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Saturday, November 27, 2010

Oral change orders and the NOM clause, part III

I agree with Steve Feldman's comments on P&D Consultants that we published yesterday.  My point in the original post (which wasn't clear) is not that P&D Consultants is wrong, but that the same considerations that militate in favor of enforcing a no-oral-modifications clause in a government contract are present in private contracting.

Years ago in practice I was involved in a lot of litigation over oral change orders, and I know what an absolute mess they can cause.  The government obviously does not want to be bound every time some employee (even if it's the contracting offier or the Air Force general in charge of the program) says something.  But that's the same reason that private parties put those clauses in their agreements.  My point was that courts seem to think those clauses serve a very valuable protective function when it's the government's money, but not when it's a private transaction.  I don't see the distinction.

FGS

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Comments

Wouldn't the often-asserted superior efficiency of private enterprise suggest better supervision of agents and thus less need for a bright-line rule enforcing NOM clauses?

Posted by: John Patrick Hunt | Nov 27, 2010 11:11:21 AM

Government employees, as a matter of law, have much less authority to enter into binding contracts than private company employees. Local government governing bodies routinely approve in vote of a politically elected governing body, every single contract. Higher up the food chain, in state government, this isn't the case, but often, there must be direct legislative authoritzation to enter into the contract often audited by a state treasurer or state attorney general or state auditor. In all cases, the concern is that government decisions be vested in democratically elected officials and that the authority not be unduly delegated to emloyees with merit system protection. Non-delegation is alive and well as a constitutional doctrine as expressed in the SEC accounting board case last year.

In contrast, private enterprises have widely varying governance regimes that are not a matter of public knowledge or public record. A representation by an agent of a private company in the absence of authority amounts to fraud if not honored, and since representations are all that the public has to rely upon from private entities this is a serious problem. It in impracticable in most cases for members of the public to insist on proof of board authorization of private entity action. And, the concern for protecting the democratic rights of the owners is generally trivial in private company contexts.

An alternative to an NOM clause which I frequently include in contracts I draft, is to have an initial framework contract approved by a senior officer that sets forth who has the authority to modify the contract. For example, "this contract may only be modified by the President, the Vice President, or the Treasurer of the Company." Such a clause, at least if conspicuous, may deny a middle manager or rank and file employee apparent authority to modify the contract. But, a President of the Company must still be as good as his word.

Posted by: ohwilleke | Nov 29, 2010 10:24:02 PM

But that's the same reason that private parties put those clauses in their agreements.

Posted by: hyundai a7hd | Apr 23, 2012 3:01:26 AM

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