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variety of legal and judicial thinking in the system, allowing relatively large claims to be adjudicated without requiring the claimant to come to Washington, and counteracting the inflation that has occurred since the present limit of $10,000 was set.

However, the Court of Claims should remain as the leader in Government contract law. For this reason, the very large cases, as well as a substantial majority of the other cases should continue to be adjudicated in the Court of Claims. Thus, we recommend that the jurisdictional increase be limited to $100,000.

DISSENTING POSITION

Because of the related recommendations concerning the geographically dispersed SCBCA system and improved agency procedures for settling disputes without resort to court action, one Commissioner* believes that direct access to the courts should provide primarily for more rapid and due process resolution of the larger, more difficult cases. The Court of Claims should remain the leader in Government contract law. It is unwise to unnecessarily precipitate any large increase in the number of cases that might go to the district courts instead of the alternate forums which may, under our recommended system, be more appropriate. Accordingly, he believes the jurisdictional limit of the district courts should be raised from the current $10,000 only to $25,000. A $25,000 limit would counteract the inflationary increase noted, and an increase to that level is warranted. The $25,000 limit would have the added advantage of correlating with the $25,000 SCBCA limit, thus eliminating some of the potential for “forum shopping" that is viewed by some as an undesirable element in the process.

Until recently, contractors have been generally unable to recover interest on amounts recovered at the close of a dispute, unless payment was specially authorized by statute. However, in October 1971 the Comptroller General ruled that interest may be paid,53 and a number of procuring agencies have promulgated rules allowing interest payment in certain instances,54 The Government, through its mandatory contractual clauses, has long required a contractor to pay interest on any amounts owing to the Government that are not paid within 30 days.55

The recent moves to allow payment of interest are justifiable and fair. The goals of the administrative and judicial processes are to reimburse the successful party. These goals are frustrated, however, if final payment of a judgment ignores the long delays and losses resulting from a lengthy mandatory review procedure. Without interest payment, Government contractors, whether or not they are required to continue performance despite an expensive dispute, must bear the additional financial burdens for an extended period with hope of recouping only the principal costs due them.

Further, we believe that the payment of interest will have a beneficial effect in providing additional inducement for the settlement of claims short of litigation. The prospect of agencies being required to pay interest on claims delayed by litigation encourages the agencies to avoid these payments by settling claims at an early stage and gives the contractor added bargaining power with the assurance of full payment if the claim is eventually paid.

Payment of Judgments From Agency Appropriations

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63 51 Comp. Gen. 251 (1971).

64 Defense Procurement Circular No. FPR 1-1.322, ASPR 7-104.82.

55 See, e.g., ASPR 7–104.39.

*Commissioner Sanders.

from funds provided for by the Permanent and Definite Appropriations Act 56 on approval by the General Accounting Office. For judgements over $100,000, the Department of Justice must report to the Department of the Treasury, which in turn must obtain the funds from Congress.

This practice has two drawbacks. First, there may be an incentive in certain cases on the part of the procuring agency to avoid settlements and prolong litigation in order to have the final judgment against the agency occur in court, thus avoiding payment out of agency funds. Second, the practice may tend to hide from Congress the true economic costs of some procurements by not requiring the agencies to seek additional appropriations to pay the judgment.

In order to promote settlements and to assure that the total economic cost of procurement programs is charged to those programs, all judgments awarded in court on contract claims should be paid from the defendant agency's appropriations. If the agency does not have the funds to make the payment, the agency should be required to request additional appropriations from Congress, if possible.

Many of the Government actions that result in prime contractor claims also affect the subcontractor. These may include delay caused by Government orders to suspend work, defective specifications, change orders and constructive changes, delays or deficiencies in Governmentfurnished property, disallowances under costreimbursement contracts, compensation under incentive contracts, termination settlements, and the enforcement of socioeconomic regulations.

With the avenue of direct relief largely closed, the subcontractor must find alternative means to obtain relief for Government actions. The subcontractor can usually bring suit in court against the prime contractor, but such a suit lacks the relative speed and economy of a direct administrative proceeding against the Government. Perhaps more important, it means a suit against a customer that may be damaging to the subcontractor's future business and may be unfair to the prime contractor since the Government is the actual party at fault. The prime contractor may bring the Government into the suit as a third-party defendant, but even this is not always possible. At present, the subcontractor's only means of access to the boards of contract appeals is to persuade the prime contractor to "sponsor" it (to bring a claim to the board on its behalf) or to seek permission to bring the action itself in the prime contractor's name, assuming it can establish the Government's liability to the prime contractor on the claim.

