The Judgment Fund was established by Congress in 1956 to alleviate the need for specific legislation following every successful claim against the United States. The purpose behind the Judgment Fund was to eliminate the procedural burdens involved in getting an individual appropriation from Congress, allowing for the prompt payment of judgments and reducing the amount of interest accrued between the time the judgment was awarded and payment was made. Although the Judgment Fund successfully eliminated the need for legislative action in almost every case, and in most cases resulted in prompter payments to successful claimants, it also had the unintended consequence of incentivizing procuring agencies to avoid settling meritorious claims in favor of prolonged litigation. Specifically, an agency could avoid making payment from its own appropriated funds if it refused to settle a case and instead sought a decision from a court, subsequently providing it access to the Judgment Fund which draws money straight from the Treasury. Congress eliminated this problem when it passed the Contracts Disputes Act (CDA) of 1978, which requires agencies to reimburse the Judgment Fund with appropriated funds that are current at the time of the judgment against the agency. Although contracting officers are no longer incentivized to avoid settlement, the source and availability of funds can still impact whether or not they decide to settle a claim because there are differences between how a judgment is funded and how a settlement can be funded.
With few exceptions, contracting officers are authorized, within the limits of their warrant, to decide or resolve all claims arising under or relating to the contract that they are responsible for administering. The Federal Acquisition Regulation (FAR) shows us that the resolution of claims by mutual agreement is preferred over prolonged litigation. Specifically, the FAR provides that agencies should attempt to resolve all claims by mutual agreement if possible. Courts also weighed in on this matter and found that one of the main reasons behind the CDA was to “induce resolution of contract disputes with the government by negotiation rather than litigation.” When considering whether or not to settle a claim, there are many factors that a contracting officer must consider. One of the key factors is how a settlement will be funded.
As discussed in this article, there are significant differences between how a judgment is funded versus how a settlement is funded. These differences can impact a contracting officer’s decision of whether or not to settle a claim. In practice, the driving factors behind the contracting officer’s decision are the source and availability of funds, and the impact, if any, to an agency’s ongoing or planned activities or programs. For example, a settlement will have little impact on an agency if the settlement relates to an in-scope contract change and there are still funds available (either current or expired) from the same appropriation cited on the original contract. In this case, a contracting officer is very likely to settle a meritorious claim. The same is true where there are expired funds of the same type still available within the agency and the claim relates back to the original contract.
The more difficult cases are those where the funding source is exhausted or closed, or the settlement relates to an out-of-scope contract change that requires the settlement to be paid from current funds. In those cases, the contracting officer will have to assess whether settling a claim will significantly impact an agency’s ongoing activities or programs. If so, the contracting officer might decide to pursue a consent judgment which could provide some flexibility regarding the timing of reimbursement to the Judgment Fund. Alternatively, the contracting officer could decide to litigate the claim and hope that any appeal is denied, knowing that if the appeal is sustained it will take a considerable amount time before the judgment or award is final and payment is due. Ultimately, a contracting officer’s decision could come down to whether or not there is a cash flow advantage to the procuring agency.
Although contracting officers are no longer incentivized to avoid settlement, the source and availability of funds can impact whether or not they decide to settle a claim because of the effect a funding source can have on an agency’s programs or activities. It is essential that both contractors and fiscal law practitioners understand the differences between how a judgment is funded versus how a settlement is funded so they can properly assess the potential impacts to the procedural outcome of a claim.
Timothy A. Furin is a partner in the firm’s Government Contracting Group. He draws on his background as an acquisition law specialist in the U.S. Army Judge Advocate General’s Corps to help clients navigate the federal government procurement process.