PRACTICAL APPLICATION OF ADR FOCUS SESSION: Contracts

Presented by: Justice Robert J . Torres, Supreme Court of GuamJames F. Nagle, Oles Morrison Rinker & Baker LLC

and John Thos. Brown, Author, Guam, Procurement Process Primerat the

Department of Interior, Office of Insular AffairsADR ConferenceSan Francisco, CAMay 18-19, 2011

Outline Of Presentation • Jim Nagle – ADR Act of 1996 /FAR ( federal

scheme )

• John Thos. Brown – ADR / Local Procurement ( GovGuam)

• JRJT – Guam Military build up ;DOD ADR Policy , DON and USAF

Objectives

• Analyze the benefits of ADR in government contracting (Federal and Local)

• Discuss procedural requirements and practical considerations of ADR methods

• Illustrate the advantages through successful ADR cases

“The notion that most people want black-robed judges, well-dressed lawyers, and fine paneled courtrooms as the setting to resolve their dispute is not correct. People with problems, like people with pains, want relief, and they want it as quickly and inexpensively as possible."

Warren E. Burger, former Chief Justice United States Supreme

Court

Commitment to ADR in Government Contracting

• ADR Act of 1996 intended to extend use of ADR methods from private industry and the judicial system to government agency use

• Perceived benefits: Greater efficiency lower costs more informal procedures better continuing relationships consensual solutions

Commitment to ADR • Guam Executive Order No. 2004-22 encourages

government of Guam agencies to include mediation and arbitration clauses in contracts.

• Guam Public Law 27-81 (April 30, 2004) enacted the Guam International Arbitration Law at Title 7 Guam Code Annotated:– Chapter 42A “Guam International Arbitration Chapter”– Chapter 42B “Court-Referred Arbitration and Alternative

Dispute Resolution”– Chapter 43A “Guam Mediation Chapter”– Chapter 43B “Court-Referred Mediation”

Alternative Dispute Resolution Procedures

Presented by Panelist James F. NagleJAMSJAMS

jnagle@jamsadr.comjnagle@jamsadr.com

• ADR Act of 1996, 5 U.S.C. 571 et seq.ADR Act of 1996, 5 U.S.C. 571 et seq.• Executive Order 12988 (1996)Executive Order 12988 (1996)

– Partnering– Mediation– Binding arbitration (award final 30 days after

service but may be extended 30 days)– Nonbinding arbitration– Settlement judge (Board judge will act as

mediator)– Mini-trial

Alternative Dispute Resolution (ADR) Procedures

FAR 33.210

• “Contracting Officers are authorized to use ADR procedures to resolve claims.”

• http://www.usdoj.gov/ar/guidance.html

FAR 33.214

• If the CO rejects a contractor’s request for If the CO rejects a contractor’s request for ADR, the CO must provide the contractor ADR, the CO must provide the contractor with explanation explaining why ADR is with explanation explaining why ADR is inappropriate . inappropriate . But seeBut see 5 U.S.C. 581(b)(1) 5 U.S.C. 581(b)(1)

• If a contractor rejects an agency request If a contractor rejects an agency request for ADR, the contractor must inform the for ADR, the contractor must inform the agency in writing of the specific reasons agency in writing of the specific reasons for rejectionfor rejection

• ADR may be used at any time that the ADR may be used at any time that the contracting officer has authority contracting officer has authority

FAR 33.214 (Continued)

• A neutral person may be used A neutral person may be used • Confidentiality shall be protectedConfidentiality shall be protected• COs have flexibility to select the COs have flexibility to select the

appropriate ADR procedure—the appropriate ADR procedure—the agreement must be in writing and must agreement must be in writing and must specify a maximum award that may be specify a maximum award that may be issued by the arbitratorissued by the arbitrator

• Binding arbitration only as allowed by Binding arbitration only as allowed by agency guidelinesagency guidelines

ADR Between the Prime/General Contractor and the Government is

Extremely Common• Normally with the judge from the Board of Contract

Appeals –the settlement judge

• Settlement judge may be the hearing judge but there are problems with that

• Free

• Objective

• Authoritative

ADR Between a Prime/General Contractor and a Subcontractor,

Typically Not a Sitting Board Judge

• Possibly retired judge or any other Possibly retired judge or any other knowledgeable arbitratorknowledgeable arbitrator

