B-129249, OCTOBER 11, 1956, 36 COMP. GEN. 305

B-129249: Oct 11, 1956

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CONTRACTS - DEFAULT - EXCESS COSTS - CONTRACTING OFFICERS' RESPONSIBILITY A CONTRACTOR WHO WAS AWARDED A CONTRACT ON THE BASIS OF A CERTIFICATE OF COMPETENCY ISSUED BY THE SMALL BUSINESS ADMINISTRATION AFTER THE CONTRACTING AGENCY HAD EXPLAINED THAT THE ARTICLE REQUIRED WAS DIFFICULT TO MANUFACTURE AND FURNISHED ITS REASONS FOR BELIEVING THE CONTRACTOR INCAPABLE OF PRODUCING THE ARTICLE. 1956: REFERENCE IS MADE TO YOUR LETTERS OF SEPTEMBER 13 AND SEPTEMBER 24. WHICH WERE URGENTLY NEEDED BY THE BUREAU OF AERONAUTICS. THAT TWO RESPONSIVE BIDS WERE RECEIVED. CONCLUDED THAT AIRBORNE DID NOT HAVE THE ENGINEERING EXPERIENCE. THE CASE WAS FORWARDED TO THE SMALL BUSINESS ADMINISTRATION SO THAT AGENCY MIGHT CONSIDER WHETHER IT DESIRED TO ISSUE A CERTIFICATE OF COMPETENCY ON BEHALF OF AIRBORNE.

B-129249, OCTOBER 11, 1956, 36 COMP. GEN. 305

CONTRACTS - DEFAULT - EXCESS COSTS - CONTRACTING OFFICERS' RESPONSIBILITY A CONTRACTOR WHO WAS AWARDED A CONTRACT ON THE BASIS OF A CERTIFICATE OF COMPETENCY ISSUED BY THE SMALL BUSINESS ADMINISTRATION AFTER THE CONTRACTING AGENCY HAD EXPLAINED THAT THE ARTICLE REQUIRED WAS DIFFICULT TO MANUFACTURE AND FURNISHED ITS REASONS FOR BELIEVING THE CONTRACTOR INCAPABLE OF PRODUCING THE ARTICLE, MAY NOT BE RELIEVED OF LIABILITY FOR EXCESS COSTS INCIDENT TO DEFAULT UNDER THE COMMON-LAW PRINCIPLE OF RELEASE DUE TO UNFAIR ADVANTAGE.

TO THE SECRETARY OF THE NAVY, OCTOBER 11, 1956:

REFERENCE IS MADE TO YOUR LETTERS OF SEPTEMBER 13 AND SEPTEMBER 24, 1956, RELATIVE TO THE DEFAULT OF AIRBORNE, INC., UNDER CONTRACT NO. N600 (A) 41780, DATED APRIL 9, 1956.

IT APPEARS THAT ON JANUARY 11, 1956, THE NAVY PURCHASING OFFICE, WASHINGTON, D.C., ISSUED AN INVITATION ( IFB 600-749-56) FOR BIDS FOR MANUFACTURING AND FURNISHING 638 STARTER GENERATORS, TYPE A-4, WHICH WERE URGENTLY NEEDED BY THE BUREAU OF AERONAUTICS; THAT TWO RESPONSIVE BIDS WERE RECEIVED, ONE FROM AIRBORNE, INC., A SMALL BUSINESS CONCERN, AT A UNIT PRICE OF $701.50 (AFTER CORRECTION OF A MISTAKE IN BID), AND ONE FROM BENDIX AVIATION CORPORATION AT A UNIT PRICE OF 1,329; BUT THAT THE NAVY DEPARTMENT, AS A RESULT OF A PREAWARD SURVEY, CONCLUDED THAT AIRBORNE DID NOT HAVE THE ENGINEERING EXPERIENCE, OR FINANCIAL RESOURCES, NECESSARY TO ENABLE IT TO PERFORM THE CONTRACT. IN ACCORDANCE WITH MANDATORY PROCEDURES, THE CASE WAS FORWARDED TO THE SMALL BUSINESS ADMINISTRATION SO THAT AGENCY MIGHT CONSIDER WHETHER IT DESIRED TO ISSUE A CERTIFICATE OF COMPETENCY ON BEHALF OF AIRBORNE. SUCH A CERTIFICATE WAS ISSUED BY THE AGENCY ON MARCH 29, 1956, AND, FOLLOWING A REQUEST BY THE NAVY DEPARTMENT FOR RECONSIDERATION OF THE AGENCY'S ACTION IN THE MATTER, THE SMALL BUSINESS ADMINISTRATION, AFTER FURTHER INVESTIGATION, CONFIRMED ITS ORIGINAL ACTION BY LETTER OF APRIL 6, 1956, TO THE NAVY DEPARTMENT. ACCORDINGLY, THE CONTRACT WAS AWARDED TO AIRBORNE ON APRIL 9, 1956, AT ITS BID PRICE, IN THE AGGREGATE AMOUNT OF $447,557, AS REQUIRED BY LAW.

