A-91343, APRIL 7, 1938, 17 COMP. GEN. 827

A-91343: Apr 7, 1938

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THE PROVISION IS INVALID AND UNENFORCEABLE AS BEING IN EFFECT A PENALTY SINCE. THE CONTRACTOR STATES IN PART AS FOLLOWS: WE HAVE BEFORE US NOTICE OF SETTLEMENT OF CLAIM IN THE ABOVE FILE AND WISH TO TAKE EXCEPTION TO THE MANNER IN WHICH THIS CLAIM IS FIGURED. THIS PARAGRAPH HAD THE APPROVAL AND SUPPORT OF THE UNITED STATES BUREAU OF MINES AND IS THE RECOGNIZED AND CUSTOMARY MEANS BY WHICH COAL SAMPLES ARE TAKEN WHEN GOVERNMENT PURCHASES ARE INVOLVED. TO ASSUME THAT A VARIATION OF ONE OR TWO PERCENT IN THE SULPHUR CONTENT OF COAL WOULD SUBJECT THE CONTRACTOR TO A PENALTY OF 30 PERCENT OF HIS CONTRACT PRICE IS SO RIDICULOUS AND ABSURD THAT IT SHOULD NOT BE THE SUBJECT OF CONTROVERSY BETWEEN THE CONTRACTOR AND THE UNITED STATES GOVERNMENT. * * * BY REFERRING TO THE ANALYSIS YOU CAN DETERMINE THAT THE COAL WAS ACTUALLY BETTER IN QUALITY THAN THAT GUARANTEED UNDER THE CONTRACT.

A-91343, APRIL 7, 1938, 17 COMP. GEN. 827

CONTRACTS - SUBSTITUTION FOR STANDARD GOVERNMENT COAL PURCHASE CONDITIONS - EXCESSIVE DAMAGE PROVISIONS WHERE COAL CONTRACT PROVIDED--- IN LIEU OF THE STANDARD GOVERNMENT PURCHASE CONDITIONS AND CONTRARY TO THE AUTHORIZED PRACTICE--- FOR A REDUCTION OF THIRTY PERCENT OF THE CONTRACT PRICE SHOULD THE GOVERNMENT ANALYSES SHOW THAT COAL DELIVERED FAILED IN ANY RESPECT TO MEET THE CONTRACT REQUIREMENTS, REGARDLESS OF THE DEGREE OF VARIATION AND WITHOUT RESPECT TO THE FACT THAT THE HEATING QUALITY MIGHT NEVERTHELESS BE SUPERIOR TO THAT REQUIRED, THE PROVISION IS INVALID AND UNENFORCEABLE AS BEING IN EFFECT A PENALTY SINCE, INSTEAD OF A REASONABLE MEASURE OF DAMAGES LIKELY TO FLOW FROM A BREACH OF THE CONTRACT, IT STIPULATES AN ARBITRARY DEDUCTION, TOTALLY WITHOUT POSSIBLE RELATION TO ANY PROBABLE DAMAGES; AND IN THE ABSENCE OF A SHOWING OF ACTUAL DAMAGES, THERE EXISTS NO BASIS FOR THE WITHHOLDING OF ANY PORTION OF THE CONTRACT PRICE BY REASON OF A SLIGHT EXCESS IN SULPHUR CONTENT OF THE COAL DELIVERED.

DECISION BY ACTING COMPTROLLER GENERAL ELLIOTT, APRIL 7, 1938:

THE SINCLAIR COAL CO. HAS REQUESTED A REVIEW OF SETTLEMENT DATED OCTOBER 26, 1937, COVERING A CLAIM FOR $98.68 CONSISTING OF TWO ITEMS, ONE FOR $10 AND ONE FOR $88.68 DEDUCTED FROM PAYMENTS MADE ON VOUCHERS 3882 AND 4624, RESPECTIVELY, FOR 200.25 TONS OF COAL FURNISHED THE UNITED STATES ENGINEER CORPS, WAR DEPARTMENT, UNDER CONTRACT W-461-ENG 7599, DATED OCTOBER 31, 1935.

IN SUPPORT OF ITS REQUEST, THE CONTRACTOR STATES IN PART AS FOLLOWS:

WE HAVE BEFORE US NOTICE OF SETTLEMENT OF CLAIM IN THE ABOVE FILE AND WISH TO TAKE EXCEPTION TO THE MANNER IN WHICH THIS CLAIM IS FIGURED, PARTICULARLY TO ITEM OF $88.68, DEDUCTED FROM VOUCHER 4624 OF APRIL 1936, ACCOUNT OF G. C. REINHARDT, CAPTAIN, CORPS OF ENGINEERS.

