A-74294, OCTOBER 7, 1936, 16 COMP. GEN. 344

A-74294: Oct 7, 1936

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NOT PRIMARILY ESTABLISHED AS A MEASURE OF COMPENSATION IN THAT THE SUPPLIES INVOLVED WERE NOT URGENTLY NEEDED AND THE SAME LIQUIDATED DAMAGE RATE WAS TO APPLY WHETHER AWARD WAS MADE ON ANY OR ALL OF THE ITEMS IN THE INVITATION FOR BIDS. ARE UNENFORCEABLE. THERE IS NO BASIS FOR THE WITHHOLDING OF ANY PART OF THE CONTRACT PRICE FOR DELIVERY DELAYS. AS THE DAMAGES DUE TO DELIVERY DELAYS ARE REDUCED IN PROPORTION TO PARTIAL DELIVERIES. 1936: I HAVE BEFORE ME A MATTER WHICH I BELIEVE SHOULD BE BROUGHT TO YOUR ATTENTION. WERE REJECTED AS UNSATISFACTORY. 000 TUBES WAS NOT MADE AND ACCEPTED UNTIL AUGUST 10. IT IS CLEAR FROM THE DECIDED CASES THAT SUCH A PROVISION CANNOT LEGALLY BE SUSTAINED WHERE THE CIRCUMSTANCES WARRANT THE CONCLUSION THAT AT THE TIME THE CONTRACT WAS MADE THE STIPULATED LIQUIDATED DAMAGES DID NOT BEAR SOME REASONABLE RELATION TO THE PROBABLE ACTUAL DAMAGES TO BE EXPECTED FROM A DEFAULT.

A-74294, OCTOBER 7, 1936, 16 COMP. GEN. 344

CONTRACTS - LIQUIDATED DAMAGES - ENFORCEABLE AND UNENFORCEABLE PROVISIONS CONTRACT LIQUIDATED DAMAGE CLAUSES FOR DELAYS IN DELIVERY, WHOLLY DISPROPORTIONATE TO THE PROBABLE ACTUAL DAMAGE INVOLVED, AND NOT PRIMARILY ESTABLISHED AS A MEASURE OF COMPENSATION IN THAT THE SUPPLIES INVOLVED WERE NOT URGENTLY NEEDED AND THE SAME LIQUIDATED DAMAGE RATE WAS TO APPLY WHETHER AWARD WAS MADE ON ANY OR ALL OF THE ITEMS IN THE INVITATION FOR BIDS, ARE UNENFORCEABLE, AND, IN THE ABSENCE OF ACTUAL DAMAGE SHOWN, THERE IS NO BASIS FOR THE WITHHOLDING OF ANY PART OF THE CONTRACT PRICE FOR DELIVERY DELAYS. LIQUIDATED DAMAGES FOR DELAYS IN DELIVERY SHOULD BE PROVIDED FOR IN LARGE QUANTITY STOCK ITEM CONTRACTS FOR SUPPLIES NOT READILY PROCURABLE IN THE OPEN MARKET BUT, IN SUCH CASES, AS THE DAMAGES DUE TO DELIVERY DELAYS ARE REDUCED IN PROPORTION TO PARTIAL DELIVERIES, THE STIPULATION SHOULD BE ON THE BASIS OF AN APPROPRIATE PERCENTAGE OF THE CONTRACT PRICE OF ANY UNDELIVERED SUPPLIES FOR EACH DAY OF DELAY AFTER THE DELIVERY DATE FIXED IN THE CONTRACT.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE ADMINISTRATOR OF VETERANS' AFFAIRS, OCTOBER 7, 1936:

