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Washington, D.C.

The subcommittee met, pursuant to notice, at 11:00 a.m., in Room 318, Old Senate Office Building, Senator Joseph M. Montoya (Acting Chairman), presiding.

Present: Senator Montoya.

Also present: William T. McInarnay, counsel; Prof. Harold C. Petrowitz, special counsel; Earl W. Thevenot, professional staff member; Daniel T. Coughlin, minority counsel, and Paul T. Demos, administrative assistant to Senator Montoya.

Senator MONTOYA. The meeting will come to order.

The boards of contract appeals that function in the various Federal departments and agencies for the adjudication of contract disputes have developed in a remarkably informal manner. Despite the fact that they have no statutory basis, they have functioned effectively in disposing of contract controversies that have arisen between the Government and its contractors.

The enormous expansion of Federal procurement beginning with World War II and continuing up to the present has placed some strains on this administrative technique. That these strains exist is clearly indicated by some recent Federal court decisions involving these boards of contract appeals.

Hovering over the whole issue of administrative adjudication of contract controversies is this basic question: What degree of finality can be given to the decision of a contract appeals board and to the record that is developed by it in deciding a given case? The Supreme Court of the United States in Carlo Bianchi v. United States, 373 U.S. 709, decided 1963, took the position that the court review of a board decision provided for by the so-called Wunderlich legislation, 41 U.S.C. § 321, should be on an essentially appelate basis-unless fraud in the procuring of the administrative decision was alleged. This meant that the court would be limited to the record made before the board. The Court of Claims has held that it can in many situations try appeals from board decisions de novo. Associated with this issue of finality is the problem of the nature of the remedy being sought. Is it an equitable adjustment called for by the terms of the contract, or is it in the nature of unliquidated damages because the contract has been breached?

The Supreme Court may give some answers to these questions when it renders its decision in the Utah Construction and Mining Co. v.


United States and Anthony P. Grace v. United States cases. But regardless of the answers that the Supreme Court may give, no analysis of Federal boards of contract appeals as they function today can afford to ignore these important issues. Specifically, on this question of finality depends the amounts of responsibility that can be entrusted to an administrative body that is engaged in adjudication. If board decisions are to be given that degree of finality specified by the Wunderlich legislation, their composition and procedures must be such that they afford the parties a fair and complete hearing and that they develop an adequate case record for use on appeal to a court should this become necessary. There is, of course, the matter of deciding exactly what job we want these boards of contract appeals to do. But we can best do this after we have found out what they are doing and where possible shortcomings may lie.

This hearing is the culmination of the information acquisition phase of the study of the operation and effectiveness of boards of contract appeals that function in the several Federal departments and agencies which this subcommittee has been conducting for the past several months. We have acquired detailed information on the organization and procedure of the boards, and we have received a representative number of answers to our questionnaires that were directed to claimants before these boards requesting their comments and opinions concerning their experiences. And we have the comments of a group of experts that were expressed during a round-table conference relative to the various problems involving the administrative boards.1

This issue of finality, then, has a definite bearing on everything we do here today. There are, however, some specific things we wish to look into and discuss during these hearings.

Among them are:

1. Should subcontractors have direct access to the boards where the claim is based primarily on governmental action?

2. Should the authority and jurisdiction of the boards be broadened

to include claims that are presently based on breach of contract?

3. Should the Government have standing to appeal to a court on the basis of Wunderlich Act criteria the decision of a board of contract appeals?

4. Are boards and their members sufficiently independent?

5. Should the rules of procedure of the various boards be made more uniform?

6. Should rules of evidence be more clearly spelled out?

7. What percentage of board membership should be lawyers?

8. What should be the minimum rank and pay of board members to insure that they are well-qualified?

9. Should boards have the subpena power?

10. Should boards have power to award interest on certain claimsparticularly those involving funds withheld by the Government?

11. Should the losing party be required to pay the costs of the winning party?

12. Are part-time boards effective?

13. Do ad hoc boards present any special problems?

1 See App. V, p. 147.

A number of witnesses, both inside and outside the Government, have kindly consented to testify and give their views on some of these problems. I would like to initiate the testimony by calling first Mr. Louis Spector, Chairman of the Armed Services Board of Contract Appeals.

Mr. Spector.


Mr. SPECTOR. Thank you, Mr. Chairman.

The Department of Defense sincerely appreciates this opportunity to be represented at public hearings of the Senate Committee on Small Business dealing with the operation and effectiveness of boards of contract appeals as organized in the various Federal agencies. The information developed will supplement data heretofore furnished by our letters of April 3, and August 5, 1965, in response to your earlier requests.

It is generally acknowledged that the Department of Defense has had by far the longest and most intensive experience with the administrative procedures developed to provide fair and efficient disposition of Federal contract disputes. Its board of contract appeals and rules of procedure designed to accomplish that purpose, have long served as a model for similar developments in other agencies. This is a natural outgrowth of the fact that the Department of Defense has, by the nature of its mission, long been charged with responsibility for the bulk of the Government's procurement program, a program which involves the purchase of the most complex supplies and construction. A great deal of material has been researched, written and documented on this historical development over the years, but the committee staff is thoroughly familiar with this material, and it would be inappropriate and in fact impossible to review all these developments within the time allotted.

