Tag: Contractor

The Power of Incorporation Compels You: Surety Succeeds in Compelling Contractor to Arbitrate Bond Claims Pursuant to Arbitration Clause in Subcontract

In Swinerton Builders, Inc. v. Argonaut Insurance Co., Swinerton Builders, a contractor, sued a surety on bond claims arising from defaults by its subcontractor on a series of work orders. The owner of Swinerton’s mechanical subcontractor on three projects passed away unexpectedly, and the subcontractor was unable to complete its remaining work on the projects.

Swinerton filed a complaint in August 2023 against Argonaut, the subcontractor’s surety, seeking to recover on the payment and performance bonds issued by Argonaut. The complaint also included claims for breach of the covenant of good faith and fraud. Argonaut responded by moving to dismiss based on the arbitration clause in Swinerton’s subcontract. The bonds at issue incorporated by reference the subcontract, including the arbitration provision. The federal district court converted the motion to dismiss to a motion to stay and compel arbitration based on the requirements of the Federal Arbitration Act.

To compel arbitration, the court noted that Argonaut must show that there was an agreement to arbitrate with Swinerton and that the disputes at issue fell under that agreement. Swinerton argued that it only agreed to arbitrate disputes between Swinerton and the subcontractor and that the arbitration provision did not apply to Argonaut, a non-signatory to the subcontract agreement.

The court disagreed with Swinerton and granted Argonaut’s motion. Relying on precedent holding that a surety may be bound by an arbitration provision where the bond incorporates the underlying contract containing the arbitration clause, the court ruled that the same rationale supported the surety’s motion to compel in this instance. The court also did not find persuasive Swinerton’s argument that it should not be compelled to arbitrate where the bonded subcontractor’s default was not disputed. The court determined the alleged breaches of the subcontract would have to be arbitrated.

It is not clear why Argonaut elected to pursue arbitration as opposed to litigating the bond claims. The surety may have been concerned with the bad faith and fraud claims asserted by Swinerton and concluded that arbitrating such disputes would be preferable to a jury trial on those issues. However, the court did note that the arbitrator would retain authority to determine which of Swinerton’s claims were arbitrable under the arbitration agreement, so there remains a risk that some of the claims will be referred back to the court by the arbitrator. Regardless, for parties choosing whether to arbitrate or litigate under their construction contracts, the expansive application of the arbitration provision by the court in Swinerton Builders is another factor to be considered, especially where performance is secured by third-party bonds, guarantees, and other instruments.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Contractors, visit the NLR Construction Law section

The Power of Incorporation Compels You: Surety Succeeds in Compelling Contractor to Arbitrate Bond Claims Pursuant to Arbitration Clause in Subcontract

In Swinerton Builders, Inc. v. Argonaut Insurance Co., Swinerton Builders, a contractor, sued a surety on bond claims arising from defaults by its subcontractor on a series of work orders. The owner of Swinerton’s mechanical subcontractor on three projects passed away unexpectedly, and the subcontractor was unable to complete its remaining work on the projects.

Swinerton filed a complaint in August 2023 against Argonaut, the subcontractor’s surety, seeking to recover on the payment and performance bonds issued by Argonaut. The complaint also included claims for breach of the covenant of good faith and fraud. Argonaut responded by moving to dismiss based on the arbitration clause in Swinerton’s subcontract. The bonds at issue incorporated by reference the subcontract, including the arbitration provision. The federal district court converted the motion to dismiss to a motion to stay and compel arbitration based on the requirements of the Federal Arbitration Act.

To compel arbitration, the court noted that Argonaut must show that there was an agreement to arbitrate with Swinerton and that the disputes at issue fell under that agreement. Swinerton argued that it only agreed to arbitrate disputes between Swinerton and the subcontractor and that the arbitration provision did not apply to Argonaut, a non-signatory to the subcontract agreement.

The court disagreed with Swinerton and granted Argonaut’s motion. Relying on precedent holding that a surety may be bound by an arbitration provision where the bond incorporates the underlying contract containing the arbitration clause, the court ruled that the same rationale supported the surety’s motion to compel in this instance. The court also did not find persuasive Swinerton’s argument that it should not be compelled to arbitrate where the bonded subcontractor’s default was not disputed. The court determined the alleged breaches of the subcontract would have to be arbitrated.

