B-174725, JUN 16, 1972

B-174725, JUN 16, 1972

BID PROTEST - FOREIGN MILITARY SALES - EXERCISE OF CONTRACT OPTION - PROPRIETY CONCERNING THE PROTEST OF BELL HELICOPTER COMPANY RELATIVE TO A FOREIGN MILITARY SALE OF HELICOPTERS TO CANADA PURSUANT TO SOLICITATIONS ISSUED BY THE ARMY AVIATION SYSTEMS COMMAND. 1) SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968, 22 U.S.C. 2762 (1970), PROHIBITS GOVERNMENT SALES OF COMMERCIALLY AVAILABLE UNCLASSIFIED DEFENSE ARTICLES TO ECONOMICALLY DEVELOPED NATIONS. THE COMP. GEN. IS UNABLE TO CONCLUDE THAT THIS STATUTORY PROHIBITION WAS "WAIVED" OR THAT THE ARRANGEMENT NOW PROPOSED IS THE SAME AS THAT ORIGINALLY RECOMMENDED. ACCORDINGLY, THE UNITED STATES CANNOT PROPERLY EXERCISE THE BELL OPTION TO PROCURE AIRCRAFT FOR DIRECT SALE TO CANADA. 2) NOTWITHSTANDING THE PROVISIONS OF SECTION 22, GAO DOUBTS THE PROPRIETY OF EXERCISING AN OPTION WHERE THE CONTRACT IS SILENT WITH REGARD TO FOREIGN MILITARY SALES, ESPECIALLY WHERE THE CONTRACTOR PREDICTS FINANCIAL LOSS AT THE OPTION PRICE. SEE ASPR 1-1505(C). 3) IFB-0235 SHOULD BE CANCELLED SINCE ITS PURPOSE WAS TO TEST THE MARKET AGAINST AN OPTION WHICH MAY NOT BE EXERCISED AND ITS SPECIFICATIONS FAIL TO PROVIDE A COMPETITIVE BASIS FOR AWARD. 4) SINCE DIVERSION AND REPLENISHMENT ARE MORE REASONABLY VIEWED AS RELATED PARTS OF THE SAME PROCUREMENT, IT APPEARS THAT BELL WAS INDUCED TO DIVERT AIRCRAFT TO CANADA IN THE BELIEF THAT REPLENISHMENT AND THE ESTABLISHMENT OF A FAIR PRICE WOULD OCCUR THROUGH SUBSEQUENT NEGOTIATION OF A SOLE-SOURCE CONTRACT. FOR THE FOREGOING REASONS, BELL IS LEGALLY ENTITLED TO HAVE ITS PRICE FOR HELICOPTERS DELIVERED TO CANADA DETERMINED THROUGH NEGOTIATION BY THE ARMY FOR 74 REPLACEMENT HELICOPTERS.

TO MR. SECRETARY:

FURTHER REFERENCE IS MADE TO A LETTER DATED FEBRUARY 1, 1972, FROM YOUR ASSISTANT DEPUTY FOR MATERIEL ACQUISITION, AND LETTERS DATED FEBRUARY 22, MARCH 25 AND MAY 11, 1972, REFERENCE AMCGC-P, FROM THE DEPUTY GENERAL COUNSEL, ARMY MATERIEL COMMAND, FURNISHING REPORTS ON THE PROTEST OF BELL HELICOPTER COMPANY (BELL) UNDER RFQ DAAJ01-71-Q 0244(2E) AND IFB DAAJ01-72 -B-0235(PE) (HEREAFTER REFERRED TO AS "RFQ 0244" AND "IFB-0235"), ISSUED BY THE ARMY AVIATION SYSTEMS COMMAND.

THE PRINCIPAL ISSUE RAISED BY THE PROTEST IS WHETHER BELL WAS INDUCED TO DIVERT AIRCRAFT FROM ITS ARMY PRODUCTION, TO SATISFY THE REQUIREMENTS OF A FOREIGN MILITARY SALE, IN THE BELIEF THAT THE REPLACEMENT OF THE DIVERTED AIRCRAFT AND THE PRICE TO THE FOREIGN CUSTOMER WOULD BE CONCLUDED THROUGH THE SUBSEQUENT NEGOTIATION OF A CONTRACT WITH BELL AS THE SOLE SOURCE.

THE PROTEST ALSO QUESTIONS WHETHER THE INCREASE OPTIONS IN BELL'S ARMY CONTRACT, WHICH IS SILENT AS TO ITS USE TO FULFILL FOREIGN MILITARY SALES COMMITMENTS, PROPERLY COULD BE EXERCISED TO SATISFY A COMMITMENT BY ARMY TO PROCURE AIRCRAFT FOR SALE TO A FOREIGN COUNTRY.

A RELATED ISSUE IS WHETHER AN AWARD MAY BE MADE UNDER AN INVITATION FOR BIDS ISSUED FOR THE PURPOSE OF "TESTING THE MARKET" AGAINST THE CONTEMPLATED EXERCISE OF BELL'S OPTION.

FINALLY, WE WILL EXAMINE WHETHER THERE HAS BEEN AN EFFECTIVE WAIVER OF THE PROHIBITION, CONTAINED IN SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968, AGAINST SALES BY THE UNITED STATES OF COMMERCIALLY AVAILABLE UNCLASSIFIED DEFENSE ARTICLES TO ECONOMICALLY DEVELOPED NATIONS.

FACTUAL NARRATIVE

IN 1967 AND 1968, THE DEPARTMENT OF THE ARMY CONDUCTED A TWO-STEP FORMALLY ADVERTISED PROCUREMENT FOR THE SUPPLY OF LIGHT OBSERVATION HELICOPTERS (LOHS) DURING FISCAL YEARS (FY) 1968 THROUGH 1972. TECHNICALLY ACCEPTABLE PROPOSALS WERE SUBMITTED BY BELL AND BY HUGHES TOOL COMPANY - AIRCRAFT DIVISION (HUGHES) UNDER STEP I OF THE PROCUREMENT, AND AWARD WAS MADE TO BELL AS THE LOW, RESPONSIVE, RESPONSIBLE BIDDER UNDER STEP II. THE BACKGROUND OF THIS PROCUREMENT IS PROVIDED IN OUR DECISION WHICH IS REPORTED AT 48 COMP. GEN. 49 (1968), WHEREIN HUGHES' PROTEST AGAINST THE AWARD TO BELL WAS DENIED.

THE 1968 BELL CONTRACT, IDENTIFIED AS CONTRACT DAAJ01-68-C-1699 ("CONTRACT-1699") PROVIDED FOR DELIVERY OVER A PERIOD OF 5 YEARS OF A BASIC QUANTITY OF 2200 AIRCRAFT AND CONTAINED ANNUAL AND FOLLOW-ON INCREASE OPTIONS TOTALING 675 AIRCRAFT. THE OPTION PRICES ARE TO BE DETERMINED THROUGH THE APPLICATION OF A PRICE ESCALATION FORMULA TO THE BASIC CONTRACT PRICE. CONTRACT-1699 IS SILENT AS TO WHETHER IT MAY BE USED TO SATISFY REQUIREMENTS FOR FOREIGN MILITARY SALES (FMS). BELL ASSERTS THAT AT NO TIME DURING THE PROCUREMENT PROCESS THAT LED TO THE AWARD OF CONTRACT-1699 WAS IT SUGGESTED THAT THE CONTRACT PRODUCT MIGHT BE USED FOR FOREIGN MILITARY SALES PURPOSES. WHILE THIS ASSERTION IS NOT DISPUTED BY YOUR DEPARTMENT, IT IS THE ARMY'S POSITION THAT THE OPTION PROVISIONS OF THE CONTRACT WERE PREMISED, AT LEAST IN PART, UPON THE POSSIBILITY OF FOREIGN MILITARY SALES, AND THAT THE OPTIONS WERE AVAILABLE TO FULFILL SUCH REQUIREMENTS IN THE ABSENCE OF ANY EXPRESS CONTRACTUAL PROHIBITION THEREOF.

BELL STATES THAT IN 1966, IT APPROACHED THE GOVERNMENT OF CANADA IN AN EFFORT TO SELL IT LOHS; SUBMITTED A PROPOSAL TO SELL ITS OH-58A LOH TO THAT COUNTRY; CONDUCTED DISCUSSIONS WITH CANADA REGARDING A DIRECT PROCUREMENT OF AIRCRAFT; AND EXPANDED ITS CANADIAN SALES ACTIVITIES.

IN THE SPRING OF 1969, CANADA ADVISED THE UNITED STATES GOVERNMENT OF A REQUIREMENT FOR 100 OH-58A AIRCRAFT AND REQUESTED INFORMATION CONCERNING THEIR PRICE AND AVAILABILITY. IN RESPONSE TO AN INQUIRY FROM THE ARMY AVIATION SYSTEMS COMMAND (AVSCOM) CONTRACTING OFFICER, BELL QUOTED A PRICE OF $80,000 PER AIRFRAME. AT THE SAME TIME IT WAS SOLICITING A QUOTATION FROM BELL, THE ARMY, APPARENTLY UNKNOWN TO BELL, WAS ALSO CONSIDERING EXERCISING THE FY 69 OR FY 70 OPTIONS TO SATISFY THE CANADIAN REQUIREMENT. ON JUNE 13, 1969, THE ARMY OFFERED TO CANADA THE FY 69 OPTION FOR 75 AIRCRAFT. HOWEVER, ON JUNE 30, 1969, THE EXPIRATION DATE OF THE OPTION, CANADA ADVISED THE ARMY THAT IT "WOULD BE ADMINISTRATIVELY IMPOSSIBLE TO FORMALIZE A LETTER OF INTENT WITHIN THE TIME FRAME REQUIRED." THE ARMY WAS REQUESTED TO PROVIDE A FORMAL OFFER FOR 115 OH- 58AS SO THAT THE REQUIREMENT COULD BE PLACED IN CANADIAN APPROPRIATIONS:

PURSUANT TO THIS REQUEST, IN JULY, 1969, THE ARMY ASKED BELL FOR A QUOTATION ON 115 AIRCRAFT, TO WHICH BELL RESPONDED WITH AN AIRFRAME PRICE IN EXCESS OF $89,000. IN SEPTEMBER 1969, BELL RESPONDED WITH A PRICE OF $87,500 TO AN ARMY INQUIRY BASED UPON A QUANTITY OF 107 AIRCRAFT. THE SAME PRICE WAS FURNISHED BY BELL IN FEBRUARY 1970, IN RESPONSE TO ANOTHER ARMY INQUIRY. ANOTHER ARMY INQUIRY IN MARCH 1970, BASED UPON A QUANTITY OF 74 AIRCRAFT WITH AN OPTION FOR AN ADDITIONAL 33, ALSO ELICITED A PRICE FROM BELL OF $87,500. ON MARCH 25, 1970, ARMY EXECUTED A DEPARTMENT OF DEFENSE FORM 1513, BY WHICH IT OFFERED, UNTIL APRIL 30, 1970, TO SELL 74 AIRCRAFT TO CANADA AT A UNIT PRICE OF $87,500 PER AIRFRAME.

IT IS OUR UNDERSTANDING THAT AT THE TIME THE FY 69 OPTION WAS OFFERED TO CANADA, THAT COUNTRY HAD EXPRESSED INTEREST ONLY IN BELL'S AIRCRAFT, THE OH-58A. HOWEVER, IN THE LATTER HALF OF 1969, THE CANADIANS EVALUATED THE AIRCRAFT OF SEVERAL ADDITIONAL MANUFACTURERS, INCLUDING HUGHES' OH-6A LOH. AS A RESULT OF THIS COMPETITION, CANADA CHOSE THE OH-58A TO SATISFY ITS REQUIREMENTS, AND ON MAY 26, 1970, IT ACCEPTED THE UNITED STATES' OFFER OF SUCH AIRCRAFT BY THE EXECUTION OF A DEPARTMENT OF DEFENSE FORM 1513 (OFFER AND ACCEPTANCE). ASSUMING THAT THE SUBSEQUENT ACTIONS TAKEN BY THE ARMY CONSTITUTED A WAIVER OF THE UNTIMELINESS OF CANADA'S ACCEPTANCE, THE DD FORM 1513 CONSTITUTES A CONTRACT BETWEEN THE CANADIAN AND UNITED STATES GOVERNMENTS WHEREBY THE LATTER AGREED TO SUPPLY OH-58AS AT AN ESTIMATED PRICE WHICH WAS BASED UPON AN AIRFRAME PRICE OF $87,500. AVAILABILITY OF THE AIRCRAFT WAS STATED AS "P(13N", WHICH MEANT THAT SERVICEABLE DEFENSE ARTICLES WOULD BE OBTAINED THROUGH PROCUREMENT, WITH A LEAD TIME OF 13 MONTHS. CONDITION A.1 OF THIS CONTRACT STATES:

"A. THE GOVERNMENT OF THE UNITED STATES:

1. AGREES TO FURNISH SUCH ITEMS FROM ITS DEPARTMENT OF DEFENSE STOCKS AND RESOURCES, OR TO PROCURE THEM UNDER THE MOST ADVANTAGEOUS TERMS AND CONDITIONS AVAILABLE CONSISTENT WITH DEPARTMENT OF DEFENSE REGULATIONS AND PROCEDURES. WHEN PROCURING FOR THE PURCHASER, THE DEPARTMENT OF DEFENSE SHALL, TO THE EXTENT POSSIBLE, EMPLOY THE SAME CONTRACT CLAUSES, THE SAME CONTRACT ADMINISTRATION, AND THE SAME INSPECTION PROCEDURES AS WOULD BE USED IN PROCURING FOR ITSELF, EXCEPT AS OTHERWISE REQUESTED BY THE PURCHASER AND AS AGREED TO BY THE DEPARTMENT OF DEFENSE."

THE RECORD SHOWS THAT IN APRIL 1970, SHORTLY BEFORE CANADA ANNOUNCED ITS SELECTION OF THE OH-58A AND EXECUTED THE CONTRACT WITH THE UNITED STATES, AN AIRCRAFT MANUFACTURER OTHER THAN BELL OR HUGHES PROTESTED AGAINST THE ARMY'S PARTICIPATION IN THE CANADIAN PROCUREMENT ON THE BASIS THAT IT CONSTITUTED UNFAIR COMPETITION TO MANUFACTURERS WHOSE AIRCRAFT WERE NOT IN THE ARMY INVENTORY. ALTHOUGH THIS PROTEST APPARENTLY WAS EVENTUALLY RESOLVED, IT DID INFLUENCE THE ARMY'S DECISION IN THE SPRING OF 1970 AS TO HOW PROCEED WITH THE PROCUREMENT OF THE AIRCRAFT THE UNITED STATES HAD AGREED TO SELL TO CANADA. IN MID JUNE 1970, AVSCOM WAS PREPARING TO EXERCISE THE CONTRACT-1699 FY 70 OPTION TO FULFILL THE CANADIAN REQUIREMENT. HOWEVER, APPARENTLY BY DIRECTION OF THE THEN ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS) (ASAI&L)), ARMY MATERIEL COMMAND (AMC) INSTRUCTED AVSCOM THAT "THE SUBJECT OPTION WILL NOT BE EXERCISED." THUS, FOR THE SECOND YEAR, THE ARMY FAILED TO EXERCISE AN AVAILABLE CONTRACT OPTION TO SATISFY THE CANADIAN REQUIREMENT.

