Friday, May 4, 2012

MODEL SUBCONTRACT DISPUTES CLAUSE

The standard FAR disputes, changes and termination clauses are not mandatory subcontract flow down clauses.  In fact, it is improper to flow down the standard FAR disputes clause.  So here is a model subcontract disputes clause:

DISPUTES
1)  If a dispute arises in the performance of this subcontract, the parties will first attempt to negotiate a settlement.  If negotiation is unsuccessful, they agree to submit the dispute to mutually agreed upon mediation.  If mediation does not resolve the dispute, either party may seek redress in any court of competent jurisdiction.  Pending resolution of any dispute, the parties shall proceed diligently with the performance of the work.

2)  However, if any dispute gives the subcontractor recourse against the U.S. Government through the prime contractor's prime contract, the parties may agree to pass the subcontractor's dispute through the prime to the U.S. Government.  The subcontractor must submit the claim within 5 years after it accrues; the prime must cooperate fully with the subcontractor in prosecuting the claim; the parties agree to be bound by the outcome; the subcontractor must certify its claim in a form approved by the prime contractor; each party will bear its own costs in prosecuting the claim; and any other dispute or portion of the dispute not resolved in paragraph 1) above may be decided by a court of competent jurisdiction.  Pending resolution of the dispute, the parties shall proceed with performance of the work.

3)  This subcontract shall be government by the laws of the _____________________.  However, any FAR, DFARS or other federal agency clause or any clause substantially based on a federal agency clause shall be construed and interpreted according to the federal common law of contracts as applied by federal agency judicial tribunals.

This is just one example based on the work of the American Bar Association's Public Contract Law Section, which also publishes guides on which clauses are mandatory flow down clauses.  We have used other more expanded versions, but the concepts are clear.  If the federal prime contract is implicated, it is wise to provide a mechanism, even a requirement, that the subcontractor "pass through" the claim/dispute to the federal government.  This is sometimes called a "sponsorship agreement" which also can be negotiated separately at the time the dispute arises. 

Subcontract terms and conditions under federal government prime contracts can be tricky.  There is nothing in FAR, DFARS or any other federal regulation which provides a single source guide to mandatory flow down clauses.  Moreover, many flow down clauses need to be modified for subcontracts.  The disputes clause is the best example of a clause which has to be totally rewritten for subcontracts.

Subcontracting may be the best way to engage the federal marketplace but the confluence of federal and state law may make it a more complicated undertaking.

Postscript:  We're getting some good comments on ways to modify the clause depending on whether the prime contractor or the subcontractor has the superior bargaining position.  I usually opt for trying to make the clause fair to both sides.  Obviously, depending on who has the superior bargaining position, the prime or the sub can improve its position on the language.

bill@spriggslawgroup.com

1 comment:

  1. In setting up a mechanism to allow a subcontractor to file an REA or claim through the prime contractor, the subcontractor should try to get the prime contractor to agree to sponsor the REA or claim without any "strings attached". I saw a recent situation where the prime only agreed to sponsor the claim of the subcontractor if the subcontractor agreed to waive any claims the subcontractor might have with the prime

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