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Published on June 16, 2022 • Law

Can a Surety Assert a Claim that Arose Before the Surety Took Over the Contract?

Vitalii Vodolazskyi | Shutterstock

The government terminated a contract, and the contractor’s surety took the contract over. The surety appealed a change claim to the ASBCA. The board, however, determined it lacked jurisdiction. The claim arose before the surety took over the contract. The surety therefore lacked privity with respect to the claim and did not have standing to appeal.

Appeal of Fidelity and Deposit Company of Maryland, ASBCA No. 63052

Background

The Army Corps of Engineers contracted with ECC CENTCOM for the design and construction of housing quarters. Fidelity and Deposit Company was the surety to ECC’s contract.

In April 2016, the Corps terminated ECC’s contract for cause. In July 2016, Fidelity and the government entered a takeover agreement under which Fidelity stepped in to perform the contract.

In 2021, Fidelity submitted a claim to the Corps, seeking to recover costs arising from the Corps’ unilateral contract modification. The Corps denied the claim. Fidelity appealed to the ASBCA

Legal Analysis

The Corps moved to dismiss Fidelity's appeal, alleging that Fidelity lacked privity with respect to the claim and thus didn’t have standing to appeal. The board agreed. To bring an appeal, a claimant must have privity with the government. Here, the government issued the modiciation at issue in December 2015. Fidelity didn’t enter a takeover agreement with the government until July 2016. Thus, Fidelity was not in privity with the government when the modification was issued.

Fidelity argued that it had been assigned ECC’s rights as part of the takeover agreement. Indeed, the takeover agreement stated that Fidelity had all the rights to the same extent as if had initially executed the contract.

The board, however, found that Fidelity had not been assigned ECC’s rights. A takeover agreement cannot assign an original contractor’s rights unless the original contractor is a party to that agreement. Fidelity was not a party to the takeover agreement. The takeover agreement could not assign ECC’s claim.

Fidelity is represented by Robert C. Nicely and Rebecca S. Glos of Watt, Tieder, Hoffar & Fitzgerald, L.L.P. The government is represented by Michael P. Goodman, Rebecca L. Bockmann, and Michael E. Taccino of the Army Corps of Engineers.

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