IT FURTHER APPEARS THAT AIRBORNE WAS UNABLE TO FURNISH A PREPRODUCTION MODEL MEETING THE REQUIREMENTS OF THE SPECIFICATIONS, AND THAT THE CONTRACT WAS TERMINATED FOR DEFAULT ON JUNE 15, 1956, AFTER WHICH A LETTER CONTRACT WAS ENTERED INTO WITH THE BENDIX AVIATION CORPORATION FOR FURNISHING THE GENERATORS AT AN APPROXIMATE TOTAL COST OF $828,762.

YOU STATE THAT THE DEPARTMENT OF THE NAVY IS OF THE FIRM OPINION THAT AIRBORNE EXERCISED MARKED DILIGENCE IN PROCEEDING UNDER THE CONTRACT, BUT THAT, AT THE TIME OF THE SUBMISSION OF ITS BID AND ISSUANCE OF THE CERTIFICATE OF COMPETENCY, THE CONCERN FAILED TO UNDERSTAND THE COMPLEXITY OF THE ITEM BEING PROCURED AND THE PRODUCTION DIFFICULTIES INVOLVED; THAT, IN ATTEMPTING TO PERFORM UNDER THE CONTRACT, AIRBORNE INCURRED SUBSTANTIAL COSTS; AND THAT THE CONCERN'S NET WORTH, ACCORDING TO ITS DECEMBER 31 BALANCE SHEET, IS ONLY ABOUT $11,000, AND THEREFORE THE CHANCE OF COLLECTION OF THE EXCESS COSTS INVOLVED, IN THE APPROXIMATE AMOUNT OF $381,205, APPEARS VERY DOUBTFUL AT BEST. IN VIEW OF THESE CIRCUMSTANCES, AND THE FACT THAT THE GOVERNMENT WAS ABLE TO OBTAIN THE GENERATORS FROM BENDIX AT A PRICE NO MORE THAN IT WOULD HAVE HAD TO PAY HAD THE CONTRACT BEEN AWARDED TO THAT CONCERN ORIGINALLY, YOU RECOMMEND THAT WE AUTHORIZE THE WAIVER OF THE GOVERNMENT'S CLAIM AGAINST AIRBORNE FOR EXCESS COSTS ON AN EQUITABLE BASIS.

THERE IS NO PROVISION OF LAW WHICH AUTHORIZES US TO REMIT, OR WAIVE, THE LIABILITY OF A CONTRACTOR FOR EXCESS COSTS, OR DAMAGES, RESULTING FROM HIS DEFAULT. HENCE, THE LIABILITY OF AIRBORNE MUST BE DETERMINED IN ACCORDANCE WITH THE ORDINARY PRINCIPLES OF COMMON LAW. IN THIS CONNECTION, THE PRINCIPLE IS WELL ESTABLISHED THAT COURTS CANNOT RELEASE PARTIES FROM IMPRUDENT BARGAINS UNLESS AN UNDUE ADVANTAGE HAS BEEN TAKEN OF THEM. IN OTHER WORDS, THE FACT THAT A BARGAIN IS A HARD ONE DOES NOT ENTITLE A PARTY TO BE RELIEVED THEREFROM IF HE ASSUMED IT FAIRLY AND VOLUNTARILY. SEE 12 AM. JUR., CONTRACTS, SECTION 184.

IN THE PRESENT INSTANCE, AIRBORNE STATED A UNIT PRICE OF $401.50 FOR MANUFACTURING THE GENERATORS IN ITS ORIGINAL BID, AND THE CONTRACTING OFFICER, NOTING THAT THE PRICE WAS GREATLY OUT OF LINE WITH THE PRICE STATED BY THE BENDIX AVIATION CORPORATION, REQUESTED A VERIFICATION OF THE BID. BY LETTER OF FEBRUARY 3, 1956, AIRBORNE ADVISED THAT, DUE TO A CLERICAL MISINTERPRETATION, THE FIGURE "7" HAD BEEN TRANSFORMED INTO A "4" IN TRANSCRIBING THE UNIT PRICE OF $701.50 SET FORTH ON THE CONTRACTOR'S WORKSHEET WITH THE RESULT THAT A BID OF $401.50 PER UNIT WAS SUBMITTED INSTEAD OF THE INTENDED BID OF $701.50. THE CONTRACTOR SUBMITTED PHOTOSTATIC COPIES OF ITS WORKING PAPERS IN SUPPORT OF ITS CONTENTION AS TO THE MISTAKE AND REQUESTED THAT THE CORRECTED BID OF $701.50 PER UNIT, OR TOTAL PRICE OF $447,557, BE ACCEPTED. THE LETTER CONCLUDED:

WE ARE VERY ANXIOUS TO HAVE THE PRIVILEGE OF SUPPLYING THIS APPARATUS TO YOU, AND MAY WE ASSURE YOU THAT ON THE BASIS OF OUR OVER 35 YEARS AS SUCCESSFUL CONSULTING ENGINEERS IN ELECTRICAL ROTATING MACHINERY PRIOR TO THE INCEPTION OF AIRBORNE, INC., WE WILL EXTEND EVERY EFFORT TO PROVIDE EXCELLENT UNITS TO YOU IN ACCORDANCE WITH OUR DELIVERY SCHEDULE.

