Legislature(2001 - 2002)
04/10/2001 01:37 PM Senate TRA
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 152-DOTPF-RELATED CONTRACT CLAIMS
MR. DON SMITH, staff to Senator Cowdery, sponsor of SB 152,
explained that the measure relates to the handling and interest on
contract controversies involved in DOTPF. The proposed legislation
would simply require that when a contract settlement with DOTPF is
in dispute and finally settled in favor of the contractor, interest
must be paid to the contractor on the settlement amount for the
time the contract was in dispute. The interest would accrue at the
rate applicable to judgments and interest in state statute.
TAPE 01-13, SIDE B
Disputes do occur and many take way too long to settle. There is
no urgency to settle on the state's part, therefore interest
expenses would increase the settlement incentive. The state earns
interest on the money while it is under dispute and, many times,
financially strapped contractors end up settling simply because
they can't fight the time delay. Contractors have to pay their
expenses while the dispute is ongoing. SB 152 would provide
fairness. Letters of support from the Alaska General Contractors
and others have been placed in members' packets.
SENATOR TAYLOR said he met with Dick Hatten (ph), the executive
director of the Alaska General Contractors and learned that this
would apply to cases that do not go to court.
MR. SMITH said that is correct.
SENATOR TAYLOR clarified that these cases are arbitrated and
involved claims for cost overruns or change orders.
VICE-CHAIRMAN WARD said he would have DOTPF staff address the
details.
SENATOR TAYLOR said he believes if a case is taken to court, the
winning party would have the right to pre-judgment interest.
Mr. Dennis Poshard, Special Assistant, DOTPF, and Mr. Doug Gardner,
Assistant Attorney General, took the witness stand.
SENATOR TAYLOR asked Mr. Gardner if SB 152 will apply to matters
that are being litigated.
MR. GARDNER said the bill applies to administrative claims. He
explained that an example would be a situation in which a
contractor is building a road and a condition changed. Alaska law
requires the contractor to bring a claim before DOTPF under the
procurement code. There are a variety of different levels of
review and a final decision is made by the Commissioner after a
review by a hearing officer has taken place. The party can appeal
the decision in Alaska Superior Court. If appealed to the court
system, the case will always be considered an appellate case.
VICE-CHAIRMAN WARD took public testimony.
MR. KEVIN BRADY, an attorney with Olds, Morrison, Rinker and Baker,
informed the committee that he has had the opportunity to litigate
approximately four claims through the administrative hearing
process, even up into the judicial review process. The cases are
large and complex involving tens of thousands of documents. The
process itself takes anywhere from 24 to 60 months. During that
period of time, no interest accrues on the contractor's claim, to
the financial detriment of the contractor. Private owners pay
prejudgment interest, federal agencies pay prejudgment interest,
municipalities and cities pay pre-judgment interest, so there is no
legitimate basis for DOTPF, or any other state agency, to withhold
pre-judgment interest and treat contractor claimants disparately
from other tort or contract claimants. He offered to answer
questions.
VICE-CHAIRMAN WARD asked if any law exists that prevents DOTPF from
paying pre-judgment interest now.
MR. BRADY said to his knowledge, there is not. He said sometime in
1998, DOTPF made the decision, based on what he believes is an
erroneous interpretation of an Alaska Supreme Court case, that it
no longer has to pay.
VICE-CHAIRMAN WARD asked Mr. Gardner to elaborate on that case.
MR. GARDNER said he is not counsel of record in that case but that
case is pending before the Alaska Supreme Court at this time.
SENATOR TAYLOR asked what shift or change of policy DOTPF made in
1998 based upon an interpretation of a Supreme Court decision.
VICE-CHAIRMAN WARD then asked if the 1998 case is being appealed.
MR. GARDNER said the issue that he believes was raised in the case
that Mr. Brady was referring to involves a 1996 Alaska Supreme
Court decision named Danko Exploration v. State (924 P2nd 432). He
noted it has been a fairly long standing interpretation of the
state's status of its sovereign immunity that the state only agrees
to be sued in capacities where it waves its sovereign immunity. He
said:
I don't believe that the issue has been raised, at least
not to my knowledge, and again the attorney in the case
may know more but I don't believe the question of pre-
judgment interest has come up very often to the extent
that we have begun litigating it in this case is because
the claimant, who Mr. Brady represents, raised the issue.