It is not clear why Argonaut elected to pursue arbitration as opposed to litigating the bond claims. The surety may have been concerned with the bad faith and fraud claims asserted by Swinerton and concluded that arbitrating such disputes would be preferable to a jury trial on those issues. However, the court did note that the arbitrator would retain authority to determine which of Swinerton’s claims were arbitrable under the arbitration agreement, so there remains a risk that some of the claims will be referred back to the court by the arbitrator. Regardless, for parties choosing whether to arbitrate or litigate under their construction contracts, the expansive application of the arbitration provision by the court in Swinerton Builders is another factor to be considered, especially where performance is secured by third-party bonds, guarantees, and other instruments.

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© 2024 Bradley Arant Boult Cummings LLP
For more on Contractors, visit the NLR Construction Law section

Department of Defense Issues Final CMMC Rule

On October 11, 2024, the Department of Defense (“DoD”) issued the first part of its final rule establishing the Cybersecurity Maturity Model Certification (“CMMC”) program. As expected, the final rule requires companies entrusted with national security information to implement cybersecurity standards at progressively advanced levels, (CMMC level 1, CMMC level 2, and CMMC level 3) depending on the type and sensitivity of the information. While the final rule largely tracks the proposed rule issued in December 2023, we outline below several notable updates DoD included in the final rule and their potential impacts on DoD contractors.

Updated Implementation Timeline

DoD extended the timeline for CMMC implementation. DoD will now roll out the CMMC program in a four-phased approach:

  • Phase 1 will begin in early to mid-2025 when DoD finalizes the second part of its CMMC rule under 48 C.F.R. Part 204. Once that rule is finalized, DoD will begin including CMMC level 1 and CMMC level 2 self-assessment requirements in new solicitations. That is, while DoD contractors will not need to obtain a CMMC certification by Phase 1, they will need to self-assess and affirm compliance with CMMC level 1 and/or level 2 security requirements when competing for new DoD contracts.
  • Phase 2 will begin one year after the start of Phase 1 (~early to mid-2026). During Phase 2, DoD will begin including CMMC level 2 certification requirements in applicable solicitations. Contractors who expect to bid on solicitations requiring a CMMC level 2 certification should plan to obtain that certification by early 2026 to avoid losing out on DoD opportunities.
  • Phase 3 will begin one year after the start of Phase 2 (~early to mid-2027). During Phase 3, DoD will begin requiring contractors to meet the CMMC level 2 certification requirements as a condition to exercise option periods on applicable contracts awarded after the effective date of the CMMC rule. DoD will also begin including CMMC Level 3 requirement in applicable solicitations.
  • Phase 4 will begin one year after the start of Phase 3 (~early to mid-2028). During Phase 4, DoD will include CMMC program requirements in all applicable CMMC solicitations and as a condition to exercise option periods on applicable contracts regardless of when they were awarded.

Narrower Assessment Scope for Security Protection Assets

The final rule narrows the assessment scope for contractors’ Security Protection Assets (“SPA”). Under the proposed rule, certain contractor assets that provide security functions or capabilities (i.e., SPAs) for the protection of controlled unclassified information (“CUI”) had to meet all security requirements of CMMC level 2. The final rule reduces that assessment scope so now SPAs only need to be assessed against “relevant” security requirements. This change should reduce the regulatory burden on contractors because they will no longer need to show how SPAs meet CMMC security requirements that are not applicable to the SPAs being assessed.

External Service and Cloud Service Providers

The final rule provides greater clarity as to when External Service Providers (“ESPs”) are within the scope of a contractor’s CMMC assessment. Under the final rule, if an ESP deals with CUI, then it must be assessed against all CMMC level 2 security requirements and must obtain a CMMC level 2 assessment or certification. By contrast, ESPs that only deal with security protection data (“SPD”)—data used to protect a contractor’s assessed environment—are subject to a more limited assessment and do not require a full CMMC level 2 assessment or certification. A service provider that does not deal with CUI or SPD does not meet the CMMC definition of ESP and presumably is outside the scope of any CMMC assessment.