ON JULY 6, 1970, AMC ASSIGNED THE CANADIAN CASE TO AVSCOM FOR ITS TOTAL MANAGEMENT AND AGAIN INSTRUCTED AVSCOM THAT "OPTIONS IN THE U.S. ARMY CONTRACT ARE NOT TO BE USED." BY MESSAGE OF JULY 14, 1970, AMC REPEATED THIS INSTRUCTION AND ADVISED AVSCOM: "NEGOTIATIONS FOR THIS PROCUREMENT SHOULD BE ADDRESSED TOWARDS OBTAINING A PRICE COMPARABLE TO CURRENT CONTRACT COST."

BY LETTER DATED JULY 29, 1970, CANADA INDICATED ITS UNDERSTANDING THAT IMPLEMENTATION OF ITS ACCEPTANCE OF ARMY'S FORM 1513 OFFER HAD BEEN DELAYED PENDING A DECISION BY ARMY CONCERNING USE OF THE FY 1970 OPTION UNDER CONTRACT-1699. CANADA, THEREFORE, REQUESTED OF THE UNITED STATES ITS ASSURANCE THAT "DELIVERIES WILL COMMENCE IN OCTOBER 1971 AT A RATE OF FIVE HELICOPTERS PER MONTH AT A PRICE NO LESS FAVORABLE THAN WOULD HAVE BEEN OBTAINED, HAD THE FISCAL 1970 OPTION BEEN EXERCISED." THIS LETTER WAS ANSWERED ON AUGUST 21, 1970, BY THE DEPUTY ASSISTANT SECRETARY OF DEFENSE, MILITARY ASSISTANCE AND SALES, WHO SET FORTH THE REASON FOR THE NONEXERCISE OF THE FY 70 OPTION, STATED IT WOULD BE PREMATURE TO DETERMINE WHETHER THE FY 71 OPTION WOULD BE AVAILABLE TO THE CANADIANS, AND OBSERVED:

"AS YOU KNOW, THE SEPARATE NEGOTIATIONS WITH (BELL) WILL BE CONDUCTED IN ACCORDANCE WITH ASPR PARAGRAPH 6-705.3 WHICH REQUIRES THAT 'FOREIGN MILITARY SALES CONTRACTS SHALL BE PRICED ON THE SAME PRINCIPLES AND WITH THE SAME CARE THAT IS USED IN PRICING NORMAL DEFENSE CONTRACTS.' THIS DOES NOT NECESSARILY MEAN THAT PRICES OF NORMAL DEFENSE CONTRACTS FOR AN ITEM ARE APPLICABLE TO FOREIGN MILITARY SALES CONTRACTS FOR THE SAME ITEM. CONSEQUENTLY, WE REGRET THAT WE ARE UNABLE TO PROVIDE ASSURANCE OF A PRICE NO LESS FAVORABLE THAN COULD BE OBTAINED UNDER THE U.S. ARMY OPTION - ALTHOUGH WE HOPE THAT THE DIFFERENCE, IF ANY, WILL NOT BE GREAT.

"WITH RESPECT TO DELIVERY, THE U.S. ARMY HAS AGREED THAT YOUR REQUIREMENT OF FIVE AIRCRAFT PER MONTH BEGINNING IN OCTOBER 1971 WILL BE PROVIDED BY DIVERSION FROM U.S. ARMY PRODUCTION UNTIL NORMAL LEAD TIME DELIVERIES ARE RESUMED. HOWEVER, THIS ACTION WILL NOT CHANGE THE NEGOTIATED PRICE REACHED FOR THE GOVERNMENT OF CANADA WITH (BELL).

"IN VIEW OF THE FOREGOING, IT IS RECOMMENDED THAT PROCUREMENT NEGOTIATIONS CONTINUE ON A SEPARATE CONTRACT BASIS WITH THE OBJECTIVE OF OBTAINING THE LOWEST PRICE EQUITABLE TO YOUR GOVERNMENT AND TO (BELL)."

CONSONANT WITH THIS ADVICE, IN LATE AUGUST, 1970, DEPARTMENT OF THE ARMY (DA) AUTHORIZED AMC TO DIVERT AIRCRAFT FROM BELL'S PRODUCTION UNDER CONTRACT-1699 TO SATISFY THE CANADIAN DELIVERY SCHEDULE. HOWEVER, DURING SEPTEMBER, CONSIDERATION WAS GIVEN WITHIN AVSCOM TO OBTAINING AIRFRAMES AND ENGINES THROUGH THE USE OF LETTER CONTRACTS. THIS COURSE OF ACTION WAS DISAPPROVED IN A LETTER DATED OCTOBER 1, 1970, FROM AMC TO AVSCOM, IN WHICH THE LATTER WAS DIRECTED TO "NEGOTIATE DEFINITIVE CONTRACTS FOR AIRCRAFT AND ENGINES" AND WAS AUTHORIZED TO DIVERT AIRCRAFT FROM ARMY PRODUCTION TO CANADA. IN ACCORDANCE WITH THE ADVICE WHICH HAD BEEN GIVEN TO CANADA, THE LETTER FURTHER STATED THAT THE DIVERSION "WILL NOT CHANGE THE NEGOTIATED PRICES REACHED WITH THE CONTRACTORS FOR APPLICATION TO THIS SALES CASE."

IT THEREFORE APPEARS THAT IN OCTOBER 1970, THE ARMY'S INTENTION WAS TO SATISFY THE CANADIAN REQUIREMENT THROUGH THE DIVERSION OF AIRCRAFT UNDER CONTRACT-1699. THESE AIRCRAFT WERE TO BE REPLACED UNDER A SEPARATE CONTRACT WITH BELL, THE PRICE OF WHICH WOULD CONSTITUTE THE BASIS OF THE PRICE TO CANADA. THIS INTENTION WAS COMMUNICATED BY THE AVSCOM CONTRACTING OFFICER TO BELL ON OCTOBER 14, AS FOLLOWS:

"2. THE GOVERNMENT NOW HAS A TENTATIVE REQUIREMENT TO FURNISH 74 OH58A'S TO CANADA *** . THE DELIVERY REQUIREMENT FOR THE CANADIAN QUANTITY IS OCT. 71 AND TO MEET THIS REQUIREMENT IT WILL BE NECESSARY TO MODIFY FIVE UNITS PER MONTH ON THE EXISTING CONTRACT DAAJ01-1699 TO MEET THE CANADIAN CONFIGURATION. *** THE CHANGES IN CONFIGURATION ARE MINOR AND ASSUMING A SUPPLEMENTAL AGREEMENT BY JANUARY OR FEBRUARY OF 1971, DIVERSION OF THESE QUANTITIES UNDER THE EXISTING CONTRACT COULD BE EFFECTED.

"3. THE QUANTITY OF *** SHIPS WOULD THEN BE REPLACED BY SEPARATE CONTRACT TO MEET THE U.S. ARMY CONFIGURATION."

CANADA DESIRED CERTAIN CONFIGURATION CHANGES IN THE BELL AIRCRAFT, WHICH CHANGES WERE PROVIDED AVSCOM IN LATE OCTOBER 1970. BY SEVERAL MESSAGES IN OCTOBER AND NOVEMBER, AVSCOM REQUESTED BELL TO FURNISH A FIRM FIXED PRICE PROPOSAL FOR THE MODIFICATIONS TO THE 74 AIRCRAFT WHICH AVSCOM INTENDED TO DIVERT FROM CONTRACT-1699 TO CANADA. ON DECEMBER 1, 1970, BELL ADVISED AVSCOM THAT THE PRICING OF THE MODIFICATIONS UNDER THE DIVERSION WOULD BE SUBMITTED THE FOLLOWING WEEK, STATING:

"THIS PROPOSAL WILL ASSUME PAYBACK OF SIMILAR QUANTITY OF STANDARD OH 58A HELICOPTERS TO U.S. ARMY INVENTORY BY SEPARATE CONTRACT IN ACCORDANCE WITH (THE CONTRACTING OFFICER'S MESSAGE OF OCTOBER 14, 1970, QUOTED ABOVE)."

THE COPY OF THIS MESSAGE FURNISHED US BY THE ARMY HAS WRITTEN THEREON: "THE MOD FOR THE CANADIANS UNDER 1699 HAS NO RELATIONSHIP TO THE BUY BACK QUANTITY." HOWEVER, IT IS NOT SHOWN WHEN OR BY WHOM THIS NOTATION WAS WRITTEN, NOR THAT BELL WAS TOLD AT THAT TIME THAT ARMY DID NOT AGREE WITH ITS ASSUMPTION. ON DECEMBER 18, 1970, BELL SUBMITTED ITS PROPOSAL FOR THE MODIFICATION OF THE HELICOPTERS TO BE DIVERTED FROM CONTRACT-1699. THE PROPOSAL WAS PREDICATED UPON THE INCLUSION IN THE MODIFICATION OF THE FOLLOWING CLAUSE:

"THE PARTIES HEREBY RECOGNIZE THAT IT IS NOT THE INTENT OF THIS CONTRACT TO PROCURE FOR FOREIGN GOVERNMENTS EITHER FMS OR MAP HELICOPTERS OR SUPPLIES. THIS CONTRACT WAS PLACED FOR THE EXPRESS PURPOSE OF FULFILLING THE U.S. ARMY'S REQUIREMENT FOR LOH HELICOPTERS. THE DIVERSION OF HELICOPTERS FROM THIS CONTRACT TO CANADA *** HAS BEEN CHOSEN BY THE GOVERNMENT ONLY AS AN ADMINISTRATIVE EXPEDIENCY TO SATISFY IMMEDIATE REQUIREMENTS FOR THE SUPPLIES TO BE DIVERTED. THE PARTIES AGREE TO NEGOTIATE AN ADDITIONAL PROCUREMENT FOR *** OH-58A HELICOPTERS TO REPLACE HELICOPTERS BEING DIVERTED BY THIS ACTION."

CONCURRENTLY WITH ITS RECEIPT OF THIS PROPOSAL, AVSCOM WAS COMPLETING THE PREPARATION OF RFQ-0244, WHICH WAS TO BE ISSUED TO BELL, AS A SOLE SOURCE, REQUESTING THE QUOTATION OF A FIRM FIXED PRICE FOR HELICOPTERS TO REPLACE THOSE WHICH WERE TO BE DIVERTED. BEFORE RFQ-0244 WAS ISSUED, HOWEVER, THERE WAS DISCUSSION WITHIN AVSCOM CONCERNING THE PROPRIETY OF THE COURSE BEING TAKEN. IT WAS CONTEMPLATED THAT CANADA WOULD PAY FOR THE MODIFICATIONS MADE TO THE DIVERTED AIRCRAFT AND THE COST OF THE REPLACEMENT AIRCRAFT. THE QUOTATIONS OBTAINED FROM BELL DURING 1970 FOR OH-58AS LEFT LITTLE DOUBT THAT A QUOTATION UNDER RFQ 0244 WOULD FAR EXCEED THE PRICE AVAILABLE TO THE ARMY UNDER THE CONTRACT-1699 OPTION. REQUIRING CANADA TO PAY THE HIGHER PRICE COULD BE VIEWED AS A BREACH OF THAT PORTION OF CONDITION A.1 OF THE DD 1513 AGREEMENT BETWEEN CANADA AND THE UNITED STATES WHEREBY THE LATTER WAS OBLIGATED TO PROCURE THE HELICOPTERS "UNDER THE MOST ADVANTAGEOUS TERMS AND CONDITIONS AVAILABLE *** ."

IT WAS RECOGNIZED WITHIN AVSCOM THAT THE ENTIRE DIVERSION AND REPLACEMENT TRANSACTION COULD BE VIEWED AS ONE PROCUREMENT TO SATISFY THE NEEDS OF A FOREIGN CUSTOMER FOR OH-58A AIRCRAFT. UNDER SUCH A VIEW, RFQ-0244 COULD BE ISSUED TO BELL AS THE SOLE SOURCE UNDER THE AUTHORITY OF 10 U.S.C. 2304(A)(10) AND ARMED SERVICES PROCUREMENT REGULATION (ASPR) 3-210.2(I). ON THE OTHER HAND, THE DIVERSION AND REPLACEMENT COULD BE VIEWED AS TWO SEPARATE TRANSACTIONS. ALTHOUGH THE DIVERSION WAS NECESSARY TO MEET CANADA'S DELIVERY REQUIREMENTS FOR OH 58A AIRCRAFT, EITHER THE OH-58A OR HUGHES' OH-6A WAS CONSIDERED TO BE A SATISFACTORY REPLACEMENT AIRCRAFT FOR THE ARMY'S INVENTORY. IT WAS THEREFORE CONCLUDED THAT THE REPLACEMENT AIRCRAFT COULD BE OBTAINED THROUGH EXERCISE OF THE FY 71 OPTION IN CONTRACT-1699, IF THAT PRICE WAS DETERMINED TO BE THE BEST OBTAINABLE FOR LOHS. TESTING OF THE MARKET IN ORDER TO MAKE THAT DETERMINATION COULD BE ACCOMPLISHED BY ISSUANCE OF RFQ-0244 TO BOTH BELL AND HUGHES.

OBJECTIONS WERE ALSO PERCEIVED TO THE ABOVE-QUOTED CLAUSE SUGGESTED BY BELL IN ITS PROPOSAL OF DECEMBER 18, 1970. AVSCOM'S VIEW WAS THAT CONTRACT-1699 WAS AVAILABLE TO FULFILL FOREIGN MILITARY SALES REQUIREMENTS. FURTHERMORE, THE PROPOSED AGREEMENT TO NEGOTIATE A SEPARATE CONTRACT FOR THE REPLACEMENT HELICOPTERS WAS SEEN AS VIOLATIVE OF THE "ANTI-DEFICIENCY ACT." 31 U.S.C. 665.

WHILE AVSCOM WAS REEVALUATING ITS POSITION, HUGHES LEARNED OF RFQ 0244 AND ASKED TO "BE ADDED TO THE BIDDERS LIST" THEREUNDER. ON JANUARY 29, 1971, BELL PROPOSED TO AVSCOM THAT BELL SHOULD UNDERTAKE, AT ITS OWN RISK, SEPARATE PRODUCTION OF THE CANADIAN AIRCRAFT, PREDICATED UPON A CONTRACT BEING ENTERED INTO DURING JULY 1971. ISSUANCE OF THE SOLICITATION WAS DELAYED PENDING A DECISION AS TO HOW TO RESPOND TO HUGHES. AMC, WHOSE GUIDANCE HAD BEEN SOUGHT, REQUESTED BY MESSAGE OF FEBRUARY 8, 1971, THAT AVSCOM TAKE ACTION:

" *** TO EXPEDITIOUSLY COMPLETE NEGOTIATION OF A FINAL SEPARATE CONTRACT PRICE WITH (BELL) FOR PROCUREMENT OF OH-58A HELICOPTERS UNDER THE FMS CASE.

"2. THIS HEADQUARTERS WILL BE ADVISED OF FINAL NEGOTIATED PRICE PRIOR TO ANY AWARD."

