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Bailment Agreements and Government Liability


stoney

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Search the forums and am unable to find what I am looking for regarding bailment agreements and government liability in the context of the FAR and CO authority.

Long story short, vendor is letting customer use some fancy gadgets to test in their system at no-cost. They just pay for return shipping (GPC purchase). However, vendor and customer want to enter into a bailment agreement to make it official. Part of the agreement is a "if you break it you buy it clause".

Question is, who has the authority to bind the government to pay for the gadgets if the worst case scenario happens? Who is the AF going to come looking for if the vendor files a claim or comes banging on doors?

The FAR/DFARS/AAFARS don't speak on these types of situations. At best, we made a case that this can be part of customer market research but contracting doesn't enter into this process until later.

Customer wants contracting to sign it thinking we have authority here even after explaining we don't (no appropriated funds to obligate). Legal does not recommend it. Our solution is to have the customer, or the customer's commander/program office head to sign it, accepting the risk. If that's the case, if it breaks, how do we process that claim? 

My solution is the Federal Tort Claims process. Other solutions is a GPC purchase for a nominal fee (cost of shipping) with maybe a indemnity clause?

Time is of the essence (like it always is) so the route of doing  an award for the cost of shipping with an option for the full price of the item might be off the table due to the time of drafting/approving a sole source J&A. 

Ultimately, even if we got their commander or program office, or even the Wing/CC to sign it, how do we process that claim financially in that event? Can't just write a check can we?

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As you noted, the FAR does not cover bailment agreements.   Bailment agreements are not contracts, at least as FAR as the FAR is concerned.

Contracting officers under the FAR do not sign bailment agreements, cooperative agreements, grants, real property leases, and so forth. All of these are legal, but they are not within the province of the FAR or contracting officers.  Your attorneys should tell you who is authorized to sign bailment agreements in your agency.

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Just now, ji20874 said:

As you noted, the FAR does not cover bailment agreements.   Bailment agreements are not contracts, at least as FAR as the FAR is concerned.

Contracting officers under the FAR do not sign bailment agreements, cooperative agreements, grants, real property leases, and so forth. All of these are legal, but they are not within the province of the FAR or contracting officers.  Your attorneys should tell you who is authorized to sign bailment agreements in your agency.  Ask them to earn their pay by doing the research to find the answer. 

 

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If the Agency is going to go forward with signing a bailment agreement without clear authorization and funds for contingencies, a "break it and buy it clause" would likely wind up in the Board of Contract Appeals.

Lorna's Agile Acquisition Blog is as follows:


"An Agreements Officer is essentially a Contracting Officer with the legal authority to write assistance instruments (essentially non-FAR-based contracts) called Other Transactions. It’s slightly more complicated than that, but you get the idea. You can find the statute for OTs at 10 USC 2371. It’s the most popular buzzword in the Air Force since…since it was the most popular buzzword in 1997.

Back in 1997 when I was first writing OTs, I didn’t have to have special authority or even a special Contracting Officer’s warrant on my wall to distinguish my specialness to award OTs. I had bosses who trusted me, whether or not they liked me, and that was good enough. I got things done, and they knew it. I think I officially had a Grants Officer warrant, in name at least, because I had been writing grants for a couple of years in the same Lab organization before I discovered the perks of 2371. All it took to get a Grants Officer warrant, or an Agreements Officer warrant, was to be a Contracting Officer already and to have taken a basic Grants course. It’s different now because you have to have more coursework to get an Agreements Officer warrant and you have to have that authority delegated down to your organization. In some cases, the buying organization needing their Contracting Officer to become an Agreements Officer doesn’t have the authority to issue an Agreements warrant and must go through another organization who may or may not wish to vouch for the individual needing the warrant. It’s messy, but hopefully will work its way out as OTs rise in popularity again."

     

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23 hours ago, stoney said:

Search the forums and am unable to find what I am looking for regarding bailment agreements and government liability in the context of the FAR and CO authority.

Long story short, vendor is letting customer use some fancy gadgets to test in their system at no-cost. They just pay for return shipping (GPC purchase). However, vendor and customer want to enter into a bailment agreement to make it official. Part of the agreement is a "if you break it you buy it clause".

