K-Con, Inc. v. Sec’y of the Army, 2018 U.S. App. LEXIS 31196 (Fed. Cir., November 5, 2018)
In September 2013 K-Con, Inc. (“K-Con”) entered into two contracts with the government to supply and construct pre-engineered metal buildings for a laundry facility and a communications equipment shelter. The government issued both contracts using Standard Form 1449, entitled Solicitation/Contract/Order for Commercial Items. The contracts’ terms did not contain any requirement to provide a performance or payment bond. Nor did they include FAR 52.228-15, which requires performance and payment bonds on construction contracts.
In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued. K-Con initially refused but ultimately provided the bonds two years later. The contracts were then adjusted to add the cost of the bonds.
K-Con submitted a claim under each contract for increases in costs for the two year delay, for a total value of $116,336.56. The Contracting Officer denied the claim on the basis that the agreements were construction contracts, for which performance and payment bonds were mandatory pursuant to FAR 52.228-15, and that that provision was incorporated into the contracts pursuant to the Christian doctrine under which a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal regulations. G.L. Christian & Associates v. Unites States, 312 F.2d 418 (Ct. Cl. 1963). K-Con appealed to the Armed Services Board, which affirmed the denial of the claims. K-Con then appealed to the United States Court of Appeals for the Federal Circuit.
K-Con argued that the contracts were not construction contracts, but were commercial agreements which do not include mandatory bonding requirements. The Court found the contracts ambiguous, because although commercial forms were used, the contracts included numerous references to construction activities. These clear inconsistencies would have placed a reasonable contractor on notice that the contracts were patently ambiguous. Thus, because K-Con failed to seek a clarification before the bid, it could not argue that its interpretation was proper.
K-Con also argued against application of the Christian doctrine. The Court held that to incorporate a clause under the Christian doctrine, it must find both that the clause is mandatory, and that it expresses a significant or deeply ingrained strand of public procurement policy.
The Court noted that the Miller Act states that the contractor “must” secure bonds before a construction contract of a certain value is issued and that FAR 28.102-3(a) specifies that FAR 52.228-15 “should be inserted in the solicitations and contracts for construction.” Thus, the Court found that bonding requirements were mandatory.
As to policy, the Court noted that the Miller Act was enacted to protect subcontractors and suppliers on government construction projects, and to ensure the government receives full performance at the agreed-upon cost. Because government property cannot be subject to subcontractor and supplier liens, the bonds provide an alternative remedy to protect those who provide labor or materials on a federal project. On that basis, the Court found that performance and payment bonds are “deeply ingrained” in government procurement policy.
Accordingly, the Court held that the bond requirements were incorporated by operation of law into the contracts despite the fact that these requirements were not stated in the agreements.
The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.
In September 2013 K-Con, Inc. (“K-Con”) entered into two contracts with the government to supply and construct pre-engineered metal buildings for a laundry facility and a communications equipment shelter. The government issued both contracts using Standard Form 1449, entitled Solicitation/Contract/Order for Commercial Items. The contracts’ terms did not contain any requirement to provide a performance or payment bond. Nor did they include FAR 52.228-15, which requires performance and payment bonds on construction contracts.
In October 2013 the government directed K-Con to supply performance and payment bonds before a notice to proceed could be issued. K-Con initially refused but ultimately provided the bonds two years later. The contracts were then adjusted to add the cost of the bonds.
K-Con submitted a claim under each contract for increases in costs for the two year delay, for a total value of $116,336.56. The Contracting Officer denied the claim on the basis that the agreements were construction contracts, for which performance and payment bonds were mandatory pursuant to FAR 52.228-15, and that that provision was incorporated into the contracts pursuant to the Christian doctrine under which a court may insert a clause into a government contract by operation of law if that clause is required under applicable federal regulations. G.L. Christian & Associates v. Unites States, 312 F.2d 418 (Ct. Cl. 1963). K-Con appealed to the Armed Services Board, which affirmed the denial of the claims. K-Con then appealed to the United States Court of Appeals for the Federal Circuit.
K-Con argued that the contracts were not construction contracts, but were commercial agreements which do not include mandatory bonding requirements. The Court found the contracts ambiguous, because although commercial forms were used, the contracts included numerous references to construction activities. These clear inconsistencies would have placed a reasonable contractor on notice that the contracts were patently ambiguous. Thus, because K-Con failed to seek a clarification before the bid, it could not argue that its interpretation was proper.
K-Con also argued against application of the Christian doctrine. The Court held that to incorporate a clause under the Christian doctrine, it must find both that the clause is mandatory, and that it expresses a significant or deeply ingrained strand of public procurement policy.
The Court noted that the Miller Act states that the contractor “must” secure bonds before a construction contract of a certain value is issued and that FAR 28.102-3(a) specifies that FAR 52.228-15 “should be inserted in the solicitations and contracts for construction.” Thus, the Court found that bonding requirements were mandatory.
As to policy, the Court noted that the Miller Act was enacted to protect subcontractors and suppliers on government construction projects, and to ensure the government receives full performance at the agreed-upon cost. Because government property cannot be subject to subcontractor and supplier liens, the bonds provide an alternative remedy to protect those who provide labor or materials on a federal project. On that basis, the Court found that performance and payment bonds are “deeply ingrained” in government procurement policy.
Accordingly, the Court held that the bond requirements were incorporated by operation of law into the contracts despite the fact that these requirements were not stated in the agreements.
The author, John Conrad, is an associate in the Los Angeles office of the Pepper Hamilton Construction Practice Group.
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