B-132974, SEP 19, 1963

B-132974: Sep 19, 1963

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PRECIS-UNAVAILABLE ATTORNEY GENERAL: THERE IS PRESENTED HEREWITH FOR YOUR CONSIDERATION THE MATTER OF RECOVERING SOME $242. A COPY OF WHICH IS ENCLOSED. IT WAS POINTED OUT THAT HAZELTINE RETAINED SOME $2. 000 OF THE PROVISIONAL PAYMENTS IT HAD RECEIVED UNDER ITS PRICE-REDETERMINABLE CONTRACT FOR ABOUT THREE YEARS BEYOND THE TIME IT WAS AWARE THOSE FUNDS WERE IN EXCESS OF THE PRICE IT PROPOSED TO THE NAVY FOR NEGOTIATION OF THE FINAL CONTRACT PRICE. IT WAS OBSERVED THAT DURING SOME 11 MONTHS OF THE 3-YEAR PERIOD THE CONTRACTOR HAD ACTUALLY INVESTED SOME $2. SINCE THE GOVERNMENT BORROWS FUNDS ON A LARGE-SCALE BASIS IT IS A REASONABLE PRESUMPTION THAT THE RETENTION OF THE EXCESS FUNDS BY THE CONTRACTOR TENDED TO INCREASE GOVERNMENTAL INTEREST COSTS.

B-132974, SEP 19, 1963

PRECIS-UNAVAILABLE

ATTORNEY GENERAL:

THERE IS PRESENTED HEREWITH FOR YOUR CONSIDERATION THE MATTER OF RECOVERING SOME $242,000 FROM THE HAZELTINE CORPORATION OF LITTLE NECK, NEW YORK.

IN NOVEMBER 1962 OUR OFFICE ISSUED A REPORT OF THE REVIEW OF PROVISIONAL PAYMENTS MADE UNDER DEPARTMENT OF THE NAVY CONTRACT NO. 59595 WITH THE HAZELTINE ELECTRONICS DIVISION OF THE HAZELTINE CORPORATION. IN THAT REPORT, A COPY OF WHICH IS ENCLOSED, IT WAS POINTED OUT THAT HAZELTINE RETAINED SOME $2,619,000 OF THE PROVISIONAL PAYMENTS IT HAD RECEIVED UNDER ITS PRICE-REDETERMINABLE CONTRACT FOR ABOUT THREE YEARS BEYOND THE TIME IT WAS AWARE THOSE FUNDS WERE IN EXCESS OF THE PRICE IT PROPOSED TO THE NAVY FOR NEGOTIATION OF THE FINAL CONTRACT PRICE. IN ADDITION, IT WAS OBSERVED THAT DURING SOME 11 MONTHS OF THE 3-YEAR PERIOD THE CONTRACTOR HAD ACTUALLY INVESTED SOME $2,000,000 IN UNITED STATES TREASURY BILLS UPON WHICH IT COLLECTED ABOUT $47,000 IN INTEREST. THIS, OF COURSE, RESULTED IN THE GOVERNMENT PAYING INTEREST UPON ITS OWN FUNDS. FURTHERMORE, SINCE THE GOVERNMENT BORROWS FUNDS ON A LARGE-SCALE BASIS IT IS A REASONABLE PRESUMPTION THAT THE RETENTION OF THE EXCESS FUNDS BY THE CONTRACTOR TENDED TO INCREASE GOVERNMENTAL INTEREST COSTS. AT THE AVERAGE INTEREST RATES FOR UNITED STATES TREASURY BILLS DURING THE 3-YEAR PERIOD INVOLVED, BORROWING ABOUT $2,619,000 WOULD HAVE COST THE GOVERNMENT ABOUT $242,000. AS WAS STATED IN THE REPORT, WE BELIEVE THAT THE USE OF THE FUNDS WITHOUT PAYMENT OF ANY INTEREST TO THE GOVERNMENT WOULD CONSTITUTE UNJUST ENRICHMENT BY THE CONTRACTOR.

AS A RESULT OF THE CONCLUSIONS REACHED IN THE REPORT, IT WAS RECOMMENDED THAT THE DEPARTMENT OF THE NAVY COLLECT INTEREST FOR HAZELTINE'S USE OF THE FUNDS BY MAKING OFFSETS AGAINST PAYMENTS TO BE MADE TO HAZELTINE UNDER OUTSTANDING GOVERNMENT CONTRACTS HELD BY THE CONTRACTOR. HOWEVER, SINCE HAZELTINE ASSERTED THAT DURING THE PERIOD INVOLVED THERE WAS AN AVERAGE OF $4,000,000 OUTSTANDING UNDER 150 DIFFERENT CONTRACTS WHICH IT COULD NOT INVOICE AND BE PAID FOR BECAUSE OF GOVERNMENT DELAYS IN ISSUING CONTRACTUAL DOCUMENTS TO ESTABLISH PRICES FOR ARTICLES UNDER THESE CONTRACTS, OUR OFFICE PROPOSED TO ALLOW HAZELTINE AN APPROPRIATE CREDIT TO THE EXTENT THE CONTRACTOR COULD SHOW THAT IT WAS NOT PAID WITHIN THE TIME IT NORMALLY EXPECTED TO BE PAID.

