B-181695, APR 7, 1975

B-181695, APR 7, 1975

LABOR DEPARTMENT CLAIM UNDER CONTRACT WORK HOURS AND SAFETY STANDARDS ACT, 40 U.S.C. SECS. 327-332, FOR WAGE UNDERPAYMENT CAN BE WITHHELD FROM FINAL PAYMENT UNDER CONTRACT SINCE SURETY WAS OBLIGATED TO PAY AMOUNT UNDER PAYMENT BOND. RATIONALE OF UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234 (1947), AND TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317 (5TH CIR. 1967), WHICH PRECLUDES SETOFFS AGAINST SURETY CLAIMING UNDER PERFORMANCE BOND, IS NOT APPLICABLE.

EVERGREEN ENGINEERING, INC.:

BY LETTER DATED JUNE 17, 1974, THE AUTHORIZED CERTIFYING OFFICER, DIVISION OF BUDGET AND FINANCE, DENVER SERVICE CENTER, BUREAU OF LAND MANAGEMENT, DEPARTMENT OF THE INTERIOR, REQUESTED OUR ADVICE AS TO THE PROPER DISPOSITION OF CERTAIN FUNDS NOW HELD BY THE BUREAU OF LAND MANAGEMENT (BLM). ON SEPTEMBER 5, 1972, BLM CONTRACT NUMBER 52500-CT3 44 FOR THE CONSTRUCTION OF THE EMPIRE LANDING RECREATION FACILITY NEAR PARKER, ARIZONA, WAS AWARDED TO EVERGREEN ENGINEERING, INC., OF TEMPE, ARIZONA. AS THE WORK WAS PERFORMED, PARTIAL PAYMENTS WERE MADE UNDER THE CONTRACT. PERFORMANCE OF THE CONTRACT WORK IS NOW COMPLETE AND THE AMOUNT OF $16,383,98 REMAINS TO BE DISBURSED.

IN EARLY 1973, IT APPEARS THAT THE CONTRACTOR WAS NOT PERFORMING IN ACCORDANCE WITH ALL OF THE TERMS AND CONDITIONS OF THE CONTRACT. INDEED, THE AGENCY HAD STOPPED MAKING PROGRESS PAYMENTS TO EVERGREEN. AT THIS POINT, THE AGENCY HELD A MEETING WITH THE CONTRACTOR AND ITS PAYMENT AND PERFORMANCE BOND SURETY, THE HOME INDEMNITY COMPANY. AN AGREEMENT WAS REACHED AMONG THE PARTIES THAT (1) HOME INDEMNITY, WITH THE CONTRACTOR'S CONSENT, WOULD PAY CLAIMS AGAINST ITS BONDS FOR MATERIAL AND WAGES; (2) CONTRACT FUNDS WOULD BE PAID TO THE CONTRACTOR BUT MAILED TO THE SURETY'S COUNSEL; AND (3) EVERGREEN WOULD COMPLETE THE CONTRACT.

SECTION 1-18.803-1 OF THE FEDERAL PROCUREMENT REGULATIONS (FPR) (2ND ED., AMEND. 48, SEPT. 1968) CLEARLY RESERVES IN THE GOVERNMENT THE RIGHT TO TERMINATE A CONTRACTOR'S RIGHT TO PROCEED WITH THE WORK, IF THE CONTRACTOR DOES NOT DILIGENTLY PROSECUTE THE WORK REQUIRED BY THE CONTRACT. HOWEVER, FPR SEC. 1-18.803-2 (2ND ED., AMEND. 48, SEPT. 1968) PROVIDES THE GOVERNMENT WITH AN ADDITIONAL OPTION IN THAT:

"IF, AFTER DUE CONSIDERATION, THE CONTRACTING OFFICER DETERMINES THAT TERMINATION IS NOT IN THE BEST INTEREST OF THE GOVERNMENT, ALTHOUGH THE CONTRACTOR IS IN DEFAULT, THE CONTRACTING OFFICER MAY PERMIT THE CONTRACTOR TO CONTINUE THE WORK, AND THE CONTRACTOR AND HIS SURETIES SHALL BE LIABLE TO THE GOVERNMENT FOR LIQUIDATED DAMAGES, AS SPECIFIED IN THE CONTRACT, OR IF LIQUIDATED DAMAGES ARE NOT SO SPECIFIED, FOR ANY ACTUAL DAMAGES OCCASIONED BY THE FAILURE OF THE CONTRACTOR TO COMPLETE THE WORK IN ACCORDANCE WITH THE TERMS OF THE CONTRACT."

THIS LATTER APPROACH APPARENTLY WAS TAKEN IN THE INSTANT CASE.