There is some evidence to suggest that the present position of the Government subcontractor can lead to unfair results when the subcontractor has a dispute with the Government. The prime contractor may refuse to sponsor a subcontractor claim for several reasons. The prime contractor may feel that the subcontractor claim would reflect adversely on the management ability of the prime con

Subcontract Disputes 57

Government procurement, for policy and practical reasons, involves extensive subcontracting. The Government encourages subcontracting to help small business and widen the industrial base. Although the subcontractor finds itself directly involved with the Government in many matters, including exposure to audits, inspections, production supervision, and termination settlements, it has no direct access to the Government in the resolution of disputes. The privity doctrine holds that the Government deals with the prime contractor in these matters, who then deals with the subcontractor and represents it in any claims actions before the agencies and the courts. 58

58 31 U.S.C. & 724a (1970).

57 For a discussion of subcontractor problems generally, see Part A, Chapter 8.

68 See, United States v. Blair, 321 U.S. 730, 737–38 (1944) ; Merritt v. United States, 267 U.S. 338 (1925). ASPR 23-203(a) and NASA PR 23.203 specifically prohibit contracting officers from

approving a provision in a subcontract granting the subcontractor the right of direct appeal from a contracting officer decision to the boards. ASPR 23–203(a) is a recent attempt by the Department of Defense to promulgate regulations governing subcontractor remedies ; see, Hotchkiss Constr. Co., ASBCA No. 8708, 1968 BCA [3691 and American LaFrance, ASBCA No. 8497, 1964 BCA 4051.

Several agencies, however, do permit subcontractors direct appeal to the Government. See, e.g., Rules of Atomic Energy Commission Board of Contract Appeals, 10 CFR $ 3.1(ii) ; Carpenter Steel Co., AECBCA No. 5-65, 65–1 BCA 4796. The National Science Foundation has also approved subcontractor direct access. Western Knapp Engineering Co., ASBCA No. 8943, 1963 BCA (3767.

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respect to the treatment of subcontractor claims, these inequities are best handled by improved subcontract administration by the prime contractor with appropriate supervision by the Government. The additional problems of contract administration and program management that would arise if subcontractors were given direct access to the Government in disputes and claims outweigh the benefit to be gained. However, Government contracting agencies must remain alert to problems associated with subcontractor claims and assure that those resulting from Government actions are decided fairly.

Obligation to Continue Work

tractor; that too many appeals in its name would indicate a litigious attitude; or that the subcontractor claim has no merit or little chance of success. The prime contractor may find that its pecuniary interest is adverse to that of the subcontractor with regard to the subcontractor's claim. Under the present sponsorship system the subcontractor is often at the mercy of the prime contractor insofar as timely assertion and followthrough of the claim is concerned.

On the other side, there are clearly a number of advantages in the present sponsorship approach. From the Government's point of view, the sponsorship approach is the simplest method of administering complex procurements. By administering its procurement through a single point of contact, the Government's job is made both simpler and cheaper. The single point of contact approach also helps suppress frivolous claims. If direct access were allowed to all Government subcontractors, contracting officers might, without appropriate safeguards, be presented with numerous frivolous claims that the prime contractor would not have sponsored. By forcing the prime contractor to administer its subcontractor network, the Government permits prime contractors and subcontractors at all tiers to use to some extent their familiar commercial procedures in contract award and administration. This advantage should not be underestimated since the considerable variation between Government and commercial contract administration often requires extensive revisions in the administrative procedures of Government prime contractors and considerable re-education of contract personnel. Finally, by denying the subcontractors direct access to administrative remedies, the Government is forcing the prime contractor and the subcontractor to negotiate their disputes. Allowing direct access would eliminate some incentive to negotiate a settlement. This might result in additional timeconsuming and expensive litigation. The forced negotiation under the present system can create a psychological familiarity between the prime contractor and subcontractor, resulting in a greater likelihood of successful negotiation in future dealings.

On balance, we have concluded that, although some inequities presently exist with

At present practically all Government contracts include the so-called standard disputes clause. This clause provides that pending “final decision of a dispute hereunder, the contractor shall proceed diligently with the performance of the contract and in accordance with the contracting officer's decision.” 59

Although the obligation created by this language is limited to matters made subject to the disputes clause by other contractual provisions, the uncertainty of the coverage of the clause and the nature of most disputes mean that a contractor runs an extreme risk if it chooses to stop work pending resolution of a dispute with the procuring agency. For all practical purposes, a contractor is committed to continue working in accordance with the decision of a contracting officer, no matter how long it takes to get a final resolution.

The traditional argument regarding the benefit of this provision to the Government is based on the theory that the Government's business is the people's business and should not be vulnerable to all the ordinary marketplace risks. It is contended that to give the contractor the option of stopping work would give it a competitive equality that is unsuitable for public procurement. The choice of stopping work is a bargaining weapon used to create economic advantage or to avoid economic disaster, but unlike private competition, when a contractor enters into a public contract it is not assumed to recover the maximum profit.60 The contractor is only expected to secure a reasonable return for supplying a commodity necessary to the public.