I HAVE BEFORE ME A MATTER WHICH I BELIEVE SHOULD BE BROUGHT TO YOUR ATTENTION. BY A BID ACCEPTED MAY 7, 1935, THE FIRM OF SCHAAR AND COMPANY, CHICAGO, PROPOSED TO FURNISH 3,000 UNGRADUATED GLASS CENTRIFUGE TUBES TO THE VETERANS' ADMINISTRATION SUPPLY DEPOT AT PERRY POINT, ., AT A PRICE OF 3 1/2 CENTS EACH, OR FOR A TOTAL CONSIDERATION OF $105. THE TUBES FIRST DELIVERED, AS WELL AS SUBSEQUENT DELIVERIES, WERE REJECTED AS UNSATISFACTORY, AND COMPLETE DELIVERY OF THE 3,000 TUBES WAS NOT MADE AND ACCEPTED UNTIL AUGUST 10, 1935, OR UNTIL AFTER A DELAY OF 80 DAYS BEYOND THE CONTRACT DELIVERY DATE. THE CONDITIONS ATTACHED TO THE INVITATION FOR BIDS, BY REFERENCE MADE A PART OF THE CONTRACT, STIPULATED THAT LIQUIDATED DAMAGES FOR DELAY IN DELIVERY WOULD BE CHARGED AT THE FLAT RATE OF $10 A DAY. HENCE, ON THE FACE OF THE CONTRACT THE CONTRACTOR APPEARS CHARGEABLE WITH LIQUIDATED DAMAGES AGGREGATING $800 FOR SOMETHING LESS THAN 3 MONTHS' DELAY IN THE DELIVERY OF $105 WORTH OF SUPPLIES, OR ALMOST EIGHT TIMES THE VALUE OF THE SUPPLIES.

OBVIOUSLY, SUCH A PROPOSITION, WITHOUT MORE, SEEMS REPUGNANT TO ALL SENSE OF RIGHT AND JUSTICE, AND IT IS CLEAR FROM THE DECIDED CASES THAT SUCH A PROVISION CANNOT LEGALLY BE SUSTAINED WHERE THE CIRCUMSTANCES WARRANT THE CONCLUSION THAT AT THE TIME THE CONTRACT WAS MADE THE STIPULATED LIQUIDATED DAMAGES DID NOT BEAR SOME REASONABLE RELATION TO THE PROBABLE ACTUAL DAMAGES TO BE EXPECTED FROM A DEFAULT. AS WAS POINTED OUT IN DECISION OF APRIL 8, 1932, 11 COMP. GEN. 384, THE TRUE OFFICE OF A PROVISION FOR LIQUIDATED DAMAGES IS TO AGREE UPON--- THAT IS, LIQUIDATE--- IN ADVANCE THE AMOUNT OF THE DAMAGES WHICH THE DEFAULTING PARTY MUST PAY IN CASES WHERE FROM THE SUBJECT MATTER OF THE CONTRACT THE MEASURE OF ACTUAL DAMAGES IS UNCERTAIN OR DIFFICULT TO ESTABLISH. HOWEVER, THIS DOES NOT PERMIT A STIPULATION FOR LIQUIDATED DAMAGES WHOLLY DISPROPORTIONATE TO PROBABLE ACTUAL DAMAGES AND THE COURTS HAVE MAINTAINED THE PRINCIPLE THAT SUCH ARBITRARY STIPULATIONS WILL BE TREATED AS UNENFORCEABLE PROVISIONS FOR A PENALTY, ALTHOUGH DENOMINATED LIQUIDATED DAMAGES IN THE CONTRACT. IN SUN PRINTING AND PUBLISHING ASS-N V. MOORE, 183 U.S. 642, 672, THE SUPREME COURT OF THE UNITED STATES, AFTER AN EXHAUSTIVE CONSIDERATION OF THE HISTORY AND GROWTH OF THE PRINCIPLES OF LAW RELATING TO LIQUIDATED DAMAGES, SAID:

