Sub Won't Collect from Bond Surety, Subcontract Price was Subject to Definitization

Tuesday, January 08, 2019 9:32 am
January 2019 - Volume 41 Number 1

Contracts --- Incorporation by Reference

U.S. v. Travelers Cas. & Sur. Co., 2018 U.S. Dist. Lexis 210238 (December 13, 2018)

A surety successfully argued that it wasn’t liable for $300K owed to a sub because the subcontract was not a fixed-price agreement but was open to auditing and definitization.

In March 2014, Hensel Phelps Construction Co. (Hensel Phelps) entered into a federal government contract to modify and improve a building at the John F. Kennedy Space Center. Surety Travelers Casualty and Surety Company (Travelers) furnished Hensel Phelps with a Miller Act payment bond for the project.

In March 2015, the government issued a unilateral contract modification (Mod15) regarding the design of access/egress ways---specifically, adding fireproofing work to the contract. Mod15 set a “not to exceed value” of $7,180,252 and required the contractor to “track costs incurred for this action separately from other contract costs.”

Hensel Phelps hired subcontractor Architectural Coating, Inc. (ACI) to perform the Mod15 fireproofing work, but ACI claimed it was not paid for work that it performed and Hensel Phelps accepted. It sued Hensel Phelps and Travelers under the Miller Act, 40 U.S.C.§3131, seeking $376,609 of the full subcontract amount: $646,866.

Bond amount obligations undefined

Here, on a motion for summary judgment, Travelers first argued that ACI could not make a claim based on the un-audited subcontract amount of $646,866 because Mod15 introduced an undefined contract cost.

The surety claimed that the Hensel Phelps-ACI subcontract, which incorporated the prime contract by reference and thus also Mod15, was “subject to auditing, adjustment, and change pursuant to an Undefinitized Contract Action.” In other words, it contended that the subcontract was never a fixed-price contract and was instead “subject to definitization”--- that is, further definition of the agreement/price. Moreover, because the subcontract defined the amounts due under a payment bond, those too were as yet undefined, Travelers argued.

In response, ACI argued that the subcontract, which did not contain any unit or line-item prices, was a lump sum agreement. The court did not agree based on unambiguous language in the subcontract:

The subcontract stated that “t[..]


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