• What law appliesWhat law applies– Federal Procurement Law– Even if not Federal Procurement Law,

because of flow down clauses, federal concepts will often have to be discussed such as equitable adjustment, cost allowability

• Arbitrator’s decisions between a prime and subcontractor are not normally binding on the government. FAR 44. But see FAR 49.108-5(c),Recognition of judgments and arbitration awards.:

(c) When a contractor and a subcontractor (c) When a contractor and a subcontractor submit the subcontractor’s settlement submit the subcontractor’s settlement proposal to arbitration under any applicable proposal to arbitration under any applicable law or contract provision, the TCO shall law or contract provision, the TCO shall recognize the arbitration award as the cost of recognize the arbitration award as the cost of settling the proposal of the contractor to the settling the proposal of the contractor to the same extent and under the same conditions as same extent and under the same conditions as in paragraphs (a) and (b) of this section. in paragraphs (a) and (b) of this section.

• However, they can be persuasive in However, they can be persuasive in

determining whether costs are allowable determining whether costs are allowable

FAR 49.108-5 (c)

Informal Dispute Processes in the Guam Procurement

Law*

* Based on the ABA Model Procurement Code

Presented by Panelist John Thos. Brown johnthosbrown@gmail.com

Author, Guam Procurement Process Primer

Application of Guam Procurement Law in Federal

Context

• 5 GCA § 5004: – This Chapter shall apply to every expenditure of

public funds irrespective of their source, including federal assistance funds, by this Territory, acting through a governmental body, under any contract

Application of Guam Procurement Law in Federal

Context (cont’d)32 CFR § 33.36 Procurement.

• (a) When procuring property and services under a grant, a State will follow the same policies and procedures it uses for procurements from its non-Federal funds. • (b) (1) Grantees and subgrantees will use their own procurement procedures which reflect applicable State and local laws and regulations, provided that the procurements conform to applicable Federal law and the standards identified in this section.

Solicitation Disputes 5 GCA § 5425. Authority to Resolve Protested Solicitations and Awards. (b) Authority to Resolve Protests. The Chief Procurement Officer, the Director of Public Works, the head of a purchasing agency, or a designee of one of these officers shall have the authority, prior to the commencement of an action in court concerning the controversy, to settle and resolve a protest of an aggrieved bidder, offeror, or contractor, actual or prospective, concerning the solicitation or award of a contract. This authority shall be exercised in accordance with regulations promulgated by the Policy Office*.

* There are no regulations promulgated for a mutual resolution of solicitation controversies.

Contract Disputes

5 GCA § 5427. Authority to Resolve Contract and Breach of Contract Controversies.

§ 5427(a) Applicability. This Section applies to controversies between the Territory and a contractor and which arise under, or by virtue of, a contract between them. This includes without limitation controversies based upon breach of contract, mistake, misrepresentation, or other cause for contract modification or rescission.

Contract Disputes (con’t)

5 GCA 5427(b) Authority to Resolve Controversy • The Chief Procurement Officer, the Director of

Public Works, the head of a purchasing agency, or a designee of one of these officers is authorized, prior to commencement of an action in a court concerning the controversy, to settle and resolve a controversy described in Subsection (a) of this Section.

• This authority shall be exercised in accordance with regulations promulgated by the Policy Office.

Regulatory Scheme to Resolve Contract Disputes

Policy2 GAR § 9103(a)(1):

It is the territory's policy to try to resolve all [contract] controversies by mutual agreement without litigation.

Regulatory Scheme to Resolve Contract Disputes (cont’d)

• In appropriate circumstances, informal discussions between the parties can aid in the resolution of differences by mutual agreement and are encouraged.

• If such informal discussions do not resolve the controversy, individuals who have not participated substantially in the matter in controversy may be brought in to conduct discussions if this is feasible.

• Independent committees and panels which review controversies expeditiously and informally with a view to fair settlement possibilities also are encouraged at this stage.

2 GAR 1903(b) Scope of Regulation.

5 GCA §5427 of the Guam Procurement Act is applicable to controversies between the territory and a contractor which arise under, or by virtue of, a contract between them.

This includes without limitation controversies based upon breach of contract, mistake, misrepresentation, or other cause for contract modification, reformation, or rescission.

