Tucker Act Jurisdiction
May 2, 2023
In this Surety Today blog post we will discuss the topic of Tucker Act Jurisdiction. What is it and how do you get it? You can’t just up and sue the federal government. The government enjoys what is known as “sovereign immunity.” Which basically means you can’t sue the government unless the government says you can. In the surety context, one way to assert a limited type of claim against the government exists under the Tucker Act.
Sovereign Immunity/Jurisdiction
Sovereign immunity is an ancient tenant from English law which holds that the sovereign is immune from claims because the sovereign is the law. The concept carried over from England to the Government of the United States after independence. Accordingly, the federal government is immune from suit absent “a clear statement … waiving sovereign immunity … together with a claim falling within the terms of the waiver.” Dolan v. U.S. Postal Serv., 546 U.S. 481, 498, 126 S.Ct. 1252, 163 L.Ed.2d 1079 (2006). A waiver of sovereign immunity cannot be implied. Rather, the government’s waiver must be unequivocally expressed in statutory text and will be strictly construed, in terms of its scope, in favor of the sovereign and continued immunity. In the absence of a waiver, the effect of sovereign immunity is to bar otherwise valid claims.
Over time, the government began to relax its sovereign immunity protection with various statutory waivers. A well-known example would be the Tort Claims Act, which waives sovereign immunity under certain conditions for tort claims against the government. For our purposes, in this discussion, the relevant statutory waiver for claims against the government is found in the Tucker Act. 28 U.S.C. § 1491 et seq. This Act authorizes the Court of Federal Claims and the Federal Circuit Appellate Court “to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States . . . .” Id. § 1491(a)(1). The Act does not provide for jurisdiction to grant equitable relief such as injunctions or for non-monetary relief, such as a mandamus or declaratory judgment.
The Tucker Act, however, is only a jurisdictional statute; it does not create any substantive right enforceable against the United States for money damages. The Act merely confers jurisdiction whenever the substantive right otherwise exists. Therefore, a surety seeking to assert a claim against the government under the Tucker Act must identify and plead (1) an independent contractual relationship, (2) constitutional provision, (3) federal statute, or (4) executive agency regulation that provides a substantive right to money damages in favor of the surety and against the government. See Fisher v. United States, 402 F.3d 1167, 1171 (Fed.Cir.2005. The burden of establishing jurisdiction under the Tucker Act will fall upon the surety.
The vast majority of the time, there is no constitutional provision, federal statute, or executive agency regulation that provides a substantive right to money damages to a surety against the federal government. The Miller Act merely requires the contractor to provide the bonds, it does not grant a right to the surety against the government.
This leaves the “express or implied contract with the United States” grounds for jurisdiction under the Tucker Act. To establish jurisdiction pursuant to the Act that is based on an express contract, the following elements must be proven: (1) proof of mutuality of intent to contract, (2) an unambiguous offer and acceptance, (3) consideration, and (4) actual authority on the part of the government official to bind the federal government. See El Centro v. United States, 922 F.2d 816, 820 (Fed. Cir. 1990); Yachts Am., Inc. v. United States, 779 F.2d 656, 661 (Fed. Cir. 1985); OAO Corp. v. United States, 17 Cl. Ct. 91, 99 (1989). Essentially, the contract must be between the surety and the government and entitle the surety to money damages in the event of the government’s breach of that contract. Silverman v. United States, 679 F.2d 865, 870, 230 Ct.Cl. 701 (1982); Ransom v. United States, 900 F.2d 242, 244 (Fed. Cir. 1990). This requirement can typically be met when the surety enters into a takeover agreement with the government and would only apply to the rights arising after the effective date of the agreement. Nelson Constr. Co. v. United States, 79 Fed. Cl. 81, 90 (2007). However, in the absence of a takeover agreement or for acts occurring prior to its entry, the case law is fairly well established that the surety’s performance and payment bonds are not considered to be “contracts” with the federal government. The Court in Ransom v. U.S., observed that the government does not sign the bonds, nor is there any language in the terms of the Miller Act bonds themselves that even purports to obligate the government to anything. Ransom, 900 F.2d at 244; Am. Ins. Co. v. United States, 62 Fed. Cl. 151, 154–55 (2004);Fireman’s Fund Ins. Co. v. United States, 909 F.2d 495, 500 (Fed. Cir. 1990). While it is well settled that a surety bond “creates a three-party relationship, in which the surety becomes liable for the principal’s debt or duty to the third party obligee,” Ins. Co. of the W. v. United States, 243 F.3d 1367, 1370 (Fed. Cir. 2001), a third-party status does not create privity of contract with the Government. Id.