WE NEXT WANT TO DIRECT YOUR ATTENTION TO STANDARD GOVERNMENT PURCHASE CONDITIONS (COAL), STANDARD FORM NO. 43, PARAGRAPH 16, SUBJECT--- SAMPLING. THIS PARAGRAPH HAD THE APPROVAL AND SUPPORT OF THE UNITED STATES BUREAU OF MINES AND IS THE RECOGNIZED AND CUSTOMARY MEANS BY WHICH COAL SAMPLES ARE TAKEN WHEN GOVERNMENT PURCHASES ARE INVOLVED. TO ASSUME THAT A VARIATION OF ONE OR TWO PERCENT IN THE SULPHUR CONTENT OF COAL WOULD SUBJECT THE CONTRACTOR TO A PENALTY OF 30 PERCENT OF HIS CONTRACT PRICE IS SO RIDICULOUS AND ABSURD THAT IT SHOULD NOT BE THE SUBJECT OF CONTROVERSY BETWEEN THE CONTRACTOR AND THE UNITED STATES GOVERNMENT. * * * BY REFERRING TO THE ANALYSIS YOU CAN DETERMINE THAT THE COAL WAS ACTUALLY BETTER IN QUALITY THAN THAT GUARANTEED UNDER THE CONTRACT. THE B.T.U. GUARANTEED WAS ONLY 13,000 AND BOTH CARS SHIPPED EXCEEDED THIS GUARANTEE BY A COMFORTABLE MARGIN. WE WANT FULL REINSTATEMENT OF THIS CLAIM FOR $88.68 AND RESPECTFULLY REQUEST THAT THE HANDLING OF IT BE EXPEDITED.

WITH RESPECT TO THE ITEMS INVOLVED IN THE SETTLEMENT IN QUESTION, THE ONE FOR $88.68--- REPRESENTING 30 PERCENT OF THE CONTRACT PRICE OF THE COAL FOR WHICH PAYMENT WAS MADE ON VOUCHER NO. 4624--- WAS DISALLOWED BECAUSE OF THE EXCESS SULPHUR CONTENT OF THE COAL DELIVERED. THE ITEM OF $10 REPRESENTED A DEDUCTION MADE ON VOUCHER 3882 TO COVER ANY EXCESS FREIGHT RESULTING FROM DELIVERY FROM A POINT OTHER THAN THAT NAMED IN THE CONTRACT. OF THIS ITEM THE SUM OF $5.90 WAS FOUND TO BE SUFFICIENT TO COVER THE EXCESS COST OF FREIGHT, THUS LEAVING A BALANCE DUE OF $4.10, WHICH AMOUNT WAS APPLIED IN PARTIAL LIQUIDATION OF THE CONTRACTOR'S INDEBTEDNESS TO THE UNITED STATES IN THE AMOUNT OF $5.59 ARISING OUT OF AN OVERPAYMENT MADE ON VOUCHER 10 64112, MARCH 1937, ACCOUNT OF G. F. ALLEN, CHIEF DISBURSING OFFICER, TREASURY DEPARTMENT, BY REASON OF AN ERRONEOUS ADJUSTMENT OF PRICE OF COAL FURNISHED THE INDIAN SERVICE, DEPARTMENT OF INTERIOR, DURING OCTOBER AND DECEMBER 1936, UNDER CONTRACT NO. I-1-IND- 12162.

THE SPECIFICATIONS FORMING A PART OF CONTRACT NO. W-461-ENG-7599, PROVIDED:

2. AWARD WILL BE MADE TO THE LOWEST RESPONSIBLE BIDDER OFFERING A COAL NEAREST IN COMPLIANCE WITH THE SPECIFICATIONS. EXTREME LOW B.T.U. AND EXTREME HIGH SULPHUR CONTENT COAL WILL NOT BE CONSIDERED. NO BONUS WILL BE PAID ON COAL BETTER THAN THE SPECIFICATIONS.

3. TESTS MAY BE MADE ON ANY LOT OF COAL DELIVERED. SUCH TESTS, IF MADE, WILL BE MADE BY THE BUREAU OF MINES ON SAMPLES SELECTED BY A REPRESENTATIVE OF THE UNITED STATES.