FOLLOWING THE ISSUANCE OF OUR REPORT, THE ASSISTANT SECRETARY OF THE NAVY (INSTALLATIONS AND LOGISTICS) REPORTED BY LETTER OF MARCH 4, 1963, THAT PERSONNEL CONFERRED WITH HAZELTINE REPRESENTATIVES WHO REPRESENTED THAT IT WOULD BE BURDENSOME TO PROVE THE ASSERTION RELATIVE TO THE GOVERNMENT'S DELAY IN PAYING OVER $4,000,000 UNDER 150 CONTRACTS AND STATED FURTHER THAT OUR OFFICE HAS INFORMATION SUBSTANTIATING THE ASSERTION. WE HAVE NO SUCH INFORMATION AVAILABLE HERE.

FURTHER, WHILE OUR RECOMMENDATION THAT CONSIDERATION BE GIVEN IN THE SETTLEMENT OF THE INTEREST MATTER TO ANY CLAIMED OFFSETS THAT HAZELTINE COULD DEMONSTRATE WERE VALID WAS OFFERED IN THE SPIRIT OF FAIRNESS, WE NOW ARE SATISFIED THAT THE GOVERNMENT IS NOT LEGALLY LIABLE FOR INTEREST FOR DELAYS IN MAKING PAYMENTS AND WE ARE OF THE OPINION THAT SUCH AN OFFSET WOULD NOT BE PROPER.

THE RULE AS TO THE RECOVERY OF INTEREST FROM ONE WHO HAS BEEN OVERPAID IS SET OUT IN THE RESTATEMENT OF THE LAW ON RESTITUTION IN SECTION 156. THAT SECTION PROVIDES THAT ONE WHO HAS A DUTY TO PAY THE VALUE OF A BENEFIT RECEIVED IS ALSO UNDER A DUTY TO PAY INTEREST UPON SUCH VALUE FROM THE TIME A BREACH OF DUTY IN FAILING TO MAKE RESTITUTION WAS COMMITTED. COMMENT "B," IN EXPLANATION OF SECTION 156, STATES THAT WHERE AN OVERPAYMENT HAS BEEN MADE THE PAYER IS ENTITLED TO INTEREST THEREON FROM THE TIME WHEN THERE WAS A BREACH OF DUTY TO REPAY. ALSO SEE GENERALLY NORTHROP AIRCRAFT, INC. V. UNITED STATES, 130 CT.CL. 626 (1955).

ESSENTIALLY, THE CONTRACTOR HAS TAKEN THE POSITION THAT THERE WAS NO DUTY TO REPAY UNTIL THERE HAD BEEN A DEMAND FOR PAYMENT AND A REASONABLE OPPORTUNITY TO PAY; THAT, WHILE IT MADE A REDETERMINATION PROPOSAL REDUCING THE CONTRACT PRICE THREE YEARS BEFORE THE GOVERNMENT REDETERMINED THE CONTRACT PRICE, THE MATTER WAS FOR NEGOTIATION AND WAS NOT FINALIZED UNTIL THE GOVERNMENT MADE THE DETERMINATION TO REDUCE THE CONTRACT PRICE.

IN OUR VIEW, WHEN THE CONTRACTOR SUBMITTED ITS PROPOSAL FOR REDETERMINATION OF THE CONTRACT PRICE IT SHOULD HAVE BEEN EVIDENT THAT THE CONTRACTOR HAD BEEN OVERPAID. WE FEEL THAT THE CONTRACTOR SHOULD HAVE MADE A VOLUNTARY REFUND TO THE GOVERNMENT AT THAT TIME AND SINCE IT DID NOT DO SO BUT INSTEAD RETAINED THE USE AND BENEFIT OF THE OVERPAID AMOUNTS FOR THREE YEARS, THE GOVERNMENT IS ENTITLED TO COLLECT INTEREST FOR THE 3- YEAR PERIOD INVOLVED. IN OTHER WORDS, WE SUGGEST THAT THE BREACH OF DUTY TO REPAY THE GOVERNMENT OCCURRED WHEN THE CONTRACTOR DETERMINED THAT THE CONTRACT PRICE WAS EXCESSIVE.

THE ASSISTANT SECRETARY OF THE NAVY (INSTALLATIONS AND LOGISTICS) HAS EXPRESSED SUBSTANTIAL DOUBT THAT THE GOVERNMENT CAN REQUIRE THE PAYMENT OF INTEREST IN THIS CASE AS A MATTER OF LEGAL OBLIGATION AND HAS STATED THAT THE NAVY IS RELUCTANT TO WITHHOLD THE AMOUNT OF THE GOVERNMENT'S CLAIM FROM AMOUNTS OTHERWISE DUE HAZELTINE AND THEREBY INCUR THE RISK OF BEING HELD TO HAVE BREACHED THE CONTRACTS UNDER WHICH THE AMOUNTS ARE OTHERWISE PAYABLE.

IN VIEW OF THE UNUSUAL NATURE OF THE CASE, AND THE RELUCTANCE EXPRESSED BY THE ASSISTANT SECRETARY OF THE NAVY, WE THOUGHT IT BEST TO BRING THIS MATTER TO YOUR ATTENTION AT THIS TIME FOR CONSIDERATION OF INSTITUTION OF A SUIT AGAINST HAZELTINE. HOWEVER, IF YOUR DEPARTMENT WISHES, WE WILL DIRECT THE NAVY TO MAKE WITHHOLDINGS FROM FUNDS OTHERWISE PAYABLE TO THE CONTRACTOR, THEREBY LEAVING IT UP TO HAZELTINE TO INSTITUTE SUIT IF IT SO DESIRES.