Legislature(2003 - 2004)

04/24/2003 08:06 AM STA

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 250-STATE CONTRACTS                                                                                                        
CHAIR WEYHRAUCH  announced that  the next  order of  business was                                                               
HOUSE  BILL  NO. 250,  "An  Act  relating  to protests  of  state                                                               
contract   awards,  to   claims  on   state  contracts,   to  the                                                               
arbitration of  certain state  construction contract  claims, and                                                               
to hearings and appeals under  the State Procurement Code; making                                                               
conforming  amendments   in  the  State  Procurement   Code;  and                                                               
providing for an effective date."                                                                                               
Number 0285                                                                                                                     
REPRESENTATIVE  HOLM,  Alaska  State Legislature,  spoke  as  the                                                               
sponsor of  HB 250.   He informed the  committee that HB  250 was                                                               
legislation negotiated  between the Department  of Transportation                                                               
&  Public Facilities'  procurement  officers  and the  Associated                                                               
General Contractors  (AGC).  Representative Holm  paraphrased the                                                               
following sponsor statement:                                                                                                    
     Construction claims occur when  parties to the contract                                                                    
     disagree as to whether a  specific element of a project                                                                    
     is within the  scope of work defined  by a construction                                                                    
     contract.   For  projects  undertaken by  the State  of                                                                    
     Alaska, the  Alaska procurement code defines  a process                                                                    
     for resolving those differences.                                                                                           
     Ideally such a process  should resolve differences in a                                                                    
     fair and expeditious manner.                                                                                               
     At   this  time,   however,  the   perception  in   the                                                                    
     construction community  is that the process  has slowly                                                                    
     deteriorated  so   that  it   is  no  longer   fair  or                                                                    
     expeditious.   As  now  prescribed,  when a  contractor                                                                    
     files a  claim, the  procurement officer  involved with                                                                    
     the claim  initially evaluates the  claim and  issues a                                                                    
     ruling on the  perceived merits.  If  the contractor is                                                                    
     not  satisfied, an  appeal is  made to  the procurement                                                                    
     officer's supervisor.                                                                                                      
     There is  no review  by an  independent party  unless a                                                                    
     contractor elects to  appeal the supervisor's decision.                                                                    
     Even  then,  the hearing  officer  is  selected by  the                                                                    
     state,   which   raises    concern   about   the   true                                                                    
     independence of  the hearing officers, since  the state                                                                    
     has  sole discretion  to maintain  the hearing  officer                                                                    
     list.    Delays  are  rampant.    Justice  is  delayed.                                                                    
     Contractors are forced to  expend money defending their                                                                    
     claim,  but  that  money cannot  be  recovered  in  the                                                                    
     process.      Small   contractors  cannot   afford   to                                                                    
     participate  in the  claims  process  because of  these                                                                    
     costs.   Claims  of less  than $250,000  are frequently                                                                    
     not  pursued because  of  the  great expense  involved.                                                                    
     The entire process is ripe for review and revision.                                                                        
     The purpose  of HB  250 is  to modify  the construction                                                                    
     claims  process  to  once  again   create  a  fair  and                                                                    
     expeditious claims process.   Specifically, HB 250 will                                                                    
     modify the procurement  code pertaining to construction                                                                    
     claims in the following manner:                                                                                            
     1. If  a procurement officer  does not issue  a written                                                                    
     decision  by  the due  date,  the  contractor may  seek                                                                    
     2. On  appeals of all construction  claims, the parties                                                                    
     can agree to binding arbitration.                                                                                          
     3.  The timelines  for decisions  have been  tightened,                                                                    
     and redundant requirements have been eliminated.                                                                           
     4. An arbitrator or hearing  officer who does not issue                                                                    
     a decision by the deadline is disqualified for a year.                                                                     
     5. Qualifications for  arbitrators and hearing officers                                                                    
     will   be   established    by   the   commissioner   of                                                                    
     administration in regulation.                                                                                              
     6. The  contractor is entitled  to recover some  of the                                                                    
     claims costs incurred.                                                                                                     
     Prompt  passage of  HB 250  will expedite  contractor's                                                                    
