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The Federal Circuit affirmed an ASBCA decision finding that a surety lacked standing to intervene in an appeal pending before the board. Under the CDA only the prime contractor can appeal a claim to the ASBCA. The only exception to this rule occurs when the prime contractor’s surety has entered a takeover agreement with the government. But even then, a surety can only appeal claims that arose after execution of the takeover agreement. Here, a surety sought to intervene in an appeal pending before the ASBCA. But the claims before the ASCBA arose before the execution of the takeover agreement. Thus, the surety was barred from intervening in the ASBCA appeal. Two judges on the Federal Circuit panel concurred in the outcome, but the concurrence reasoned that the rule that prohibits sureties from asserting claims prior to a takeover agreement conflicts with the general law of suretyship.

Ikhana, LLC had a contract with the Army Corps of Engineers to build an access lane and screening facility at the Pentagon. As part of the contract, Ikhana obtained performance and payment bonds from a surety, Guarantee Company of North America (GCNA). As a condition for issuing the bonds, GCNA required Ikhana to execute an indemnity agreement that gave GCNA all rights under the contract if Ikhana defaulted.

Ikhana encountered problems with construction that resulted in delays and cost overruns. Ikhana submitted claims to the Corps seeking compensation for the delays. The Corps did not issue a final decision on the claims; instead, it terminated Ikhana’s contract for default. Ikhana appealed its termination and the four claims to the ASBCA.

As a result of the default, GCNA invoked its rights under the indemnity agreement and assumed Ikhana’s rights under the government contract. GCNA then entered into a settlement agreement with the Corps in which it agreed to dismiss Ikhana’s appeals pending before the ASBCA. GCNA moved to intervene in the ASBCA action so it could dismiss the appeals. But the board denied GCNA’s motion, finding that that it lacked standing. GCNA appealed to the Federal Circuit, arguing that the board had erred in not allowing GCNA to replace Ikhana in the appeals.

The court reasoned that a party seeking to supplant the plaintiff in a legal proceeding must be able to show that they could have initiated the complaint on their own. Under the CDA, however, only contractors can appeal a decision to the board.  The point of this limitation is to ensure that there is a single point of contact for contract claims. The only exception to this rule, set forth in Fireman’s Fund Ins. Co. v. England, 313 F.3d 1344 (Fed. Cir. 2002), is when a surety executes a takeover agreement under which the government allows the surety to step into the contract. But, the court noted, even if a surety enters a takeover agreement, it will only have standing to assert claims that arose after the takeover agreement was executed.

Here, assuming that GCNA’s settlement with the government was a takeover agreement, Ikhana’s claims pending before the ASBCA arose before GCNA executed the agreement. Accordingly, even if it had taken over the contract, GCNA still lacked standing to dismiss the claims before the board.

One of the judges on the panel concurred in the outcome but wrote a separate opinion (which another judge joined) to criticize the precedent underlying the decision. The concurring judge argued that the case on which the decision was based, Fireman’s Fund, was wrongly decided.

As noted, Fireman’s Fund holds that a surety that executes a takeover agreement can only raise claims against the government for work the surety did itself following the takeover agreement. This rule was intended to narrow the claims before the board to those between the government and a single point of contact, i.e., the prime contractor. But the court noted that this “single point of contact” rule was based on a Senate Report that was primarily concerned with precluding subcontractors from bringing claims, not sureties. A surety is different than a subcontractor in that sureties are obligated to step into the contract and ensure that performance is completed. And outside of the government contracts context, a surety is typically expected to address pending litigation involving the contractor. Thus, a rule limiting the ability of sureties of government contracts to only resolve claims that arise after a takeover agreement conflicts with the law of suretyships.  The concurrence opined that this case was an appropriate vehicle to review the rule in Fireman’s Fund.

GCNA is represented by Patrick Michael Pike of Pike & Gilliss, LLC. Ikhana is represented by William Atkins Scott of Pederson & Scott, P.C.