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Fara Fasat

DPAS

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Scenario: a subcontractor has accepted a rated order from a prime. Sub has made deliveries on time, but prime has failed to pay. In accordance with its standard practice, sub wants to put a hold on future deliveries until prime pays.

However, can a contractor do that under a rated order? A contractor's primary obligation under a rated order is to deliver on time, even if it requires delaying deliveries on non-rated orders. Must the sub therefore keep delivering even if the prime is not paying, and seek other remedies?

I have searched the DPAS regs thoroughly, and gone through all training materials from DoD, DoC, and even the DAU DPAS course. None of them answer this question. However, none of them mention any exception to the obligation to deliver on time either.

My conclusion so far is that the sub must continue delivering on the current order, but if anyone knows of an exception to this ....

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Fara – No expert by any means .......

15 CFR 700.13 (c)(1)provides for optional reasons for a supplier to reject or otherwise not comply with an order  - including payment matters.  In your scenario the order has been accepted but delivery compliance is now potentially delayed.  Is the delay due to regularly established terms of  payment?  If so does not 15 CFR 700.13 (d)(3) provide direction on what the next step is?    

This approach seems to be supported by the Q and A found on page 37 of this document discussing compliance with order.  https://www.bis.doc.gov/index.php/documents/other-areas/strategic-industries-and-economic-security/1615-dpas-training-slides/file

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Fara:

There is not much analysis of DPAS out there. But you might want to read a 2001 Briefing Paper by Marc F. Efron and Robert T. Ebert entitled, Defense Priorities and Allocations System. It includes the following statement:

Quote

Willful violations of Title I and the DPAS regulation may result in a maximum fine of $10,000, one year in prison, or both. The DPA also authorizes the Government to seek injunctive relief to halt or prevent violations and to enforce compliance.

Whether Title I can be used to compel a contractor to remain in a certain business or to continue a certain product line is unclear. However, on at least one occasion, SIES issued a directive ordering continued production to fill rated orders when a contractor wanted to close its production line. In 1998, Optical Imaging Systems, Inc. (OIS) discontinued production of flat panel displays, which are used in U.S. military systems that are considered vital to the national defense. At the time OIS announced it was discontinuing production, it had a number of rated subcontracts with Department of Defense prime contractors. OIS refused to continue delivery on these previously accepted rated subcontracts, even though the prime contractor offered interim funding. SIES responded by issuing a directive ordering OIS either to perform its rated subcontracts or face penalties under the DPA. However, there is no report of whether OIS complied with this directive or whether SIES took any of the threatened actions.
 
Footnotes omitted.
 
I found nothing in the regs that addresses the situation that you described. There has been very little litigation about compliance with DPAS and prosecution for noncompliance. Absent an agency directive to perform, I believe that the sub in your case may take contractual action such as stopping deliveries in light of the prime's refusal to pay them. I suspect that there is very little risk involved. However, if the agency issues a directive to perform, then the sub had better call an attorney.
 

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I'm confused. In the scenario described, wouldn't the first action be to file a claim rather than to stop work? If the subcontractor is a small business, wouldn't it have other options available to address a prime who wasn't paying?

Stopping deliveries just seems to extreme, if there are other options.

Just saying. Obviously Fara knows the details and the other steps may already have been tried.

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Thanks for the responses. Here are my thoughts:

C Culham: I don't think 700.13 (d)(3) helps. That applies when the supplier "finds that shipment will be delayed" which suggests production difficulties or other inability to meet the delivery date. Here, the supplier has made the product but wants to withhold shipment. It hasn't 'found' that delivery will be delayed; it wants to delay.

Vern: trying to get that BP now. That quote concerns me. OIS accepted orders, wanted to stop production, and refused delivery. In response, SIES issued a directive to OIS to perform, and presumably could have taken enforcement action. That's what concerns me unless there is clear authority excusing performance of deliveries. 

Given the regs' priority requirements, DPAS clearly expects suppliers to put themselves in potentially breaching positions with other customers in order to meet a rated order's deliveries. That tells me that the overall mandate of DPAS is "meet your delivery date regardless of other impacts." 

