Chapter 12 - § 12.6 • MISCELLANEOUS ISSUES
| Jurisdiction | Colorado |
§ 12.6.1-Bid Bonds
Bid bonds protect the owner from the principal backing out on its low bid. Required on most public contracts, bid bonds normally obligate the surety for either a specific sum or a specific percentage of the principal's bid (often 5 percent). The surety will be liable if the principal submits the low bid and then fails to execute the contract, or if the surety fails to provide performance and payment bonds on behalf of the principal.180
Colorado courts have addressed two of the major issues surrounding bid bonds - namely, what happens when the bidder makes a mistake in his or her bid, and what happens if the surety refuses to issue a performance and payment bond after its principal submits the low bid.
The Colorado Supreme Court embarked on an extensive analysis of issues surrounding mistaken bids in its decision in Powder Horn Constructors, Inc. v. City of Florence.181 Powder Horn submitted a low bid on a construction project to the city, and, as required in the bid documents, it provided the owner with a bid bond in the penal sum of 5 percent of the total. When the bids were opened, the second lowest bidder was approximately $55,000 above Powder Horn. On bid opening, however, the city engineer observed that one of the items that Powder Horn bid was substantially low in comparison to the other submittals. As it turns out, Powder Horn mistakenly omitted the cost of one major item, which should have increased the bid by $66,000. Powder Horn then withdrew its bid. Despite that, the city proceeded to award the contract to Powder Horn for the original bid amount. When Powder Horn refused to sign the contract, the city awarded the contract to the second lowest bidder, then commenced litigation against Powder Horn and its surety. Both the trial court and the court of appeals found that Powder Horn was liable to the city in the amount of the bid bond, as it had not exercised reasonable care in preparing its bid. The court of appeals, however, recognized that in some circumstances a bidder may be permitted to rescind its bid because of a mistake in calculations. The court of appeals concluded that rescission of a bid is only available when the bidder proves (1) the mistake relates to a material feature of the contract; (2) it occurred despite the exercise of reasonable care; and (3) the public authority can be placed in status quo.182 The court of appeals went on to hold that Powder Horn could not rescind its bid because it had not exercised reasonable care in its preparation.183
The supreme court rejected the court of appeals' analysis. As it observed, a substantial body of law supports the argument that because there is no meeting of the minds when a bidder submits a bid that contains a mistake of fact, the bid accepted is not the bid intended.184 The court went on to draw a distinction between errors in judgment and mathematical or clerical errors; the former results in a desired but mistaken bid, while the latter results in an unintended bid. The court held that a fair and reasonable policy is to recognize that prior to a public entity's acceptance of a bid for a construction project, the bidder may in some circumstances obtain equitable relief from the consequences of the bid containing a mathematical or clerical error.185 The supreme court then rejected the court of appeals' insistence on a reasonable care standard, substituting in its place a good faith standard.186
The supreme court also rejected the city's argument that the bid bond was payable as liquidated damages whenever the principal failed to execute the construction contract. The court held that nothing in the bid bond evidenced an intent to liquidate damages, but merely to set a penal sum for the surety's obligation.187
In L&M Enterprises, Inc. v. Hartford Accident & Indemnity Co., the U.S. District Court for the District of Colorado, based upon the terms of the general indemnity agreement, decided that a surety could refuse to issue a performance and payment bond on behalf of a low bidder without incurring additional liability to the principal.188 In this case, L&M's $2.2 million bid was more than $1.5 million lower than the second lowest bid. Although L&M wanted to proceed with the project, Hartford refused to issue performance and labor and material payment bonds. The obligee let the project to the second lowest bidder and received the $25,000 penal sum of the bid bond. L&M then sued Hartford for breach of contract and related causes of action.189 The district court held that "[a]ccording to the express language of the [general indemnity] Agreement, Hartford may decline to issue any bond for which a request is made, without being subject to liability for such a decision."190
§ 12.6.2-Obligee Due Diligence
Reasonable care should always be taken to determine that a construction surety bond has been issued by a qualified surety. Construction surety bonds are not immune to fraudulent activity. Obligees have been known to accept forged and otherwise fraudulent bonds.191 Although surety fraud is not a common occurrence, precautions are warranted because the financial consequences can be very severe. Owners and general contractors are wise to ensure that notices to proceed are not issued until they are confident the tendered bonds are authentic and that the surety is viable. Suppliers to public works projects should exercise due diligence and verify that the contracting public entity has actually obtained the required payment bond from the general contractor. Although the issue has not yet been addressed in Colorado, there may be no cause of action against a contracting public entity for failing to require the contractor to post the bond.192
The best protection against fraud is to ensure that all employee(s) assigned to receive surety bonds are experienced or are thoroughly trained. Intake personnel should be familiar with the local market and local surety practices, and understand where and how a local contractor will obtain a surety bond in the usual course of business. Intake personnel should be suspicious of anything out of the ordinary.
