Recovery for Impairment of Suretyship

The Government Contracts practice was retained by a Miller Act surety to investigate payments made by the United States Navy, Naval Facilities Engineering Command, to the prime contractor/principal on a Whidbey Island NAS housing upgrade project. These payments were made prior to the Navy’s termination of the contract for default by the principal. As a result of our investigation, we determined that the Navy had paid the contractor for work not done and materials not even purchased, much less delivered to the Navy. Because of these payments for work not done and materials not delivered, the Navy had insufficient funds left when the surety stepped in to finish the project, and the surety had to pay to complete the project.

On behalf of the surety, we filed suit in the Court of Federal Claims, asserting that the Navy (1) impaired the surety's collateral by overpaying the prime contractor in violation of the contract's payment provisions and (2) breached the takeover agreement between the Navy and our client by improperly assessing liquidated damages against the balance of funds otherwise due the surety. After a trial, the court held that the Navy had impaired the surety’s collateral and breached the takeover agreement by improperly assessing liquidated damages and awarded our client more than $1.7 million.