(In)equitable Subrogation: The Federal Circuit’s Irrational and Unworkable Progress Payment Framework in Balboa

by Will F. Hawkins

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Abstract

American taxpayers spend more than $100 billion per year on federal construction projects. Yet massive construction delays, huge budget overruns, and unorganized contractors increase the cost of construction for the federal government. Passed in 1935, the Miller Act attempted to protect the federal government in the event that the contractor defaulted or was unable to complete the project. By requiring contractors to enlist third party “sureties” as guarantors on projects, the Miller Act provides the government with the assurance that another party will step in to complete projects if need be. Contractors are typically paid via periodic progress payments, with monthly invoices paid for work completed. If a contractor defaults, forcing a surety to take over on the project, the doctrine of equitable subrogation entitles the surety to all remaining progress payments due to the contractor. Fearing that default may be imminent and eager to receive any payments it can, a surety may be inclined to warn the federal government of imminent contractor default, at the same time that the contractor assures the federal government that it can perform. A series of Federal Circuit cases allows the surety to sue the federal government to recover progress payments that were already made to the contractor, even though those payments were made prior to the contractor defaulting, in accordance with federal regulations.

Given an opportunity to reduce this risk of double payment, the Federal Circuit instead created an incoherent and unworkable progress-payment framework in Balboa Insurance Co. v. United States, complicating a government official’s regulatory mandate to provide progress payments to contractors. The court misinterpreted a standard that is normally extremely deferential to the federal government, and created a complex eight-factor behemoth that unreasonably burdens the federal government. This Note proposes new regulations to replace Balboa, which focuses on whether the federal government received reasonable assurances from the contractor that it would complete performance.

(In)equitable Subrogation: The Federal Circuit’s Irrational and Unworkable Progress Payment Framework in Balboa

by Will F. Hawkins

Click here for a PDF file of this article

Abstract

American taxpayers spend more than $100 billion per year on federal construction projects. Yet massive construction delays, huge budget overruns, and unorganized contractors increase the cost of construction for the federal government. Passed in 1935, the Miller Act attempted to protect the federal government in the event that the contractor defaulted or was unable to complete the project. By requiring contractors to enlist third party “sureties” as guarantors on projects, the Miller Act provides the government with the assurance that another party will step in to complete projects if need be. Contractors are typically paid via periodic progress payments, with monthly invoices paid for work completed. If a contractor defaults, forcing a surety to take over on the project, the doctrine of equitable subrogation entitles the surety to all remaining progress payments due to the contractor. Fearing that default may be imminent and eager to receive any payments it can, a surety may be inclined to warn the federal government of imminent contractor default, at the same time that the contractor assures the federal government that it can perform. A series of Federal Circuit cases allows the surety to sue the federal government to recover progress payments that were already made to the contractor, even though those payments were made prior to the contractor defaulting, in accordance with federal regulations.

Given an opportunity to reduce this risk of double payment, the Federal Circuit instead created an incoherent and unworkable progress-payment framework in Balboa Insurance Co. v. United States, complicating a government official’s regulatory mandate to provide progress payments to contractors. The court misinterpreted a standard that is normally extremely deferential to the federal government, and created a complex eight-factor behemoth that unreasonably burdens the federal government. This Note proposes new regulations to replace Balboa, which focuses on whether the federal government received reasonable assurances from the contractor that it would complete performance.