IT MAY, WE THINK, FAIRLY BE STATED THAT WHEN A CLAIMED DISPROPORTION HAS BEEN ASSERTED IN ACTIONS OF LAW, IT HAS USUALLY BEEN AN EXCESSIVE DISPROPORTION BETWEEN THE STIPULATED SUM AND THE POSSIBLE DAMAGES RESULTING FROM A TRIVIAL BREACH APPARENT ON THE FACE OF THE CONTRACT, AND THE QUESTION OF DISPROPORTION HAS BEEN SIMPLY AN ELEMENT ENTERING INTO THE CONSIDERATION OF THE QUESTION OF WHAT WAS THE INTENT OF THE PARTIES, WHETHER BONA FIDE TO FIX THE DAMAGES OR TO STIPULATE THE PAYMENT OF AN ARBITRARY SUM AS A PENALTY, BY WAY OF SECURITY.

IN WISE V. UNITED STATES, 249 U.S. 361, 365, THE SUPREME COURT SAID:

* * * WHEN THAT INTENTION IS CLEARLY ASCERTAINABLE FROM THE WRITING, EFFECT WILL BE GIVEN TO THE PROVISION, AS FREELY AS TO ANY OTHER, WHERE THE DAMAGES ARE UNCERTAIN IN NATURE OR AMOUNT OR ARE DIFFICULT OF ASCERTAINMENT OR WHERE THE AMOUNT STIPULATED FOR IS NOT SO EXTRAVAGANT, OR DISPROPORTIONATE TO THE AMOUNT OF PROPERTY LOSS, AS TO SHOW THAT COMPENSATION WAS NOT THE OBJECT AIMED AT OR AS TO IMPLY FRAUD, MISTAKE, CIRCUMVENTION, OR OPPRESSION. THERE IS NO SOUND REASON WHY PERSONS COMPETENT AND FREE TO CONTRACT MAY NOT AGREE UPON THIS SUBJECT AS FULLY AS UPON ANY OTHER, OR WHY THEIR AGREEMENT, WHEN FAIRLY UNDERSTANDINGLY ENTERED INTO WITH A VIEW TO JUST COMPENSATION FOR THE ANTICIPATED LOSS, SHOULD NOT BE ENFORCED.

IN MORE RECENT CASE, KOTHE V. R. C. TAYLOR TRUST, 280 U.S. 224, DECIDED JANUARY 6, 1930, THE SUPREME COURT SAID IN REFUSING TO ENFORCE A STIPULATION FOR LIQUIDATED DAMAGES:

"* * * THE QUESTION ALWAYS IS, WHAT DID THE PARTIES INTEND BY THE LANGUAGE USED? WHEN SUCH INTENTION IS ASCERTAINED IT IS ORDINARILY THE DUTY OF THE COURT TO CARRY IT OUT.' AND SEE UNITED STATES V. UNITED ENGINEERING CO., 234 U.S. 236, 241: "SUCH CONTRACTS FOR LIQUIDATED DAMAGES WHEN REASONABLE IN THEIR CHARACTER ARE NOT TO BE REGARDED AS PENALTIES AND MAY BE ENFORCED BETWEEN THE PARTIES.' BUT AGREEMENTS TO PAY FIXED SUMS PLAINLY WITHOUT REASONABLE RELATION TO ANY PROBABLE DAMAGE WHICH MAY FOLLOW A BREACH WILL NOT BE ENFORCED. THIS CIRCUMSTANCE TENDS TO NEGATIVE ANY NOTION THAT THE PARTIES REALLY MEANT TO PROVIDE A MEASURE OF COMPENSATION--- "TO TREAT THE SUM NAMED AS ESTIMATED AND ASCERTAINED DAMAGES.'

THERE ARE TWO MATTERS APPARENT ON THE FACE OF THE PRESENT CONTRACT WHICH SEEM CLEARLY TO ESTABLISH THAT THE LIQUIDATED DAMAGE STIPULATION OF $10 A DAY FOR DELAY IN DELIVERY WAS NOT PRIMARILY TO PROVIDE A MEASURE OF COMPENSATION WITH ANY REASONABLE RELATION TO THE PROBABLE DAMAGE WHICH MIGHT FOLLOW A BREACH.