AS WE STATED ABOVE, IN THE FALL OF 1970, AVSCOM CONTEMPLATED SATISFYING THE CANADIAN REQUIREMENT THROUGH THE MODIFICATION AND DIVERSION OF AIRCRAFT UNDER CONTRACT-1699, WHICH WERE TO BE REPLACED UNDER A SEPARATE SOLE SOURCE CONTRACT WITH BELL FOR OH-58AS IN THE STANDARD ARMY CONFIGURATION. AVSCOM REGARDED AMC'S MESSAGE OF FEBRUARY 8, 1971, AS REQUIRING A CHANGE IN DIRECTION WHEREBY AVSCOM WAS TO CONCENTRATE UPON THE DEVELOPMENT OF A PRICE FOR A SOLE SOURCE DIRECT PURCHASE OF OH-58AS, IN THE CANADIAN CONFIGURATION, FOR DELIVERY TO CANADA. AVSCOM INFORMED BELL THAT IN ADDITION TO A DIVERSION FOLLOWED BY A NEGOTIATED PROCUREMENT OF REPLACEMENT HELICOPTERS, THREE OTHER POSSIBLE COURSES OF ACTION WERE UNDER CONSIDERATION: (A) DIVERSION UNDER CONTRACT-1699 AND REPLACEMENT BY EXERCISE OF THE OPTION UNDER THAT CONTRACT; (B) DIVERSION AND DELAYING THE DECISION WHETHER TO EXERCISE THE OPTION UNTIL JUST PRIOR TO ITS EXPIRATION IN MARCH 1972; AND (C) NEGOTIATION OF A SEPARATE CONTRACT FOR THE AIRCRAFT TO BE FURNISHED TO CANADA.

BY MESSAGE OF FEBRUARY 10, 1971, AVSCOM ADVISED BELL THAT IT INTENDED TO PURSUE THE NEGOTIATION OF A FIXED PRICE FOR THE MODIFICATION OF THE CANADIAN AIRCRAFT, AND THAT THE GOVERNMENT ALSO INTENDED TO PURSUE THE DEVELOPMENT OF PRICES FOR A SEPARATE SOLE SOURCE CONTRACT TO OBTAIN OH 58AS MODIFIED FOR CANADA AND DELIVERED DIRECTLY TO IT, WITH AN "RFQ TO THIS EFFECT" TO BE ISSUED SHORTLY. HOWEVER, BELL WAS INFORMED THAT ANY RELEASE TO PRODUCTION OF AIRCRAFT TO BE DELIVERED TO CANADA WAS SOLELY AT ITS OWN RISK. AVSCOM THEN ADVISED HUGHES THAT RFQ-0244 WAS BEING PREPARED TO OBTAIN OH-58A AIRCRAFT AT THE SPECIFIC REQUEST OF A FOREIGN COUNTRY AND THEREFORE THE SOLICITATION WAS RESTRICTED TO BELL, THE SOLE SOURCE OF THE OH-58A.

THE CONTRACTING OFFICER'S COMMUNICATIONS IN EARLY FEBRUARY 1971 WERE THE FIRST INDICATION TO BELL THAT THE ARMY WAS CONSIDERING EXERCISE OF THE OPTION UNDER CONTRACT-1699 IN CONNECTION WITH THE CANADIAN MILITARY SALES CASE, ALTHOUGH THIS COURSE OF ACTION HAD BEEN CONTEMPLATED BY THE ARMY IN 1969 AND 1970. WHEN FEBRUARY PASSED WITHOUT THE ISSUANCE OF RFQ-0244, BELL REQUESTED A CONFERENCE WITH THE THEN ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS), AT WHICH THE DEPUTY FOR PROCUREMENT (NOW MATERIEL ACQUISITION) WAS PRESENT. BELL STATES THAT DURING THE CONFERENCE, HELD ON MARCH 5, 1971, IT:

" *** EXPLAINED *** THAT THERE HAD BEEN INDICATIONS FROM ARMY PROCUREMENT OFFICIALS IN ST. LOUIS THAT THEY WERE CONSIDERING EXERCISE OF THE OPTION CONTAINED IN CONTRACT 1699 AS THE MEANS OF PROCURING THE SEVENTY-FOUR HELICOPTERS FOR CANADA AND THAT BELL THOUGHT THIS IMPROPER SINCE THE OPTION PRICE WOULD HAVE RESULTED IN BELL'S SUSTAINING A SUBSTANTIAL LOSS ON EACH OF THE SEVENTY-FOUR HELICOPTERS. (THE FORMER ASSISTANT SECRETARY) GIVE NO INDICATION THAT HE WAS UNSYMPATHETIC TO BELL'S POSITION BUT HE WAS OBVIOUSLY IN NO POSITION TO DETERMINE AT THE MEETING WHETHER BELL IN FACT WOULD LOSE MONEY ON THE HELICOPTERS IF SOLD AT THE OPTION PRICE. WANTED TO BE ASSURED THAT NO MORE THAN A FAIR PRICE WAS PAID BY CANADA FOR THE HELICOPTERS AND THAT BELL WOULD, IN FACT, SUFFER A LOSS IF THE OPTION PRICE GOVERNED.

"IT WAS CLEARLY CONTEMPLATED BY (THE ASSISTANT SECRETARY) THAT IF IT WERE ESTABLISHED THAT BELL WOULD SUFFER A LOSS AT THE OPTION PRICE AND IF THE ARMY PROCUREMENT OFFICIALS WERE ABLE TO REACH AGREEMENT ON A PRICE WITH BELL - PRESUMABLY A FAIR PRICE - THE PLANNED COURSE OF ACTION WOULD CULMINATE IN THE AWARD OF A CONTRACT TO BELL FOR THE SEVENTY-FOUR HELICOPTERS. *** "

AT THE REQUEST OF OUR OFFICE, THE FORMER ASSISTANT SECRETARY PROVIDED US WITH THE FOLLOWING RECOLLECTION OF THE MARCH 5 CONFERENCE:

"DURING THAT MEETING, I CONCURRED WITH (BELL'S) POSITION THAT THE U.S. ARMY SHOULD NOT CAUSE A U.S. CONTRACTOR TO LOSE MONEY FOR THE SALE OF ITS PRODUCT TO A WELL-DEVELOPED, FOREIGN COUNTRY. AS SUCH, I INDICATED THAT THE ARMY WOULD POSTPONE EXERCISING ITS OPTION PRICE FOR BELL HELICOPTERS TO BE SOLD TO THE CANADIANS UNTIL THE ARMY COULD MAKE TWO DETERMINATIONS. FIRST, WHETHER BELL HELICOPTER WOULD IN FACT LOSE MONEY BY SELLING HELICOPTERS TO CANADA AT THE U.S. ARMY'S OPTION PRICE, AND SECOND, (ASSUMING THAT THE ARMY COULD VERIFY THE POTENTIAL LOSS FOR BELL BY USING THE OPTION PRICE) WHETHER THE ARMY COULD NEGOTIATE A FAIR AND REASONABLE PRICE FOR THE HELICOPTERS, HIGHER THAN THE ARMY'S OPTION PRICE. (BELL AGREED TO) COOPERATE WITH THE ARMY IN (1) ALLOWING AN AUDIT TO BE MADE OF BELL HELICOPTER OPERATIONS, AND (2) NEGOTIATING A NEW PRICE WITH THE ARMY FOR THE HELICOPTERS TO BE PURCHASED BY THE CANADIANS.

"I SHOULD POINT OUT THAT NO COMMITMENT WAS MADE TO BUY HELICOPTERS FOR CANADA AT A PRICE HIGHER THAN THE OPTION, PRICE, SINCE WE COULD NOT BE CERTAIN AT THAT TIME THAT BELL WOULD INCUR A LOSS OR THAT THE ARMY WOULD BE ABLE TO NEGOTIATE A REASONABLE PRICE WITH BELL FOR THE PURCHASE OF THE HELICOPTERS.

"AT THE CONCLUSION OF THE MEETING, I DIRECTED (THE DEPUTY FOR PROCUREMENT) TO HAVE THE ARMY MATERIEL COMMAND WORK WITH BELL HELICOPTER TO MAKE A DETERMINATION OF THE TWO CONDITIONS SET FORTH *** ABOVE.

"PRIOR TO THE DISCUSSION WITH (BELL), I ASKED ARMY PROCUREMENT SPECIALISTS WHY THE U.S. ARMY WAS ACTING AS A THIRD PARTY IN THE SALE OF A PRODUCT BY A U.S. FIRM TO A WELL-DEVELOPED FOREIGN COUNTRY. I WAS INFORMED THAT THIS PROCEDURE WAS FOLLOWED AS PART OF AN AGREEMENT WITH THE CANADIAN GOVERNMENT AND THAT THEY PERFORMED THE SAME PROCEDURE IN PURCHASES BY THE U.S. GOVERNMENT FROM CANADIAN FIRMS."

IN REGARD TO THE ABOVE-QUOTED DESCRIPTION OF THE CONFERENCE GIVEN BY BELL, THE FORMER ASSISTANT SECRETARY HAS STATED TO OUR OFFICE:

"I FIND THE REFERENCED MATERIAL ACCURATE AND WOULD ONLY MAKE THE FOLLOWING REFINEMENT:

"PAGE 6 - 'REACH AGREEMENT ON A PRICE WITH BELL - PRESUMABLY A FAIR PRICE *** ' - DURING THIS MEETING I WAS EXPLICIT ABOUT OBTAINING A FAIR PRICE AS A PREREQUISITE. I THOUGHT IT INAPPROPRIATE TO MAKE ANY COMMITMENTS TO BEL UNTIL I WAS ABLE TO ASCERTAIN:

1. THAT BELL WOULD IN FACT INCUR A LOSS AT THE OPTION PRICE,

2. THAT THE ARMY WOULD BE ABLE TO NEGOTIATE A FAIR PRICE WITH BELL, AND

3. THAT THERE WERE NO LEGAL IMPEDIMENTS OR VIOLATIONS OF PROCUREMENT POLICY TO PROCEED WITH A SEPARATE CONTRACT FOR THE PURPOSE OF THE CANADIAN HELICOPTERS."

THE DEPUTY FOR PROCUREMENT HAS FURNISHED US THE FOLLOWING STATEMENT CONCERNING THE MARCH 5 CONFERENCE:

"(BELL PRESENTED ITS POSITION) THAT THE ARMY SHOULD NOT REPLACE THE 74 AIRCRAFT DIVERTED TO CANADA FROM CONTRACT NO. DAAJ01-72-B-0235(PE) BY EXERCISE OF THE OPTIONS UNDER THAT CONTRACT WHICH REMAINED AVAILABLE. (BELL) ARGUED THAT THE ARMY SHOULD AWARD A SEPARATE SOLE SOURCE CONTRACT TO BELL FOR THE 74 AIRCRAFT. (BELL) EMPHASIZED THAT (IT) WOULD LOSE MONEY IF REQUIRED TO SELL THE 74 HELICOPTERS AT THE OPTION PRICE AND THAT (BELL) CONSIDERED IT UNFAIR AND IMMORAL FOR THE ARMY TO PUT BELL IN A LOSS POSITION IN CONNECTION WITH A SALE TO A FOREIGN GOVERNMENT.

"THERE WAS A DISCUSSION AS TO WHETHER BELL COULD ESTABLISH THAT IT WOULD LOSE MONEY AT THE OPTION PRICE. (THE ASSISTANT SECRETARY) INDICATED THAT A ONE YEAR EXTENSION OF THE OPTION MIGHT PROVIDE A RATIONALE FOR NOT EXERCISING IT AT THE PRESENT TIME. AT NO TIME DID (THE ASSISTANT SECRETARY) OR I COMMIT THE ARMY TO ENTERING INTO A SEPARATE CONTRACT WITH BELL FOR THE 74 AIRCRAFT, NOR DID WE STATE THAT THE ARMY WOULD NOT EXERCISE THE OPTION FOR THIS PURPOSE. NO COMMITMENT WAS MADE, AS NOW ALLEGED BY BELL, THAT THE ARMY WOULD NOT EXERCISE THE OPTION IF A SEPARATE CONTRACT COULD BE NEGOTIATED AT A REASONABLE PRICE AND BELL COULD VERIFY DURING THE NEGOTIATION THAT SUPPLYING THE AIRCRAFT AT THE OPTION PRICE WOULD RESULT IN A FINANCIAL LOSS TO BELL. IN SUMMARY, ALTHOUGH (BELL) WAS ALLOWED TO PRESENT (ITS) POSITION IN DETAIL AND VARIOUS POINTS (IT) RAISED WERE DISCUSSED, NO COMMITMENTS OF ANY SORT WERE MADE ON BEHALF OF THE ARMY BY (THE ASSISTANT SECRETARY) OR MYSELF."

UNDER THE CIRCUMSTANCES, WE ARE CONSTRAINED TO ACCEPT THE STATEMENT OF THE FORMER ASSISTANT SECRETARY THAT BELL WAS ADVISED THAT THE EXERCISE OF THE CONTRACT-1699 OPTION WOULD BE POSTPONED UNTIL IT WAS DETERMINED THAT BELL WOULD LOSE MONEY BY SELLING THE AIRCRAFT TO CANADA AT THE OPTION PRICE, AND IF SO, WHETHER THE ARMY COULD NEGOTIATE A FAIR AND REASONABLE PRICE FOR THE HELICOPTERS, HIGHER THAN THE OPTION PRICE. HOWEVER, WE ACCEPT THE POSITION OF BOTH OFFICIALS THAT NO COMMITMENT WAS MADE AT THE CONFERENCE THAT THE ARMY WOULD BUY HELICOPTERS FOR CANADA FROM BELL AT A PRICE HIGHER THAN THE OPTION PRICE.

AT THE TIME OF THE MARCH 5 CONFERENCE, THE ASSISTANT SECRETARY WAS IN RECEIPT OF A MESSAGE FROM AMC, INFORMING HIM THAT IT DID NOT APPEAR POSSIBLE TO OBTAIN A SEPARATE CONTRACT PRICE COMPARABLE TO THE FY 71 OPTION PRICE. ALL INDICATIONS WERE THAT EACH AIRCRAFT PROCURED BY SEPARATE CONTRACT WOULD COST $25,000 TO $30,000 MORE THAN ONE OBTAINED THROUGH USE OF THE OPTION. AMC VIEWED THE PROBABLE PRICE TO BE OBTAINED BY A SEPARATE CONTRACT TO VIOLATE THE OBLIGATION UNDER ASPR 6 705.3 AND THE DD FORM 1513 AGREEMENT WITH CANADA TO PROCURE UNDER THE MOST ADVANTAGEOUS TERMS AVAILABLE. AMC THEREFORE ASKED THE CONCURRENCE OF THE ASSISTANT SECRETARY IN TERMINATING NEGOTIATIONS FOR A SEPARATE CONTRACT; FILLING THE CANADIAN REQUIREMENT BY DIVERSION FROM ARMY PRODUCTION; ESTABLISHING THE PRICE TO CANADA AS THE CURRENT ARMY OH-58A AIRFRAME COST, PLUS ESCALATION COSTS OF REPLACEMENT AIRCRAFT (APPROXIMATELY $69,485); DEFERRING ACTION ON REPLACEMENT; AND REPLACING THE DIVERTED AIRCRAFT ON A COMPETITIVE BASIS WITH THE OH-58A OPTION PRICE AS THE CEILING PRICE. THE RESPONSE TO THIS INQUIRY WAS MADE ON MARCH 18, 1971, BY THE DEPUTY FOR PROCUREMENT, BY DIRECTION OF THE ASSISTANT SECRETARY, AMC WAS DIRECTED TO:

" *** PROCEED WITH NEGOTIATION OF A SEPARATE CONTRACT WITH (BELL) TO FULFILL THE REQUIREMENTS OF PENDING FOREIGN MILITARY SALES CASES. PRIOR TO AWARD, HOWEVER, A BRIEFING WILL BE PROVIDED THIS OFFICE."

