October 2017

A United States District Court ruled that there are instances where a surety and its broker could face liability for its principal’s violation of the Federal Government’s False Claim Act. In United States ex rel. Scollick v. Narula, 2017 WL 3268857 (July 31, 2017), an individual whistleblower brought an action under the False Claims Act alleging that construction companies, their principals, sureties, and others participated in fraudulent schemes to obtain set-aside government contracts. The principals had obtained the government contracts in question by submitting performance and payment bonds issued by various sureties. At least in part, the whistleblower relied on a theory of “indirect presentment” and alleged that the sureties’ and broker’s actions led to the submission of false claims, and continued to do so upon becoming aware of the principals’ fraudulent activity. The principals’ sureties and their broker sought to dismiss the case at an early stage, but the Court found that there were sufficient allegations that the sureties and broker knew or should have known the principals were fraudulently asserting their status as a service-disable veteran-owned small business. Whether the allegations against the sureties and the broker are ultimately proven remains to be seen, as the case is still ongoing in the United States District Court of Columbia. However, the sureties and the broker continue to face significant exposure in the form of three times the damages sustained, which could include the economic benefit obtained by the allegedly fraudulent conduct. It should also be pointed out that the individual whistleblower is seeking to recover anywhere between 15% – 30% of the proceeds awarded to the government. This case serves as another example of the increasing scrutiny and exposure on those who stretch the requirements to obtain contracts under set-aside government programs, thereby negating the program’s fundamental purpose – which is to assist those targeted groups to increase their share in the marketplace. https://www.lexology.com/library/detail.aspx?g=06560f5b-9d5f-4bef-ba4f-44b387aa3049

Liberty Mutual has agreed to pay all cost overruns associated with delays in the completion of Clearfield Municipal Authority’s new waste water treatment plant, announced CMA Engineer Jim Balliet of Gwin. Dobson & Foreman. In May 2014 CMA began a $35 million project to construct its waste water treatment plant. But in early 2015, the original contractor, NVP of Jeanette, defaulted on the project. Liberty Mutual, who was the bonding company for NVP, took over the project and hired a new general contractor, Lobar Construction Services of Dillsburg, to complete the job. However, the default delayed the completion of the project by about a year causing cost overruns among several of the subcontractors. For example electrical contractor Church & Murdock incurred additional costs of $123,216 due to the delay. However, initially Liberty Mutual refused to pay the bill, and Church & Murdock threatened to walk off the job last year if they weren’t paid. CMA decided in June 2016 to pay the electrical contractor and litigate the matter with Liberty Mutual once the project was completed to avoid any more delays in the completion of the plant. Now that the project is done, Balliet said Tuesday that Liberty Mutual has agreed to pay all the costs associated with the delays as a result of NVP’s default. “It’s good news,” Solicitor John Ryan said. The final closeout from Liberty Mutual was $1.378 million, according to CMA Chairman Russell Triponey. Balliet also reported that Lobar is essentially done with all of its contract work and any work after this point would be under the two-year warranty. The CMA voted to make its final payments of $124,915.42 and $1,378,138 to Lobar and $93,817 to Church and Murdock to closeout the project. In other business, CMA Manager John Williams reported that the state Department of Environmental Protection has asked to have a training seminar for its water plant evaluators at the Moose Creek Reservoir. Williams said they agreed to host the training and in return the CMA will have both the Moose Creek Reservoir and the Montgomery Run Reservoir plant evaluations completed early this year by the DEP. http://www.theprogressnews.com/progress_news/liberty-mutual-settles-dispute-with-clearfield-municipal-authority/article_59d59eb6-de3b-5287-8aed-d693079e503a.html