To establish jurisdiction based on an implied contract, the same requirements of an express contract must exist without the executed writing. It must be proven that there was a meeting of the minds, which is inferred, as a fact, from the conduct of the parties showing, in the light of the surrounding circumstances, their tacit agreement. Balt. & Ohio R.R. Co. v. United States, 261 U.S. 592, 597 (1923); Emp’rs Ins. of Wausau v. United States, 23 Cl. Ct. 579, 581 (1981). The government abhors contracts that are not in writing, so implied contracts are exceedingly rare and difficult to prove. Addressing the issue of implied contracts for sureties, the Ransom court noted that the requirement that bonds be provided does not create an implied contract. The court stated that the fact that the government requires contractors to provide bonds cannot be construed as an objective manifestation that the government intended to undertake obligations to the surety. Id, 900 F.2d at 244–45.
If a surety is unable to rely on the existence of an express or implied contract as the jurisdictional basis for a claim against the government, the surety may be able to invoke the doctrine of equitable subrogation to step into the shoes of the contractor for the purpose of satisfying the jurisdictional requirements of the Tucker Act. See Nelson Constr. Co., 79 Fed. Cl. at 90; Nat’l Am. Ins. Co. v. United States, 498 F.3d 1301, 1304 (Fed. Cir. 2007). Courts have uniformly agreed that it is settled law that the Tucker Act, coupled with the doctrine of equitable subrogation, provides subject matter jurisdiction to the court to determine a surety’s claim against the government stemming from the bonded contract funds. Id. In Nelson Construction, the Court noted that “[p]ursuant to the doctrine of equitable subrogation, . . . the surety has standing to sue the government because the government is clearly the primary beneficiary of the surety’s obligation and it would be inequitable to allow it to retain monies which it has previously agreed to pay for work done.” Id.; United Sur. & Indem. Co. v. United States, 87 Fed. Cl. 580, 587 (2009), aff’d, 403 F. App’x 508 (Fed. Cir. 2010). Since equitable subrogation is the key to Tucker Act jurisdiction for the surety, let’s explore subrogation next.
The Surety’s Equitable Right of Subrogation
Over 120 years ago, the Supreme Court observed that it was elementary that a surety was entitled to assert the equitable doctrine of subrogation. Prairie State Bank v. United States, 164 U.S. 227, 231, 17 S.Ct. 142, 144, 41 L.Ed. 412 (1896). As the name suggests, the surety’s right to subrogation is equitable in origin and implementation, and relates back to the date when the surety bonds are first issued. National Surety Corp. v. United States, 118 F.3d 1542, 1546 (Fed. Cir. 1997). Equitable subrogation, as a creature of equity, is enforced solely for the purpose of accomplishing the ends of substantial justice. It arises by operation of law and is independent of any contractual relations between the parties. Pearlman v. Reliance Ins. Co., 371 U.S. 132, 136 n. 12, 83 S.Ct. 232, 9 L.Ed.2d 190 (1962). The fundamental equity in permitting the surety to assert its subrogation rights is that a surety is a party that is secondarily liable for an obligation, not primarily liable, and the surety should not, in fairness, suffer a loss that was caused by other parties. Subrogation is a rule that the law adopts to compel the eventual satisfaction of an obligation by the one who ought to pay it. Depending on the circumstances, as a result of the operation of subrogation, the surety can “step into the shoes” of various parties including the obligee, the principal and its subcontractors and suppliers and is entitled to all of the rights relating to the construction contract.
For purposes of Tucker Act jurisdiction, the Federal Circuit has explained that an equitable subrogation claim is based on the theory that the triggering of a surety’s bond obligation gives rise to an implied assignment of rights by operation of law whereby the surety is subrogated to the principal’s property rights in the contract balance. Lumbermens Mut. Cas. Co. v. United States, 654 F.3d 1305, 1312 (Fed Cir. 2011) (quoting Balboa Ins. Co. v. United States, 775 F.2d 1158, 1161 (Fed Cir. 1985). This in turn satisfies the requirement of jurisdiction under the Tucker Act. Of course, for the right of equitable subrogation to arise, the surety must perform pursuant to its bond obligations to remedy the principal’s default or satisfy unpaid subcontractors and suppliers.