PURSUANT TO THESE INSTRUCTION, AVSCOM ISSUED TO BELL RFQ DAAJ01-71-Q 0244(2E) ON MARCH 26, 1971, UNDER COVER OF A LETTER WHICH STATED IN PART:

"2. IN ORDER FOR THE GOVERNMENT TO HAVE SUFFICIENT LEAD TIME TO FURNISH THE REQUIRED GFM FOR THIS RFQ, IT MAY BE NECESSARY TO ADJUST THE DELIVERY SCHEDULE ON CONTRACT DAAJ01-68-C-1699. THE SUPPLEMENTAL AGREEMENT ON CONTRACT DAAJ01-68-C-1699 WOULD BE IN CONJUNCTION WITH THE AWARD OF SUBJECT PROPOSAL AND WOULD POSSIBLY REDUCE THE QUANTITY TO APPROXIMATELY 45 A MONTH, DURING WHICH TIME THE SCHEDULE ON THE SEPARATE CONTRACT COULD BE MET."

HOWEVER, IT IS CLEAR FROM THE RECORD THAT AVSCOM REGARDED THE PRINCIPAL PURPOSE OF RFQ-0244 TO BE THE OBTAINING OF A SEPARATE CONTRACT PRICE WHICH WAS TO BE COMPARED WITH THE CONTRACT-1699 OPTION PRICE. CONSIDERATION WAS GIVEN WITHIN AVSCOM TO PLACING THE STATEMENT PRESCRIBED BY ASPR 1-309 ON THE SOLICITATION:

"THE GOVERNMENT DOES NOT INTEND TO AWARD A CONTRACT ON THE BASIS OF THIS REQUEST FOR QUOTATION, OR OTHERWISE PAY FOR THE INFORMATION SOLICITED."

IN FACT, THE ABOVE-QUOTED STATEMENT DID APPEAR, BUT WAS LINED THROUGH, ON THE STANDARD FORM 18, "REQUEST FOR QUOTATION" (1966 ED.) FURNISHED BELL. THE STATEMENT WAS APPARENTLY DELETED BECAUSE, IF THE PRICE TO BE NEGOTIATED WAS COMPARABLE TO THE OPTION PRICE AND APPROVAL OF HIGHER AUTHORITY WERE OBTAINED, AN AWARD WAS POSSIBLE UNDER THE SOLICITATION. HOWEVER, OTHER TERMS OF THE STANDARD FORM 18 REMAINED, SUCH AS THE LEGEND AT THE TOP THEREOF THAT:

"THIS IS NOT AN ORDER"

AND THE PROVISIONS OF BLOCK 10 THAT:

"THIS IS A REQUEST FOR INFORMATION, AND QUOTATIONS FURNISHED ARE NOT OFFERS. *** THIS REQUEST DOES NOT COMMIT THE GOVERNMENT TO PAY ANY COSTS INCURRED IN THE PREPARATION OR THE SUBMISSION OF THIS QUOTATION, OR TO PROCURE OR CONTRACT FOR SUPPLIES OR SERVICES."

THUS, AS OF THE END OF MARCH 1971, BELL HAD BEFORE IT TWO PROPOSED METHODS OF SATISFYING THE CANADIAN REQUIREMENT: THE MODIFICATION AND DIVERSION OF AIRCRAFT UNDER CONTRACT-1699, AND RFQ-0244 SOLICITING THE PRICE OF CANADIAN-CONFIGURED AIRCRAFT FOR DIRECT DELIVERY TO THAT COUNTRY. NEGOTIATIONS UNDER THE PROPOSED DIVERSION WERE HELD IN APRIL, AND ON APRIL 16, 1971, BELL SUBMITTED A "CONFIRMATION OF NEGOTIATIONS." UNDER THE HEADING "REVISED TERMS AND CONDITIONS," BELL STATED THAT IT WITHDREW:

" *** THE REQUEST FOR THE SPECIAL CONTRACT PROVISION CONTAINED IN PARAGRAPH 3 OF (ITS PROPOSAL OF DECEMBER 18, 1970) BECAUSE OF ITS RECEIPT OF RFQ DAAJ01-71-Q-0244(2E)."

THE "SPECIAL CONTRACT PROVISION" WHICH WAS WITHDRAWN RECITED IN PART: "THE PARTIES AGREE TO NEGOTIATE AN ADDITIONAL PROCUREMENT FOR *** OH 58A HELICOPTERS TO REPLACE HELICOPTERS BEING DIVERTED BY THIS ACTION."

IN CONTRAST TO THE REASON GIVEN BY BELL FOR THE WITHDRAWAL OF THIS CLAUSE, THE ARMY'S MEMORANDUM OF PRICING NEGOTIATIONS INDICATES THAT AT A FACT FINDING CONFERENCE HELD ON MARCH 20, 1971, THE GOVERNMENT NEGOTIATOR SPECIFICALLY ADVISED BELL THAT "THE GOVERNMENT DOES NOT AGREE TO OR CONCUR IN THE INCLUSION OF CLAUSE UNDER PARAGRAPH 3 OF YOUR PROPOSAL," AND THAT THE PROPOSED CLAUSE WAS EXCLUDED FROM THE NEGOTIATIONS. THE FINAL PRICE NEGOTIATED FOR THE MODIFICATION AND DIVERSION OF 74 AIRCRAFT FOR CANADA WAS $775.00 PER SHIP FOR RECURRING LABOR AND MATERIALS FOR CONFIGURATION CHANGES, AND A LUMP SUM OF $22,490 FOR NONRECURRING ENGINEERING LABOR AND MATERIALS. APPARENTLY DURING THE LATTER HALF OF APRIL, THE PROPOSED DIVERSION MODIFICATION TO CONTRACT-1699 WAS SENT TO BELL FOR ITS SIGNATURE.

ON APRIL 23, 1971, BELL SUBMITTED ITS PROPOSAL UNDER RFQ-0244. CONSONANT WITH THE ADVICE GIVEN TO BELL BY AVSCOM ON FEBRUARY 10, 1971, THE RFQ CALLED OUT CANADIAN - CONFIGURED AIRCRAFT TO BE DIRECTLY DELIVERED TO THAT COUNTRY BEGINNING NOVEMBER 1971. HOWEVER, BELL'S PROPOSAL SIGNIFICANTLY DIFFERED FROM THE RFQ IN THAT IT DESCRIBED UNITED STATES - CONFIGURED AIRCRAFT TO BE DELIVERED TO IT IN 1973 AFTER COMPLETION OF THE 2200 AIRCRAFT CONTEMPLATED BY CONTRACT-1699. BELL OFFERED THE FOLLOWING EXPLANATION FOR THIS CHANGE IN ITS PROPOSAL:

"THE CONFIGURATION CHANGES FOR THE DIVERSION OF SEVENTY-FOUR (74) OH 58A HELICOPTERS FOR CANADA *** WERE NEGOTIATED AGAINST CONTRACT DAAJ01 68-C- 1699. IN ORDER TO MEET DESIRED CANADIAN *** DELIVERY SCHEDULES THE ONLY RECOURSE AVAILABLE IS TO CONTRACTUALLY AUTHORIZE THE NEGOTIATED DIVERSION EFFORT AGAINST CONTRACT-1699 AND TO 'PAY BACK' THESE HELICOPTERS TO THE U.S. ARMY THROUGH THE PROCUREMENT CONTEMPLATED BY THE RFQ. THIS PROPOSAL IS BASED UPON THAT PREMISE, AND CORRESPONDING CHANGES ARE BEING PROPOSED IN THE WORK STATEMENTS AND DELIVERY SCHEDULES. *** ."

THE SIGNIFICANCE OF THIS LANGUAGE WAS RECOGNIZED BY AVSCOM, WHICH REALIZED BELL'S PROPOSAL UNDER RFQ-0244 WAS FOR THE REPLACEMENT OF AIRCRAFT LOST TO THE ARMY AS THE RESULT OF THE ANTICIPATED DIVERSION UNDER CONTRACT-1699. OF COURSE, HUGHES HAD NOT BEEN PERMITTED TO COMPETE UNDER RFQ-0244 ON THE BASIS THAT THE RFQ WAS FOR CANADIAN CONFIGURED OH-58AS FOR DIRECT SALE TO THAT COUNTRY. THIS WAS NOT THE SITUATION PRESENTED BY BELL'S APRIL 23 PROPOSAL. WE HAVE CAREFULLY EXAMINED THE ARMY'S ADMINISTRATIVE REPORTS AND SUPPORTING DOCUMENTS, AND FIND NO INDICATION THEREIN THAT BELL WAS ADVISED DURING THE NEGOTIATIONS UNDER RFQ-0244 THAT THE ABOVE-QUOTED AND - UNDERSCORED PREMISE WAS IN ERROR. IN FACT, IT APPEARS THAT THE ARMY CONDUCTED NEGOTIATIONS ON THE BASIS THAT RFQ-0244 REPRESENTED REPLACEMENT AIRCRAFT FOR THOSE TO BE DIVERTED TO CANADA UNDER THE MODIFICATION TO CONTRACT-1699. WE OBSERVE IN THIS REGARD THAT AMENDMENT 0001 TO RFQ 0244, DATED JULY 1, 1971, CHANGED THE SPECIFICATIONS TO REFLECT U.S. ARMY, NOT CANADIAN, AIRCRAFT AND CHANGED THE DELIVERY SCHEDULE SO AS TO COMMENCE DELIVERIES IN JULY 1973 INSTEAD OF NOVEMBER 1971 (THE DATE DESIRED BY THE CANADIANS).

THE CONTRACTING OFFICER OPENED THE NEGOTIATIONS WITH BELL WITH THE FOLLOWING STATEMENT:

"I HAVE BEEN INSTRUCTED BY THE U.S. ARMY MATERIEL COMMAND TO NEGOTIATE A FIRM FIXED PRICE FOR THIS PROPOSED PROCUREMENT OF 74 EACH OH-58A KIOWA HELICOPTERS AND OPTION QUANTITY OF 33 EACH. I AM NOT AUTHORIZED TO SIGN A CONTRACT FOR THE PROCUREMENT OF THESE HELICOPTERS UNTIL THE RESULTS OF THIS NEGOTIATION ARE FORWARDED TO THE U.S. ARMY MATERIEL COMMAND AND THEIR SUBSEQUENT APPROVAL IS OBTAINED."

THE ADMINISTRATIVE REPORT MAINTAINING THAT THIS STATEMENT CONSTITUTED CLEAR NOTICE TO BELL THAT RFQ-0244 WAS ISSUED SOLELY TO OBTAIN A PRICE FOR TRANSMITTAL TO HIGHER HEADQUARTERS (PRESUMABLY FOR COMPARISON WITH THE OPTION PRICE) AND "THAT NO AUTHORITY EXISTED TO AWARD A CONTRACT." AGREE THAT THIS STATEMENT ADVISED BELL THAT THE CONTRACTING OFFICER LACKED AUTHORITY TO AWARD A CONTRACT WITHOUT THE APPROVAL OF AMC. HOWEVER, WE DO NOT BELIEVE THAT BELL COULD BE CHARGED WITH NOTICE, ON THE BASIS OF THIS STATEMENT, THAT RFQ-0244 WAS ISSUED "SOLELY TO OBTAIN A PRICE" IN THE SENSE THAT IT WAS SOLELY FOR INFORMATIONAL OR PLANNING PURPOSES. IN FACT, IT IS OUR UNDERSTANDING THAT THE NOTICE PRESCRIBED BY ASPR 1-309, RELATING TO SOLICITATIONS FOR INFORMATIONAL OR PLANNING PURPOSES, WAS DELETED FROM THE SOLICITATION IN RECOGNITION OF THE FACT THAT AN AWARD WAS POSSIBLE UNDER RFQ-0244 IF THE REQUISITE APPROVAL WAS OBTAINED.

NEGOTIATIONS UNDER RFQ-0244 WERE BEGUN IN JUNE 1971. IN LATE JUNE, WHEN BELL'S QUOTATIONS GREATLY EXCEEDED THE PRICE OBTAINABLE UNDER THE CONTRACT -1699 OPTION, AVSCOM REQUESTED AUTHORITY FROM AMC TO TERMINATE THE NEGOTIATIONS AND TO EXERCISE THE OPTION. BELL BECAME AWARE THAT AVSCOM HAD TAKEN A POSITION FAVORING EXERCISE OF THE OPTION AND VOICED ITS OBJECTIONS TO USE OF THE OPTION FOR FMS CASES. AMC SUBSEQUENTLY DENIED AVSCOM'S REQUEST. NEGOTIATIONS CONTINUED IN JULY AND ON AUGUST 20, 1971, AVSCOM AND BELL AGREED UPON A FINAL PRICE OF $88,750 PER AIRCRAFT (INCLUDING FOREIGN SALES AND NON-RECURRING EXPENSES).

ON AUGUST 3, 1971, WHILE NEGOTIATIONS WERE STILL IN PROGRESS UNDER RFQ- 0244, BELL EXECUTED AND RETURNED THE DIVERSION MODIFICATION TO CONTRACT- 1699. WHEN THE MODIFICATION HAD NOT BEEN SIGNED BY THE CONTRACTING OFFICER AS OF AUGUST 17, 1971, BELL WITHDREW ITS SIGNATURE, EXPRESSING DISSATISFACTION WITH DELAYS IN THE EXECUTION AND IMPLEMENTATION OF THE "CANADIAN DIVERSION/MODIFICATION PROGRAM." WE OBSERVE THAT THE MESSAGE WITHDRAWING BELL'S SIGNATURE MAKES NO REFERENCE TO RFQ-0244. WHEN THE PARTIES REACHED AGREEMENT ON PRICE UNDER RFQ-0244 ON AUGUST 20, BELL SENT THE FOLLOWING CONFIRMATORY MESSAGE:

"IN RESPONSE TO RFQ DAAJ01-71-Q-0244, THE FOLLOWING HAS BEEN AGREED:

"A. AIRCRAFT UNIT PRICE (ITEMS 1 AND 1AA): $88,750 EACH INCLUDING FOREIGN SALES EXPENSE, ONE-TIME COSTS AND DATA.

"F. THE ABOVE IS PREDICATED UPON RECEIPT OF A CONTRACT IMPLEMENTING THIS PROCUREMENT ON OR BEFORE 1 JANUARY 1972.

"3. (SUPPLEMENTAL AGREEMENT) P00123 TO CONTRACT DAAJ01-68-C-1699 HAS BEEN EXECUTED BY (BELL). THE (BELL) SIGNATURE MAY BE CONSIDERED VALID PROVIDED (CERTAIN TECHNICAL CHANGES ARE MADE TO THAT MODIFICATION)."

THE AVSCOM CONTRACTING OFFICER SIGNED THE DIVERSION MODIFICATION TO CONTRACT-1699 THE SAME DAY. BELL ASSERTS THAT AT THIS POINT, IT "UNDERSTOOD THAT THE TOTAL PROCUREMENT PLAN HAD BEEN RESOLVED, AND THAT THE REPLACEMENT CONTRACT WOULD BE FORTHCOMING SHORTLY."