1. THE GOVERNMENT INVITATION FOR BIDS REQUESTED PROPOSALS ON TWO SEPARATE ITEMS, ONE FOR FURNISHING GRADUATED GLASS TUBES AND ONE FOR FURNISHING UNGRADUATED GLASS TUBES. THE RIGHT WAS RESERVED TO ACCEPT A BID ON "ANY ITEM.' HOWEVER, THE LIQUIDATED DAMAGE STIPULATION WAS TO APPLY IN THE STATED AMOUNT OF $10 A DAY WHETHER ONE OR BOTH OF THE ITEMS BID UPON WERE AWARDED TO THE SAME CONTRACTOR. CLEARLY THE PROBABLE COMPENSATORY DAMAGE WOULD NOT BE THE SAME FOR A BREACH AS TO ONE ITEM AS THEY WOULD BE FOR A BREACH AS TO BOTH ITEMS. IF BOTH ITEMS WERE LET TO THE SAME CONTRACTOR THE DAMAGES WOULD BE FIXED AT $10 A DAY WHETHER THERE WAS DELAY IN DELIVERY OF EITHER ONE OR BOTH THE ITEMS, WHEREAS IF THE ITEMS WERE LET TO SEPARATE CONTRACTORS THE STIPULATED DAMAGES WOULD BE $10 A DAY AS TO EACH ITEM, OR $20 A DAY IF DELIVERY OF BOTH ITEMS WAS DELAYED. AS A MATTER OF FACT, THE CONTRACTOR HERE BID ON BOTH ITEMS, AND ITS BID ON THE GRADUATED TUBE ITEM WAS IN AN AMOUNT SUBSTANTIALLY LARGER THAN ITS BID ON THE UNGRADUATED TUBES. ONLY THE LATTER BID WAS ACCEPTED AND YET THE STIPULATION FOR LIQUIDATED DAMAGES WAS THE SAME AS IT WOULD HAVE BEEN IF BOTH BIDS HAD HAD ACCEPTED. OBVIOUSLY SUCH A PROVISION IN SUCH A CONTRACT COULD NOT HAVE BEEN BASED ON ANY CALCULATED REASONABLE RELATION TO THE PROBABLE DAMAGES WHICH MIGHT FOLLOW A BREACH, AND NEGATIVES "ANY NOTION THAT THE PARTIES REALLY MEANT TO PROVIDE A MEASURE OF COMPENSATION"--- THAT IS,"TO TREAT THE SUM NAMED AS ESTIMATED AND ASCERTAINED DAMAGES.'