Question is, who has the authority to bind the government to pay for the gadgets if the worst case scenario happens? Who is the AF going to come looking for if the vendor files a claim or comes banging on doors?

The FAR/DFARS/AAFARS don't speak on these types of situations. At best, we made a case that this can be part of customer market research but contracting doesn't enter into this process until later.

Customer wants contracting to sign it thinking we have authority here even after explaining we don't (no appropriated funds to obligate). Legal does not recommend it. Our solution is to have the customer, or the customer's commander/program office head to sign it, accepting the risk. If that's the case, if it breaks, how do we process that claim? 

My solution is the Federal Tort Claims process. Other solutions is a GPC purchase for a nominal fee (cost of shipping) with maybe a indemnity clause?

Time is of the essence (like it always is) so the route of doing  an award for the cost of shipping with an option for the full price of the item might be off the table due to the time of drafting/approving a sole source J&A. 

Ultimately, even if we got their commander or program office, or even the Wing/CC to sign it, how do we process that claim financially in that event? Can't just write a check can we?

The government routinely accepts risk of loss because, as policy, it's cheaper than paying the contractor to obtain commercial insurance. See, for example, the DFARS Ground and Flight Risk Clause. In this particular case it's not clear who's really benefiting here. You write "vendor is letting customer use ... to test in their system ...." That doesn't explain who's benefiting. Is the government customer asking to use the fancy gadgets, or is the the contractor pushing the customer to use the fancy gadgets? That matters.

And it's not just about risk of loss. You have not addressed (in your post) who is paying for installation of the "fancy gadgets" and who is paying to uninstall them. You have not posted who's doing the testing and who's doing the test data recording and who will use that test data. In other words, you have asked a question about a single part of a potentially complex deal, and I would be careful about any advice given based on an obviously incomplete scenario. That said, here are some very general thoughts for consideration:

If the government customer benefits it should be willing to accept risk of loss, which creates a contingent liability (i.e., a contingency that won't have to be funded unless a event happens). Alternately, the government customer could agree to reimburse the contractor for the cost of purchased insurance. Another alternative is that the government could make it clear to the contractor that part of the deal is that the contractor accepts risk of loss and, therefore, must purchase its own insurance at its own (non-reimbursed) cost, or else cover the risk through a CAS 416 self-insurance charge (which would also not be reimbursed).

To my way of thinking, the right approach is very much dependent on who the real benefiting party is, and also what's going on with the other aspects of the deal.

 

I'll add in a gratuitous comment FWIW: If this deal is designed solely to benefit the government to obtain "fancy gadgets" with no use of appropriated funds, then I would explore whether you have an ADA problem in addition to the bailment agreement challenge. A critical point would be just how long is this testing going to last? How long is the government going to have possession?

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Good reasons to use these and some bad too.  Many agencies have policies on who signs - COs, PMs, finance officers, etc.  A few agencies indirectly encourage these via market research and subsequent publication notice of anything promising discovered.  Lots of CIO offices also find these very helpful for COTS type things to see how they perform before buying. 
 

Here’s an example of an old one which looks a lot like a contract.  I remembered it because of the outcome which received lots of attention

https://epic.org/foia_docs/3-15-10/EPIC_Executed_Loan_Agreement.pdf

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On 10/2/2020 at 3:03 PM, ji20874 said:

Bailment agreements are not contracts, at least as FAR as the FAR is concerned.

I wonder?  Let me pose why.....

Contract - FAR 2.101 - Contract means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements covered by 31 U.S.C.6301, et seq. For discussion of various types of contracts, see part  16.

Commercial Item - FAR 2.101 - Commercial item means (1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and- (i) Has been sold, leased, or licensed to the general public; or (ii) Has been offered for sale, lease, or license to the general public;     (2) Any item that evolved from an item described in paragraph (1) of this definition through advances in technology or performance and that is not yet available in the commercial marketplace, but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Government solicitation;.....

