EMPLOYEES UNDER THE SERVICE CONTRACT ACT OF 1965, AND THE INTERNAL REVENUE SERVICE FOR TAXES OWED BY THE DEFAULTED CONTRACTOR. IN THAT SITUATION THE SOLICITOR OF LABOR ASKED THE CONTRACTING OFFICER TO GIVE PRIORITY TO THE UNPAID EMPLOYEES' CLAIMS. CONCLUDED THAT OUR OFFICE "WOULD NOT BE REQUIRED TO OBJECT TO PRIORITY BEING GIVEN TO PAYMENT OF THE AMOUNTS DUE THE UNPAID EMPLOYEES IN ACCORDANCE WITH THE REQUEST OF THE SOLICITOR OF LABOR." ALTHOUGH WE HELD THAT THE GOVERNMENT MAY GIVE PRIORITY TO THE UNPAID EMPLOYEES, WE DID NOT HAVE THE QUESTION PRESENTED IN THAT CASE OF A SURETY'S LIABILITY FOR EXCESS COSTS. UNDER THE TERMS OF THE PERFORMANCE BOND THE SURETY IS LIABLE TO THE GOVERNMENT FOR THE EXCESS COSTS RESULTING FROM THE CONTRACTOR'S DEFAULT. IN MEASURING THE EXTENT OF THE COSTS, WE BELIEVE THE GOVERNMENT MUST DEDUCT FUNDS IT WITHHELD FROM A DEFAULTED CONTRACTOR AT THE SURETY'S REQUEST. WHILE THE GOVERNMENT MAY CHOOSE TO APPLY THE WITHHELD FUNDS TO THE BENEFIT OF UNPAID EMPLOYEES RATHER THAN TO ITS OWN CLAIMS, THE GOVERNMENT MAY NOT LOOK TO THE SURETY TO REIMBURSE IT FOR THE FUNDS PAID TO THE EMPLOYEES. SEE HOME INDEMNITY COMPANY V. UNITED STATES, 180 CT. CL. 173, 376 F.2D 890(1967).

ACCORDINGLY, WE BELIEVE THAT THE SURETY HEREIN MAY NOT BE HELD LIABLE FOR THE $1,326.29 PAID BY THE AIR FORCE TO THE DEPARTMENT OF LABOR, EXCEPT TO THE EXTENT TO WHICH THAT AMOUNT WAS USED TO SATISFY THE SURETY'S OBLIGATION UNDER ITS PAYMENT BOND.