For Cloud Service Providers (“CSPs”) dealing with CUI, the final rule tracks current DoD security requirements, which require CSPs to meet security requirements equivalent to the FedRAMP moderate baseline. Like with ESPs, CSPs that only deal with SPD are subject to a more limited assessment and CSPs that do not deal with CUI or SPD are outside of the CMMC scope.

© 2024 Blank Rome LLP

Massachusetts Appeals Court Ruling: Contractor Justified Not Paying Subcontractor That Refused To Perform Work

The general contractor on a public demolition project paid nothing to a subcontractor that had performed the majority of its work but refused to perform work that it claimed was outside of its scope of work. The subcontractor sued the general contractor and after cross-motions for summary judgment the Superior Court sided with the general contractor, holding that the work in dispute was within the subcontractor’s scope and that the subcontractor breached the subcontract by refusing to perform the work. The Superior Court also held that the subcontractor was not entitled to be paid for the work it did perform because it had not substantially performed its obligations under the subcontract. The subcontractor appealed, and the Massachusetts Appeals Court affirmed the Superior Court’s decision. Acme Abatement Contractor, Inc. v. S&R Corporation, No. 2014-P-257, 2015 Mass. App. Unpub. LEXIS 855 (Aug. 20, 2015). Click here to view the Appeals Court decision.

Contracting Background

S&R Corp. (“S&R”) was awarded a demolition contract by the Town of Weymouth (the “Town”). Part of S&R’s work included the demolition of concrete bleachers adjacent to an athletic field. S&R subcontracted the asbestos abatement work to Acme Abatement Contractor, Inc. (“Acme”). Among other things, Acme was required to remove asbestos containing paint from the bleachers prior to demolition.

Scope Dispute Arises

After Acme had commenced work, it informed S&R that it would remove paint only from the side walls of the bleachers but not the risers because Acme believed that paint did not contain asbestos and, therefore, was not within its scope. S&R directed Acme to the project specifications and identified the contract language that it believed clearly required Acme to remove the riser paint. Despite this language, Acme claimed it did not have to remove the riser paint and even went so far as to have the riser paint tested, which test results came back negative for asbestos. Even though tests performed after the subcontract was signed and work had commenced showed that the riser paint did not contain asbestos, the subcontract language included the risers within Acme’s scope and Acme “owned” that work. Nevertheless, Acme refused to remove the riser paint.

Acme performed the remainder of its obligations and then abandoned the project without removing the riser paint. S&R was forced to engage a substitute contractor to remove the riser paint because the project schedule was in jeopardy and S&R faced the prospect of being assessed liquidated damages by the Town if it did not complete the project on time. S&R did not issue payment for any of Acme’s work, even the two-thirds of the subcontract work that Acme performed, on the ground that Acme had materially breached its subcontract.

Subcontractor Sues and Contractor Wins Summary Judgment

Acme brought suit against S&R seeking $145,000 in damages for breach of contract and quantum meruit. Acme also sought treble damages and attorneys’ fees under M.G.L. c. 93A, for a total of damages in excess of $450,000. Both parties eventually moved for summary judgment. The Superior Court granted summary judgment in S&R’s favor finding that: (1) the subcontract required the removal of the riser paint; (2) the subcontract required that Acme perform the disputed work under protest and that Acme’s failure to do so was a material breach of the subcontract; (3) Acme had failed to provide required closeout documents; and, (4) Acme could not recover under quantum meruit for the work it did perform because it did not substantially complete its subcontract obligations.

Subcontractor Appeals

Acme appealed to the Massachusetts Appeals Court, which affirmed the Superior Court’s decision in S&R’s favor. Rather than address whether the removal of the riser paint was within Acme’s scope, the Appeals Court held that Acme breached the subcontract by not performing the disputed work as required by the subcontract. The relevant language provided:

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Article By Andrew G. Wailgum & James F. Radke of Murtha Cullina
© Copyright 2015 Murtha Cullina