Bailment - Blacks Law Dictionary (online)(emphasis added) - A delivery of goods or personal property, by one person to another, in trust for the execution of a special object upon or in relation to such goods, beneficial either to the bailor or bailee or both, and upon a contract, express or implied, to perform the trust and carry out such object, and thereupon either to redeliver the goods to the bailor or otherwise dispose of the same In conformity with the purpose of the trust. Watson v. State, 70 Ala. 13, 45 Am. Rep. 70; Com. v. Maher, 11 Phila. (Pa.) 425: McCaffrey v. Knapp, 74 111. App. 80; Krause v. Com., 93 Pa. 418, 39 Am. Rep. 702; Fulcher v. State, 32 Tex. Cr. R. 021, 25 S. W. 025. See Code Ga. 1882, 

Example of a Bailment that benefits both entities (reference https://www.investopedia.com/terms/b/bailment.asp)(I did not add emphasis)  - Bailment that Benefits Both the Bailor and Bailee: An example of this would be parking your car in a paid parking lot. You would get the benefit of parking your car and the owner of the lot would get the benefit of the fee that is paid. A bailee can face liability for damaging the bailed items if they were negligent.

Conclusion - The FAR provides that a contract that provides that a seller is to provide something and the buyer is to pay.  This definition has been stretched to an extent as evidenced by "no cost contracts" discussions of which can be found in the Forum.  Add to this thought that the FAR now provides for the ability to perform a Commercial Item (CI) contract that is to take the form of that found in the commercial market place (tailoring) with some exceptions where certain terms and conditions are to be placed in the CI contract.  As noted a bailment is a legally binding instrument or if you will a contract.    So in the context of the FAR, noting especially FAR 1.102(d), could  a CO conclude that there is nothing present in the FAR that would prevent a CO from signing bailment that has the intent to benefit, and provides the best value, to the Government through the bailment arrangement?

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A bailment agreement becomes a rental agreement (or contract) if there is an obligation to pay, and rental agreements (except for real property) are generally governed by the FAR.  Some contracts create bailments, but all bailments do not create contracts (at least as far as the FAR is concerned).  

Yes, a contracting officer may sign a contract after making a determination of best value -- after notice, solicitation, evaluation, and best value selection.  But I also suppose that most bailment situations occur in market research situations, where use of a free demo is common, and without any best value process.  The Government should be able to take advantage of free trials just as private consumers can -- I am okay with robust market research.  If the product is damaged during the free trial, maybe it is the vendor's loss -- that's okay, and that is customary practice in some market sectors -- or, maybe the Government has some responsibility and the SF-95 process exists for this purpose.  

Yes, an agency can delegate signature authority for bailment agreements to contracting officers.  An agency can also delegate other transaction authority, cooperative agreements authority, and so forth to contracting officers.  But all of this is outside the context of the FAR, and is not inherent in the 1102 responsibility.  To me, a contracting officer only signs a bailment agreement is the contracting officer has a specific and separate delegation in accordance with agency procedures.

The link below is to a State Department case involving a bailment agreement -- there was no contracting officer involved anyhow, anywhere -- but it was a valid bailment agreement -- here's an extract: 

Quote

The parties agree that this case is not governed by the Contract Disputes Act because it does not involve a contract for the procurement of goods or services. Rather, it involves an alleged bailment contract for the possession and use of certain electronic transmission equipment. The Tucker Act, 28 U.S.C. § 1491(a)(1), gives the U.S. Court of Federal Claims jurisdiction over claims founded upon “any express or implied contract with the United States.”

http://www.uscfc.uscourts.gov/sites/default/files/opinions/BASKIR.Telenor.pdf

Contracting officers (and procurement attorneys) must realize that there is a huge world of transactions outside the FAR -- they should not look at every transaction through a FAR lens.

The original poster's attorney should get out of the FAR and do the research in agency regulations to decide who can sign the bailment agreement.

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Thank you for all your input. To help clear things up, here are some more details.

Customer has developed fancy software and wants to test it out on cutting edge hardware to show proof of concept. They don't have this hardware and only need it temporarily (2-3 weeks). The following is my assumption: Customer found a vendor who has this hardware and asked to borrow it.

