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OF THE SELECT COMMITTEE ON SMALL BUSINESS, Washington, D.C. The subcommittee met, pursuant to notice, at 11:05 a.m., in room 318, Old Senate Office Building, Senator Joseph M. Montoya (Acting Chairman), presiding.

Present: Senators Montoya, Morse, and Bartlett.

Also present: William T. McInarnay, counsel; Prof. Harold C. Petrowitz, special counsel; Daniel T. Coughlin, minority counsel. Senator MONTOYA. The committee will come to order.

The first witness this morning is going to be Mr. J. Edward Welch, Deputy General Counsel of the General Accounting Office.


Mr. WELCH. Mr. Chairman, we appreciate your invitation and welcome this opportunity to discuss the operation and effectiveness of boards of contract appeals that function in various Federal agencies for the adjudication of contract disputes.

I have with me Mr. Vasil Vasiloff, who is an attorney-adviser in the Office of General Counsel of the General Accounting Office.

The General Accounting Office is vitally interested in the subject. Our interest is primarily directed to insuring that the contract disputes procedure operates fairly so as to protect not only the interests of contractors but of the Government as well. Our testimony today will therefore be concerned with that problem.

We should like to note that the role of the General Accounting Office in the area of contract disputes is not always understood or appreciated. Accordingly, we feel that an explanation of our functions in this area, and the reason for the exercise of those functions, is desirable.

Under the Budget and Accounting Act, 1921, and the Budget and Accounting Procedures Act of 1950, the Comptroller General of the United States, as the head of the General Accounting Office and agent of Congress, is vested with authority to examine and audit the financial transactions of the Government. Section 305 of the 1921 act provides that all claims and demands whatever by or against the Government and all accounts whatever in which the Government is


interested either as debtor or creditor, shall be settled and adjusted in the General Accounting Office. Section 304 of the same act authorizes disbursing officers, and the heads of departments and establishments, to apply to the Comptroller General for a decision on any question involving a payment to be made by them or under them. Also, the provisions of 31 U.S.C. 82d authorize certifying officers to apply for and obtain a decision by the Comptroller General on any question of law involved in any payment on any vouchers presented to them for certification.

Under the terms of these statutes, it is well established that the legal propriety of payments made by public officers in the transaction of the Government's business, except where Congress has specifically provided otherwise, is subject to determination by the General Accounting Office and that such payments are not final until settled by the General Accounting Office, which may disallow credit in the accounts of the fiscal officers of the Government for disbursements not made in accordance with law.

Accordingly, in transactions involving an expenditure of public funds we have regularly reviewed the conditions underlying any payment made pursuant to a contractual agreement and, if we found that a payment had been improperly made, we have taken whatever action was necessary to recover the amounts paid. Conversely, a contractor who believes that he is entitled to an additional amount under a contract may present a claim to the General Accounting Office for settlement, regardless of the administrative action taken in the matter. While we have always recognized that in acting in such matters we are bound to accept the administrative determination of the pertinent facts to the extent such determinations are entitled to finality, we have always reviewed, and sometimes questioned, administrative decisions under the standard "disputes" clause on the basis of the standards prescribed in judicial decisions and in the Wunderlich Act. We believe that our jurisdiction to review disputes clause decisions on such bases, as well as other administrative determinations, is conferred by the basic settlement and audit authority granted by the Budget and Accounting Act, 1921. While our claims determinations thereunder have no effect on the rights of contractors to pursue any remedies they may have in the courts and have no binding effect in judicial proceedings, they are binding upon the executive agencies.