But, we believe if the - and I don't want to - I don't
think it would be useful to go through the Danko decision
here, but I think that if the decision is read, it's my
sense that this has been a long standing interpretation
of Alaska law. The pre-judgment interest occurs when the
state waives its sovereign immunity on that issue and it
has not, according to our reading of the Danko case by
the Alaska Supreme Court and by the Superior Court judge
that visited this issue on two occasions and found that
the state had not waved its sovereign immunity on this
issue. So, I would say at this point, it was the
Department of Law's position that pre-judgment interest
wasn't - couldn't be awarded on these claims and that
position has now been validated by a Superior Court judge
and will be heard by the Supreme Court. So, I wouldn't
say it's an erroneous interpretation of the law, it seems
to be accurate according to the court.
SENATOR TAYLOR asked if, prior to the Danko case when the state
paid [indisc.].
MR. GARDNER said he is not aware of any case in which the state
paid pre-judgment interest on a disputed claim that was going
through the administrative process. He noted there are other cases
cited within Danko that suggest that this line of logic has gone
back further than 1996.
SENATOR TAYLOR asked Mr. Brady if he had any further comment.
MR. BRADY said he would like to correct several of Mr. Gardner's
statements. He stated the commissioner's office had authorized
awards of pre-judgment interest, even up to and including 1998.
[Mr. Brady's next statement was inaudible]. He concluded by saying
the Department of Law took the position that pre-judgment interest
was an inappropriate component of the award, and since then DOTPF
discontinued the practice of awarding pre-judgment interest to
contract claimants.
VICE-CHAIRMAN thanked Mr. Brady.
MR. MIKE MILLER, the immediate past president of the Associated
General Contractors of Alaska, stated support for SB 152. He
stated that in his experience, pre-judgment interest became a
controversy in the late 1980s in the Northern region. That
controversy was settled at the regional level after almost three
years of "butting heads." He pointed out that in public works
construction, a contractor has no choice but to complete the work
or perform the work that he's supposed to do. Even if there is a
dispute, the contractor must complete the work otherwise the
contractor will be liable for breach of contract. Given the
state's ability to drag claims out forever, contractors are at a
huge disadvantage to recover. The time value of money is a basic
principle in our economic society and the contractors only want to
be treated fairly. SB 152 will quell any doubt as to whether state
sovereignty is given up. It corrects an oversight; the wording of
SB 152 was in the model procurement code as it was contemplated by
the legislature in the 1980s, but fell out for some reason.
MS. KATELYN MARKLEY, Development Specialist with the Alaska
Industrial Development and Export Authority (AIDEA), said that
AIDEA works through DOTPF under the procurement rules. Disputes do
arise when construction projects are underway and, in the past,
AIDEA has been able to settle those disputes through negotiated
settlements. She said it is difficult to estimate a fiscal note
for this bill. It could range from zero, if no disputes occur, to
the millions. She told the committee that the contractor on the
Healy [indisc.] gold project originally had a claim in the
millions. The settlement, just based on an 18 month time period,
could have been based on a $10 million claim, and could have cost
an additional $1.6 million [in pre-judgment interest]. AIDEA
settled the claim for approximately $1.1 million. Had AIDEA paid
interest based on the dates the claim when filed, the cost would
have been an additional $188,000. AIDEA didn't pay interest and
once the claim was settled, the claim was paid the following month.
Ms. Markley repeated that she cannot provide a fiscal note but
should this arise, it could have an impact on AIDEA projects.
VICE-CHAIRMAN WARD noted there was no further testimony.
SENATOR TAYLOR moved SB 152 from committee and asked for unanimous
consent.
VICE-CHAIRMAN WARD announced that with no objection, the motion
carried and that the bill does not have any further referrals.
With no other business to come before the committee at this time,
he adjourned the meeting at 2:40 p.m.
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