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44 minutes ago, Fara Fasat said:

Given the regs' priority requirements, DPAS clearly expects suppliers to put themselves in potentially breaching positions with other customers in order to meet a rated order's deliveries. That tells me that the overall mandate of DPAS is "meet your delivery date regardless of other impacts." 

I think you might have gone a bit too far - what if the order was a cost type contract and the Government ran out of money to pay for the effort?  Would the contractor(s) still be required to "meet [their] delivery date regardless?"  I'd think not, so why would a subcontractor have a requirement to perform in spite of prime contractor's breach of contract?  Since a breach of contract can be grounds for termination (none of us, except maybe Fara Fasat, know the terms and conditions of the subcontract), maybe this subcontractor should terminate the current order and then refuse subsequent orders under the authority of 15 USC 700.13( c )(1).

Quote

(c) Optional rejection. Unless otherwise directed by Commerce, rated orders may be rejected in any of the following cases as long as a supplier does not discriminate among customers:

(1) If the person placing the order is unwilling or unable to meet regularly established terms of sale or payment;

Question: why wouldn't your same logic apply to the prime contractor's contractual responsibilities (one of which is timely payment for deliveries)?  Your argument is essentially under rated orders, contractors have a requirement to perform contract obligations in spite of whatever hardships may arise - if we accept that premise, the prime has an obligation is to fulfill its promise under the subcontract (payment) while the subs fulfill theirs (delivery).  Maybe an argument could/should be made that the prime is the one in violation of 15 USC 700 - by not paying in a timely manner the prime has not given rated orders the "preferential treatment" required by the DPA.

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With regard to the logic mention in a couple of posts - It would seem to me that the 15 CFR 700.8 should be considered......

"Person. Any individual, corporation, partnership, association, or any other organized group of persons, or legal successor or representative thereof; or any authorized State or local government or agency thereof; and for purposes of administration of this part, includes the United States Government and any authorized foreign government or international organization or agency thereof, delegated authority as provided in this part."

And then the logic is this read if 15 CFR 700.13.....

The Government placed an order with a person (prime), who accepted the order and in turn placed a order with a  supplier (person), the supplier accepted the order and delivered (partially?), now the person (prime) placing the order with the supplier is unwilling  to meet regularly established terms of payment and therefore delays the delivery of further items.  The person (supplier) informs the customer (prime) of the interruption and informs the prime that the new delivery date will be when the supplier receives payment in accord with established terms of payment in the supplier contract.

 

 

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I’ve read the article and a couple of the cases in it that sounded promising.

The article itself was very general and thus not of much use. One case was a bankruptcy case (193 B.R. 204), and the bankruptcy court cited the DPAS acceptance/rejection criteria to assert that a supplier could withhold performance. It looked at 700.13(c), which gives a supplier the right to reject an order, and asserted that this explicitly allows a supplier to refuse to ship when its terms aren't met. I don't buy it. The court took contract formation criteria and applied it to contract performance. 

The Sterling Millwrights case (26 Cl.Ct. 49) was more on point. Complicated facts before the Claims Court in a T for D case, but one Sterling defense was that various government delays and failures excused its own failure to meet the DPA. The Claims Court disagreed and said that “the court must conclude that the government’s indolence in performing its contract obligations did not excuse Albany Steel [a subcontractor] and Sterling from performing in accordance with the DPA.” 

Sterling has been cited many times, but not on DPAS. It remains the only case I can find on this issue, and it concluded that a supplier had to continue performance in the face of government failures. The full context  of Sterling makes a direct comparison difficult, but it's a red flag.

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Seems to me that the sub may choose to stop delivering and the prime may choose to stop paying if they each have that right under the contract between them. To me, in so far as DPAS is concerned, if the prime is reasonably in jeopardy of or has actually failed to deliver or perform per the prime contract, the Government may exercise its right against the prime. The Government may step in with the sub if requested by the prime. For all anybody knows, the sub delivered items are not acceptable from a quality or other standpoint, and the prime is seeking another source or in the process of terminating the subcontract to protect the prime schedule.  

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