HOWEVER, THE "TOTAL PROCUREMENT PLAN" HAD NOT BEEN RESOLVED INSOFAR AS THE ARMY WAS CONCERNED. IN SEPTEMBER 1971, AVSCOM RECOMMENDED TO AMC THAT THE REPLENISHMENT OF ARMY AIRCRAFT NOT BE ACCOMPLISHED BY SEPARATE CONTRACT, AND AMC RECOMMENDED THAT REPLENISHMENT BE ACCOMPLISHED BY EXECUTION OF THE CONTRACT-1699 OPTION, A COURSE OF ACTION WHICH INHERENTLY REQUIRED A PRIOR "TESTING OF THE MARKET" IN A COMPETITIVE PROCUREMENT. OCTOBER 7, 1971, THE DEPUTY FOR PROCUREMENT, OASA (I&L) CONCURRED WITH THE RECOMMENDATION.

IN MID-OCTOBER BELL LEARNED THAT THE ARMY AGAIN WAS CONSIDERING EXERCISE OF ITS OPTION, AND APPARENTLY IN THE REALIZATION THAT IT WOULD NOT RECEIVE A CONTRACT UNDER RFQ-0244, ORALLY PROPOSED THE NEGOTIATION OF A SEPARATE CONTRACT FOR DELIVERY OF 74 OH-58AS TO CANADA STARTING IN NOVEMBER, WITH A CORRESPONDING EXTENSION OF THE ARMY DELIVERY SCHEDULE. THIS, OF COURSE, WAS ESSENTIALLY WHAT HAD BEEN CONTEMPLATED BY RFQ-0244 UNTIL BELL SUBMITTED ITS PROPOSAL OF APRIL 23, 1971, BASED UPON SUPPLYING REPLACEMENT ARMY AIRCRAFT. ADDITIONALLY, HUGHES LEARNED OF THE ARMY'S INCLINATIONS AND ON NOVEMBER 2, 1971, IT ASKED TO BE PERMITTED TO BID ON ANY SOLICITATION DESIGNED TO "TEST THE MARKET" PRIOR TO THE POSSIBLE EXERCISE OF BELL'S OPTION.

BELL'S SUGGESTION THAT A SEPARATE CONTRACT BE NEGOTIATED WAS NOT ACCEPTED, AND ON NOVEMBER 15, 1971, IFB DAAJ01-72-B-0235(P2E) WAS ISSUED TO BELL AND HUGHES, WHO WERE INFORMED THEREIN:

"THIS SOLICITATION IS ISSUED PURSUANT TO ASPR 1-1505 FOR THE PURPOSE OF TESTING THE MARKET. THE GOVERNMENT HAS AN OPTION IN CONTRACT DAAJ01 68-C- 1699 TO PURCHASE THE SUPPLIES SPECIFIED IN THIS SOLICITATION AT A PRICE OF $67,096.13 PER UNIT. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPH 10 OF THE SOLICITATION INSTRUCTIONS AND CONDITIONS AND NOTICES TO OFFERORS (SF 33A), AWARD UNDER THIS SOLICITATION MAY BE MADE IF THE PRICE SUBMITTED IS BELOW THE OPTION PRICE SPECIFIED ABOVE."

HUGHES SUBMITTED THE SOLE BID UNDER IFB-0235, WITH A UNIT PRICE OF $63,900 FOR ITS OH-6A AIRFRAME. TO THIS AMOUNT THE ARMY HAS ADDED AN EVALUATION FACTOR OF $580.00 PER UNIT, TO REFLECT CERTAIN GOVERNMENT FURNISHED EQUIPMENT PROVIDED HUGHES, RESULTING IN AN EVALUATED UNIT PRICE OF $64,480. SINCE THIS PRICE IS LESS THAN THE CONTRACT-1699 OPTION PRICE OF $67,096.13, THE ARMY PROPOSES TO MAKE AWARD TO HUGHES UNDER IFB-0235. THE ARMY PROPOSES TO CHARGE CANADA FOR THE OH-58AS WHICH HAVE BEEN AND ARE TO BE DELIVERED TO IT, THE CONTRACT-1699 OPTION PRICE PAID BY THE ARMY PLUS THE MODIFICATION P00123 EXPENSES INCLUDING FOREIGN SALES EXPENSE. WHILE THE FOREIGN SALES EXPENSE IS YET TO BE NEGOTIATED BETWEEN BELL AND THE ARMY, AND THUS THE PRECISE PRICE TO CANADA HAS NOT BEEN ESTABLISHED, IN ANY EVENT THAT PRICE WILL EXCEED THE HUGHES PRICE UNDER IFB-0235.

DISCUSSION

INTRODUCTION

FROM THE FOREGOING IT IS APPARENT THAT BELL WAS AWARDED CONTRACT-1699 IN 1968 TO SUPPLY THE ARMY A BASIC QUANTITY OF 2,200 HELICOPTERS, AS THE RESULT OF SUBMITTING A COMPETITIVE PRICE WHICH BELL ALLEGES IS NOW LESS THAN ITS COST OF PRODUCING THE AIRCRAFT. WHILE THE ARMY MAY HAVE CONTEMPLATED THAT THE OPTIONS IN BELL'S CONTRACT WOULD BE AVAILABLE TO SATISFY ITS FOREIGN MILITARY SALES COMMITMENTS, THE RECORD SHOWS THAT BELL WAS UNAWARE OF THIS INTENTION UNTIL FEBRUARY 1971, ALMOST THREE YEARS AFTER AWARD OF THE CONTRACT. THEREFORE, WHEN BELL APPROACHED THE CANADIAN GOVERNMENT IN AN EFFORT TO SELL IT LOHS, AND WHEN IT SUPPLIED QUOTATIONS TO AVSCOM FOR CANADA IN 1969 AND 1970, BELL COULD REASONABLY ASSUME THAT A PURCHASE BY CANADA WOULD BE IN ADDITION TO THE 2,200 AIRCRAFT IT HAD CONTRACTED TO SELL TO THE ARMY, AND THAT ANY SALE TO CANADA WOULD BE MADE AT ITS THEN CURRENT MARKET PRICE, WHICH EXCEEDED THE CONTRACT-1699 PRICE.

HOWEVER, IF AN AWARD IS MADE TO HUGHES UNDER IFB-0235, THE ARMY WILL RECEIVE NO MORE HELICOPTERS FROM BOTH BELL AND HUGHES THAN IT HAD CONTRACTED TO RECEIVE FROM BELL UNDER CONTRACT-1699. SINCE HUGHES COMPETED IN 1968 FOR THAT QUANTITY BUT DID NOT SUBMIT THE LOW BID, HUGHES IS NOW BEING GIVEN ANOTHER OPPORTUNITY TO COMPETE FOR A PORTION OF THE AIRCRAFT UPON WHICH IT HAD UNSUCCESSFULLY BID IN 1968. ON THE OTHER HAND BELL, WHICH COULD REASONABLY HAVE EXPECTED TO SELL A BASIC QUANTITY OF 2,200 AIRCRAFT TO THE ARMY AT ITS CONTRACT-1699 PRICE AND 74 TO CANADA AT ITS MARKET PRICE, IS IN THE POSITION OF PROVIDING 2,126 OH-58AS UNDER CONTRACT-1699, AND 74 TO CANADA AT THE CONTRACT-1699 PRICE (PLUS AMOUNTS FOR CONFIGURATION CHANGES AND FOREIGN SALES EXPENSE.) THE RECORD SHOWS THAT AT THE SAME TIME BELL WAS QUOTING A CURRENT MARKET PRICE FOR ITS AIRCRAFT TO CANADA, BOTH DIRECTLY AND THROUGH THE ARMY, THE ARMY WAS OFFERING TO SUPPLY THE SAME AIRCRAFT TO CANADA THROUGH EXERCISE OF THE CONTRACT-1699 OPTION AT THE OPTION PRICE. IRRESPECTIVE OF WHETHER THE AIRCRAFT DIVERTED UNDER BELL'S CONTRACT ARE SOLD DIRECTLY TO CANADA AT BELL'S OPTION PRICE, OR REPLACEMENT AIRCRAFT ARE OBTAINED BY ARMY UNDER THE OPTION, THE RESULT WILL BE THAT BELL AIRCRAFT WILL HAVE BEEN SOLD TO CANADA AT THE ARMY CONTRACT PRICE, RATHER THAN AT BELL'S MARKET PRICE.

PROPRIETY OF EXERCISE OF THE OPTION IN VIEW OF SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968

IN ITS PROTEST BELL CONTENDS THAT IT HAS THEREFORE HAD A CHANGE IN POSITION, TO ITS DETRIMENT, IN THE SALE OF ITS PRODUCT - A CHANGE ATTRIBUTABLE TO COMPETITION FROM THE ARMY. THIS COMPETITION, BELL ASSERTS, IS VIOLATIVE OF SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968, 22 U.S.C. 2762 (1970) WHICH PROVIDES IN PERTINENT PART:

"NO SALES OF UNCLASSIFIED DEFENSE ARTICLES SHALL BE MADE TO THE GOVERNMENT OF ANY ECONOMICALLY DEVELOPED NATION UNDER THE PROVISIONS OF THIS SECTION UNLESS SUCH ARTICLES ARE NOT GENERALLY AVAILABLE FOR PURCHASE BY SUCH NATIONS FROM COMMERCIAL SOURCES IN THE UNITED STATES: PROVIDED, HOWEVER, THAT THE PRESIDENT MAY WAIVE THE PROVISIONS OF THIS SENTENCE WHEN HE DETERMINES THAT THE WAIVER OF SUCH PROVISIONS IS IN THE NATIONAL INTEREST."

A VIRTUALLY IDENTICAL PROVISION WAS CONTAINED IN SECTION 507(B) OF THE FOREIGN ASSISTANCE ACT OF 1961, PUB. L. NO. 87-195, SEC 507(B), 75 STAT. 437, WHICH WAS REDESIGNATED AS SECTION 523 OF THE FOREIGN ASSISTANCE ACT OF 1967, PUB. L. NO. 90-137, SEC 201(G)(1), 81 STAT. 456. THE PRINCIPAL DIFFERENCE BETWEEN THE 1961 AND 1968 ACTS IS THAT IN THE FORMER THE SECRETARY OF DEFENSE RATHER THAN THE PRESIDENT WAS AUTHORIZED TO WAIVE THE PROHIBITION. HOWEVER, BY EXECUTIVE ORDER NO. 11501, 34 F.R. 20169 (DECEMBER 22, 1969), THE PRESIDENT DELEGATED THE FUNCTIONS CONFERRED UPON HIM BY SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968 TO THE SECRETARY OF DEFENSE. ADDITIONALLY, SECTION 46 OF THE FOREIGN MILITARY SALES ACT OF 1968 IS A SAVING PROVISION WHICH CONTINUES IN FULL FORCE AND EFFECT ALL DETERMINATIONS, AUTHORIZATIONS, AND REGULATIONS ISSUED UNDER AUTHORITY OF ANY PROVISION OF LAW REPEALED BY THE ACT, SUCH AS SECTION 523 OF THE FOREIGN ASSISTANCE ACT OF 1967.

IT IS NOT DISPUTED THAT THE OH-58A IS A COMMERCIALLY-AVAILABLE UNCLASSIFIED DEFENSE ARTICLE, OR THAT SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968 IS APPLICABLE TO THE CANADIAN FOREIGN MILITARY SALES CASE. THE POSITION OF YOUR DEPARTMENT IS THAT PURSUANT TO THE PROVISO CONTAINED IN SECTION 22, ITS PROVISIONS HAVE BEEN WAIVED. HOWEVER BELL CONTENDS THAT A VALID WAIVER OF THE STATUTORY PROHIBITION COULD ONLY OCCUR IF THE APPROPRIATE OFFICIAL WERE AWARE THAT:

" *** BELL WAS READY, WILLING AND ABLE TO FURNISH THE SEVENTY-FOUR HELICOPTERS TO CANADA, AFTER HAVING WON A COMPETITION WITH OTHER HELICOPTER MANUFACTURERS; THAT BELL HAD QUOTED TO CANADA A PRICE OF $87,500 THAT CANADA SUBSEQUENTLY EXPRESSED WILLINGNESS TO PAY IN ITS AGREEMENT OF MAY 26, 1970, WITH THE ARMY *** THAT BELL WOULD SUSTAIN A SUBSTANTIAL LOSS IF, THROUGH EXERCISE BY THE ARMY OF THE CONTRACT 1699 OPTION, BELL WERE, IN EFFECT, COMPELLED TO SELL SEVENTY-FOUR HELICOPTERS TO CANADA AT THE CONTRACT-1699 OPTION PRICE, AND THAT THERE WAS NO APPARENT NATIONAL INTEREST REQUIRING THAT THE SEVENTY-FOUR HELICOPTERS BE FURNISHED TO CANADA BY THE ARMY RATHER THAN BELL. IT MUST APPEAR THAT THE SECRETARY TOOK INTO ACCOUNT ALL PERTINENT FACTORS AND THAT THE DETERMINATION TO ISSUE THE WAIVER HAD A RATIONAL BASIS AND WAS NOT SIMPLY AN ARBITRARY OR PERFUNCTORY ACT WITH RESPECT TO THE PROCUREMENT INVOLVED."

OUR OFFICE CONSIDERED A SIMILAR ARGUMENT IN OUR DECISION B-160870, JULY 27, 1967, IN WHICH WE AFFIRMED UPON RECONSIDERATION A DECISION OF APRIL 27, 1967, WHICH HELD THAT THE STATUTORY PROHIBITION HAD BEEN EFFECTIVELY WAIVED. WE OBSERVED IN OUR JULY 27 DECISION THAT ON SEPTEMBER 8, 1962, THE SECRETARY OF DEFENSE ISSUED A MEMORANDUM TO THE SECRETARIES OF THE ARMY, NAVY AND AIR FORCE, THE DIRECTOR, DEFENSE SUPPLY AGENCY, AND THE ASSISTANT SECRETARIES OF DEFENSE FOR INTERNATIONAL SECURITY AFFAIRS AND INSTALLATIONS AND LOGISTICS. THE MEMORANDUM STATES IN PART:

"2.B. PURSUANT TO THE AUTHORITY VESTED IN ME BY SECTION 507(B) OF THE (FOREIGN ASSISTANCE ACT OF 1961), I HEREBY DETERMINE IT TO BE IN THE NATIONAL INTEREST THAT THE FOREGOING PROHIBITION NOT APPLY TO:

"(1) SALES MADE PURSUANT TO SPECIAL INTERNATIONAL AGREEMENTS,

"C. THE AUTHORITY VESTED IN ME BY SECTION 507(B) OF THE ACT TO WAIVE THE FOREGOING PROHIBITION IS HEREBY DELEGATED TO THE ASSISTANT SECRETARY OF DEFENSE (INTERNATIONAL SECURITY AFFAIRS)."