2. WHILE THE INVITATION FOR BIDS ADVISED PROSPECTIVE BIDDERS THAT THE SUPPLIES WERE TO BE PURCHASED "AGAINST A DEFAULTING CONTRACTOR" AND STATED THERE WAS IMMEDIATE NEED FOR THE ITEMS, ALL OF THE 3,000 GLASS TUBES HERE INVOLVED WERE TO BE DELIVERED TO THE VETERANS' ADMINISTRATION SUPPLY DEPOT AT PERRY POINT, MD., AND WERE EVIDENTLY TO RESTOCK SUCH ITEM AT THE SUPPLY DEPOT. AT LEAST IT IS NOT TO BE SUPPOSED THAT THIS WHOLE NUMBER OF GLASS TUBES WAS THEN AND THERE REQUIRED FOR IMMEDIATE USE. IN THIS CONNECTION IT IS NOTED THAT WHILE THE CONTRACTOR OFFERED DELIVERY WITHIN 1 DAY AFTER RECEIPT OF AN ORDER, A PURCHASE ORDER THE TUBES WAS NOT MAILED TO THE CONTRACTOR UNTIL 13 DAYS AFTER THE BID WAS ACCEPTED. HOWEVER THIS MAY BE, THE STIPULATION FOR LIQUIDATED DAMAGES MADE NO ALLOWANCE FOR PARTIAL DELIVERIES, THE SAME FLAT AMOUNT OF $10 A DAY WAS TO APPLY UNTIL THE LAST OF THE 3,000 TUBES WERE DELIVERED. ON SUCH A STOCK ITEM THE PROBABLE ACTUAL DAMAGES FOR DELAY IN DELIVERY WOULD AT LEAST BE REDUCED IN PROPORTION TO PARTIAL DELIVERIES, AND AS NO SUCH PROVISION WAS MADE IT SEEMS CLEAR THAT THE STIPULATION HERE WAS NOT A BONA FIDE ESTIMATION OF PROBABLE DAMAGES WHICH WOULD RESULT FROM A DEFAULT, BUT WAS MERELY AN ARBITRARY PROVISION FOR A PENALTY TO COERCE TIMELY DELIVERY. SEE NORTHWESTERN TERRA COTTA V. CALDWELL, 234 FED. 491; CERTIORARI DENIED, 242 U.S. 643, WHERE THE CIRCUIT COURT OF APPEALS FOR THE ENGLISH CIRCUIT, AFTER A COMPREHENSIVE REVIEW OF THE DECIDED CASES, SAID, AT PAGE 505, IN HOLDING THAT THE CONTRACT STIPULATION AS FOR LIQUIDATED DAMAGES WAS UNENFORCEABLE:

* * * THAT IS, WHEN THE CONTRACT WAS TO FURNISH ALMOST INNUMERABLE ARTICLES, AND NOT TO BUILD A BUILDING, IT CANNOT BE ASSUMED THAT THE PARTIES MEANT TO STIPULATE FOR THE SAME DAMAGES FOR TOTAL FAILURE TO DELIVER ANY PART OF THE GOODS AND FOR A FAILURE TO DELIVER A SINGLE ONE OF THE INNUMERABLE ARTICLES TO BE DELIVERED. * * *

IN VIEW OF ALL THE FACTS AND CIRCUMSTANCES APPEARING IN THIS PARTICULAR CASE IT MUST BE HELD THAT THE STIPULATION CONTAINED IN THE CONTRACT AS MADE WAS NOT A VALID AND ENFORCEABLE PROVISION FOR LIQUIDATED DAMAGES, AND, AS THERE IS NO SHOWING OF ANY ACTUAL DAMAGES RESULTING FROM THE DELAY IN DELIVERY, THERE APPEARS NO BASIS FOR WITHHOLDING ANY PART OF THE CONTRACT PRICE FOR THE SUPPLIES, AND THE CONTRACTOR'S CLAIM BEFORE THIS OFFICE WILL BE SETTLED ACCORDINGLY. SEE DECISION OF SEPTEMBER 20, 1932, A -44466, TO THE SECRETARY OF THE INTERIOR.

