Construction Law

Can an Existing Claim Be Stayed for Mediation? featured image

Can an Existing Claim Be Stayed for Mediation?

Despite the fact that our legal system is over two hundred years old, individuals and companies alike still manage to find ways to raise critical questions that have never been asked before. It’s one of the many reasons why all contractors should consult a Miami construction litigation attorney for all of their construction-related legal needs. Such was the case when one plaintiff filed complaints against eighteen defendants in the United States District Court for the District of Columbia for several violations of the False Claims Act (FCA). 

The plaintiff alleged that the defendants were attempting to perpetuate a scheme where they would claim to be service-disabled veteran-owned small business (SDVOSB) owners in order to submit bids and collect millions of dollars in government construction contracts. When handled legally, this is referred to as obtaining SDVOSB status.

Arguably, the most unique aspect of United States ex. rel. Scollick v. Narula, et al., No. 14-cv-1339 (D.D.C.) is the fact that the plaintiff pursued not only the contractors who attempted to falsify SDVOSB status but also the insurance broker who assisted them in securing the necessary bonds required to bid and obtain the contracts in the first place. The defendant also pursued the surety responsible for the issuance of bid and performance bonds. 

The rationale for this extensive attack? According to the defendant, the bonding companies “knew or should have known” that the contractors were deceptive shells for companies that didn’t truly have SDVOSB status. This lead to the assertion that both the contractors and bonding companies be held equally liable for “indirect presentment” and “reverse false claims” as dictated by the FCA.

As our Miami construction litigation attorneys will discuss in this editorial, obtaining government bids by falsifying your status as a SDVOSB is a huge mistake, but it also raises an interesting question: Can an existing claim be stayed for mediation? As you will learn during the course of this article, the answer is a resounding “yes,” but only in specific situations.

Rewriting the Rules for Underwriters

One of the most radical aspects of United States ex. rel. Scollick v. Narula, et al., No. 14-cv-1339 (D.D.C.) is that it brought a claim against the surety industry that had never been attempted before. You’re probably familiar with the Miller Act (40 U.S.C. §3131), which requires contractors to obtain bid bonds, performance bonds, and payment bonds to work on government contracts. Any contractor who fails to obtain these bonds is barred from participating in the bidding process. However, the bids being granted are subject to underwriting. This means that fraudulent bonds should be nullified. But that’s not what happened in this case. Bad bonds were issued, which means underwriting and due diligence requirements for the surety industry need to be examined closely and addressed to prevent future accidents like this.

Facilitating Fraud

Shockingly, the surety defendants were actually dismissed at first; that is, until the defendant amended their complaint by providing factual allegations dispelling any notion that the defendants took part in reasonable underwriting and due diligence procedures. In other words, if they had been doing their jobs, they would have been able to reveal, quite easily, that the contractors did not possess the necessary skills, resources, experience, or SDVOSB status to be granted bonding.

The defendant further alleged that the surety company “knowingly facilitated the fraud scheme and knowingly caused false claims to be submitted to the government” by distributing surety bonds to defendants they “knew, or should have known” were “concealing material information from the government” relating to their eligibility for set-aside contracts. Essentially, the government would have never entered into contracts with such low-quality contractors had the surety properly vetted them beforehand. 

Eventually, the court reversed their original decision. They pointed their finger at the allegations relating to insurance defendants not performing their due diligence, claiming that they were complicit in the alleged misconduct and facilitated fraudulent contractor behavior. Basically, despite the broker and insurer never outright presenting false claims or false statements to the government, their act of permitting fraudulent contractors to procure bonds was viewed as an equal indictment.

Five Years Later…60 Days of Mediation

Here’s where things really get interesting — the point where our titular question will finally be answered. Despite over five years of ongoing claims, the parties both requested a sixty-day stay of proceedings to pursue mediation. Believe it or not, the request was granted. A case that had been dragged to and from through the United States legal system was suspended to see if mediation would suffice. This is important because if mediation proves successful in setting this dispute, it could be proposed as a means to handle more claims in the future. It could also have a significant effect on the pricing and availability of Miller Act bonds. So, what does this mean for your firm? First and foremost, you should always be prepared to enter mediation with the help of a Miami contractor attorney. Second, you must ensure that your bid packages are compliant with all relevant laws to avoid an extended legal battle, or even a simple bid protest. Fortunately, a Miami contractor attorney can also assist you with these services. 

If you would like to speak with one of our Miami contractor attorneys, please contact us today.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.