General Information Form

Submitting Entity: Section of Public Contract Law

Submitted By: David A. Churchill, Chair

  1. Briefly summarize the recommendation.

The recommendation is that the House of Delegates adopt as ABA policy a basic principles for allocating risk in the formation of public procurements.

  1. Indicate whether the recommendation was approved or will be considered, the governing body of the submitting entity which has or will approve, and the date of such action. If the vote was taken other than at a regularly scheduled meeting of the governing body, describe the procedure.

The recommendation was approved by the Council of the Public Contract Law Section at its meeting on May 22, 1999.

  1. If this or a similar recommendation has been submitted previously to the House of Delegates or the Board of Governors, please include all relevant information -- summary of the recommendation, when and before what group the recommendation was considered, and what action or position was taken on the matter.

This recommendation has not been submitted previously.

A similar set of first principles dealing with competition for public procurements co-sponsored by both the Section of Public Contract Law and the Section on State and Local Government Law was approved by the House of Delegates in August 1998 and another set of principles for resolving controversies and providing remedies in public procurements was approved by the House of Delegates in February 1999.

  1. Are there any existing Association policies which are relevant to this recommendation, and if so, how would they be affected by the adoption of this recommendation?

No known relevant Association policies.

  1. Explain what urgency exists which requires that action on this matter be taken at this meeting. If deferral is acceptable, note the time by which action is necessary.

No urgency exists, beyond the fact that we believe the Association should be on record as endorsing this basic principle affecting public procurements.

  1. If the recommendation is a legislative resolve, indicate the current status in the Congress.

N/A.

  1. If adoption of the recommendation would result in expenditures, estimate the funds necessary, suggest the anticipated source for funding, and list proposed direct and indirect costs. Indirect costs include those such as staff time or administrative overhead.

N/A.

  1. Review the background of the proponents of the recommendation to determine if there are potential conflicts of interest. If such potential is found, list by name those proponents who have a material interest in the subject matter of the recommendation because of specific employment or representation of clients. Note all individuals who abstained from discussion or voting on the recommendation due to a conflict of interest.

No conflict of interest is perceived among the proponents of the recommendation. The recommendation was endorsed unanimously by the voting members of the governing Council of the Section.

  1. List the sections, committees, bar associations or affiliated entities to which the recommendation has been referred, the date of the referral, and the response of each group, if known.

The recommendation is being referred to the following ABA entities.

Administrative Law and Regulatory Section

Business Law Section

General Practice, Solo and Small Firm Section

Judicial Division

Forum on the Construction Industry

Individual Rights and Responsibilities Section

Litigation Section

Senior Lawyers Division

Tort and Insurance Practice Section

Young Lawyers Division

Dispute Resolution Section

Government and Public Sector Lawyers Section

State and Local Government Law Section



  1. Indicate the name, address and telephone number of the person who should be contacted prior to the meeting concerning questions about the report.
David A. Churchill

McKenna & Cuneo, L.L.P.

1900 K Street, N.W.

Washington, DC 20006

(202) 496-7559

 Marshall J. Doke, Jr.

Gardere & Wynne LLP

Suite 3000

1601 Elm Street

Dallas, TX 75201

(214) 999-4703

  1. Indicate the name of the person who will present the report to the House and who should be contacted at the meeting when questions arise concerning its presentation and debate.
David A. Churchill

McKenna & Cuneo, L.L.P.

1900 K Street, N.W.

Washington, DC 20006

(202) 496-7559



AMERICAN BAR ASSOCIATION

SECTION OF PUBLIC CONTRACT LAW

Executive Summary for

Principle on risk allocation in formation of public procurements

Summary of the recommendation.

The recommendation is that the House adopt as Association policy a fundamental principle regarding the allocation of risk in the formation of public procurements.

Summary of the issue which the recommendation addresses.

The issue is that the Association does not have any existing policy stating the Association's adherence to this basic principle in the context of public procurements.

Explanation of how the proposed policy position will address the issue.

The policy position will state in a short principle the fundamental notions that apply to allocation of risk in the formation of public procurements.

Summary of any minority views or opposition which have been identified.

None known.



AMERICAN BAR ASSOCIATION

SECTION OF PUBLIC CONTRACT LAW

Principle for Risk Allocation in Formation of Public Procurements

RECOMMENDATION

RESOLVED, that the American Bar Association urges all parties to any public acquisition at the federal, state, local, and territorial level to adhere to the following principle regarding risk allocation in formation of public procurements and that the American Bar Association supports federal, state, local and territorial legislation and regulations to implement this principle.

In drafting public procurement contracts the parties should, to the maximum

extent practicable, (i) clearly identify the risks of performance for both parties,

and (ii) allocate those risks and the values exchanged in a commercially

reasonable manner, consistent with the broader obligations of parties to

public contracts.