To achieve a proper perspective, however, it should be briefly observed that these "disputes" procedures, and the Armed Services Board of Contract Appeals, have evolved historically over a period of 100 years, and that they have evolved as an essential element of the whole procurement and contracting mission. These administrative procedures extend back into our governmental history far longer, for example, than do the adjudication functions of the Administrative Procedure Act agencies which they so closely resemble. During the past century, contract "disputes" procedures have frequently come to the attention of the U.S. Supreme Court in cases involving Defense procurement, and they have been endorsed in concept by our highest Court. They find a close parallel in arbitration which has long been utilized and judicially sanctioned in nongovernmental contracting. Focusing specifically on the Armed Services Board of Contract Appeals, it can appropriately be viewed as an important link in a chain between a multiplicity of contracting officers, at one end of the chain, and an occasional lawsuit at the other end. The board, by furnishing the appellate benefits of these "disputes" procedures, exercises a strong

inhibiting influence upon unnecessary contract appeals and litigation, at both ends of this chain.

The armed services board is in effect the product of a continuous evolutionary process within the Department dating back to the First World War, when boards were first constituted within the War and Navy Departments. An examination of this continuing evolutionary process demonstrates that its purpose is and always has been, to provide an efficient, fair, objective, independent, quasi-judicial procedure, committed to the twin constitutional concepts of due process and equal treatment. Today's procedures therefore reflect 100 years of experience with the disputes procedures and almost 50 years of experience in the use of a board of contract appeals to implement those procedures. This experience has been tempered by congressional interest and statutes, by constant attention from industry and bar associations, by the President's Administrative Conference, by the board's actual involvement in many, many thousands of decisions, and finally by the Defense Department's own enlightened self-interest in securing just and inexpensive determination of appeals without unnecessary delay, as an essential adjunct of its procurement mission.

One measure of these disputes procedures, and the benefits which they confer upon both the contracting public and this Department, is the sheer magnitude of the procurement program to which they relate.

For some years Defense expenditures have comprised over half of the entire Federal budget and more than half these Defense expenditures have been in the form of contracts. Defense contract dollars obligated during the fiscal year ending last June, totalled over $27 billion.

In that year, in Defense, over 13 million separate contract actions were accomplished worldwide. That volume of commercial activity would generate a mass of controversy and litigation if it involved only simple, every day items; but it in fact also involves, as we all know, commodities and construction projects of almost infinite variety and complexity.

Relating these statistics to our subject, it is safe to conclude that almost all the contractual controversy and potential litigation generated by that massive contract program, is disposed of by these disputes procedures. Witness the fact that the existence of a quasi-judicial, appellate procedure at the Department head level, and the publication and wide dissemination of its decisions to the persons engaged in Government contracting, serves to deter an untold number of disputes. These are settled at the contracting officer level under the Department's long-established policy of reaching agreement without the necessity of appeal or litigation whenever possible. Judging from the average number of appeals docketed with our Board annually only one contract transaction in every 13,000 results in an appeal.

Moreover, of those disputes which are appealed, the administrative appeal procedure serves to finally conclude the dispute in the vast majority of the cases we hear. Based on records kept since 1942, during which period a total of 14,000 appeals have been docketed with the Board, it appears that less than 4 percent have subsequently been sued in any court. And many of those in this small group were cases over which the Board had no jurisdiction, and were therefore cases which

the Board could not review on the merits, cases which it did not have an opportunity to decide.

It should also be observed that a substantial number of cases are settled at various stages of the proceedings after being docketed before the board, the procedures themselves serving as a catalyst to bring the parties into agreement.

There are other benefits inherent in these disputes procedures. It is apparent that they provide a less expensive and less formal method for the disposition of Government-contract controversy than provided by the courts. This is advantageous to both parties. It is particularly important to the Government, one of the two parties to every one of these thousands of disputes, and therefore the party with a multiplied interest in a sound, final, and relatively inexpensive procedure.

Moreover, with its enormous recordkeeping problems, and turnover of personnel due to death, transfer, and retirement, the Government has an equally high interest in resolving these disputes without costly litigation; or at least making the record, while documents and witnesses are still available.

Another benefit flowing from these administrative procedures is the elimination from the contractual relationship of the element of economic duress. When a dispute arises, neither the contractor nor the Government is obliged to accept an unfair ultimatum or settlement, just because the sole alternative to that is an intolerable collapse of the contract in midperformance, followed by protracted and expensive litigation. On the contrary, the disputes procedures permit existing relationships to be preserved while the dispute is resolved on its merits in an orderly, collateral proceeding.

Finally, many of the unique clauses found in Government contracts, clauses which provide adjustments and remedies in a variety of factual circumstances, would be unworkable without the related disputes procedures because they are dependent on those procedures for resolution of any disputes which develop thereunder, and for the contractual obligation that the parties meanwhile proceed with the contract.

The rules of procedure before the board are designed to provide all the elements of due process, and yet be sufficiently brief and uncomplicated as to be useful to a small unrepresented contractor with an appeal. It is recognized that sensible and fair application of the rules in individual cases is as important as the particular wording employed in a set of rules. This underlying policy is summarized in a "Statement of Purpose" appearing in our rules to this effect:

"Emphasis is placed upon the sound administration of these rules in specific cases, because it is impracticable to articulate a rule to fit every possible circumstance which may be encountered. These rules will be interpreted so as to secure just and inexpensive determination of appeals without unnecessary delay.

"Preliminary procedures are available to encourage full disclosure of relevant and material facts, and to discourage unwarranted surprise. "All time limitations specified for various procedural actions are computed as maximums, and are not to be fully exhausted if the action described can be accomplished in a lesser period."

The rules are specifically designed to help anyone in a hurry. It is recognized that "justice delayed is justice denied" and that individual cases should on occasion be switched to a fast track. Under

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