OUR 1967 DECISIONS CONCERNED A FOREIGN MILITARY SALE TO THE FEDERAL REPUBLIC OF GERMANY. AT THE TIME OF THE SALE THERE WERE IN EXISTENCE SPECIAL AGREEMENTS WITH THAT COUNTRY BY WHICH THE UNITED STATES, AT THE REQUEST OF THE GERMAN GOVERNMENT, WAS OBLIGATED TO SELL CERTAIN SUPPLIES AND SERVICES. IN VIEW OF THE EXISTENCE OF THESE SPECIAL INTERNATIONAL AGREEMENTS, WE STATED THAT THE MEMORANDUM OF SEPTEMBER 8, 1962, OPERATED TO WAIVE THE STATUTORY PROHIBITION. WE FURTHER STATED THAT "THE STATUTE DOES NOT REQUIRE THE EXERCISE OF THE WAIVER ON A CASE BY-CASE BASIS *** ." IN SHORT, BY VIRTUE OF THE AGREEMENTS BETWEEN THE UNITED STATES AND THE FEDERAL REPUBLIC OF GERMANY, WHENEVER THE GERMAN GOVERNMENT REQUESTED CERTAIN ARTICLES OR SERVICES, IT WAS "IN THE NATIONAL INTEREST" THAT THE SALE BE MADE BY THE UNITED STATES.

IN THE INSTANT CASE, IT IS NOT ARGUED THAT COMPARABLE INTERNATIONAL AGREEMENTS EXIST BETWEEN CANADA AND THE UNITED STATES. RATHER, THE WAIVER IS SAID TO HAVE OCCURRED PURSUANT TO A SERIES OF DELEGATIONS OF AUTHORITY UNDER THE SEPTEMBER 8, 1962, MEMORANDUM OF THE SECRETARY OF DEFENSE.

THUS, ON MARCH 18, 1966, THE ASSISTANT SECRETARY OF DEFENSE (INTERNATIONAL SECURITY AFFAIRS) SIGNED STAFF MEMORANDUM NUMBER 4, PARAGRAPH 4 OF WHICH PROVIDES:

"UNDER MY GENERAL DIRECTION AND THAT OF THE PRINCIPAL DEPUTY, THE DEPUTY FOR INTERNATIONAL LOGISTICS NEGOTIATIONS (ILN) SUPERVISES, ADMINISTERS, AND DIRECTS THE FOREIGN MILITARY SALES PROGRAMS IN ACCORDANCE WITH DOD DIRECTIVE 5100.27."

BY MEMORANDUM OF SEPTEMBER 22, 1967, THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (INTERNATIONAL SECURITY AFFAIRS/INTERNATIONAL LOGISTICS NEGOTIATIONS) ADVISED THE ASSISTANT SECRETARIES FOR INSTALLATIONS AND LOGISTICS OF THE ARMY, NAVY AND AIR FORCE AND THE DIRECTOR, DEFENSE SUPPLY AGENCY THAT THE MEMORANDUM DATED SEPTEMBER 8, 1962, OF THE SECRETARY OF DEFENSE WOULD BE IMPLEMENTED AS FOLLOWS:

"ANY FOREIGN MILITARY SALES ARRANGEMENT SIGNED OR APPROVED BY THE SECRETARY OF DEFENSE, DEPUTY SECRETARY OF DEFENSE, ASSISTANT SECRETARY OF DEFENSE (ISA), OR THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (ISA/ILN), AND WHICH ENTAILS THE SALE OF ITEMS WHICH MIGHT GENERALLY BE AVAILABLE TO THE PURCHASER FROM COMMERCIAL SOURCES IN THE U.S; CONSTITUTES A WAIVER OF THE PROHIBITION IN ACCORDANCE WITH PARAGRAPH 2.B.(1) OF THE (1962) MEMORANDUM."

IN 1969, THE TITLE OF THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (INTERNATIONAL SECURITY AFFAIRS/INTERNATIONAL LOGISTICS NEGOTIATIONS) WAS CHANGED TO "(INTERNATIONAL SECURITY AFFAIRS/MILITARY ASSISTANCE AND SALES)."

IN JULY OF 1970, THE GOVERNMENT OF CANADA WAS SERIOUSLY CONCERNED ABOUT THE POSSIBILITY THAT THE AIRCRAFT FOR WHICH IT HAD CONTRACTED WOULD BE DELIVERED LATE AND AT A SUBSTANTIALLY HIGHER PRICE THAN THAT AVAILABLE UNDER THE CONTRACT-1699 OPTION, WHICH IS EXPECTED TO BE EXERCISED FOR ITS BENEFIT. THEREFORE, ON JULY 29, 1970, THE CANADIAN ASSISTANT DEPUTY MINISTER OF SUPPLY WROTE THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (MILITARY ASSISTANCE AND SALES), REQUESTING ASSURANCE THAT:

" *** DELIVERIES WILL COMMENCE IN OCTOBER 1971 AT A RATE OF FIVE HELICOPTERS PER MONTH AT A PRICE NO LESS FAVORABLE THAN WOULD HAVE BEEN OBTAINED HAD THE FISCAL 1970 OPTION BEEN EXERCISED."

THE RESPONSE TO THIS REQUEST WAS MADE ON AUGUST 21, 1970, BY THE DEPUTY ASSISTANT SECRETARY, IN A LETTER QUOTED IN PART ON PAGES 4 AND 5 OF THIS DECISION. IT IS THE ARMY'S POSITION THAT THIS LETTER EMBODIES THE SIGNATURE OR APPROVAL OF THE "FOREIGN MILITARY SALES ARRANGEMENT" WITH CANADA, PURSUANT TO THE DEPUTY ASSISTANT SECRETARY'S MEMORANDUM OF SEPTEMBER 22, 1967, AND THUS CONSTITUTES A WAIVER OF THE PROHIBITION OF SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968.

THE PURPOSE OF THE STATUTORY PROHIBITION IS TO:

" *** PROMOTE THE USE, BY THE GOVERNMENTS OF THE ECONOMICALLY DEVELOPED NATIONS, OF PRIVATE CHANNELS OF TRADE IN PURCHASING UNCLASSIFIED DEFENSE ARTICLES FROM THE UNITED STATES. *** THE COMMITTEE IS OF THE OPINION THAT, WHENEVER THIS CAN BE DONE WITHOUT IMPAIRING OUR NATIONAL AND COLLECTIVE SECURITY ARRANGEMENTS, THE GOVERNMENTS OF SUCH NATIONS OUGHT TO USE PRIVATE CHANNELS OF TRADE IN PURCHASING UNCLASSIFIED DEFENSE ARTICLES WHICH ARE GENERALLY AVAILABLE FOR PURCHASE FROM COMMERCIAL SOURCES IN THE UNITED STATES." H.R. REP. NO. 1788, 87TH CONG; 2D SESS. 28 (1962).

IT WOULD THEREFORE SEEM THAT, ABSENT A SPECIAL INTERNATIONAL AGREEMENT UNDER WHICH THERE IS A SERIES OF TRANSACTIONS, A WAIVER OF THE STATUTORY PROHIBITION NORMALLY SHOULD OCCUR WHEN THE FOREIGN GOVERNMENT INITIALLY SEEKS TO PURCHASE AN ITEM THROUGH GOVERNMENTAL RATHER THAN PRIVATE CHANNELS. IN THE INSTANT CASE, THIS WOULD HAVE BEEN IN MAY 1969, WHEN CANADA FIRST REQUESTED THE UNITED STATES TO OBTAIN PRICE AND AVAILABILITY OF OH-58A AIRCRAFT. HOWEVER, THE LETTER WHICH IS PUT FORTH AS THE WAIVER WAS NOT WRITTEN UNTIL AUGUST 1970, AFTER THE UNITED STATES HAD BECOME INVOLVED IN THE SALE TO CANADA TO THE EXTENT THAT CANADA HAD BEEN OFFERED THE FY 69 OPTION UNDER BELL'S ARMY CONTRACT AND WOULD HAVE BEEN OFFERED THE FY 70 OPTION HAD NOT THE PROTEST OF ANOTHER MANUFACTURER INFLUENCED THE ARMY'S DECISION. FURTHER, THERE IS NO INDICATION IN THE LETTER OF AUGUST 21, 1970, THAT IT WAS WRITTEN IN REFERENCE TO SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968. INSTEAD, IT APPEARS THAT THE LETTER WAS INTENDED TO ALLAY CANADA'S APPREHENSIONS REGARDING PRICE AND DELIVERY OF THE AIRCRAFT, AND APPARENTLY WOULD NEVER HAVE BEEN WRITTEN HAD NOT CANADA VOICED THESE APPREHENSIONS TO THE UNITED STATES. WHILE WE DO NOT QUESTION DETERMINATIONS BY OFFICIALS OF THE DEPARTMENT OF DEFENSE THAT A WAIVER OF THE STATUTORY PROHIBITION IS IN THE "NATIONAL INTEREST," B- 160870, JULY 27, 1967, UNDER THE CIRCUMSTANCES OF THE INSTANT CASE WE ARE UNABLE TO ASCRIBE TO THE LETTER OF AUGUST 21, 1970, THE SIGNIFICANCE OF A "WAIVER."

FURTHERMORE, EVEN IF THE LETTER OF AUGUST 21, 1970, CONSTITUTED THE APPROVAL OF THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (MILITARY ASSISTANCE AND SALES) OF A "FOREIGN MILITARY SALES ARRANGEMENT," THAT "ARRANGEMENT" DIFFERS SUBSTANTIALLY FROM WHAT IN FACT HAS OCCURRED. THE DEPUTY ASSISTANT SECRETARY ADVISED CANADA THAT ITS DELIVERY SCHEDULE WOULD BE MET THROUGH DIVERSION FROM ARMY PRODUCTION. HOWEVER, IT WAS RECOMMENDED THAT THE PRICE FOR CANADA BE OBTAINED "THROUGH PROCUREMENT NEGOTIATIONS *** ON A SEPARATE CONTRACT BASIS WITH THE OBJECTIVE OF OBTAINING THE LOWEST PRICE EQUITABLE TO YOUR GOVERNMENT AND TO (BELL)." CANADA EXPLICITLY WAS NOT GIVEN THE ASSURANCE WHICH IT SOUGHT THAT THE PRICE TO IT WOULD BE NO LESS FAVORABLE THAN COULD BE OBTAINED UNDER THE CONTRACT-1699 OPTION. THUS, THE "ARRANGEMENT" WHICH WAS APPROVED AND RECOMMENDED TO CANADA WAS TO SUPPLY ITS NEEDS BY DIVERSION FROM CONTRACT-1699, AND TO ESTABLISH THE CANADIAN PRICE BY A SEPARATE CONTRACT NEGOTIATED WITH BELL. YOUR DEPARTMENT NOW PROPOSES TO ACQUIRE THE REPLACEMENT AIRCRAFT FROM HUGHES AND TO CHARGE CANADA FOR THE OH-58AS THE CONTRACT-1699 PRICE PLUS AMOUNTS FOR THE CANADIAN CONFIGURATION CHANGES AND FOREIGN SALES EXPENSE.

SINCE WE DO NOT AGREE THAT THE LETTER OF AUGUST 21, 1971, CONSTITUTED A WAIVER OF THE STATUTORY PROHIBITION, AND SINCE THE FOREIGN MILITARY SALES "ARRANGEMENT" NOW PROPOSED IS NOT THAT RECOMMENDED BY THAT LETTER, WE ARE OF THE OPINION THAT NO EFFECTIVE WAIVER HAS BEEN MADE OF THE PROVISIONS OF SECTION 22 OF THE FOREIGN MILITARY SALES ACT OF 1968. IT FOLLOWS THAT UNDER THAT STATUTE THE UNITED STATES CANNOT PROCURE, THROUGH CONTRACT- 1699, AIRCRAFT FOR DIRECT SALE TO CANADA.

THE STATUTORY PROHIBITION DOES NOT APPLY TO SALES FROM STOCKS OF THE DEPARTMENT OF DEFENSE. 22 U.S.C. 2761. HOWEVER, IT IS NOT CONTENDED THAT THE INSTANT CASE INVOLVES A SALE FROM STOCK, AS OPPOSED TO A CONTRACT "FOR THE PROCUREMENT OF DEFENSE ARTICLES*** FOR SALE FOR UNITED STATES DOLLARS *** " TO WHICH THE PROHIBITION IS APPLICABLE. 22 U.S.C. 2762. THIS UNDERSTANDING IS REFLECTED IN THE DD FORM 1513 (OFFER AND ACCEPTANCE) WHICH COMPRISES THE CONTRACT BETWEEN THE UNITED STATES AND CANADA FOR THE SALE OF THE HELICOPTERS. THEREIN, THE SOURCE OF SUPPLY IS GIVEN AS "P" (PROCUREMENT) RATHER THAN "A" (SERVICEABLE STOCKS).

VALIDITY OF A UNILATERAL EXERCISE OF THE OPTION ON BEHALF OF CANADA

APART FROM THE PROVISIONS OF THE FOREIGN MILITARY SALES ACT OF 1968, WE HAVE SERIOUS RESERVATIONS CONCERNING THE PROPRIETY OF THE UNILATERAL EXERCISE OF AN OPTION FOR THE BENEFIT OF A FOREIGN GOVERNMENT IF THE CONTRACT IS SILENT CONCERNING SUCH EXERCISE. ASPR 1-1505(C) PROVIDES: "OPTIONS SHOULD BE EXERCISED ONLY IF IT IS DETERMINED THAT:

"(II) THE REQUIREMENT COVERED BY THE OPTION FULFILLS AN EXISTING NEED OF THE GOVERNMENT, AND

"(III) THE EXERCISE OF THE OPTION IS MOST ADVANTAGEOUS TO THE GOVERNMENT, PRICE AND OTHER FACTORS CONSIDERED."

IN THE INSTANT CASE, EXERCISE OF THE OPTION WAS CONTEMPLATED FOR THE PURPOSE OF FULFILLING AN EXISTING NEED NOT OF "THE GOVERNMENT," I.E; THE UNITED STATES, BUT OF CANADA. SIMILARLY, EXERCISE OF THE OPTION WAS MOST ADVANTAGEOUS NOT TO THE UNITED STATES, BUT TO CANADA, WHICH WOULD THEREBY OBTAIN A LOWER PRICE THAN WAS AVAILABLE UNDER A SEPARATE CONTRACT.

THE UNILATERAL EXERCISE OF OPTIONS TO FULFILL FOREIGN MILITARY SALES COMMITMENTS IS ESPECIALLY QUESTIONABLE WHERE, AS IN THE INSTANT CASE, THE CONTRACTOR ALLEGES IT WOULD INCUR A LOSS AT THE OPTION PRICE. AMONG OTHER OCCASIONS, IN ITS MEETING OF MARCH 5, 1971, WITH THE THEN ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS), BELL MAINTAINED THAT IT WOULD INCUR A LOSS AT THE CONTRACT-1699 OPTION PRICE. THE FORMER ASSISTANT SECRETARY HAS ADVISED OUR OFFICE THAT AT THE CONCLUSION OF THAT MEETING, HE DIRECTED HIS DEPUTY FOR PROCUREMENT TO HAVE AMC WORK WITH BELL TO DETERMINE IF BELL WOULD SUSTAIN A LOSS AT THE OPTION PRICE.