This summer, the Washington Supreme Court ended a long dispute within the construction industry and issued an opinion finding that a performance bond is, in essence, an insurance contract. The court made clear that a public owner who must sue to enforce coverage of a performance bond is entitled to Olympic Steamship fees. This case, King County v. Vinci Construction Grands Projects/Parsons RCI/Frontier-Kemper JV, No. 92744-8 (“Vinci”) may significantly change the landscape for contractors performing public contracts and public agencies administering public contracts. In addition to awarding attorney fees to a public owner who must sue to enforce a bond, a majority of the court seems to gut the requirement that a public agency must make an offer of settlement as required under public works statute. Instead, the Court held that the attorney fee provision of the statute is not the exclusive fee remedy, and that parties to a public works contract may pursue fees based on contract, statute, or other equitable principles without having to make a settlement offer. Lastly, the Court determined that the County’s attorneys’ fees to dispute bond coverage could not be separated from its attorneys’ fees on the breach of contract claims, and so the County was entitled to both. The facts in Vinci were not in dispute. The joint venture contracted with King County to expand the County’s wastewater treatment system. When the contractors failed to meet the contract deadline caused by unforeseen site conditions, the County terminated the contractors and brought a claim against the performance bond. The contractors contended that they were not in breach of the contract because the delays were the fault of the County and further alleged that the County had breached the contract by terminating the contractors. The sureties agreed with the contractors and refused to cover the County’s claim against the performance bond and complete the Project. The County sued the contractors and one of the surety companies. The other sureties intervened in the lawsuit and adopted the contractors’ breach of contract defenses for refusing to perform on the bond. The trial court held in favor of the County and awarded it damages for $130 million for the contractors’ breach. The trial court further awarded the County nearly $15 million for its attorneys’ fees because the contractors defaulted under the contract and the sureties had wrongfully denied coverage on the performance bond. The Court of Appeals affirmed the trial court’s holding. The sureties appealed to the Washington Supreme Court, who affirmed the decision of the Court of Appeals. The Court’s decision resolves a longstanding issue: Olympic Steamship fees apply equally to surety bonds as insurance contracts. In determining this, the Court looked at the disparity of bargaining powers between the contractor and the surety. Yet, a performance bond involves a surety, the contractor (principal), and public agency (obligee). The dissenting opinion argued that the critical difference between a bond and a take-it-or-leave-it insurance policy is that the obligee (in this case, the County) dictates the terms of the bond, so there can be no disparity in bargaining power between the surety and the public obligee. However, the majority of the court disagreed and found that the County was entitled to its attorneys’ fees under the equitable remedy provided in Olympic Steamship. The Court’s allowance of attorney fees’ for coverage disputes in performance bonds is significant because it could have the unintended consequence of making bonds more difficult to obtain for contractors as well as making bond premiums on public projects cost prohibitive. Many small contractors have difficulty obtaining bonds on projects, thus, this decision can make it even more problematic for those smaller contractors trying to perform more public contracting work. The Vinci court’s second key holding may have more far-reaching consequences in the construction industry. The Court found that the attorney fee provisions of the public works statute is not the exclusive remedy for awarding fees. The majority in Vinci found that there was no language in RCW 39.04. et. al. suggesting that the statutory fee provision excludes all other means of recovering attorney fees. It emphasized that the state legislature, in its final bill report acknowledged that attorney fees may be awarded as authorized by statute, contract, or other equitable common law grounds. Therefore, the prevailing party in a public works dispute, may pursue attorney fees based on contract, statute, or other equitable principles (such as the one delineated in Olympic Steamship). Prior to this ruling, the only way a prevailing party could recover its attorneys’ fees was to comply with RCW 39.04.240, which requires the party seeking to recover its fees to make a settlement offer. If the offer is not accepted then, at trial, the party making the offer has to do as well or better than the offer it made to settle the dispute. The statute is intended to encourage parties to public contracts to resolve their disputes before engaging in a costly and time consuming trial—in Vinci, the trial lasted nearly three months and the County’s attorneys were financed with public funds. Now, the Vinci Court’s ruling opens the door to other approaches for contractors and public owners to obtain their attorneys’ fees. It may deter parties from making offers to settle disputes that arise under a public works contract—causing parties to engage in costly litigation at the tax payers’ expense instead of reaching a resolution. It is also important to note that Olympic Steamship fees are an equitable remedy that are awarded to an insured seeking to enforce an insurance contract. This remedy is not necessarily reciprocal, meaning that contractor and sureties defending a bond coverage claim may not be entitled to their fees if they prevail. Thus, in cases where a court finds that the surety properly denied a bond claim does not necessarily mean that the surety or contractor will recover its attorneys’ fees for defending that claim. Arguably, the public agency has no risk in having to pay the opposing party’s attorneys’ fees for litigating the