In the case of United States v. Moorman, 338 U.S. 457 (1950), the Supreme Court held that the parties to a Government contract had the power to contract away their right to a judicial review on a question of law. In United States v. Wunderlich, 342 U.S. 98 (1951), the Supreme Court held that decisions under the disputes clause on questions of fact were final unless fraud was alleged and proved. As a result of these two decisions the Comptroller General recognized that his powers of review on questions of law could be eliminated by agreement of authorities and on questions of fact had been eliminated. One of the major reasons for the enactment of the Wunderlich Act was to assure to the General Accounting Office a limited right of review comparable to, though perhaps not precisely the same as, that given to the courts. (C.J.Langenfelder & Sons, Inc. v. United States, 341 F. 2d 600, 608 (1965).) Moreover, the legislative history of the Wunderlich Act shows that the Congress recognized the authority of

the General Accounting Office to review disputes clause decisions and, we think, deemed the exercise of such authority necessary and desirable. This was explained on pages 6 and 7 of House Report No. 1380, 83d Congress, 2d session, to accompany S. 24 (the bill which ultimately became the Wunderlich Act) where it was stated that:

The proposed legislation, as amended, will not add to, narrow, restrict, or change in any way the present jurisdiction of the General Accounting Office either in the course of a settlement or upon audit, and the language used is not intended either to change the jurisdiction of the General Accounting Office or to grant any new jurisdiction, but simply to recognize the jurisdiction which the General Accounting Office already has.

The elimination of the specific mention of the General Accounting Office from the provisions of the bill as amended should not be construed as taking away any of the jurisdiction of that Office. It is intended that the General Accounting Office, as was its practice, in reviewing a contract and change orders for the purpose of payment, shall apply the standards of review that are granted to the courts under the bill. At the same time there is no intention of setting up the General Accounting Office as a "court of claims." Nor should the elimination of the specific mention of the General Accounting Office in the bill be construed as limiting its review to the fraudulent intent standard prescribed by the Wunderlich decision.

Under the standard disputes clause and the Wunderlich Act contractors have a right to judicial review which serves to protect them from administrative decisions that fail to meet the standards set forth in the Wunderlich Act. Conversely, the Court of Claims in the Langenfelder case held the disputes clause decisions favorable to contractors are not immune to challenge by the Government. Since the Langenfelder case recognizes that the Government may challenge a decision favorable to a contractor, it may well be asked why the General Accounting Office believes its review function is necessary to protect the Government's interest? We think the answer is fairly obvious. The crucial question here is not whether the Government has the right to judicial review of board decisions favorable to contractors but in what manner and under what procedure can the Government gain access to the courts for such a review? Since disputes clause decisions are, in effect, those of the head of the department or agency involved an appeal by the department or agency would be highly unlikely.

The Court of Claims noted in the Langenfelder case the practical unlikelihood that the Government would be able to obtain judicial review of board decisions as a matter of course. We believe, therefore, that unless the General Accounting Office raises an objection, either on its own initiative or on a submission by an accountable officer having responsibility for approval or payment of the award, and directs the department head not to make payment under a particular decision, decisions adverse to the Government that fail to meet the Wunderlich Act standards of finality will go undetected and unremedied.

The argument has sometimes been made that the Government is not in need of the protection afforded by the review jurisdiction of the GAO or the courts since the decisions to be reviewed are rendered by Government officials, the Government itself. We believe that this argument is fallacious and does not recognize the realities of the situation. It is a matter of record that erroneous administrative decisions under the disputes clause are, in fact, made. This is evidenced by the number of successful contractor appeals made to the courts. We

think there is no reasonable basis then to assume that contract appeal boards do not occasionally, at least, render erroneous decisions against the Government. Thus the argument that the Government is not in need of the protection afforded by GAO or court review because such decisions are made by Government officials, overlooks the fact that these officials can err in favor of contractors, as well as in favor of the Government. The argument also ignores the fact that contract disputes hearings are adversary proceedings in which the hearing tribunal should be—and is generally considered to be impartial and independent.

To view the appeals boards purely as agents of the Government in connection with their decisionmaking function is to reduce them to a subservient status with the implication that they are incapable of exercising independent, fair and impartial judgment. The fact is the contract appeal boards have in effect become institutionalized and have a long and honorable history of fair and impartial adjudication of disputes brought before them by contractors. We believe that no responsible critic today could support any contention, or would even contend, that in the hearing of a case the boards represent the department's or agency's interest. Generally, as we understand it, the Government's interest is represented before the boards by a trial attorney, the same as is the contractor's.