THE MATTER IS BEING BROUGHT TO YOUR ATTENTION AT THIS LENGTH BECAUSE OF THE ADMINISTRATIVE PRACTICE INVOLVED. THE SUPPLIES HERE IN QUESTION APPARENTLY WERE NOT READILY PROCURABLE IN THE OPEN MARKET, AS EVIDENCED BY THE CIRCUMSTANCES THAT A PRIOR CONTRACTOR HAD DEFAULTED AND THAT THIS CONTRACTOR, WHOSE BID WAS THE ONLY ONE RECEIVED ON INVITATIONS SENT TO 12 DEALERS, APPARENTLY MET GREAT DIFFICULTY IN SUPPLYING TUBES MEETING THE CONTRACT SPECIFICATIONS. A DELAY IN OBTAINING AT LEAST A PARTIAL DELIVERY OF SUCH SUPPLIES MAY HAVE CAUSED THE GOVERNMENT GREAT INCONVENIENCE AND ACTUAL INTANGIBLE LOSSES OR DAMAGES NOT READILY ASCERTAINABLE IN A MONEY EQUIVALENT. IN A CONTRACT FOR SUCH SUPPLIES A PROPER STIPULATION FOR LIQUIDATED DAMAGES FOR DELAY WOULD APPEAR NOT ONLY APPROPRIATE BUT DESIRABLE IN THE INTEREST OF THE GOVERNMENT. SEE 11 COMP. GEN. 384, THAT SUCH PROVISIONS ARE NOT APPROPRIATE IN CONTRACTS FOR COMMODITIES EASILY PROCURABLE IN THE OPEN MARKET, AS TO WHICH THE ACTUAL DAMAGES FOR A DEFAULT IN DELIVERY ARE READILY ASCERTAINABLE, AND, ALSO, AS TO THE DUTY OF GOVERNMENT AGENTS TO MITIGATE OR CONSERVE LIQUIDATED DAMAGES BY SEASONABLY TERMINATING A DEFAULTED CONTRACT AND BUYING AGAINST THE CONTRACTOR'S ACCOUNT INSTEAD OF PERMITTING A DELAY WITH CONSEQUENT LIQUIDATED DAMAGES TO CONTINUE AN UNREASONABLE TIME. IN THE PRESENT CASE IT DOES NOT APPEAR THAT A PROPER LIQUIDATED DAMAGE PROVISION WAS INAPPROPRIATE OR THAT THE SUPPLIES COULD HAVE BEEN PROCURED IN THE OPEN MARKET AT AN EARLIER TIME TO MITIGATE THE ACCRUAL OF DAMAGES AGAINST THE CONTRACTOR. HOWEVER, THE FORM OF STIPULATION USED IN THE CONTRACT, BEING WITHOUT ANY REASONABLE RELATION TO THE PROBABLE DAMAGES TO BE ANTICIPATED FOR A DEFAULT, HAS OPERATED TO LEAVE THE GOVERNMENT WITHOUT ANY RIGHT TO ASSESS LIQUIDATED DAMAGES FOR THE DELAY INVOLVED AND WITHOUT COMPENSATION FOR THE INTANGIBLE DAMAGES WHICH SUCH DELAY MAY HAVE CAUSED.

FOR THESE REASONS THERE IS RECOMMENDED FOR YOUR ADMINISTRATIVE CONSIDERATION AND, ALSO, FOR THE CONSIDERATION OF ADMINISTRATIVE OFFICERS GENERALLY, THE DESIRABILITY OF ADOPTING IN SUCH SUPPLY CONTRACTS THE USE OF A STIPULATION FOR LIQUIDATED DAMAGES, AS USED WITH UNQUESTIONED EFFECT BY VARIOUS DEPARTMENTS AND AGENCIES, WHEREBY THE AMOUNT OF LIQUIDATED DAMAGES WILL BE FIXED ON THE BASIS OF AN APPROPRIATE PERCENTAGE OF THE CONTRACT PRICE OF ANY UNDELIVERED SUPPLIES, FOR EACH DAY OF DELAY AFTER THE DELIVERY DATE FIXED IN THE CONTRACT. SUCH A PROVISION, BEING DIRECTLY PROPORTIONED TO THE TIME OF DELAY AND TO THE EXTENT OF THE BREACH AS MEASURED BY THE ACTUAL QUANTITIES OF SUPPLIES UNDELIVERED SHOULD BE UNQUESTIONABLY VALID AND ENFORCEABLE AS IN HARMONY WITH THE PRINCIPLES ENUNCIATED BY THE COURTS, AND I BELIEVE YOU WILL AGREE THAT THE ADOPTION OF SUCH PROCEDURE WOULD BE DEFINITELY IN THE INTEREST OF THE GOVERNMENT AND WOULD MAKE FOR MORE EFFICIENT ADMINISTRATION.