By: Robert E. Little, Jr.
Individual sureties are natural persons - as opposed to corporations and limited liability companies - who offer to bind themselves on bid, performance, and payment bonds. Individual sureties are acceptable from prime contractors on federal construction projects, provided the individual owns and pledges sufficient assets to cover the appropriate percentage of the value of the bid or contract. However, they are not eligible for listing on the Department of Treasury's list of approved corporate sureties. This means that neither they nor their assets have been federally vetted.
Attendees of the Bonding Basics segment of the 5th Annual National Veterans Small Business Conference and Expo, where I was a panelist representing the Naval Facilities Engineering Command (NAVFAC), were treated to a discussion about individual sureties. Although some attendees may have left the conference with the impression that individual sureties are a simple last resort for firms that cannot obtain bonding through corporate sureties or with the assistance of the U.S. Small Business Administration's (SBA) Surety Bond Guarantee Program, individual sureties are not so simple. There have been many occasions where contractors have lost out on federal government contracting opportunities because they did not understand the significance of establishing the acceptability and value of the asset or assets pledged by an individual surety.
During my 17 years as senior counsel at NAVFAC headquarters, I observed that the Navy's experience with individual sureties' pledged assets mirrored that of the Federal Highway Administration (FHA) in the 2009 case Tip Top Construction, Inc. v. U.S. I saw pledges of everything from non-existent bank stock and untradeable securities to "corporate reinsurance debentures" printed on very nice-looking paper.
Tip Top Construction, Inc. v. U.S.
The Tip Top case turned on whether or not the individual surety had pledged acceptable assets to back its bond. By way of background, the FHA issued an invitation for bids for the construction of a traffic circle and related work on the island of St. John in the U.S. Virgin Islands. The solicitation required bidders to submit a bid bond in the amount of either 20% of the bid price or $3 million, whichever was less. Bidders were permitted to use individual sureties to provide the bid bond.
Three bids were submitted on the project, and Tip Top Construction, Inc. (Tip Top) was the low bidder. Tip Top elected to use an individual surety but its bid was ultimately rejected by the contracting officer because the bid bond did not comply with the requirements of the Federal Acquisition Regulation (FAR).
FAR § 28.203 indicates that individual sureties are permitted on federal projects, but the decision as to whether or not bid bonds are acceptable is left to the discretion of contracting officers. Under FAR § 28.203(c), if the contracting officer "determines that no individual surety in support of a bid guarantee is acceptable, the offeror utilizing the individual surety shall be rejected as nonresponsible." Because the contracting officer determined that Tip Top's bid bond was unacceptable, it rejected Tip Top's bid as nonresponsible.
To back the bond obligation, the individual surety pledged "previously mined, extracted, stockpiled and marketable coal." The contracting officer rejected the coal as being speculative. The Plaintiff responded to the contracting officer's decision at various times over a period of months, arguing that the coal was "readily marketable," had been accepted by other agencies, had a "spot price," was "stockpiled," and was "above ground."
Tip Top filed a protest with the GAO, who affirmed the contracting officer's conclusion. Tip Top appealed the decision. Ultimately, the Court of Appeals for the Federal Circuit affirmed the GAO's decision, agreeing with the contracting officer that coal - along with other commodities generally - was an unacceptable asset due to its speculative nature.
Although a problem commonly encountered by bidders and contractors is how slowly information about assets can surface, the Court's decision did not turn on the fact that, during the preceding matter before the GAO, evidence slowly emerged that the surety's pledged "coal" was really "coal refuse" from earlier mining operations in the general vicinity. The Court did, however, use that fact as an illustration as to why coal is inherently speculative. The Court also did not rely on the government's submissions that "coal refuse" has no spot price, that the "above ground" "stockpile" (characterized by the surety's counsel as a "tangible mountain of coal") was in the last stages of being completely buried pursuant to an environmental restoration permit, and that the individual surety never had a permit to re-mine the reclaimed coal refuse.
Lessons from Tip Top
In reaching its conclusion in the Tip Top case, the Court placed the burden of proving the acceptability of individual surety assets on the contractor. Tip Top instructs that it is not a good idea for a contractor to simply rely on the representations of the individual surety. Contractors must do their homework and independently verify any representations made, as they would in making any other business decision.
Robert E. Little, Jr. is a Partner in the firm and a member of the Federal Contracting Practice Group.