HOWEVER, DUE TO LABOR PROBLEMS WHICH AROSE ON THIS JOB, THE DEPARTMENT OF LABOR, ON DECEMBER 6, 1973, REQUESTED THE WITHHOLDING OF $3,773.57 TO COVER WAGE UNDERPAYMENTS OF $2,993.57 DUE AN EMPLOYEE OF THE CONTRACTOR AND LIQUIDATED DAMAGES OF $780. HOME INDEMNITY OBJECTS TO THE WITHHOLDING OF THESE FUNDS AND CITES UNITED STATES V. MUNSEY TRUST CO., 332 U.S. 234 (1947), TO SUPPORT ITS CONTENTION THAT A PERFORMANCE BOND SURETY HAS SUPERIOR RIGHTS TO THE CONTRACT FUNDS AND THAT THE GOVERNMENT CANNOT OFFSET ITS CLAIMS, OR THE CLAIMS OF OTHERS, AGAINST THESE FUNDS. ALSO CITED ARE TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, 382 F.2D 317 (5TH CIR. 1967); SECURITY INSURANCE CO. OF HARTFORD V. UNITED STATES, 428 F.2D 838 (CT. CL. 1970); AND AETNA CASUALTY AND SURETY COMPANY V. UNITED STATES, 435 F.2D 1082 (5TH CIR. 1970).

HOWEVER, THE CASES CITED BY COUNSEL WHICH RELATE TO THE GOVERNMENT'S SETOFF RIGHTS VIS-A-VIS PERFORMANCE BOND SURETIES EITHER COMPLETING THE WORK OF THE DEFAULTED CONTRACTOR OR AIDING THE CONTRACTOR IN CONTINUING PERFORMANCE ARE NOT APPLICABLE.

THE RIGHT OF A COMPLETING SURETY TO RETAINED FUNDS AND REMAINING PROGRESS PAYMENTS UNDER A PERFORMANCE BOND IS WELL ESTABLISHED. PRAIRIE STATE BANK V. UNITED STATES, 164 U.S. 227 (1896); TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, SUPRA, CERT. DENIED 390 U.S. 906 (1968); SECURITY INSURANCE CO. OF HARTFORD V. UNITED STATES, SUPRA. INDEED, IN THAT SITUATION THE SURETY IS A SUBROGEE OF THE GOVERNMENT. HOWEVER, THAT RIGHT TO RETAINED FUNDS IS PREMISED ON THE FACT THAT A SURETY, EXERTING EFFORT CONSISTENT WITH ITS OBLIGATION UNDER THE PERFORMANCE BOND AND THUS ASSURING COMPLETION OF THE PROJECT FOR THE AGREED PRICE, SHOULD NOT BE REQUIRED TO BEAR EXPENSES FOR WHICH IT WOULD NOT OTHERWISE BE LIABLE. TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, SUPRA. THE COURT SPECIFICALLY STATED THAT:

"IF THE GOVERNMENT UNDERTOOK TO COMPLETE THE CONTRACT, THE SURETY WOULD BE LIABLE FOR COSTS EXCEEDING THE CONTRACT PRICE, BUT NOT FOR TAXES OWED BY THE CONTRACTOR. THE SURETY SHOULD NOT BE WORSE OFF BECAUSE IT UNDERTAKES TO FINISH THE JOB. THE PERFORMANCE BOND IS TO ASSURE THAT THE GOVERNMENT HAS A COMPLETED PROJECT FOR THE AGREED CONTRACT PRICE. THE OBLIGATION MAY BE PERFORMED EITHER IN KIND OR IN MONEY. PERFORMANCE RESULTS EQUALLY WHEN THE SURETY COMPLETES THE CONTRACT OR WHEN THE SURETY PAYS THE GOVERNMENT ANY DAMAGE WHICH THE GOVERNMENT INCURS IN COMPLETING THE JOB. IN EITHER EVENT, THE SURETY IS ENTITLED TO HAVE THE FULL CONTRACT PRICE APPLIED TO THE PERFORMANCE OF THE CONTRACT." TRINITY UNIVERSAL INSURANCE CO. V. UNITED STATES, SUPRA, AT 321.

ON THE OTHER HAND, WHEN THE SURETY'S CLAIM TO RETAINED FUNDS IS BASED ON ITS EXPENDITURES UNDER A PAYMENT BOND, THAT CLAIM IS SUBJECT TO SETOFF FOR ALL DEBTS OWED BY THE DEFAULTED CONTRACTOR TO THE GOVERNMENT. UNITED STATES V. MUNSEY TRUST CO., SUPRA; AETNA CASUALTY AND SURETY COMPANY V. UNITED STATES, SUPRA; B-169420, SEPTEMBER 4, 1970; B-169264, JUNE 10, 1971; FPR SEC. 1-18.803-6(C)(1). HERE, THE SURETY IS MERELY A SUBROGEE OF THE CONTRACTOR.

