49.108-5 Recognition of judgments and arbitration awards
Source: FAR 49.108-5 on acquisition.gov
Judgments and arbitration awards against prime contractors are only recognized as settlement costs if specific fairness, notification, and cooperation requirements are met.
Overview
FAR 49.108-5 outlines how Termination Contracting Officers (TCOs) should recognize judgments and arbitration awards involving subcontractors when settling terminated prime contracts. Specifically, it details the conditions under which a judgment or arbitration award against a prime contractor by a subcontractor can be treated as a cost in the settlement of the prime contract. The regulation ensures that only fair and reasonable judgments or awards, properly allocable to the terminated portion of the contract, are recognized, and sets forth specific requirements for prime contractors to follow to ensure such recognition.
Key Rules
- Recognition of Judgments
- TCOs must treat a final judgment against a prime contractor as a settlement cost if certain conditions are met, including reasonable subcontract termination clauses, fair subcontract terms, reasonable settlement efforts, prompt notification to the Government, and diligent defense of the suit.
- Partial Recognition
- If all conditions are not met, the TCO may allow only the portion of the judgment deemed fair, considering overall settlement policies.
- Recognition of Arbitration Awards
- Arbitration awards are recognized as settlement costs under the same conditions as judgments, provided the award is properly allocable and the required conditions are satisfied.
Responsibilities
- Contracting Officers: Must evaluate whether the conditions for recognizing judgments or arbitration awards are met and determine the allocable cost for settlement.
- Contractors: Must include proper termination clauses, act reasonably in settlement efforts, notify the Government promptly, and cooperate in legal proceedings.
- Agencies: Oversee the process and may assume control of legal defenses if necessary.
Practical Implications
- This section ensures that only justified legal or arbitration costs are recognized in contract settlements, protecting government interests.
- Contractors must be proactive in managing subcontracts and legal disputes to ensure costs are recoverable.
- Failure to comply with these requirements can result in disallowance of significant costs, impacting contract closeout and financial recovery.
(a) When a subcontractor obtains a final judgment against a prime contractor, the TCO shall, for the purposes of settling the prime contract, treat the amount of the judgment as a cost of settling with the contractor, to the extent the judgment is properly allocable to the terminated portion of the prime contract, if-
(1) The prime contractor has made reasonable efforts to include in the subcontract a termination clause described in 49.502(e), 49.503(c), or a similar clause excluding payment of anticipatory profits or consequential damages;
(2) The provisions of the subcontract relating to the rights of the parties upon its termination are fair and reasonable and do not unreasonably increase the common law rights of the subcontractor;
(3) The contractor made reasonable efforts to settle the settlement proposal of the subcontractor;
(4) The contractor gave prompt notice to the contracting officer of the initiation of the proceedings in which the judgment was rendered and did not refuse to give the Government control of the defense of the proceedings; and
(5) The contractor diligently defended the suit or, if the Government assumed control of the defense of the proceedings, rendered reasonable assistance requested by the Government.
(b) If the conditions in paragraphs (a)(1) through (5) of this section are not all met, the TCO may allow the contractor the part of the judgment considered fair for settling the subcontract settlement proposal, giving due regard to the policies in this part for settlement of proposals.
(c) When a contractor and a subcontractor submit the subcontractor’s settlement proposal to arbitration under any applicable law or contract provision, the TCO shall recognize the arbitration award as the cost of settling the proposal of the contractor to the same extent and under the same conditions as in paragraphs (a) and (b) of this section.