     claims and return fairness to the process.                                                                                 
REPRESENTATIVE HOLM concluded by urging the prompt passage of HB                                                                
250, adding that there is nearly $400 million worth of work for                                                                 
the fiscal year 2003.                                                                                                           
Number 0638                                                                                                                     
MARK O'BRIEN,  Chief Contracts Officer,  Contracting, Procurement                                                               
and   Appeals,  Office   of  the   Commissioner,  Department   of                                                               
Transportation  &  Public  Facilities  (DOT&PF),  explained  that                                                               
about two years  ago the department began a process  with the AGC                                                               
in  order  to  review  revisions  to the  claims  process.    The                                                               
discussions resulted  in review of  a way to improve  the process                                                               
such that  it was faster, fairer,  and less expensive.   In terms                                                               
of  faster, the  legislation proposes  specific timeframes  where                                                               
there were none and shortens  existing timeframes by which action                                                               
must be taken to keep the  claims moving forward.  Arbitration is                                                               
offered as  an alternative to  the hearing officer process.   Mr.                                                               
O'Brien  related  the  general belief  that  arbitration  process                                                               
offers  a  faster  and  fairer  resolution.    Furthermore,  this                                                               
legislation  makes  arbitration final  and  there  is no  lengthy                                                               
court appeal  process.   With regard  to fairer,  the arbitration                                                               
process  together with  regulations  govern the  selection.   The                                                               
contractors  and  the  state  believe that  it  will  provide  an                                                               
opportunity to provide  a true, fair, and neutral  third party to                                                               
hear the  claim.   The less expensive  aspect is  [borne through]                                                               
arbitration,  which is  generally  considered  less formal,  more                                                               
expeditious,   and   therefore    a   less   expensive   process.                                                               
Additionally,  he said,  there  will be  no  additional cost  for                                                               
appeals under arbitration, with very few exceptions.                                                                            
MR. O'BRIEN  noted that  the only  issue that  the administration                                                               
can't completely  agree with  the AGC on  are the  provisions for                                                               
cost and fee.   He explained that  Rule 79 and 82  [of the Alaska                                                               
Rules of Civil Procedure] allow  the contractor and the state, if                                                               
they  are the  prevailing party,  to recover  partial fees  under                                                               
different circumstances.  For example,  if there was a $2 million                                                               
claim  and the  arbitrator  awarded the  contractor $50,000,  the                                                               
arbitrator  would estimate  that the  Rule  82 fees  and Rule  79                                                               
costs would amount to about $73,000.   If one were to apply those                                                               
figures  to the  last  11  years worth  of  cases  on claims  and                                                               
average out  the costs  depending upon  the prevailing  party, it                                                               
would  amount  to about  $145,000  a  year in  additional  claims                                                               
costs.   Mr. O'Brien informed  the committee that  the arbitrator                                                               
has the authority, based on  factors such as complexity or length                                                               
of litigation, to increase those  costs.  Therefore, the $145,000                                                               
a  year  in  additional  claims   costs  represents  the  minimum                                                               
additional  cost estimate  based on  the past  11 years  worth of                                                               
claims history.   Mr. O'Brien highlighted that  these fees aren't                                                               
eligible  for reimbursement  under  the  federal aid  provisions.                                                               
Most of the  claims are funded under  federal appropriations, and                                                               
therefore the additional costs would be obligations.                                                                            
Number 0993                                                                                                                     
CHAIR WEYHRAUCH  posed a  situation in which  there is  a dispute                                                               
between DOT&PF  and a  contractor and the  dispute goes  to court                                                               
where there is a prevailing party.   He asked if the state or the                                                               
contractor  are entitled  to attorney  fees  incurred before  the                                                               
administrative part of the dispute.                                                                                             
MR.  O'BRIEN   replied  no  and   specified  that   those  aren't                                                               
recoverable  fees.   Past  court  decisions  have held  that  the                                                               
claimant isn't  eligible to  recover cost  and fees  for hearings                                                               
under the administrative process.                                                                                               
Number 1125                                                                                                                     
DICK   CATTANACH,   Executive    Director,   Associated   General                                                               
Contractors  of  Alaska,  testified  in support  of  HB  250  and                                                               
thanked  the sponsor.   Mr.  Cattanach  related that  contractors                                                               
currently view the process as very expensive.                                                                                   
[Due to technical  difficulties, the committee held  HB 250 until                                                               
later in  the meeting and  had Mr. Cattanach  call back.   In the                                                               