THEREFORE, SINCE WE DO NOT VIEW THE SITUATION IN THE INSTANT CASE AS A SETOFF AGAINST A PERFORMANCE BOND OF THE TYPE PROSCRIBED BY MUNSEY TRUST, SUPRA, AND TRINITY, SUPRA, SETOFF IS PERMISSIBLE. THE CLAIM AGAINST THE RETAINED FUND IN THE INSTANT CASE IS A CLAIM FOR WHICH THE SURETY IS IN ANY EVENT ULTIMATELY LIABLE UNDER ITS MILLER ACT PAYMENT BOND, 40 U.S.C. SEC. 270AA)(2) (1970), AND THE CONTRACT WORK HOURS AND SAFETY STANDARDS ACT, 40 U.S.C. SECS. 327-332 (1970). THE PERTINENT PROVISION OF THE LATTER STATUTE PROVIDES:

"IF THE ACCRUED PAYMENTS WITHHELD UNDER THE TERMS OF THE CONTRACTS, AS AFORESAID, ARE INSUFFICIENT TO REIMBURSE ALL THE LABORERS AND MECHANICS WITH RESPECT TO WHOM THERE HAS BEEN A FAILURE TO PAY THE WAGES REQUIRED PURSUANT TO SECTIONS 327-332 OF THIS TITLE, SUCH LABORERS AND MECHANICS SHALL, IN THE CASE OF A DEPARTMENT OR AGENCY OF THE FEDERAL GOVERNMENT, HAVE THE RIGHTS OF ACTION AND/OR OF INTERVENTION AGAINST THE CONTRACTOR AND HIS SURETIES CONFERRED BY LAW UPON PERSONS FURNISHING LABOR OR MATERIALS, AND IN SUCH PROCEEDINGS IT SHALL BE NO DEFENSE THAT SUCH LABORERS AND MECHANICS ACCEPTED OR AGREED TO ACCEPT LESS THAN THE REQUIRED RATE OF WAGES OR VOLUNTARILY MADE REFUNDS." 40 U.S.C. SEC. 330(B).

WE DO NOT BELIEVE THAT SURETY'S RELIANCE ON MUNSEY TRUST AND SUBSEQUENT CASES WHICH PRECLUDE SETOFF AGAINST TAX LIENS ARE CONTROLLING IN THE INSTANT CASE AS THE LABORERS AND MECHANICS ARE AUTOMATICALLY GIVEN A RIGHT OF ACTION AGAINST THE SURETY WHERE ACCRUED PAYMENTS WITHHELD ARE INSUFFICIENT REIMBURSEMENT. TO REFUSE TO WITHHOLD THE FUNDS WOULD CAUSE NEEDLESS LITIGATION, EXPENSE, AND INCONVENIENCE TO ALL PARTIES CONCERNED, AS A SEPARATE COURT PROCEEDING TERMINATING IN THE SAME OUTCOME WOULD RESULT.

OUR OFFICE IS EMPOWERED BY 40 U.S.C. SEC. 330(A) (1970) TO "*** PAY DIRECTLY TO SUCH LABORERS AND MECHANICS, FROM THE SUMS WITHHELD ON ACCOUNT OF UNDERPAYMENTS OF WAGES, THE RESPECTIVE AMOUNTS ADMINISTRATIVELY DETERMINED TO BE DUE ***." THEREFORE, THE SUM OF $2,993.57, REQUESTED TO BE WITHHELD BY THE DEPARTMENT OF LABOR, SHOULD BE TRANSFERRED TO OUR OFFICE FOR PROPER DISPOSITION IN ACCORDANCE WITH THE CONTRACT WORK HOURS AND SAFETY STANDARDS ACT.

WE DO NOT BELIEVE OUR HOLDING IN 52 COMP. GEN. 633 (1973), CITED BY COUNSEL FOR THE SURETY, IS IN CONFLICT WITH OUR HOLDING IN THE INSTANT CASE. THE PRIOR CASE INVOLVED AN ATTEMPT BY THE AIR FORCE TO TURN OVER WITHHELD FUNDS TO THE DEPARTMENT OF LABOR TO COVER WAGE DEFICIENCIES BOTH UNDER THE DEFAULTED CONTRACT AND OTHER CONTRACTS. IN THAT CASE WE HELD THAT THE PORTION OF THE RETAINAGE WHICH SATISFIED THE SURETY'S OBLIGATION UNDER THE INSTANT PAYMENT BOND WAS PROPERLY WITHHELD.

WITH REGARD TO THE $780 LIQUIDATED DAMAGES ASSESSED, UNDER THE PROVISIONS OF 40 U.S.C. SEC. 330(C) (1970), THIS AMOUNT SHOULD BE DEPOSITED IN THE APPROPRIATE ACCOUNT TO THE CREDIT OF THE UNITED STATES.

IN VIEW OF THE FOREGOING, UPON EXECUTION OF AN AGREEMENT INDEMNIFYING THE GOVERNMENT AGAINST SUBSEQUENT CLAIMS BY THE CONTRACTOR, THE SURETY MAY BE PAID $12,610.41, THE AMOUNT REMAINING DUE UNDER THE CONTRACT. SEE MATTER OF BALBOA INSURANCE CO., B-181471, JULY 3, 1974.