Month: May 2011

Setoff by Payment Bond Surety Rejected by EDVA

Many subcontracts contain setoff provisions, even respecting other projects. Those allow a contractor to setoff obligations it is owed on other projects by the same subcontractor on unrelated projects.

The Eastern District of Virginia, Alexandria Division, in U.S. ex rel. Acoustical Concepts, Inc. v. Travelers Cas. & Sur. Co. of Amer., 635 F.Supp.2d 434 (2009), recently looked at the question of whether the payment bond surety of a contractor who had included that kind of setoff clause in its subcontract could avail itself of the setoff right and not make payment for labor or materials that would otherwise be due under a project’s payment bond, and concluded the surety could not avail itself of such setoff right.

The court recognized that the subcontractor had agreed to the setoff right, but held that since the Miller Act does not reference such a setoff right, nor does the payment bond, then the surety was regardless liable for the full amount because that was the value of the labor and materials furnished for the bonded project. This makes for an interesting result by which the surety’s liability is greater than that of its principal, the contractor. Fairness regarding that result depends upon the eyes of the beholder, but the result is consistent with similar analysis regarding the affect of a subcontract’s pay if paid clause, so at least there’s consistency.

However, because the result seems to undermine the well established surety principle that a surety stands in its principal’s shoes, the implications on other cases, including state Little Miller Act cases, remains to be seen.

Fridge benefit challenges

I attended an interesting lunch meeting today put on by the Tidewater AGC involving strategies for dealing with Davis-Bacon act fringe benefits. The presenter was Lind Sawyer with Capital Strategies.

She put forth several really interesting strategies to move away from cash fringes, as opposed to employer directed programs. It was interesting to hear what some contractors were doing with fringes within the regulatory constricts to keep their businesses competitive, and how companies like Capital Strategies can help.

The presentation reminded me how increasingly important wage compliance is becoming with the expansion of the D-B act to much more that the traditional federal construction projects, particularly with the use and requirements associated with Recovery Act funds. For more information about fringe strategies, contact Lind Sawyer at (757) 421-0411.

Pay When Paid Clauses: A different twist on use in defense

Judge Trenga of the Eastern District of Virginia recently decided a new twist on the pay when paid defense in Virginia in U.S. ex rel. Aarow Equipment & Services v. Travelers Cas. & Sur. Co. of Amer., Civil Action No. 1:09-cv-00861 (March 16, 2010). The subcontractor in that case was making a Miller Act claim, and asserted that the surety could not defend on the basis of the subcontract’s pay when paid clause. The prime contractor withheld payments from Aarow that had been withheld by the government.

Aarow quit work because of that withholding, and the prime contractor terminated Aarow. Aarow then sued the surety under the Miller Act for the unpaid amounts, arguing that the surety was liable regardless of the government’s withholdings because the surety could not avail itself of the pay when paid clause. Judge Trenga disagreed, noting that the issue for that case was not one of timing, but of amount; which must be resolved from looking at the subcontract. Because the prime contractor was not liable for the amount claimed (Aarow could not justify its work stoppage because the prime contractor was not liable at the time for the monies Aarow was claiming due), nor was the surety.

Stated otherwise in that case, the pay when paid clause of itself did not preclude Aarow’s payment bond claim against the surety, but the pay when paid clause was properly considered in determining whether Aarow was properly default terminated, and thus not owed anything. This case shows pay when paid clauses still may have relevance to federally bonded projects, and subcontractors assume significant risk if they presume otherwise.

SBJA 2010 Changes: False Claims Act implications

The Small Business Act has always had an enforcement trigger for violations, but with the 2010 act changes the hammer has gotten bigger. Section 1341 of the Small Business Jobs Act of 2010 (SBJA), referred to as the “Presumed Loss Rule,” has new incentives to both federal and whistleblower enforcement. Essentially, the act’s language now presumes the government suffers loss based on the total amount the government expends on a contract where the small business status has been misrepresented, with no offset or credit for the value or benefit actually received by the government.

That is, even if the work was fully conforming, the entire contract value is presumed as a value loss to the government because of size status misrepresentation. Furthermore, under the False Claims Act, damages can be trebled (tripled) based on that presumed loss value; a significant risk for anyone making such a size misrepresentation. The Committee Report that established the bill noted its intention that the presumption be irrebuttable, even though the statute only speaks of the loss being presumed; leaving interpretation up to the courts. The SBJA does direct the SBA though to promulgate regulations to establish defenses for innocent mistakes, but the SBA has not yet done so. But expect those defenses to be very limited, and likely very hard to establish.

Bottom line, status misrepresentation has always been subject to penalty; however, the SBJA now makes those penalties much more severe, and much easier to enforce.

Bid Withdrawal Changes Coming This July

This year’s General Assembly session resulted in changes to the bid withdrawal provisions of Code Section 2.2-4330 of the Virginia Public Procurement Act.

The major change lies in the procedures. There are still two procedures. The first stays the same; allowing the bidder to give notice in writing of a bid mistake claim within 2 business days after the conclusion of the bid opening procedure. The second, however, changes for cases when the public body opens bids one day following the fixed submission time; shortening the notice period from 1 day to 2 hours.

The statute’s change also now allows bidders to request that its working papers, which it is required to submit, be considered trade secretes or proprietary information. The statute also now includes a maximum timeframe of 5 days for the public body to notify the bidder of its withdrawal decision, and now requires the public body to return the bidder’s work papers and any copies thereof with the decision notice.

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