AS INDICATED ABOVE, YOUR DEPARTMENT CONCLUDED, ON THE BASIS OF A PREAWARD SURVEY, THAT IT WOULD NOT BE IN THE BEST INTERESTS OF THE GOVERNMENT TO AWARD THE CONTRACT TO AIRBORNE. IN YOUR LETTER OF APRIL 5, 1956, TO THE DEPUTY ADMINISTRATOR OF THE SMALL BUSINESS ADMINISTRATION, YOU REQUESTED RECONSIDERATION OF THE AGENCY'S ACTION WITH RESPECT TO THE ISSUANCE OF THE CERTIFICATE OF COMPETENCY ON THE BASIS, AMONG OTHER THINGS, THAT AIRBORNE HAD NEVER UNDERTAKEN ANY PROJECT THAT EVEN APPROACHED THE ORDER OF MAGNITUDE OF THE PROCUREMENT INVOLVED IN TECHNICAL COMPLEXITY; THAT SUCCESSFUL TESTING OF A PREPRODUCTION MODEL WOULD BE REQUIRED, AND IT HAD BEEN THE EXPERIENCE OF YOUR DEPARTMENT THAT SUBSTANTIAL TECHNICAL DIFFICULTIES WERE OFTEN ENCOUNTERED BY FIRMS PRODUCING SUCH TECHNICAL EQUIPMENT FOR THE FIRST TIME; THAT THE PREVIOUS PRODUCER OF ALMOST IDENTICAL EQUIPMENT HAD SUBMITTED A BID OF $1,329 PER UNIT, AND THEREFORE AIRBORNE'S BID OF $701.50 WAS CONSIDERED UNREASONABLY LOW BY NAVY ENGINEERING PERSONNEL; AND THAT, IN THE EVENT OF DEFAULT, AIRBORNE WOULD BE LIABLE FOR EXCESS COSTS OF AT LEAST $300,000, WHICH MIGHT NOT BE COLLECTIBLE DUE TO THE CONTRACTOR'S LIMITED FINANCIAL RESOURCES.

THE OBJECTIONS RAISED BY YOUR DEPARTMENT TO AWARDING THE CONTRACT TO AIRBORNE WERE PRESUMABLY RELAYED TO THAT CONCERN BY THE SMALL BUSINESS ADMINISTRATION, WHICH APPEARS TO HAVE MADE A REASONABLY THOROUGH INVESTIGATION OF THE MATTER. HOWEVER, THE AGENCY CONFIRMED ITS PREVIOUS ACTION IN THE MATTER BY ITS REFERRED-TO LETTER OF APRIL 6, 1956, WHICH STATED, AMONG OTHER THINGS, THAT AIRBORNE PLANNED TO SUBCONTRACT A SUBSTANTIAL PART OF THE MANUFACTURING PROCESSES INVOLVED IN THE PRODUCTION OF THE GENERATOR TO COMPANIES WHICH WERE SKILLED IN THEIR RESPECTIVE FIELD; THAT THE AGENCY HAD BEEN INFORMED--- PRESUMABLY BY THE CONTRACTOR-- - THAT THE ENGINEER RESPONSIBLE FOR THE DEVELOPMENT AT BENDIX OF THE EQUIPMENT UNDER CONSIDERATION CURRENTLY WAS IN THE EMPLOY OF AIRBORNE; THAT THE LATTER'S PRESIDENT HAD BEEN A CONSULTANT FOR BENDIX; AND THAT THE KURS AND ROOT COMPANY, WHICH WAS TO BE AIRBORNE'S PRINCIPAL SUBCONTRACTOR, WAS EXPERIENCED IN THE FIELD AND THE COMPANY HAD REVIEWED THE COST FIGURES WHICH FORMED THE BASIS FOR AIRBORNE'S BID AND FOUND THEM SOUND AND CONSERVATIVE.'