meantime, the committee turned attention to other legislation.]                                                                 
HB 250-STATE CONTRACTS                                                                                                        
CHAIR WEYHRAUCH returned to the discussion on HOUSE BILL NO. 250                                                                
"An Act relating to protests  of state contract awards, to claims                                                               
on  state   contracts,  to  the  arbitration   of  certain  state                                                               
construction contract  claims, and to hearings  and appeals under                                                               
the State  Procurement Code; making conforming  amendments in the                                                               
State Procurement Code; and providing for an effective date."                                                                   
Number 1499                                                                                                                     
DICK   CATTANACH,   Executive    Director,   Associated   General                                                               
Contractors of Alaska,  returning to the issue  of cost, informed                                                               
the  committee that  a contractor  who  had settled  a claim  for                                                               
$530,000  settled because  the contractor  couldn't afford  to go                                                               
any further.  The contractor  had already spent over $25 million.                                                               
The construction industry believes that  the cost of the claim is                                                               
sometimes used to delay the  claim, and therefore the contractors                                                               
are at a disadvantage when  dealing with an organization as large                                                               
as  the  state, which  can  financially  outlast the  contractor.                                                               
Therefore, the  cost containment provisions which  bring in Rules                                                               
68,  79, and  82  of  the Alaska  Rules  of  Civil Procedure  are                                                               
important elements of this legislation.   Mr. Cattanach urged the                                                               
committee to support HB 250.                                                                                                    
Number 1540                                                                                                                     
RICHARD  J. MONKMAN,  Assistant Attorney  General, Transportation                                                               
Section, Civil  Division (Juneau),  Department of  Law, explained                                                               
that HB 250 provides for  arbitration at the contractor's request                                                               
for claims under $250,000, which  provides for a faster and final                                                               
decision  on those  claims.   For claims  above $250,000,  if the                                                               
contractor  and  department  agree,  those  claims  can  also  be                                                               
arbitrated.    Again,  a  faster   and  more  final  decision  is                                                               
CHAIR  WEYHRAUCH asked  if parties  can still  agree not  to have                                                               
attorney fees and  costs awarded in an arbitration.   Or does the                                                               
legislation require such.                                                                                                       
MR.  MONKMAN specified  that HB  250 would  allow the  prevailing                                                               
party to request  attorney fees and costs in  accordance with the                                                               
Alaska  Rules  of Civil  Procedure.    Therefore, the  prevailing                                                               
party  would  have  the  right,   in  either  arbitration  [or  a                                                               
hearing], to  [request] attorney  fees and  costs from  the other                                                               
CHAIR WEYHRAUCH mentioned  that many times parties want  to go to                                                               
arbitration, but  don't want  to have  the possibility  of having                                                               
attorney fees  and costs awarded  against one another.   He asked                                                               
if the  parties can agree  to go  to arbitration with  each party                                                               
bearing their own fees and costs.                                                                                               
MR. MONKMAN  answered that  he supposed that  could be  the case.                                                               
However,  either party  would  have a  statutory  right to  claim                                                               
those fees  and costs.   The provision  in HB 250  references the                                                               
Uniform Arbitration  Act, which  has broad language  allowing the                                                               
parties to agree  to the parameters of an arbitration  and to the                                                               
boundaries of an arbitrator's award.   Mr. Monkman clarified that                                                               
although  he  hasn't looked  at  that  question specifically,  he                                                               
believes the parties  could agree to waive the  attorney fees and                                                               
Number 1727                                                                                                                     
REPRESENTATIVE  GRUENBERG   directed  attention  Section   7  and                                                               
acknowledged  the  chair's  concern   with  regard  to  the  word                                                               
"shall."    Representative  Gruenberg  related  his  belief  that                                                               
Alaska's current rules of civil  procedure would allow a party to                                                               
waive attorney  fees.  Actually,  the aforementioned  does occur,                                                               
he added, when one doesn't make an application for it.                                                                          
MR. MONKMAN agreed.                                                                                                             
REPRESENTATIVE  GRUENBERG turned  to  Section 7(b),  specifically                                                               
the  reference  to Rule  68.    He noted  that  there  is also  a                                                               
statutory  offer of  judgment  in AS  09.30.065.   Basically,  an                                                               
offer of judgment  allows a person to make an  offer of judgment.                                                               
For  example, if  a  person is  offered a  better  deal, but  the                                                               
offeree rejects  it and the  case is forced  to go to  trial, the                                                               
attorney fees can be obtained  and any resulting interest goes to                                                               