AMERICAN BAR ASSOCIATION

SECTION OF PUBLIC CONTRACT LAW

REPORT TO ACCOMPANY PRINCIPLE FOR RISK

ALLOICATION IN FORMATION OF PUBLIC PROCUREMENTS

Allocation of risk and values exchanged in public contracts should generally

be subject to a standard of commercial reasonableness. Such a standard recognizes that

one party to any given contract arrangement may have more bargaining power than

the other and may accept less risk, or insist on receiving greater value, than the

other.

However, gross disparity in the allocation of risk and values exchanged

creates legal uncertainties and consistently ranks as a leading cause of disputes.

In the context of public contracts, this imbalance may result from the position of a

contractor as the only available source for a critical item; or from the superior

bargaining power of the sovereign governmental entity, including its ability to impose contract

terms and conditions.

It is particularly important to review proposed terms and conditions in the context of this

principle at The time of contract formation. Contract provisions which result in oppressive risk shifting

and disparity in the values exchanged may be unenforceable in whole or in part, on grounds of

unconscionability(1)

or inadequacy of consideration.(2)

Contract clauses calling for unreasonably large

liquidated damages provide one example; such clauses are regularly stricken down by the courts.(3)

Similarly, the enforceability of clauses providing that a contractor cannot recover damages as a result of

any form of delay have often been subject to judicial exceptions.(4)

Gross disparities in risk allocation

may also indicate defects in the bargaining process, or may affect the remedy to be granted when there is

a violation of a more specific rule.(5)

Public contracting involves considerations which go beyond questions of the technical

enforceability or legal adequacy of particular terms and conditions. When gross disparities in risk allocation or values exchanged favor the governmental party they may be inconsistent with the obligation of a sovereign to deal fairly with its citizens - to "turn square corners"(6)

and to "do right."(7)

When they favor the non-governmental party, they may be inconsistent with the higher standards demanded of contractors whose ultimate customer is the public and whose compensation derives from the public treasury.(8)

Structuring a public procurement so that one party bears the overwhelming share of the risk, or receives grossly disproportionate value, is not in the best interest of the procurement process because of the possibility of a reduction in public confidence in the integrity of the process, as well as the increased likelihood of reduced competition, performance problems, bankruptcy, unconscionability, disputes and litigation which can outweigh any temporary gain or benefit to either party.

David A. Churchill

Chair, Section of Public Contract Law

Dated:May 26, 1999

1. Tomi, Inc., ASBCA No. 43284, 94-3 BCA 27,140; Aden Music Co., Inc., ASBCA No. 28225, 86-2 BCA 18,792; see also U.C.C. 2.302; Restatement (Second) of Contracts 208 (1979).

2. See Satellite Servs., Inc., B-280945 et al., Dec. 4, 1998, 98-2 CPD 125.

3. U.C.C. 2-718; Restatement (Second) of Contracts 208e (1979).

4. Peter Kiewit Sons' Co. v. Iowa S. Utils. Co., 355 F. Supp. 376 (S.D. Iowa 1973); United States Steel Corp. v. Missouri Pac. R.R. Co., 668 F.2d 435 (8th Cir. 1982); Blake Constr. Co. v. C.J. Coakley Co., 431 A.2d 569 (D.C. App. 1981); Phoenix Constructors, Inc. v. General Motors Corp., 355 N.W.2d 673 (Mich. Ct. App. 1984).

5. Restatement (Second) of Contracts 79, 208c, 364 (1979).

6. "It is no less good morals and good law that the Government should turn square corners in dealing with the people than that the people should turn square corners with their government." St. Regis Paper Co. v. United States, 368 U.S. 208, 229, 82 D.Ct. 289, 301, 7 L.Ed.2d 240 (1961) (Black, J., dissenting). See also, Brandt v. Hickel, 427 F.2d 53, 57 (9th Cir. 1970) ("To say to these appellants, 'The joke is on you. You shouldn't have trusted us,' is hardly worthy of our great government"), quoted in Heckler v. Community Health Services of Crawford County, Inc., 467 U.S. 51, 61 n. 13, 104 S.Ct. 2218, 2224, n. 13, 81 L.Ed.2d 42 (1984).

7. "It is the obligation of the United States to do right." California Federal Bank v. United States, 39 F3d.Cl. 753, 754 (1997) (Smith, J.), quoted in Sipco Services & Marine, Inc. v. United States, 41 Fed.Cl. 196, 228 (1998).

8. See, e.g., provisions in the Federal Acquisition Regulation, 48 CFR Part 3, regarding standards of conduct for contractors doing business with the Federal government.