THE RECORD DOES NOT SHOW THAT A PARTICULAR AUDIT WAS CONDUCTED FOR THE PURPOSE OF MAKING THIS DETERMINATION, OR THAT A DETERMINATION WAS MADE SPECIFICALLY IN RESPONSE TO THE SECRETARY'S DIRECTION. HOWEVER, DURING THE NEGOTIATIONS UNDER RFQ-0244, AUDITS WERE MADE OF BELL AND SEVERAL OF ITS SUBCONTRACTORS. ON THE BASIS OF THESE AUDITS AND DATA SUPPLIED BY BELL, THE GOVERNMENT'S ESTIMATES OF BELL'S COSTS EXCEEDED THE CONTRACT- 1699 PRICE, GIVING SUPPORT TO BELL'S POSITION. THE OBJECTIVE OF THE PRICE NEGOTIATIONS UNDER RFQ-0244 WAS TO:

" *** NEGOTIATE A FAIR AND REASONABLE PRICE FOR THE TIMELY DELIVERY OF THE DESIRED QUANTITY OF REQUIRED SUPPLIES. THE GOVERNMENT'S COST OBJECTIVE WAS TO NEGOTIATE A REASONABLE COST WHICH WILL REQUIRE CONTINUING EFFORT ON THE PART OF THE CONTRACTOR TO ACHIEVE AND MAINTAIN THE SAME TRENDS AND COST RELATIONSHIPS FOR THIS FOLLOW ON PROCUREMENT AS ARE CURRENTLY BEING EXPERIENCED ON (CONTRACT-1699). THE GOVERNMENT'S PROFIT OBJECTIVE WAS TO NEGOTIATE A FAIR PROFIT BASED UPON THE DEGREE OF CONFIDENCE IN THE NEGOTIATED COSTS AND COMMENSURATE WITH THE RISK ASSUMED."

SINCE THE NEGOTIATORS AGREED UPON A PRICE OF $88,750 (INCLUDING FOREIGN SALES EXPENSE AND NONRECURRING EXPENSES), IT MAY BE IMPLIED THAT THE OBJECTIVE OF THE NEGOTIATION HAD BEEN MET. THIS WOULD FURTHER SUBSTANTIATE BELL'S CONTENTION THAT IT INCURS A LOSS AT THE CONTRACT 1699 PRICE OF APPROXIMATELY $69,000.

ON THE OTHER HAND, IT IS ADMINISTRATIVELY REPORTED THAT BELL HAD SUBMITTED SEMI-ANNUAL COST INFORMATION REPORTS (DD FORM 1558) WHICH THROUGH JUNE 30, 1971, INDICATED A PROFIT WAS BEING MADE ON CONTRACT 1699. HOWEVER, THE REPORT OF DECEMBER 31, 1971, SHOWS A NET LOSS UNDER THE CONTRACT. ADDITIONALLY, BELL'S BI-WEEKLY REQUESTS FOR PROGRESS PAYMENTS (DD FORM 1195), AS LATE AS FEBRUARY 13, 1972, FORECAST A 10 PERCENT PROFIT UNDER THE OH-58A PROGRAM AND BELL OBTAINED PROGRESS PAYMENTS ON THIS BASIS. BELL HAS SUBSEQUENTLY ADVISED THAT ITS REQUESTS FOR PROGRESS PAYMENTS WERE IN ERROR, AND THAT IT HAS REPAID TO THE ARMY THE OVERPAYMENTS IT HAD PREVIOUSLY RECEIVED. THIS STATEMENT HAS NOT BEEN DISPUTED BY YOUR DEPARTMENT.

THEREFORE, WHILE THE MATTER IS NOT ENTIRELY FREE FROM DOUBT AND NO FORMAL DETERMINATION HAS BEEN MADE BY YOUR DEPARTMENT, WE BELIEVE THE RECORD AS A WHOLE CONTAINS SUBSTANTIAL SUPPORT FOR BELL'S POSITION THAT IT INCURS A LOSS AT THE CONTRACT-1699 OPTION PRICE. UNDER THE CIRCUMSTANCES, WE MUST CONCLUDE THAT EXERCISE OF THE CONTRACT-1699 OPTION FOR THE BENEFIT OF CANADA, AND NOTWITHSTANDING BELL'S OBJECTION TO SUCH ACTION, WOULD HAVE BEEN IMPROPER.

PROPRIETY OF AN AWARD TO HUGHES UNDER IFB-0235

IF, AS IS OUR VIEW, THE CONTRACT-1699 OPTION COULD NOT PROPERLY BE EXERCISED IN CONNECTION WITH THIS MILITARY SALE, QUESTIONS ARISE AS TO HOW THE ARMY'S REPLENISHMENT AIRCRAFT MAY BE OBTAINED, AND HOW THE PRICE TO CANADA SHOULD BE ESTABLISHED FOR THE AIRCRAFT SUPPLIED TO IT BY BELL. BELIEVE THERE ARE THREE ALTERNATIVES FOR ACQUIRING REPLACEMENT AIRCRAFT: AN AWARD TO HUGHES UNDER IFB-0235; A NEW COMPETITIVE PROCUREMENT ALLOCATED BETWEEN HUGHES AND BELL; OR A SEPARATE CONTRACT WITH BELL ALONE.

IFB-0235 WAS ISSUED FOR THE PURPOSE OF "TESTING THE MARKET" AGAINST BELL'S CONTRACT-1699 OPTION PRICE. THAT PRICE WAS SET FORTH IN THE INVITATION WHICH ADVISED BIDDERS THAT AWARD MAY BE MADE TO A BIDDER OFFERING A PRICE BELOW THE OPTION PRICE. SINCE, UNDER OUR DECISION OF TODAY, WE HAVE CONCLUDED THAT THE CONTRACT-1699 OPTION MAY NOT BE EXERCISED IN CONNECTION WITH THE SALE TO CANADA, THE UNDERLYING PURPOSE FOR IFB-0235 IS REMOVED AND THE PREMISE UPON WHICH BIDS WERE REQUESTED AND SUBMITTED THEREUNDER IS NO LONGER VALID. WE REGARD THIS AS A COMPELLING REASON FOR THE CANCELLATION OF IFB-0235.

HOWEVER, EVEN IF IT HAD BEEN APPROPRIATE TO EXERCISE THE CONTRACT 1699 OPTION IN THE INSTANT CASE, AND IFB-0235 THEREFORE WAS PROPERLY ISSUED TO "TEST THE MARKET" BEFORE SUCH EXERCISE, WE BELIEVE THE INVITATION CONTAINS A DEFECT WHICH WOULD PRECLUDE AWARD THEREUNDER, I.E; ITS SPECIFICATIONS DO NOT REQUIRE HUGHES TO PROVIDE AN AIRCRAFT COMPARABLE TO THE BELL OH-58A.

HUGHES' OH-6A AND BELL'S OH-58A ARE SIMILAR, BUT NOT IDENTICAL, LIGHT OBSERVATION HELICOPTERS. BOTH AIRCRAFT HAVE TWO DOORS FOR THE CREW (PILOT AND CO-PILOT), BEHIND WHICH ARE TWO CARGO DOORS. THESE DOORS ARE REMOVABLE AND BOTH AIRCRAFT CAN BE FLOWN WITH VARIOUS COMBINATIONS OF DOORS ON AND OFF. AT ALL TIMES, IFB-0235 HAS REQUIRED BELL TO FURNISH OH- 58AS MANUFACTURED IN ACCORDANCE WITH BELL SPECIFICATION 206 947-031, TO WHICH, AS REVISED, ALL OH-58AS HAVE BEEN BUILT. AS IT WAS INITIALLY ISSUED, IFB-0235 REQUIRED HUGHES TO FURNISH AIRCRAFT IN ACCORDANCE WITH ITS SPECIFICATION 369-Y-8011. THIS WAS THE SPECIFICATION TO WHICH HUGHES BID IN THE 1968 COMPETITION FOR CONTRACT 1699: SINCE THAT CONTRACT WAS AWARDED TO BELL, NO AIRCRAFT WAS EVER BUILT TO SPECIFICATION-8011. BY THE INCORPORATION OF THESE SPECIFICATIONS, THE TWO AIRCRAFT WERE TO BE CAPABLE OF THE FOLLOWING SPEEDS, EXPRESSED IN KNOTS, IN DIFFERENT CONFIGURATIONS OF DOORS ON AND OFF:

BELL OH-58A HUGHES OH-6A

SPEC. -031 SPEC. -8011

ALL DOORS ON 100 110

CREW DOORS ON,

CARGO DOORS OFF 100 110

CREW DOORS OFF,

CARGO DOORS ON 100 60

BOTH THE ARMY AND BELL REGARD THESE PERFORMANCE REQUIREMENTS AS COMPARABLE.

IN DECEMBER, 1971, HUGHES PROPOSED A NUMBER OF CHANGES TO THE SPECIFICATIONS APPLICABLE TO ITS AIRCRAFT, AMONG WHICH WAS THE FOLLOWING:

"DOORS-OFF LIMIT SPEEDS WILL BE CHANGED TO AGREE WITH THAT PRESENTLY REFLECTED IN THE OH-6A OPERATOR'S MANUAL (TM55-1520-214-10). *** "

THIS CHANGE WAS MADE IN AMENDMENT 0004 TO THE SOLICITATION, DATED DECEMBER 21, 1971. PARAGRAPH 7-24 F. OF TM55-1520-214-10 PROVIDED:

"FLIGHT WITH DOORS REMOVED. THE FOLLOWING AIRSPEED LIMITATIONS ARE PROVIDED FOR THOSE INSTANCES IN WHICH OPERATIONAL REQUIREMENTS NECESSITATE OPERATING THE HELICOPTER WITH A SPECIFIC COMBINATION OF PILOT AND/OR CARGO DOORS REMOVED.

CAUTION

PILOT DOORS OFF, CARGO DOORS ON IS NOT AN AUTHORIZED CONFIGURATION FOR ANY FLIGHT CONDITION.

"(1) CARGO DOORS OFF, PILOT DOORS ON:

AIRSPEED LIMIT SER. NO. 65-12916

THROUGH SER. NO. 65-12934 100 KT SER. NO.

65-12935 AND SUBQ. VNE

"(2) CARGO AND PILOT DOORS OFF:

AIRSPEED LIMIT SER. NO. 65-12916

THROUGH SER. NO. 65-12934 80 KTSER. NO.

65-12935 AND SUBQ. VNE"

VNE (VELOCITY NEVER EXCEED) FOR THE OH-6A IS 124 KNOTS. THEREFORE, THE EFFECT OF AMENDMENT 0004 WAS TO INCREASE THE CAPABILITY OF THE OH 6A TO 124 KNOTS IN TWO CONFIGURATIONS, BUT TO REDUCE THE OH-6A AIRSPEED CAPABILITY TO ZERO IN THE "CREW DOORS OFF, CARGO DOORS ON" CONFIGURATION. IT IS THE JUDGMENT OF YOUR DEPARTMENT "THAT THE PERFORMANCE OF AN OH-6A BUILT TO THE REQUIREMENTS OF IFB-0235, MODIFICATION 4, WOULD HAVE SUBSTANTIALLY LESS CAPABILITY THAN AN OH-58A BUILT TO THE REQUIREMENTS OF IFB-0235."

ON MARCH 15, 1972, AFTER BID OPENING, THE CONTRACTING OFFICER SOUGHT CLARIFICATION FROM HUGHES OF THE CAPABILITIES OF THE OH-6A IN THE "CREW DOORS OFF, CARGO DOORS ON" CONFIGURATION. BY TELEGRAM OF THE SAME DATE, HUGHES OFFERED TO EXECUTE A NO-COST MODIFICATION, AFTER AWARD OF A CONTRACT UNDER IFB-0235, WHICH WOULD PROVIDE AN 80-KNOT LIMIT FOR THAT CONFIGURATION. ACCEPTANCE OF THE MODIFICATION WOULD RESULT IN COMPARABLE PERFORMANCE REQUIREMENTS FOR BOTH AIRCRAFT IN THIS RESPECT.

SINCE THE OH-6A AND THE OH-58A ARE NOT IDENTICAL AIRCRAFT, ANY MEANINGFUL COMPETITION BETWEEN THEM MUST BE ON THE BASIS OF SPECIFICATIONS DESCRIBING COMPARABLE AIRCRAFT. THIS PRINCIPLE IS RECOGNIZED BY YOUR DEPARTMENT, WHICH HAS STATED THAT THE "WAIVERS AND DEVIATIONS GRANTED TO HUGHES (UNDER IFB-0235) WERE MADE TO INSURE COMPARABILITY BETWEEN THE OH-6 AND THE OH-58 CONFIGURATIONS IN PRODUCTION UNDER CONTRACT-1699. AMENDMENT 0004 TO IFB- 0235 HAD THE EFFECT OF REQUIRING HUGHES TO FURNISH AN AIRCRAFT WHICH THE ARMY VIEWS AS HAVING "SUBSTANTIALLY LESS CAPABILITY" THAN THE OH-58A. OUR OPINION, THE INVITATION THEREFORE DOES NOT PROVIDE AN ADEQUATE COMPETITIVE BASIS UPON WHICH TO MAKE AN AWARD.

WE DO NOT BELIEVE THAT THIS DEFECT PROPERLY MAY BE CURED BY AWARDING HUGHES A CONTRACT ON THE BASIS OF AN INVITATION REQUIRING AN AIRCRAFT NOT COMPARABLE TO THE OH-58A, WITH THE INTENTION OF IMMEDIATELY EXECUTING A CONTRACT MODIFICATION TO MAKE THE AIRCRAFT COMPARABLE. THE EFFECT OF SUCH A PROCEDURE WOULD BE TO AWARD A CONTRACT ON A BASIS OTHER THAN THAT UPON WHICH BIDS WERE SOLICITED AND TO PROVIDE HUGHES AN ELECTION, AFTER BID OPENING, OF BECOMING ELIGIBLE FOR AWARD BY AGREEING TO THE NO-COST MODIFICATION OR TO AVOID AWARD BY REFUSING TO ACCEPT SUCH A MODIFICATION.

IN A SIMILAR SITUATION INVOLVING ANOTHER AVSCOM PROCUREMENT, WE OBSERVED:

"WHERE THE ISSUE HAS BEEN PRESENTED AS TO WHETHER AN AWARD COULD BE MADE TO THE LOW BIDDER UNDER THE ADVERTISED SPECIFICATIONS, AND THE OMITTED REQUIREMENTS NEGOTIATED AFTER AWARD, OR WHETHER THE PROCUREMENT SHOULD BE READVERTISED UNDER SPECIFICATIONS INCORPORATING THE OMITTED REQUIREMENTS, WE HAVE HELD THAT THE ONLY PROPER WAY TO DETERMINE THE LOWEST BIDDER IS BY ADVERTISING THE ACTUAL WORK TO BE PERFORMED. THE ADOPTION OF ANY OTHER VIEW WOULD PERMIT CIRCUMVENTION OF THE COMPETITIVE BID REQUIREMENTS AND WOULD BE CONTRARY TO THE INTENT OF THE PROCUREMENT STATUTES. SEE B- 171965, MAY 20, 1971, AND DECISIONS CITED THEREIN." 51 COMP. GEN. (B- 174010, JANUARY 24, 1972)

WHILE WE BELIEVE THE DEFECTIVE SPECIFICATIONS IN THE INSTANT CASE WOULD PRECLUDE AN AWARD TO HUGHES EVEN IF IFB-0235 HAD BEEN PROPERLY ISSUED, AS INDICATED ABOVE IT IS OUR OPINION THAT THE FUNDAMENTAL IMPROPRIETY OF IFB- 0235 REQUIRING ITS CANCELLATION IS THAT IT WAS IMPROPERLY ISSUED, SINCE ITS PURPOSE WAS TO TEST THE MARKET AGAINST AN OPTION WHICH MAY NOT BE EXERCISED.