[the  offeror].   Although the  court rule  and the  statute work                                                               
together, the  statute isn't referenced in  HB 250.  He  asked if                                                               
the  statute  was  intentionally  not referenced  or  should  the                                                               
legislation be amended to include it.                                                                                           
MR. MONKMAN  related his belief  that the when  Legislative Legal                                                               
and Research Services reviewed the  legislation, it was felt that                                                               
the  reference to  the rule  was  sufficient to  bring offers  of                                                               
judgment.    Mr.  Monkman  said he  didn't  have  any  particular                                                               
objection to referencing the statute,  although the rule alone is                                                               
probably adequate for these purposes.                                                                                           
REPRESENTATIVE  GRUENBERG suggested  that  members should  review                                                               
the statute and the rule so that  they will see there really is a                                                               
difference.   If this  legislation only  provides the  benefit of                                                               
the  rule,  then  the  parties aren't  being  provided  the  full                                                               
benefit  of  the  offer  of   judgment  scheme.    Representative                                                               
Gruenberg explained  that the  court rule  provides that  one can                                                               
obtain actual  costs, which can  include enhanced  attorney fees.                                                               
The statute  refers to certain  deadlines and specifies  that one                                                               
can  recover  75  percent  of   the  attorney  fees  and  [lower]                                                               
depending upon when the offer occurs.   He wasn't sure whether it                                                               
would require additional  work.  He inquired as  to Mr. Monkman's                                                               
view on including the statute.                                                                                                  
MR. MONKMAN  related his belief  that the percentage  of recovery                                                               
referred to  by Representative Gruenberg  is included in  Rule 68                                                               
itself.  Mr. Monkman characterized Rule  68 as the "meet or beat"                                                               
provision of  the civil rules.   Rule 68 is there  to enhance the                                                               
possibility of settlement and to  encourage the parties, early in                                                               
litigation,   to   realistically   evaluate   their   claim   and                                                               
possibility of succeeding.   Most claims, like  most court cases,                                                               
settle.   Mr. Monkman  explained that under  Rule 68  the offeror                                                               
reviews the case and relates that  the claim is worth a specified                                                               
amount.  The  offeree can take the  money or go to  a hearing and                                                               
try to  beat the offer.   If the offeree doesn't  beat the offer,                                                               
the offeree will  have to pay for [the  offeror's] attorney fees,                                                               
costs,  and  enhanced interest.    Therefore,  it's an  important                                                               
piece of the legislation.                                                                                                       
Number 2086                                                                                                                     
CHAIR WEYHRAUCH pointed out that  Rule 68 references Title 9, the                                                               
offer of  judgment statute.   Chair Weyhrauch explained  that the                                                               
committee will  receive copies of  the rules.  He  announced that                                                               
if there was  going to be a conceptual amendment  he wanted it to                                                               
occur today in order to move the legislation today.                                                                             
REPRESENTATIVE  GRUENBERG  related  his  understanding  that  the                                                               
current amended Rule 68 is tied closely to the statute.                                                                         
MR. MONKMAN agreed and explained  that's why the legislation only                                                               
included the rule.                                                                                                              
CHAIR  WEYHRAUCH  noted  that  the   intent  is  to  include  any                                                               
statutory provision that would allow  parties to deal with offers                                                               
of judgment.                                                                                                                    
REPRESENTATIVE  GRUENBERG  announced  that he  wouldn't  offer  a                                                               
conceptual amendment.   He noted  that the House  recently passed                                                               
the revised Uniform  Arbitration Act and asked if  anything in HB                                                               
250 needs to conform to that.                                                                                                   
REPRESENTATIVE BERKOWITZ said that he couldn't say.                                                                             
CHAIR WEYHRAUCH, speaking  as a cosponsor of  the revised Uniform                                                               
Arbitration  Act,   said  that  he  didn't   see  anything  [that                                                               
necessitated conformity].                                                                                                       
MR. MONKMAN informed  the committee that HB 250  was drafted with                                                               
the expectation  that the revised  Uniform Arbitration  Act would                                                               
be passed.                                                                                                                      
CHAIR  WEYHRAUCH, upon  determining  there was  no  one else  who                                                               
wished to testify, closed public testimony.                                                                                     
Number 2230                                                                                                                     
REPRESENTATIVE  HOLM  moved  to   report  CSHB  250(L&C)  out  of                                                               
committee  with individual  recommendations and  the accompanying                                                               
fiscal notes.  There being no objection, it was so ordered.                                                                     

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