ALTERNATIVE DISPUTE RESOLUTION ADR IN GOVERNMENT CONTRACTING ADR

ALTERNATIVE DISPUTE RESOLUTION (ADR) IN GOVERNMENT CONTRACTING* * ADR AS A CONTRACT MANAGEMENT TOOL! Naval Postgraduate School Monterey, California Charles E. Rumbaugh September 17, 1998

Overview n n n What Is ADR? Benefits of ADR October 27, 1997 Federal Register Proposed FAR Changes Industry’s “Radical” Response Calling for Expanded Use of ADR! Management of Contracts/Subcontracts Through Effective ADR! Use of ADR at the Get-Go-Contract Award/Performance 2

What Is ADR? ADR SPECTRUM n n n n Facilitated Negotiation Mediation Fact-Finding Mini-Trials Partnering Non-Binding Arbitration Litigation 3

What Is ADR? n n Founded Upon Contract Principles Scope of ADR “Obligation” Based on ADR Provision, e. g. • “Arising Under or Relating To” Agreement Applicable ADR Rules Selection of ADR Neutral 4

ONE METHOD OF ADR. . . WHAT IS ARBITRATION? n n n n n Forum & Neutral Selection Filing of Claims/Counter-Claims Preliminary Hearing Scope of Discovery Exchange of Witness/Exhibit Lists Stipulations Applicable Rules of Evidence Form of Award Appeal Rights 5

Benefits of ADR ATTRIBUTES n n n n Preserves Relationships Satisfies Interests of Parties Cost Effective Timely Ability to Select Expert Neutral Creativity Enhanced Tailored Remedies Less “Legalistic” 6

EXPANDING ROLE OF ADR. . . CORNELL UNIVERSITY STUDY FOUND THAT 88% OF LARGEST CORPORATIONS USED MEDIATION IN PAST 3 YEARS AND THAT 79% HAVE USED ARBITRATION! – OVERWHELMING PERCENTAGE FOUND IT MORE SATISFACTORY THAN LITIGATION! – 90% FOUND MEDIATION LESS COSTLY! LAST YEAR THE AMERICAN ARBITRATION ASSOCIATION REPORTED IT RESOLVED 70, 516 CASES THROUGH ADR--AN INCREASE OF NEARLY 100% SINCE 1982! CENTER FOR PUBLIC RESOURCES’ ADR CORPORATE PLEDGE HAS BEEN ADOPTED BY 4, 000 COMPANIES! PRESIDENT ISSUED EXECUTIVE ORDER ON 2/5/96 CALLING FOR USE OF ADR WITHIN GOVERNMENT! SEVERAL GOVERNMENT AGENCIES ADVOCATE ADR INTERNATIONAL TRANSACTIONS REQUIRE ADR, e. g. NAFTA. GOVERNMENT & COMMERCIAL TRANSACTIONS USE ADR ARTICLES IN JANUARY & JULY 1997 ISSUES OF CONTRACT MANAGEMENT MAGAZINE 7

10/27/97 Federal Register Proposed FAR Changes n Implements the Administrative Dispute Resolution Act of 1996 --FAR 33. 204 n Retention of Neutral as an exception to “Full and Open Competition” Requirement n ADR Certification Conforms to Contract Disputes Act n Communication Exempt from FOIA Disclosure 8

Industry’s “Radical” Response Called for Expanded Use of ADR! n n n Advocated Explicit FAR Policy Authorizing Binding and Non. Binding Arbitration as ADR Methods ADR Remains “Voluntary” Between Contracting Officer and Prime Contractors “must” have ADR Provisions in its Subcontract Terms & Conditions in order to comply with FAR! ADR Costs Shall be deemed Allowable Costs Expanded Use Of Private Neutrals Authorize Contracting Officer to “Select and Use Special, Uniquely drafted ADR Clause when Specifically Negotiated With, and Agreed to by, the Contractor” 9

Management of Contracts/Subcontracts Through Effective ADR! Challenges in Prime/Subcontractor Relations… CHALLENGES. . . n n n n n Fewer Programs Merger & Acquisition “Craze” in Quest for Shareholder Value Fewer Primes----More Subs? Excess Capacity Price is too High Preferred Supplier Programs Supply Chain Management Best Value Procurements Walsh-Healey Manufacturer/Dealer Requirement Relaxed Commerce Business Daily Announcements Follow-On Contract Competitive? 10 . . .

Management of Contracts/Subcontracts Through Effective ADR! Challenges in Prime/Subcontractor Relations… CHALLENGES CONTINUE WHILE MARKETPLACE REFLECTS. . . n n n n Fixed Price Development Subcontracts FFP Subcontract Under Cost Type Prime “What’s Yours Is Mine” Technical Data Clauses Unabridged Termination for Convenience Clauses Detailed Cost Breakdown Requested for Competitive Procurements Excessive Certification Requests “Evergreen” Warranties 11

Management of Contracts/Subcontracts Through Effective ADR! Challenges in Prime/Subcontractor Relations… CHALLENGES CONTINUE UNABATED WHILE MARKETPLACE REFLECTS. . . n n n n No Cost Changes “Direct Costs Should be Characterized as Indirect Costs” FMS Program: No Progress/Milestone Payments! Suspension/Reduction of Progress Payments w/o Prior Notice Single Process Initiative Implementation at Subcontractor Level Obligation to Continue to Perform Pending Resolution of Dispute and Without $ Disputes Resolved in Courthouse Adversial Environment 12

Use of ADR at the Get-Go-Contract Award/Performance Contract Formation Issues---Letter Contracts/Subcontracts Finalize Open Items Teaming Agreement Issues Location of Hearing Baseball Arbitration Other Scenarios. . . 13

Use of ADR at the Get-Go-Contract Award/Performance Drafting Appropriate ADR Clauses-Format Forum Authority Limitations on Neutral Use of Checklists in Drafting Clauses 14

Use of ADR at the Get-Go-Contract Award/Performance Drafting Appropriate ADR Clauses-Recommended Solutions By Neutral Unilateral Direction To Perform Without $? Follow The Relevant Law? Consolidated Decision Covering ALL Affected Contracting Parties Including Subs? Limits/Range of Award? Equitable/Legal Remedies? Punitive Damages Eliminated or Even an Issue? Provisional Remedies? 15

Use of ADR at the Get-Go-Contract Award/Performance Commitment to ADR by Major Aerospace/Defense Contractors “New” FAR will Bring the Demise of the “Golden Rule” In Prime/Subcontract Relationships? 16