THE RELATIONSHIP BETWEEN THE DIVERSION AND REPLENISHMENT ACTIONS

IN VIEW OF THE FOREGOING IT IS APPARENT THAT THE PIVOTAL ISSUE IN THE INSTANT CASE IS WHETHER BELL WAS INDUCED TO DIVERT AIRCRAFT TO CANADA IN THE BELIEF THAT THE REPLENISHMENT OF DIVERTED AIRCRAFT AND THE ESTABLISHMENT OF THE PRICE TO CANADA WOULD OCCUR THROUGH THE SUBSEQUENT NEGOTIATION OF A SOLE SOURCE CONTRACT.

THE SOLUTION TO THIS ISSUE, WE BELIEVE, LIES IN THE DEGREE OF INTERRELATIONSHIP BETWEEN THE DIVERSION OF AIRCRAFT TO CANADA AND THE PROCUREMENT OF REPLACEMENT AIRCRAFT. IT IS YOUR DEPARTMENT'S POSITION THAT THE DIVERSION AND REPLACEMENT ARE TWO SEPARATE AND DISTINCT TRANSACTIONS. UNDER THIS VIEW, THE DIVERSION WAS CONCLUDED WITH THE EXECUTION OF MODIFICATION P00123 TO CONTRACT-1699. THE TASK, IT IS SAID, THEN BECAME ONE OF REPLENISHING THE ARMY'S INVENTORY OF LIGHT OBSERVATION HELICOPTERS, OF WHICH BOTH BELL AND HUGHES ARE QUALIFIED MANUFACTURERS. THEREFORE, THE REPLENISHMENT WAS SOUGHT TO BE ACCOMPLISHED THROUGH THE COMPETITIVE TECHNIQUE OF PROPOSING TO EXERCISE THE CONTRACT-1699 OPTION AFTER "TESTING THE MARKET" BY THE ISSUANCE OF IFB-0235 TO BELL AND HUGHES.

HOWEVER, THERE IS ANOTHER VIEW OF THE DIVERSION AND REPLENISHMENT, RECOGNIZED WITHIN AVSCOM AS EARLY AS JANUARY, 1971, WHICH WE REGARD AS LESS ARTIFICIAL AND MORE IN ACCORDANCE WITH THE ACTUAL DEVELOPMENT OF THIS FOREIGN MILITARY SALES CASE. THAT VIEW IS THAT THE DIVERSION AND REPLENISHMENT ARE RELATED PARTS OF A PROCUREMENT TO SATISFY THE REQUIREMENTS OF A FOREIGN MILITARY SALE. INDEED, WE ARE CONVINCED BY A REVIEW OF THE RECORD THAT BELL EXECUTED THE DIVERSION MODIFICATION IN THE BELIEF AND ON THE PREMISE THAT IT WOULD BE AWARDED A CONTRACT FOR THE REPLACEMENT AIRCRAFT. THE FOLLOWING CONSIDERATIONS LED TO THESE CONCLUSIONS: IN 1969, BELL WAS ENGAGED IN THE SALE OF AIRCRAFT TO CANADA THROUGH COMMERCIAL CHANNELS. BELL WAS ALSO WILLING TO SELL ITS AIRCRAFT TO CANADA THROUGH THE UNITED STATES AT THE SAME PRICE OFFERED THROUGH COMMERCIAL CHANNELS. FROM THE SPRING OF 1969 TO THE SPRING OF 1970, BELL FURNISHED QUOTATIONS TO THE ARMY ON THIS BASIS.

ON MAY 26, 1970, CANADA ACCEPTED THE UNITED STATES' OFFER TO FURNISH OH- 58AS AT AN ESTIMATED PRICE BASED UPON THE AIRFRAME PRICE OF $87,500 WHICH HAD BEEN QUOTED BY BELL. HOWEVER, WHEN THE PROCUREMENT HAD NOT BEEN CONSUMMATED BY THE END OF JULY, 1970, CANADA EXPRESSED ITS CONCERN OVER THE POSSIBILITY THAT DELAYED DELIVERIES WOULD BE MADE AT A PRICE HIGHER THAN IT EXPECTED TO PAY. THE RESPONSE THERETO WAS THE LETTER OF AUGUST 21, 1970, FROM THE DEPUTY ASSISTANT SECRETARY OF DEFENSE (MILITARY ASSISTANCE AND SALES), WHICH WE HAVE QUOTED AND DISCUSSED AT LENGTH ABOVE. IT IS CLEAR FROM THIS LETTER THAT THE DIVERSION OF AIRCRAFT TO CANADA FROM ARMY PRODUCTION UNDER CONTRACT-1699 WAS DECIDED UPON AS AN EXPEDIENT TO SATISFY THE CANADIAN DELIVERY SCHEDULE, AND THE PRICE TO CANADA WAS TO BE ESTABLISHED BY A SEPARATE NEGOTIATED CONTRACT WITH BELL.

THIS UNDERSTANDING WAS EXPRESSLY CONVEYED TO BELL BY THE CONTRACTING OFFICER, WHOSE MESSAGE OF OCTOBER 14, 1970, ADVISED THAT THE DIVERTED AIRCRAFT "WOULD THEN BE REPLACED BY SEPARATE CONTRACT TO MEET THE U.S. ARMY CONFIGURATION." BELL SUBSEQUENTLY ADVISED AVSCOM THAT ITS PROPOSAL FOR MODIFYING THE AIRCRAFT TO BE DIVERTED TO CANADA WOULD "ASSUME PAYBACK OF SIMILAR QUANTITY OF STANDARD OH-58A HELICOPTERS TO U.S. ARMY INVENTORY BY SEPARATE CONTRACT" IN ACCORDANCE WITH THE CONTRACTING OFFICER'S ADVICE. THERE IS NO INDICATION OF RECORD THAT THE ARMY MADE ANY RESPONSE TO THIS MESSAGE.

ON DECEMBER 18, 1970, BELL SUBMITTED A PROPOSAL FOR THE MODIFICATION OF DIVERTED AIRCRAFT WHICH WAS PREDICATED UPON THE INCLUSION OF A CLAUSE WHEREBY THE PARTIES WOULD AGREE TO NEGOTIATE A PROCUREMENT OF HELICOPTERS TO REPLACE THOSE BEING DIVERTED. ANY OBJECTIONS WHICH THE ARMY MAY HAVE HAD TO THIS ASPECT OF BELL'S PROPOSAL WERE NOT IMMEDIATELY COMMUNICATED TO BELL. THE ARMY DID ADVISE BELL IN FEBRUARY, 1971, THAT IN ADDITION TO THE COURSE WHICH HAD BEEN PURSUED TO THAT TIME (DIVERSIONS AND "PAYBACK" BY SEPARATE CONTRACT), IT WAS CONTEMPLATING A SEPARATE SOLE SOURCE CONTRACT FOR CANADIAN AIRCRAFT, OR A DIVERSION FOLLOWED BY A "PAYBACK" THROUGH EXERCISE OF THE OPTION. THIS WAS THE FIRST KNOWLEDGE BELL HAD THAT EXERCISE OF THE OPTION WAS CONTEMPLATED IN CONNECTION WITH THIS FOREIGN MILITARY SALES CASE.

BELL PROTESTED AGAINST THE CONTEMPLATED USE OF THE OPTION IN A MEETING OF MARCH 5, 1971, WITH THE THEN ASSISTANT SECRETARY OF THE ARMY (INSTALLATIONS AND LOGISTICS). WE THINK THE RECORD ESTABLISHES THAT BELL WAS INFORMED AT THAT MEETING THAT EXERCISE OF THE OPTION WOULD BE POSTPONED UNTIL IT WAS DETERMINED THAT BELL WOULD LOSE MONEY BY SELLING THE AIRCRAFT AT THE OPTION PRICE, AND IF SO, WHETHER A FAIR AND REASONABLE PRICE COULD BE NEGOTIATED FOR THE AIRCRAFT. SEVERAL EVENTS OCCURRED THEREAFTER WHICH COULD BE REGARDED, FROM BELL'S VIEWPOINT, AS BEING CONSONANT WITH THAT MEETING.

FIRST, APPROXIMATELY 3 WEEKS AFTER THE MEETING, BELL RECEIVED RFQ 0244, THE POSSIBLE VEHICLE FOR ARRIVING AT A "FAIR AND REASONABLE" SEPARATE CONTRACT PRICE FOR THE CANADIAN AIRCRAFT. SUBSEQUENTLY, IN REACHING AGREEMENT ON THE PRICE OF THE CONFIGURATION CHANGES TO THE AIRCRAFT TO BE DIVERTED UNDER CONTRACT-1699, BELL WITHDREW ITS REQUEST FOR THE CLAUSE BY WHICH THE PARTIES WOULD HAVE AGREED TO NEGOTIATE A SEPARATE REPLACEMENT CONTRACT, FOR THE EXPRESS REASON THAT IT HAD RECEIVED RFQ-0244. THERE IS ONE INDICATION IN THE RECORD THAT THE ARMY HAD ADVISED BELL DURING THE NEGOTIATIONS FOR THE DIVERSION THAT IT DID NOT "AGREE TO OR CONCUR IN" THE CLAUSE WHICH BELL HAD PROPOSED. HOWEVER, THE ARMY APPARENTLY DID NOT ADVANCE ANY SPECIFIC REASONS FOR ITS DISAGREEMENT, AND BELL MAY WELL HAVE DECIDED NOT TO CONTEST THIS POSITION SINCE IT LATER RECEIVED RFQ-0244.

SECOND, THE FY 71 OPTION WAS NOT EXERCISED. ALTHOUGH ITS NON EXERCISE MAY NOT HAVE BEEN THE RESULT OF THE MARCH 5 MEETING WITH THE ASSISTANT SECRETARY, IT WAS CONSISTENT WITH THE REPRESENTATIONS MADE TO BELL AT THAT MEETING.

THIRD, AUDITS WERE CONDUCTED AT BELL AND SOME OF ITS SUBCONTRACTORS DURING THE NEGOTIATIONS UNDER RFQ-0244, WHICH LED THE ARMY TO ASSUME A NEGOTIATING POSITION IN WHICH ITS ESTIMATES OF BELL'S COSTS EXCEEDED THE CONTRACT-1699 PRICE.

FOURTH, BELL AND THE ARMY NEGOTIATORS EVENTUALLY REACHED AGREEMENT ON PRICE UNDER RFQ -0244.

FIFTH, BELL'S PROPOSAL UNDER RFQ-0244 WAS EXPRESSLY BASED UPON THE PREMISE THAT THE ONLY METHOD TO MEET THE CANADIAN DELIVERY SCHEDULE WOULD BE TO DIVERT AIRCRAFT UNDER CONTRACT-1699 "AND TO 'PAY BACK' THESE HELICOPTERS TO THE U.S. ARMY THROUGH THE PROCUREMENT CONTEMPLATED BY THE RFQ." NOT ONLY IS THE RECORD DEVOID OF ANY EVIDENCE THAT THE ARMY ADVISED BELL THIS PREMISE WAS IN ERROR, BUT THE RFQ WAS SUBSEQUENTLY AMENDED TO CONFORM TO BELL'S PROPOSAL AND NEGOTIATIONS WERE CONDUCTED ON THAT BASIS.

FINALLY, BELL WITHDREW ITS SIGNATURE FROM THE DIVERSION MODIFICATION UNTIL THE PARTIES REACHED AGREEMENT ON PRICE UNDER RFQ-0244.

CONCLUSION

WE BELIEVE IT IS ABUNDANTLY CLEAR FROM THIS RECORD THAT THE DIVERSION UNDER CONTRACT-1699 AND THE PROCUREMENT OF REPLACEMENT AIRCRAFT WERE NOT INDEPENDENT TRANSACTIONS. FROM THE TIME IT BECAME APPARENT THAT A DIVERSION WAS THE ONLY METHOD BY WHICH CANADA'S DELIVERY SCHEDULE COULD BE MET, THESE TWO ASPECTS OF THIS FOREIGN MILITARY SALE WERE CONSIDERED IN TANDEM.

FURTHERMORE, WE ARE OF THE OPINION THAT THE RECORD ESTABLISHES THAT BELL AGREED TO MODIFICATION P00123 TO CONTRACT-1699 AND THEREBY MATERIALLY ALTERED ITS POSITION UNDER THAT CONTRACT, ONLY BECAUSE OF ITS UNDERSTANDING THAT IT WOULD RECEIVE A SEPARATE NEGOTIATED CONTRACT FOR REPLACEMENT AIRCRAFT, THE PRICE OF WHICH WOULD CONSTITUTE THE CANADIAN SALE PRICE. BELL CONTENDS THAT SUCH A CONTRACT WAS FORMED AS A RESULT OF THE NEGOTIATIONS UNDER RFQ-0244 AND NEEDS ONLY TO BE EXECUTED BY THE GOVERNMENT. HOWEVER, SUCH A CONCLUSION IGNORES THE FACT THAT THE SOLICITATION WAS A REQUEST FOR QUOTATIONS, UNDER WHICH BELL'S QUOTATION DID NOT CONSTITUTE AN OFFER. ALSO, BELL WAS ON NOTICE THAT THE CONTRACTING OFFICER LACKED AUTHORITY TO EXECUTE A CONTRACT UNTIL HE RECEIVED THE APPROVAL OF AMC. THIS APPROVAL WAS NEVER GRANTED. IN THE ABSENCE OF AN OFFER CAPABLE OF BEING ACCEPTED, AND OF ACCEPTANCE OF AN OFFER BY THE GOVERNMENT, WE ARE UNABLE TO CONCLUDE THAT A CONTRACT CAME INTO EXISTENCE UNDER RFQ-0244.

IN OUR OPINION, HOWEVER, THE DIVERSION FROM CONTRACT-1699 AND THE REPLACEMENT OF ARMY AIRCRAFT MUST BE VIEWED AS RELATED PARTS OF THE CANADIAN FOREIGN MILITARY SALE. WE DO NOT BELIEVE IT IS REALISTIC TO CONCEIVE, NOR DO WE THINK BELL CONCEIVED, THE DIVERSION AND REPLENISHMENT TO BE TWO ENTIRELY SEPARATE, UNRELATED TRANSACTIONS. UPON CONSIDERATION OF ALL THE FACTS AND CIRCUMSTANCES OF THIS CASE, INCLUDING THE FACT THAT BELL MATERIALLY CHANGED ITS POSITION UNDER CONTRACT-1699 IN THE BELIEF THAT A SEPARATE CONTRACT WOULD BE NEGOTIATED WITH IT AS A SOLE SOURCE, WE MUST AGREE WITH BELL'S CONTENTION THAT IT IS LEGALLY ENTITLED TO HAVE ITS PRICE FOR THE HELICOPTERS DELIVERED TO CANADA DETERMINED ON THE BASIS OF THE PRICE (NOT IN EXCESS OF $88,750) YOUR DEPARTMENT IS ABLE TO NEGOTIATE FOR 74 OH-58A REPLACEMENT HELICOPTERS.