The word controversy is meant to be broad and all-encompassing. It includes the full spectrum of disagreements from pricing of routine contract changes to claims of breach of contract.

Regulatory Scheme to Resolve Contract Disputes (cont’d)

2 GAR 1903(c) Prior Approval of Contract Settlements.

The settlement or resolution of controversies involving claims is subject to the Government Claims Act.

Regulatory Scheme to Resolve Contract Disputes (cont’d)

Guam Superior Court Jurisdiction of Procurement

5 GCA § 5480.

•(a) The Superior Court shall have jurisdiction over an action between the Territory and a bidder, offeror, or contractor, either actual or prospective, to determine whether a solicitation or award of a contract is in accordance with the statutes, regulations, and the terms and conditions of the solicitation.

•The Superior Court shall have such jurisdiction in actions at law or in equity, and whether the actions are for monetary damages or for declaratory, or other equitable relief.

•(f) All actions permitted by this Article shall be conducted as provided in the Government Claims Act.

Pacific Rock I & II Facts • Pacific Rock filed suit under the Government Claims

Act praying for final payment of, and an equitable adjustment to, the contract sum of a contract procured pursuant to the Procurement Law.

• The trial court invoked jurisdiction under the Government Claims Act and awarded Pacific Rock $219,682.34 for cost overruns and $284,363.00 owing under the original contract, as well as prejudgment interest and post-judgment interest.

IN THE SUPREME COURT OF GUAM Filed: June 2, 2000

PACIFIC ROCK CORPORATION (“Pacific Rock I”),Plaintiff-Appellee

vs. DEPARTMENT OF EDUCATION,

a department of the Executive Branch of the Government of Guam,

an unincorporated Territory of the UNITED STATES OF AMERICA,

Defendant-Appellant

2000 Guam 19

Pacific Rock I

“We hold that the Procurement Law controls actions against the Government of Guam for

contracts procured under the statute and find that PRC failed to timely file its claim at the Superior Court, leaving the court without

jurisdiction to decide the case. Accordingly, the judgment in favor of PRC is vacated.”

-- Supreme Court of Guam

IN THE SUPREME COURT OF GUAM Filed: November 7, 2001

PACIFIC ROCK CORPORATION (“Pacific Rock II”) Plaintiff-Appellee

vs. DEPARTMENT OF EDUCATION,

a department of the Executive Branch of the Government of Guam,

an unincorporated Territory of the UNITED STATES OF AMERICA

Defendant-Appellant 2001 Guam 21

Pacific Rock II

“Today, we hold that the Procurement Law controls actions against the Government of

Guam for contracts procured under the statute, however, in breach of contract suits

where monetary relief is sought, the Procurement Law serves as the final

administrative remedy that is a prerequisite to filing a claim pursuant to the Claims Act.”

-- Guam Supreme Court

ADR and Implications for Military Buildup on Guam

Presented by Panelist Justice Robert J. TorresJustice, Guam Supreme Court

Guam Build Up • Relocate ≈ 8000 Marines and their family

members from Okinawa to Guam• Establish pier for transient CVN• Position Army AMD Task Force on Guam ≈

600 soldiers and their family members• Establish Intelligence, Surveillance and

Reconnaissance Hub on Guam

International Agreement• USG and GOJ

Agreement signed Feb 09

• Reaffirms program commitment by both governments

Infrastructure Upgrades• Current systems do not meet future requirements

•Upgrade Guam’s utility system, roads and commercial port

•Wharf upgrades , site preparation and facilities construction

•Other DoD programs to improve force readiness and QOL

Military Buildup Brings Contracts…

And Potential Disputes …PROJECTS FROM 2009-PRESENT: More than 1.5 Billion Appropriated

•$73M: design-build of aircraft parking apron at Andersen

•$9.1M: construction of water and wastewater utility services North Ramp of AAFB

•$5.3M: design-build MACC for construction of new communications duct bank at AAFB

•$400M Contract to Design-Build Multiple Award Construction Contract for Renovation/ Modernization of Government Shore based facilities in Guam

Department of Defense

• The Department of Defense actively supports use of ADR techniques

• DoD Directive 5145.5 "establishes a framework for encouraging the expanded use of ADR