FROM THE FOREGOING RECITATION OF THE FACTS, IT IS CLEAR, BEYOND QUESTION, THAT YOUR DEPARTMENT EXERTED ALL EFFORTS AVAILABLE TO IT TO WARN THE CONTRACTOR THAT THE ARTICLE BEING PROCURED WOULD BE DIFFICULT TO MANUFACTURE AND TO EXPLAIN WHY THE CONTRACTOR WAS NOT CONSIDERED CAPABLE OF PRODUCING THE ARTICLE WITHIN THE TIME REQUIRED AND FOR THE PRICE STATED. THE CONTRACTOR, HOWEVER, WAS ABLE TO PERSUADE THE AGENCY OF THE GOVERNMENT CHARGED WITH MAKING THE FINAL DECISION IN THE MATTER THAT IT WAS FULLY CAPABLE OF PERFORMING AT THE PRICE STATED, AND THUS TO OBTAIN THE AWARD OF THE CONTRACT. A SOMEWHAT PARALLEL SITUATION WAS PRESENTED TO THE COURT OF CLAIMS IN THE CASE OF ALABAMA SHIRT AND TROUSER CO. V. UNITED STATES, 121 C.1CLS. 313. IN THAT CASE, THE CONTRACTOR HAD SUBMITTED A UNIT-PRICE BID FOR FURNISHING WOOL TROUSERS TO THE QUARTERMASTER CORPS OF THE ARMY. SINCE THE UNIT PRICE QUOTED APPEARED TO BE UNUSUALLY LOW AND BECAUSE OF THE METHOD OF STITCHING WHICH THE CONTRACTOR INDICATED IT PLANNED TO USE IN MANUFACTURING THE TROUSERS, THE GOVERNMENT REPRESENTATIVE EVALUATING BIDS FELT THAT THE CONTRACTOR DID NOT APPRECIATE THE MAGNITUDE OF THE WORK WHICH WOULD BE REQUIRED IN MANUFACTURING THE TROUSERS AND SAID AS MUCH TO THE CONTRACTOR'S REPRESENTATIVE. HOWEVER, THE CONTRACTOR ADVISED THE GOVERNMENT REPRESENTATIVE THAT IT WAS FAMILIAR WITH THE WORK AND DID NOT WANT TO WITHDRAW THE BID, SINCE IT COULD PERFORM THE CONTRACT AT THE PRICE STATED. AFTER THE CONTRACT WAS AWARDED, IT TURNED OUT THAT THE CONTRACTOR HAD MADE THE MISTAKE SURMISED, AND IT LOST CONSIDERABLE MONEY IN MANUFACTURING AND DELIVERING 20,000 PAIR OF THE TROUSERS UNDER THE CONTRACT, WHICH WAS SUBSEQUENTLY TERMINATED FOR DEFAULT. THE REMAINING 10,000 PAIR OF TROUSERS REQUIRED TO BE FURNISHED WERE PROCURED FROM ANOTHER SOURCE AND THE EXCESS COSTS INVOLVED WERE COLLECTED FROM THE CONTRACTOR BY VOUCHER DEDUCTION. THE CONTRACTOR BROUGHT SUIT FOR THE AMOUNT WHICH HAD BEEN COLLECTED ON THE GROUNDS THAT THE GOVERNMENT PAID A HIGHER PRICE THAN WAS NECESSARY FOR THE TROUSERS WHICH WERE PROCURED FROM THE SUBSTITUTE MANUFACTURER. THE COURT AGREED WITH THE CONTRACTOR IN RESPECT TO THIS CONTENTION AND REDUCED THE PURCHASE PRICE, FOR THE PURPOSE OF COMPUTING EXCESS COSTS, TO AN AMOUNT WHICH THE COURT FELT THE GOVERNMENT COULD HAVE PURCHASED THE TROUSERS FOR BY USING DUE DILIGENCE. HOWEVER, IN HOLDING THAT THE ALABAMA SHIRT AND TROUSER COMPANY COULD NOT ESCAPE LIABILITY FOR EXCESS COSTS COMPUTED ON THE BASIS OF ITS CONTRACT PRICE, THE COURT STATED:

* * * IN THE CIRCUMSTANCES, WE THINK THE PLAINTIFF CANNOT CHARGE THE GOVERNMENT WITH HAVING SNAPPED UP AN ADVANTAGEOUS OFFER MADE BY MISTAKE. WE THINK THE GOVERNMENT'S AGENTS DID ALL THAT COULD HAVE BEEN EXPECTED TO PROTECT THE PLAINTIFF FROM ITS OWN IMPRUDENCE.

ACCORDINGLY, YOU ARE ADVISED THAT WE FIND NO BASIS FOR RELIEVING AIRBORNE, INC., FROM LIABILITY UNDER THE CONTRACT.

THE FOLDER ENTITLED AIRBORNE, INC., WHICH WAS LOANED TO US BY YOUR MR. LEIZEAR IS RETURNED HEREWITH, BUT THE ENCLOSURES TRANSMITTED WITH YOUR LETTERS ARE BEING RETAINED FOR OUR FILE.