Notice Requirement
However, there is an important limitation on the assertion of the surety’s right of equitable subrogation under the Tucker Act – the surety must provide notice of its rights to the government. In Hanover Ins. Co. v. United States, 133 Fed. Cl. 633, 635–37 (2017) the court stated, that the surety’s right to equitable subrogation “do not arise vis-a-vis the government, . . . unless the surety notifies the government of the [principal’s] default.” The law in this regard is succinctly summarized by the Federal Circuit’s decision in Fireman’s Fund Insurance Co. v. United States:
[T]he government as obligee owes no equitable duty to a surety like Fireman’s Fund unless the surety notifies the government that the principal has defaulted under the bond. . . . notice by the surety is essential before any governmental duty exists.
909 F.2d 495, 498 (Fed. Cir. 1990).
Notice is the key to the existence of a legally enforceable duty between the government and a surety. Balboa Ins. Co. v. United States, 775 F.2d 1158, 1164 (Fed. Cir. 1985). Once notice is provided, the government must take “reasonable steps to determine for itself that the contractor had the capacity and intention to complete the job.” Id. Hanover Ins. Co. v. United States, 133 Fed. Cl. 633, 635 (2017). After notice, the government becomes a “stakeholder” with respect to the bonded contract funds and has a “duty to act with reasoned discretion to protect the interests of the surety.” Argonaut, 434 F.2d at 1368–69. Thus, the surety’s right to recover improper payments to a principal can only arise as to payments made after the obligee received notice of the principal’s default i.e.: notice that the bond obligation has been triggered and an implied assignment of the contract rights to the surety has occurred. Id., Capitol Indem. Corp. v. United States, 162 Fed. Cl. 388, 398 (2022).
The courts have recognized that contractors rely upon contract proceeds administered through progress payments to properly finance the bonded contract. Fireman’s Fund Insurance Co. v. United States, 362 F. Supp. 842, 846 (D. Kan. 1973). Thus, the Government has no legal obligation to suspend a progress payment merely upon the unsupported request of a contractor’s surety. United States Fidelity & Guaranty Co. v. United States, 676 F.2d at 628. However, when a surety has informed the Government that the contractor is in default, the Government has an obligation to take “reasonable steps to determine for itself that the contractor had the capacity and intention to complete the job.” Fireman’s Fund Insurance Co., 362 F. Supp. at 848. Under this duty the Government must act with “reasoned discretion.” See, e.g., Fireman’s Fund, 909 F.2d at 498; Balboa, 775 F.2d at 1162; United States Fire Ins. Co. v. United States, 78 Fed. Cl. 308, 325–26 (2007); Lumbermens Mut., 67 Fed. Cl. at 255; Westchester Fire Ins. Co. v. United States, 52 Fed. Cl. 567, 576 (2002).
It is only when the surety may be called upon to perform, that is, only when it may become a party to the bonded contract, that the government owes it any duty. The surety knows best when this may occur; consequently, only notice by the surety triggers the government’s equitable duty. Capitol Indem. Corp. v. United States, 162 Fed. Cl. 388, 398–99 (2022).
Of course, even if proper and timely notice is provided, the government is not obligated in all circumstances, to exalt the surety’s interests over its own. To the contrary, courts have recognized that, during the performance of a contract, the government “has an important interest in the timely and efficient completion of the contract work,” Argonaut Ins., 434 F.2d at 1367, and is “far from being a simple stakeholder.” U.S. Fidelity & Guaranty Co., 475 F.2d at 1384; see also U.S. Fidelity and Guaranty Co. v. United States, 230 Ct. Cl. 355, 676 F.2d 622, 630 (1982). “[W]here the government representative is notified of the contractor’s nonpayment of obligations during the performance of the contract, the representative is faced with the task of balancing the Government’s interest in proceeding with the contract, against possible harm to the surety.” U.S. Fidelity & Guaranty Co., 475 F.2d at 1384; see also United Bonding Ins. Co. v. Catalytic Constr. Co., 533 F.2d 469, 475 (9th Cir. 1976). Numerous cases have recognized, generally, that a contracting officer’s discretion in performing this weighing of interests and in deciding whether to withhold a progress payment is necessarily “broad.” See Nat’l Surety, 118 F.3d at 1546; Fireman’s Fund, 909 F.2d at 498; Argonaut Ins. Co., 434 F.2d at 1367–68; United Pac. Ins. Co. v. United States, 16 Cl.Ct. 555, 557 (1989); Am. Ins. Co. v. United States, 62 Fed. Cl. 151, 157–58 (2004).
In subsequent blog posts we will revisit the subject of equitable subrogation and the notice requirement for Tucker Act jurisdiction.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com) or any member of the WCS Surety and Fidelity Practice Group.