Vendor wants customer to sign a bailment agreement for liability purposes. Customer obviously has some benefit, but there is no plans to purchase this equipment. Customer wants to show off their stuff during a DV visit then ship the hardware back. I don't see the vendor really benefiting except for their perceived assumption of "getting their foot in the door". 

We are an operational CONS and we don't have agreements officers and our legal doesn't know about this either. 

 

To answer some other questions (sorry I don't do forums very much so not sure how to identify who asked) but the only money changing hands is for shipping costs. The customer is installing, testing, etc., vendor is just letting them borrow it on the condition we buy it if we break it. Here is what my unit has decided to do after discussing it further with other units and this forum:

- Customer/their commander/their program office can sign a revised agreement that myself and legal have drafted.

- This agreement removes the government's liability except as provided by the Federal Tort Claims process (damage due to negligence)

- Specifically lays out the government's non-endorsement or obligation top buy.

 

As someone has said, let's say we do allow for contingent liability and a CO/agreement officer (or just the customer for that matter) signs the document. If the worst happens, what is the payment vehicle?

 

 

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I agree with you. But with the timeline and need, we have competition concerns. Doing a bailment, I believe, keeps this out of CONS' hands and removes our CICA requirements. Would your suggestion be more of an H-type contract that still needs to be solicited or at least sole-sourced?

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Unlike a P-code, or F-code (purchase order or delivery order), an H-code contract deals with "Basic Agreements" or "Loans". Is this more along with what you are talking about? What do you suggest? Should this even be a contracting action or more of a lease the customer could sign?

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Well, I've said from the beginning that contracting officers do not sign bailment agreements, at least not in their capacity as FAR contracting officers.  Let your wing attorney tell you who can sign a bailment agreement -- the wing commander can, and maybe someone else can, too.  

If you choose to treat it like a FAR-based contract (for a short-term rental), I would recommend using a purchase order.  It most certainly is not a basic agreement under FAR 16.702.

But even if you do sign it as a bailment agreement, at your attorney's direction, who says it has to be numbered in your contract numbering system?  Don't give it any number at all.

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19 hours ago, Don Mansfield said:

@C Culham

A bailment agreement that did not involve the obligation of appropriated funds would not meet the definition of "acquisition" at FAR 2.101. Thus, the FAR would not apply by operation of FAR 1.104.

No argument but I find this quote interesting (emphasis added)....https://www.gao.gov/special.pubs/appforum2008/nocostcontracts.pdf

"3. May an agency use a no-cost contract to acquire property as opposed to a service? The no-cost contracts GAO has addressed have been for various types of services, including real estate brokerage, travel, conference planning, concession, relocation assistance, haircuts for military recruits, ferryboat transportation, and workers compensation insurance coverage. GAO reviewed many of these contracts in the context of our bid protest function. GAO has also issued a number of appropriations law decisions involving no-cost contracts. At issue in the decisions was whether the no-cost contract violated the Antideficiency Act’s voluntary services prohibition. The voluntary services prohibition, by its own terms, would not be applicable if property, rather than services, were being provided. GAO has not issued a decision involving a no-cost contract to acquire property."

14 hours ago, ji20874 said:

Well, I've said from the beginning that contracting officers do not sign bailment agreements, at least not in their capacity as FAR contracting officers. 

I am not convinced in the context of this thread that the FAR prevents a CO from signing a bailment.  With regard to your quote the FAR and its codified supplements are considered the FAR.  The DEAR and DFARS acknowledge bailments exist.  I found examples of bailments to be signed by CO's for GSA and the FBI.  I understand your intent of "FAR contracting officers" yet agencies pursuant to the FAR can bastardize (my term) the exact read you of the FAR I think you are intending.  Example FAR 1.301(a)(2) with regard to delegations of authority.  A quick look at bailments with regard to GAO protests reveals many hits that would take a lot of reading but in a general sense my offering to Don above seems to provide the summary view.   I would simply offer that such broad statement does not seem to fit a full read of the FAR with regard to how agencies may implement its guiding principles.

The thread has found an acceptable alternative for the OP, my question was rhetorical and I will leave it at that. 

Thanks to @Don Mansfield and @ji20874 for the thoughts.

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