The most reliable way to authenticate any surety bond is to contact the surety directly, rather than the producing agent. The Surety and Fidelity Association of America has a long-standing and widely accepted program that provides every bond obligee a means to quickly get reliable written assurance of bond authenticity directly from the surety. It regularly publishes and updates a "Bond Obligee's Guide" that contains inquiry forms and essential surety contact information.193
The Treasury List, published every July by the U.S. Department of the Treasury, Financial Management Service, Surety Bond Branch in the Federal Register as "Circular 570," should be a fundamental resource when assessing surety qualifications. It is primarily intended to provide information for government officials who are responsible for accepting bonds on federal projects, and lists those companies that are in compliance with Treasury Department regulations and are acceptable as sureties and reinsurers on federal bonds. The Treasury List is a particularly useful tool since the Financial Management Service of the Treasury Department keeps a close watch on the approved sureties and frequently updates the online listings. State receiverships, liquidations, or material financial problems revealed in compliance audits will quickly result in the delisting of a surety. The Treasury List also provides basic information on each surety, including the limits on the size of bond the company is qualified to write, the states in which it is licensed, and information about its home office.194
It is unwise to accept any bid, payment, or performance bond from a company that is not authorized to write surety bonds in the state where a project is located. If the name of the surety on a bond tendered for a Colorado project is unfamiliar or suspicious, the qualifications of the surety can be quickly reviewed on the Colorado Division of Insurance website. The Colorado Division of Insurance uses Pearson VUE as its insurance producer licensing vendor. SIRCON/Vertafore provides electronic licensing detail available at www.sircon.com/ComplianceExpress/Inquiry/consumerInquiry.do?nonSscrb=Y.
Private insurance company rating services are another excellent source of information on the quality, capacity, and reliability of a contract surety.195
§ 12.6.3-Individual Surety Bonds
Individual surety bonds are relatively uncommon. The vast majority of Miller Act bonds are issued by corporate sureties in the standard market whose credentials are continuously monitored by state and federal authorities. Sureties doing business in Colorado are regulated and licensed by the Colorado Division of Insurance as well as the commissioner of insurance of their state of domicile. The U.S. Department of Treasury, Financial Management Service, Surety Bond Branch maintains a list of corporate sureties who have qualified to write federal bonds. This Treasury List, also known as "Circular 570," is available on the web and updated regularly.196 A standard commercial surety that is placed in receivership by state regulators, or that fails to meet minimum federal standards, will be promptly de-listed by the Treasury Department.
Federal contracting officers have the authority to accept Miller Act bonds tendered by "individual sureties" who are not monitored by state or federal authorities. Individual surety bonds are singularly problematic due to inadequate federal procedures governing their intake and acceptance.
FAR § 28.203 sets the following stringent requirements for individual sureties:
1) An individual surety must be an actual person. No corporation, partnership, or other unincorporated associations or firms, as such, are acceptable as individual sureties;...
2) United States citizenship is required when a contract is awarded in the United
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