4. IN EVENT THAT SAMPLES OF THE COAL ARE TAKEN AS OUTLINED IN PARAGRAPH 3, 30 PERCENT OF THE CONTRACT PRICE WILL BE WITHHELD PENDING THE OUTCOME OF THE ANALYSES OF THE SAMPLES. SHOULD THE ANALYSES SHOW THE COAL REPRESENTED BY THE SAMPLES FAILS TO BE WITHIN THE LIMITS OF THE ANALYSES STATED AS BEING THAT OF THE COAL OFFERED, THE COAL ALREADY DELIVERED WILL BE ACCEPTED BUT NO ADDITIONAL PAYMENT WILL BE MADE BEYOND THE CONTRACT PRICE LESS 30 PERCENT. THE REMAINDER MAY BE REJECTED OR ACCEPTED AT A PRICE FIXED BY THE DISTRICT ENGINEER.

BIDS ARE DESIRED ON COAL THE ANALYSIS OF WHICH SHOWS EACH COMPONENT TO BE WITHIN THE LIMITS SPECIFIED BELOW:

CHART

MOISTURE, AS RECEIVED --------------------- 12 PERCENT MAX.

VOLATILE, DRY COAL ------------------------ 35 PERCENT AVG.

FIXED CARBON, DRY COAL -------------------- 40 PERCENT MIN.

ASH, DRY COAL ----------------------------- 12 PERCENT MAX.

SULPHUR, DRY COAL ------------------------- 3 PERCENT MAX.

B.T.U., DRY COAL ------------------------- 13,000 MIN.

FUSION POINT OF ASH ----------------------- 2,200 DEGREES F.MIN.

THE CONTRACTOR'S BID WHICH FORMED A PART OF SAID CONTRACT SPECIFIED THAT AN ANALYSIS OF THE COAL TO BE DELIVERED WOULD BE AS FOLLOWS:

CHART

MOISTURE ---------------------------------- 12.00 PERCENT

VOLATILE ---------------------------------- 35.00 PERCENT

FIXED CARBON ------------------------------ 53.00 PERCENT

ASH --------------------------------------- 12.0 PERCENT

SULPHUR ----------------------------------- 3.0 PERCENT

B.T.U. ------------------------------------ 13,000 PERCENT

FUSION POINT OF ASH ----------------------- 2,200 DEGREES F.

WITH RESPECT TO THE 200.25 TONS OF COAL DELIVERED PURSUANT TO THE CONTRACT IN QUESTION AND PAID FOR UNDER THE AFOREMENTIONED VOUCHERS, THE RECORDS SHOW THAT NO ANALYSIS WAS MADE OF THE 52.45 TONS COVERED BY VOUCHER 3882 SINCE THE COAL UPON INSPECTION WAS "CONSIDERED TO BE SATISFACTORY IN EVERY RESPECT" BUT TWO ANALYSES MADE OF THE 147.8 TONS COVERED BY VOUCHER 4624 SHOW THE FOLLOWING RESULTS:

CHART

TONS MOISTURE VOLATILE FIXED ASH SULPHUR B.T.U.

MATTER CARBON

47.9 8.2 45.2 47.4 7.4 4.0 13,540

99.9 11.2 42.8 47.9 9.3 5.0 13,080

THE CONTRACT PROVIDES FOR ANALYTICAL TESTS BY THE BUREAU OF MINES. STANDARD GOVERNMENT PURCHASE CONDITIONS (COAL), STANDARD FORM NO. 43, APPROVED BY THE PRESIDENT MARCH 1, 1929, FOR USE IN PURCHASING COAL FOR GOVERNMENT NEEDS, PROVIDE THAT PARAGRAPH 16 THEREOF SHALL APPLY TO CONTRACTS COVERING THE PURCHASE OF COAL WHEN SUCH PURCHASES ARE SUBJECT TO ANALYTICAL TESTS. SAID PARAGRAPH PROVIDES THAT WHERE THE COAL DELIVERED CONTAINS AN EXCESS ASH CONTENT OF 2 PERCENT OR MORE A DEDUCTION SHALL BE MADE FROM THE CONTRACT PRICE ON THE BASIS OF THE DIFFERENCE BETWEEN THE PERCENTAGE OF ASH BY ANALYSIS AND THE PERCENTAGE OF ASH SPECIFIED BY THE CONTRACT. IT CONTAINS NO PROVISION FOR A DEDUCTION FROM THE CONTRACT PRICE BECAUSE OF EXCESS SULPHUR, BUT DOES PROVIDE THAT IF THE ANALYSES SHOW THE COAL TO BE INFERIOR TO THE CONTRACT REQUIREMENTS, DELIVERIES MAY BE REJECTED AND PURCHASES MADE IN OPEN MARKET AGAINST THE CONTRACTOR'S ACCOUNT.

