Bonds, sureties, and insurance

Army Lawyer, Jan, 2006 by Michael S. Devine

Facially Valid Bid Bond Can't be Basis for Nonresponsive Bid Determination

In Aeroplate Corporation v. United States, (270) the COFC held that despite clear extrinsic evidence, a contracting officer may not look beyond a facially valid bid bond to determine whether it conforms to the invitation for bids. (271)

In this case, the contractor submitted a bid bond for the $7.3 million amount of their bid, but the bid bond did not have a corporate seal which led the contracting officer to investigate it. (272) Upon investigation, the surety on the bid bond informed the contracting officer that they would only issue performance and payment bonds up to $5.5 million, and the $7.3 million bid bond was, therefore, invalid. (273) Based on this information, the contracting officer determined that Aeroplate's bid was nonresponsive and Aeroplate protested.

Aeroplate argued that the relevant FAR provision (274) mandates that as long as a bid guarantee (bid bond) is proper on its face, the bidder has satisfied its requirements for the bid. (275) Aeroplate argued that the FAR provides remedies in the form of termination for default if the winning offeror later fails to provide performance or payment bonds as required. (276) The government pressed the argument that, as a matter of regulation and policy, the "procuring officer is not restricted to the 'superficial, truncated review [of the bid bond] urged by plaintiff." (277) The government contended that the express purpose of the bid guarantee is to "provide assurances that the bidder 'will execute a written contract and furnish required bonds, ... within the time specified in the bid." (278)

The COFC believed that the government's position "would carve out an exception" to the rule that the validity of a bid bond must be determined at the time of bid opening. (279) The court was not willing to carve such an exception based on the facts of this case. Citing Hawaiian Dredging Construction Co. v. United States, (280) the COFC held that "the overarching issue is whether the contracting officer reasonably concluded that he could not establish unequivocally at the time of bid opening that the plaintiff's bid bonds were enforceable against the surety." (281) Despite the fact the court recognized that this firm rule could result in a waste of time and resources to award a contract knowing it would be terminated for default when required bonds are not submitted, the court held that such an exception would "deprive the established law of suretyship of the certainty that has been its hallmark" (282)

The court found that the agency's nonresponsiveness determination was arbitrary, capricious, or otherwise contrary to law, and granted Aeroplate's protest on this ground. The case was referred to the Small Business Administration (SBA) for a responsibility determination since the contracting officer had also incorrectly determined that Aeroplate was nonresponsible without first referring the matter to the SBA. (283)

In 2002, the CAFC upheld the ASBCA's determination that the Tucker Act does not confer jurisdiction to the boards of contract appeal to entertain surety claims that arose prior to a takeover agreement between the government and the surety. (284) This past year, the CAFC had the opportunity to again address this issue in United Pacific Insurance Company v. Roche. (285)

In United Pacific, the CAFC again sustained the ASBCA's determination that they did not have jurisdiction to hear a surety's appeal of a contracting officer's denial of claims which arose prior to the surety and the government entering a takeover agreement. (286) The CAFC again held that the ASBCA was correct in determining that sureties in such a position did not constitute "contractors" under the Contracts Disputes Act at the time the claim arose. (287) Given the developments over the last couple of years, it is likely that sureties will get the message and file such claims in the future with the Court of Federal Claims, and not the ASBCA.

Interestingly, however, the Labor Board of Contract Appeals (LBCA) decided a case this year in which it distinguished the decisions discussed above which limited the rights of sureties to file claims for actions arising before a takeover agreement is in effect. In Maharaj Construction, Inc., (288) the LBCA allowed a surety to dismiss a defaulted contractor's appeal of their termination for default, despite the fact that the grounds for the appeal arose prior to the takeover agreement between the surety and the government. The LBCA held that the surety had standing to dismiss the contractor's appeal because in this case, unlike those discussed above, there was a General Indemnification Agreement (GIA) between the contractor and the surety which provided for an assignment of claims to the surety in the event of default, and the GIA was later incorporated into the takeover agreement between the surety and the government. (289)

Major Michael S. Devine

(270) 67 Fed. Cl. 4 (2005).

(271) A "bid bond" is a bond that serves as a bid guarantee. Such bonds are frequently used in public construction contracts to ensure the bidder will not withdraw their bid and will execute a written contract and submit any required performance and payment bonds specified in the IFB if they are awarded the contract. U.S. GEN. SVS. ADMIN. ET AL., FEDERAL ACQUISITION REG. pt. 28.001 (July 2005) [hereinafter FAR].