This brings us to the problem of devising some procedure whereby the Government's interest, as well as the contractor's interest, can be protected against decisions by the contract appeal boards which fail to meet the finality standards of the Wunderlich Act. In that connection, since the Supreme Court rendered its decision in United States v. Bianchi & Co., 373 U.S. 709 (1963), much concern has been expressed in Government procurement circles regarding the fact that the contractor's right of appeal now has been restricted by that decision to a review on the basis of the record made before the board, and considerable effort has been directed toward restoring the contractor's right to a full review de novo. Proposed legislation to correct this situation has even been introduced. Yet to our knowledge, no attention has been given to the fact that the Government has never enjoyed an effective right of even a limited judical review. In our opinion this presents a problem at least equal to the contractor's problem resulting from the Bianchi decision.

As indicated earlier, a small measure of protection to the Government is afforded by the surveillance and interposition of the General Accounting Office. However, as things now stand the protection afforded by this surveillance is not adequate. There are good reasons for this which should be mentioned.

Initially, it should be noted that the decisions adverse to the Government which are brought to the attention of the General Accounting Office by Government officials have been few and far between over the years. This, as you might expect, is the natural result of the fact that appeals board decisions are, in effect, those of the department or agency head. To our knowledge there are presently no disputes procedure regulations within the various departments or agencies which authorize or enable contracting officers, or Government attorneys, to bring a decision which they might feel as erroneous as a matter of law or does not meet the Wunderlich standards to the attention of the General Accounting Office.

Thus, unless the GAO assumes jurisdiction on its own initiative, erroneous decisions against the Government can and do go unchallenged. The various Government boards render a large number of decisions under the disputes procedure. These decisions often involve difficult questions of law or fact and are frequently based on a considerable quantity of evidence introduced by the parties.

It would be virtually impossible for the General Accounting Office on its own initiative to screen and review all of the decisions rendered by the boards for conformance to the Wunderlich Act finality standards. Nor, for that matter, does the General Accounting Office want, or think it desirable, to review each and every board decision that may be rendered against the Government. The only workable solution then, we think, is to devise a system which will afford the contracting officer or the attorney representing the Government before the board, or some other responsible administration official, all of whom are familiar with the issues and record in the case, the right to appeal those decisions which they believe warrant an appeal.

A number of proposals for the improvement of the disputes clause procedure have been put forward over the years. We recognize that the problems incident to perfecting an efficient, expenditious and fair procedure for the resolution of contract disputes are difficult to solve in a manner that will satisfy all interested parties. However, as we have indicated, any procedure that may be adopted should, we think, be so designated as to afford the Government the same or equivalent safeguard of appeal that is presently enjoyed by contractors. Certainly the rights of contractors and of the Government to a review or appeal should be equal.

We believe that a workable procedure which would provide this safeguard is possible. In a recent note appearing in the winter 1966 edition of the Georgetown Law Journal entitled "Bianchi, the Court of Claims, and the Trial De Novo," pages 644-679, the author suggests that the present boards of contract appeals be replaced by two or three Government-wide boards which would hear appeals from a contracting officer's decision. The author outlines his proposal as follows:

* Appointment to the boards would be made by the Civil Service Commission and not by the agencies involved in contracting. Because of their Government-wide status, these boards could not be accused of partiality as are the department boards on occasion. In adidtion, since they would decide a large volume of cases by virtue of their Government-wide jurisdiction, they would be able to afford the expenses of providing adequate procedures, expenses which the present boards handling a small volume of disputes find virtually prohibitive.

Disputes arising under the disputes procedure would continue to be heard by the contracting officer, but the duties and powers of the officers would be modified. In addition to gaining the power to subpena witnesses, the officer would be required to keep verbatim records of the testimony, to take the testimony in the presence of both parties or their authorized representatives, to establish a record, and upon the basis of that record to render his decision in writing. The contractor * * * might then file written notice of appeal to a board of contract appeals and submit written exceptions to the officer's decision. The board would be free to limit its review to the officer's record or to take additional evidence. In the latter event, the board would have the same powers and duties as the contracting officer. Furthermore, it could rule upon questions of law as well as questions of fact, and finality would attach to both determinations. Opinions of the board would be in writing and would be held with the record for possible review by the court of claims. Such a

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