• Department of Defense policy that "[a]ll DoD Components shall use ADR techniques as an alternative to litigation or formal administrative proceedings whenever appropriate

United States Air ForceADR Procedures

USAF Sample Agreement for Utilizing ADR

hhttp://www.adr.af.mil/

AIR FORCE POLICY DIRECTIVE 51-12

• Establishes policy for Air Force Alternative Dispute Resolution Program

• Policy to voluntarily use ADR to the maximum extent practicable to resolve disputes at the earliest stage feasible, by the fastest and least expensive method possible, and at the lowest possible organizational level

United States Air ForceADR Procedures

• Factors to consider in assessing use of ADR

• Three-part test:

• What are our business objectives?

• Why did negotiations reach an impasse?

• Are there pragmatic concerns about whether ADR will work?

Department of the Navy (DON)

SECNAVINST 5800.15, Use of Binding Arbitration

• Authorizes contracting officers to use binding arbitration to resolve contractual issues

• Binding Arbitration should be considered at the inception of an issue in controversy

• Binding arbitration is voluntary

Decision to Arbitrate

• DON’s policy is to use ADR to the maximum extent practicable, at the earliest stages

• Contracts cannot have a mandatory arbitration clause at time of award. Results in “ad hoc arbitration,” rather than “permanent arbitration.”

• Consider not using it for the six reasons under 5 U.S.C. § 572(b), plus if the matter pertains to fraud, or is outside the scope of the instruction.

Arbitration Agreement

• MUST establish a cap on the maximum award that may be issued

• MUST ELIMINATE authority to award:– Costs and attorney fees; and,– Punitive, consequential, exemplary or special damages

• The agreement should define:– The scope of discovery;– The date and length of the hearing, if any; and,– The expected level of briefing.

Hearings

• Any party is entitled to make a record.

• Parties are entitled to present evidence and be heard.

• Arbitrators have discretion regarding the weight they give the evidence.

Awards• Awards shall briefly discuss factual and legal bases for

award, but formal findings of fact, and determinations of law not required

• Awards are final and binding

• Awards do not establish legal precedent of general applicability, nor can they be used for collateral estoppel

• Awards can be cited as precedent and for res judicata in factually related proceedings

• Awards should be incorporated into the contract as a modification

ReviewFederal Arbitration Act (FAA) – Agreements to arbitrate enforced

under 9 USC § 4.– 9 USC § 9 can be used for

“confirmation.”– 9 USC § 10 has the standards to

vacate an award:• Fraud• Evident partiality• Misconduct in scheduling or

refusing to consider evidence• Exceed powers

– 9 USC § 12 provides 3 months to file for review.

ADRA Amendments to FAA– A third party may challenge

the use of arbitration if it can show that one of the six factors in 5 USC § 572 apply. See 9 USC § 10(c).

ADRA Amendments to CDA– Review is under FAA, but the

court “may set aside or limit any award that is found to violate limitations imposed by Federal statute.”

Schedule Considerations

Binding Arbitration Process

Issue impasse

Claim Filed

Contracting Officer review and final decision (COFD)

De novo appeal to ASBCA or COFC. Compulsory discovery and relatively formal hearing

Appellate review of law & factual basis

Issue impasse

Agree to arbitration

Current Process

Limited discovery & hearing, followed by arbitrator’s award

Dist. Ct review on very narrow grounds

Arbitration eliminates the COFD, reduces discovery and hearing burdens, and greatly limits appellate review.

Arbitration processes should be shorter than, or equal to, a COFD review period on similar issues.

Anticipated Uses of ADR

• Small claims

• Technical Issues

• Issues requiring rapid resolution:– To clarify obligations in long term contracts– To avoid accumulation of similar claims– To mitigate project delay or time related damages

• $50M claim filed by Centrex Construction for dispute over Portsmouth Naval Hospital

• Parties tailored ADR process to fit their needs

• Settlement was mutually beneficial and salvaged relationship

ADR Successes

Centrex Construction Case

ADR Successes

Lockheed/P-3 Case • Lockheed disputed Navy’s $25 million final price determination claim

• Parties tailored ADR process to fit their needs– Limited discovery– Use of internal senior officials

• Even if agreement is not reached on all issues, “success” in other areas

Thank You!