WHILE PROVIDING FOR ANALYTICAL TESTS BY THE BUREAU OF MINES, THE CONTRACT FAILED TO CONTAIN THE REQUIRED STANDARD GOVERNMENT PURCHASE CONDITIONS. IN LIEU THEREOF THERE WAS SUBSTITUTED A PROVISION FOR A FLAT DEDUCTION OF 30 PERCENT OF THE CONTRACT PRICE SHOULD THE ANALYSES SHOW THAT THE COAL DELIVERED FAILED IN ANY RESPECT TO MEET THE CONTRACT REQUIREMENTS. OTHER WORDS, THE DEDUCTION OF 30 PERCENT OF THE CONTRACT PRICE WAS MADE APPLICABLE IN THE EVENT OF ANY VARIATION FROM THE CONTRACT QUALITY REGARDLESS OF THE DEGREE OF VARIATION, AND WITHOUT RESPECT TO THE FACT THAT THE HEATING QUALITY OF THE COAL DELIVERED MIGHT ACTUALLY BE SUPERIOR TO THE CONTRACT REQUIREMENTS.

THE EVIDENCE OF RECORD ESTABLISHES THAT THE COAL DELIVERED UNDER THE CONTRACT WAS SUPERIOR TO THE REQUIREMENTS THEREOF INSOFAR AS HEATING VALUE WAS CONCERNED SINCE THE BRITISH THERMAL UNITS WERE HIGHER AND THE ASH CONTENT WAS LOWER THAN THAT REQUIRED UNDER THE CONTRACT. IT HAS BEEN REPORTED THAT WHETHER OR NOT THE SLIGHT EXCESS OF SULPHUR (LESS THAN AN AVERAGE OF 2 PERCENT) WOULD CAUSE ANY DAMAGE TO THE COAL BURNING EQUIPMENT WOULD DEPEND UPON WHETHER THE CHARACTER OF THE SULPHUR CONTENT WAS VOLATILE OR PYRITE; THAT, IF VOLATILE, THERE WOULD BE NO CLINKER FORMATION IN THE FURNACE AND HENCE NO DAMAGE; BUT THAT IF THE SULPHUR WERE OF A PYRITE CHARACTER IT COULD RESULT IN THE FORMATION OF A TYPE OF CLINKER WHICH MIGHT CAUSE DAMAGE. HOWEVER, SINCE THE ANALYSES FAIL TO SHOW THE CHARACTER OF THE SULPHUR CONTENT, THE RECORD DOES NOT ESTABLISH THAT THE GOVERNMENT HAS SUFFERED ANY DAMAGES AS A RESULT OF THE SLIGHT EXCESS SULPHUR CONTENT OF THE COAL DELIVERED.

WHILE THERE WAS A TECHNICAL BREACH OF THE CONTRACT PROVISION, IT WOULD APPEAR THAT SUCH PROVISION--- THE USE OF WHICH WAS CONTRARY TO THE AUTHORIZED PRACTICE--- IS WITHOUT VALIDITY SINCE IN LIEU OF A REASONABLE MEASURE OF DAMAGES LIKELY TO FLOW FROM A BREACH THEREOF, IT STIPULATES AN ARBITRARY DEDUCTION, TOTALLY WITHOUT POSSIBLE RELATION TO ANY PROBABLE DAMAGES, WHICH IS, IN EFFECT, A PENALTY AND AS SUCH IS UNENFORCEABLE. SEE KOTHE, TRUSTEE, V. R. C. TAYLOR TRUST, 280 U.S. 224; KENNEDY V. UNITED STATES, 24 CT.CLS. 123; 16 COMP. GEN. 344 AND AUTHORITIES THEREIN CITED.

IN THE ABSENCE OF A SHOWING OF ACTUAL DAMAGES, THERE EXISTS NO BASIS FOR THE WITHHOLDING OF ANY PORTION OF THE CONTRACT PRICE BY REASON OF THE SLIGHT EXCESS IN SULPHUR CONTENT OF THE COAL DELIVERED. ACCORDINGLY, IN THE ABSENCE OF OTHER OBJECTION, A SETTLEMENT WILL ISSUE IN DUE COURSE IN FAVOR OF THE CONTRACTOR FOR THE FULL AMOUNT WITHHELD UNDER VOUCHERS 3882 AND 4624--- WHICH ACCORDING TO THE RECORDS OF THIS OFFICE ARE THE ONLY VOUCHERS PENDING SETTLEMENT HEREIN--- IN THE TOTAL AMOUNT OF $98.68, LESS UNDER-DEDUCTIONS OF FREIGHT CHARGES, MUTUALLY AGREED UPON, IN THE TOTAL AMOUNT OF $11.49, OR $87.19.