Infotech and the Law: States grow more inflexible on contract terms

Richard Rector

Imagine you're applying for a job, and it looks like a match made in heaven. The employer needs someone with exactly your skills and experience, and you like the stature, salary and challenge of the position.

But there's a catch. The employer says that in your first six months on the job, the company will pay only 10 percent of your salary. The balance will be paid over the remaining six months.

You politely object to the arrangement as inconsistent with customary practice. It would unfairly delay your compensation and shift financial risk to you.

The employer is unmoved, and defends the company's position by citing a costly experience with a previous employee who had to be fired after six months on the job. The employer fears a repeat of that fiasco. You must take the job with the onerous payment terms, or decline the offer.

Most of us would decline the offer. Even if we could somehow accept the financial risk, we would not work for a company that placed so little value on both the fairness of its bargaining positions and its employees' well being.

Thankfully, few employers would insist on such terms ? but some state and local governments are willing to levy similarly onerous positions on their contractors.

Why would a state refuse to pay more than 10 percent of the contract value for development work that constitutes half of the contract work? Why would a municipality insist upon a 100 percent performance bond, when state law suggests that a 50 percent bond is adequate? Why would a county demand a three-year warranty for third-party software, when the software-maker provides only a one-year warranty?

These questions have no single answer. In each case, the state or local agency is trying to act in the public interest, and in some situations, one or more of these contract terms could be appropriate.

The problem is that state and local agencies increasingly are including a number of one-sided terms in their solicitations, and refusing to modify those terms during so-called negotiations. Relying on their sovereign powers, these agencies depart not only from standards of commercial reasonableness, but also from more balanced terms that are usually used in public contracts.

Frequently, these non-negotiable terms are an agency's reaction to a previous contract failure. The lopsided terms are intended to eliminate all risk to the agency on a high-profile issue, thereby shielding the agency and public officials from public criticism.

The instinct is understandable, but it engenders neither good government nor good business. The American Bar Association's Section of Public Contract Law addressed this issue in 2000 when it published a guiding principle for risk allocation in public procurement.

The principle requires that contracting parties allocate the risks of performance and the values exchanged "in a commercially reasonable manner." It acknowledges that oppressive contract terms are not in the best interest of the procurement process, because they reduce competition and increase the likelihood of performance problems, disputes and litigation.

Experience tells us that lopsided contract terms are shortsighted and ultimately increase the cost of goods and services to state and local agencies. For the sake of all parties, commercial reasonableness must be the touchstone of public contracts.

Richard Rector is a partner in the Government Contracts practice of DLA Piper Rudnick Gray Cary US LLP. He can be reached at richard.rector@dlapiper.com.

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