69 ASPR 7–602.6 (a). See supra note 4 for text.

While there are undoubtedly situations when it is essential that Government contract work continue uninterrupted, some deny that this is necessary for all Government contracts. Inserting the requirement in all contracts provides the Government with extreme advantages in obtaining performance as the Government wants it and relegates the contractor to an after-the-fact contest to determine what it will be paid for doing work the Government way.

The question is whether the harm done to the contractor by this obligation outweighs the benefit to the Government. Theoretically, no damage should ever occur to the contractor because the Government does in the end pay additional expenses demonstrated to have been incurred. Furthermore, the rule against stopping work is not in fact inflexible; exceptions have been made. For example, if a contractor stops work in anticipation of a change order, the delay may be considered a constructive suspension of work.“

We conclude that the existence of the obligation does no great harm to the contractor, especially if our recommendations for the informal review conference, direct access to court, and the SCBCA system (all of these would speed up the resolution of disputes) are adopted. In addition, the payment of interest will ensure full recovery to the contractor of the full amount due on the claim. At the same time, the obligation lends stability and predictability to procurement programs that are vital to the functioning of the Government. It would be administratively unworkable to draw a line between vital and nonvital programs. Therefore, the obligation to continue work should be maintained.

tions concerning the resolution of disputes arising in connection with contract performance, I would favor a more fundamental change in the disputes-resolving system.

It is evident from our findings that the major problems in the present system arise because the agency boards of contract appeals are attempting to perform a dual role—that of a due process court and, at the same time, that of an expeditious, economical administrative disputes-resolving forum. This attempt to play a dual role, and the resulting failure to delineate clearly the purpose and character of the boards, has resulted in a number of Supreme Court decisions that have compounded the problem for both the Government and its contractors. If the decisions of the boards are the decisions of administrative tribunals acting as agents for one of the parties (the Supreme Court in the recent S&E decision stated “their decisions constitute administrative adjudication in its purest sense”), the contractor has not had its day in court, because as administrative boards they lack the essential judicial authority for a complete trial and do not offer sufficient procedural due process safeguards. However, in the earlier Grace and Utah decisions and under the Wunderlich Act, the boards' decisions have been treated as the decisions of due process judicial bodies and the parties, particularly the Government, have been cut off from full consideration of the dispute by a court. I believe the resolution of this conflict cannot be achieved until a final determination is made as to the character or function to be performed by the boards, whether judicial or administrative.

We have found that, as a practical matter, most of the agency boards are now operating as contract trial courts utilizing a relatively high degree of due process safeguards in their procedures. We have recommended that whatever lack of due process now exists be remedied by eliminating substandard or inefficient parttime and ad hoc boards, granting the boards subpoena and discovery powers, and taking measures to ensure the independence and objectivity of the members. These recommendations constitute giant steps toward the transformation of the boards into true due process trial courts. Yet we have declined to complete the transformation, so we felt compelled to

SUPPLEMENTAL STATEMENT BY
PERKINS MCGUIRE, CHAIRMAN

While I endorse and support as a step in the right direction the Commission's recommenda

0 Cf., c.9., the Renegotiation Act, 50 app. U.S.C. $ 1211 (1970) where a contractor whose business is certain specified Government contracts must report on his profits and is liable to return profits which are determined to be in excess of standards established by legislation and the Renegotiation Board.

61 Utilities Contracting Co., ASBCA No. 9723, 65-1 BCA [4582.

recommend that contractors have an option of direct access to court in order to assure them of the right to a full judicial hearing on any claim or dispute.

I would draw the process to its inevitable conclusion and combine the boards as a Court of Contract Appeals, with jurisdiction to hear all appeals from administrative decisions relating to Government contracts. The details of the appropriate administrative procedures necessary for obtaining a quick and efficient administrative remedy should be left to the respective agencies, except that legislative action should be taken to ensure that new boards of contract appeals do not evolve within the agencies to defeat the contractor's right to a full judicial hearing in the Court of Contract Appeals, or to unduly delay that hearing. The Court of Contract Appeals should have independence of the personnel (judges appointed by the President and confirmed by the Senate) and subpoena and discovery power. It should substantially follow the Federal Rules of Procedure and perform its functions in the same manner as any court of record is expected to

do. The Judges of the Court of Claims could act as the appellate court with respect to the Court of Contract Appeals.

These proposals with respect to a Court of Contract Appeals are not inconsistent with our recommendations for a Small Claims Board of Contract Appeals (SCBCA) to hear disputes involving relatively small amounts of money. Such a regional system of small claims tribunals is obviously needed to provide quick, cost-effective resolution of small claims. The SCBCA system could, however, be made an arm of the Court of Contract Appeals.

I believe that if the boards are thus combined into a Court of Contract Appeals, and supplemented by the SCBCA system, the problems of (a) fragmentation of remedies, (b) remand, (c) the right of the Government to seek judicial review, and (d) direct access to the Court of Claims would become moot. As I have stated, I support the recommendations of the Commission in this area, but I believe this proposal to carry those recommendations to their logical conclusion deserves airing.

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