B-133695, SEP. 23, 1957

B-133695, SEP. 23, 1957

TO HONORABLE FRANKLIN G. FLOTETE, ADMINISTRATOR GENERAL SERVICES ADMINISTRATION:

YOUR LETTER OF SEPTEMBER 5, 1957, TRANSMITS A COPY OF THE REPORT OF THE BOARD OF REVIEW RELATIVE TO THE APPEAL OF THE DOW CHEMICAL COMPANY FROM THE DECISION OF THE CONTRACTING OFFICER, PUBLIC BUILDINGS SERVICE, ESTABLISHING AN OVERCHARGE OF $221,372.33 UNDER A PURCHASE CONTRACT FOR MAGNESIUM CHLORIDE CELL FEED AND REQUESTS OUR DECISION AS TO WHETHER THE APPEAL LEGALLY MAY BE GRANTED.

THE FACTS OF THE MATTER MAY BE SUMMARIZED BRIEFLY AS FOLLOWS: ON MAY 9, 1951, THE GENERAL SERVICES ADMINISTRATION AND THE DIAMOND MAGNESIUM COMPANY ENTERED INTO AN AGREEMENT EFFECTIVE AS OF DECEMBER 28, 1950, AUTHORIZING THE CONTRACTOR TO ACT FOR AND ON BEHALF OF THE GOVERNMENT IN THE REHABILITATION AND OPERATION OF THE GOVERNMENT-OWNED FACILITIES LOCATED AT PAINESVILLE, OHIO, KNOWN AS PLANCO 244, WITHOUT COST, EXPENSE OR PROFIT TO THE CONTRACTOR.

ON JUNE 1, 1951, THE CONTRACTOR, ACTING FOR AND ON BEHALF OF THE GOVERNMENT, ENTERED INTO A PURCHASE AGREEMENT WITH THE DOW CHEMICAL COMPANY. THIS AGREEMENT COVERED THE PURCHASE OF 190,000 TONS OF MAGNESIUM CHLORIDE CELL FEED AT A BASE PRICE OF $32.80 PER SHORT TON, F.O.B., LUDINGTON, MICHIGAN. ARTICLE 6 OF THIS PURCHASE AGREEMENT PROVIDED, IN PERTINENT PART, AS FOLLOWS:

"/A) THE BASE PRICE OF $32.80 SHALL BE SUBJECT TO ESCALATION AS FOLLOWS:

"ON OR BEFORE THE 15TH DAY OF EACH JANUARY, APRIL, JULY AND OCTOBER, DURING THE TERM OF THIS CONTRACT, SELLER SHALL CALCULATE THE AVERAGE PAID RATE PER HOUR FOR HOURLY PAID EMPLOYEES AT SELLER'S LUDINGTON, MICHIGAN PLANT FOR THE PRECEDING CALENDAR QUARTER. FOR EACH 1 PERCENT CHANGE IN SAID RATE CALCULATED ON THE BASIS OF THE RATE OF $1.66819EXISTING ON JANUARY 22, 1951, THE PRICE FOR ALL QUANTITIES OF MAGNESIUM CHLORIDE CELL FEED SHIPPED DURING SUCH QUARTER SHALL BE INCREASED OR DECREASED BY 0.75 PERCENT AND SELLER SHALL CREDIT OR DEBIT BUYER ACCORDINGLY. SUCH INCREASE OR DECREASE IN PRICE SHALL BE CALCULATED ON THE BASIS OF $32.80.'"

THE RECORD DISCLOSES THAT, ON DECEMBER 11, 1950, THE DOW CHEMICAL COMPANY AND LOCAL 12773, DISTRICT 50, UNITED MINE WORKERS OF AMERICA, EFFECTUATED AN AMENDMENT TO THEIR CONTRACTUAL AGREEMENT RELATING TO WAGE PAYMENTS AT THE COMPANY'S LUDINGTON DIVISION PLANT, WHICH PROVIDED THAT A COST-OF- LIVING BONUS WOULD BE PAID QUARTERLY BEGINNING JANUARY 1, 1951.

IN PRICING MATERIAL DELIVERED UNDER THE CONTRACT, THE DOW CHEMICAL COMPANY CALCULATED THE AVERAGE PAID RATE PER HOUR FOR ITS HOURLY PAID EMPLOYEES AT THE LUDINGTON, MICHIGAN, PLANT ON THE BASIS THAT THE COST OF- LIVING BONUS WAS A LABOR COST AND SHOULD BE INCLUDED IN THE AVERAGE PAID RATE PER HOUR, AND SUBMITTED INVOICES ACCORDINGLY, WHICH WERE PAID WITHOUT QUESTION.

THE QUESTION OF THE INTERPRETATION OF THE TERM "AVERAGE PAID RATE PER HOUR FOR HOURLY PAID EMPLOYEES FOR THE PRECEDING CALENDAR QUARTER" WAS FIRST RAISED BY A GOVERNMENT AUDITOR, AN EMPLOYEE OF THE INTERNAL AUDIT DIVISION, OFFICE OF COMPTROLLER, GENERAL SERVICES ADMINISTRATION, IN A REPORT DATED OCTOBER 1, 1954, OF A FINAL AUDIT OF THE BOOKS AND RECORDS OF THE DIAMOND MAGNESIUM COMPANY IN CONNECTION WITH ITS OPERATION AS THE GOVERNMENT'S MANAGER OF THE MAGNESIUM PLANT LOCATED AT PAINESVILLE, OHIO. THE AUDIT COVERED THE PERIOD DECEMBER 28, 1950, THROUGH JULY 31, 1953.

THE AUDITOR REQUESTED, AND WAS FURNISHED WITH, A COPY OF THE PAYROLL STATISTICAL SHEET PREPARED BY THE DOW CHEMICAL COMPANY FOR THE WEEK ENDING JANUARY 22, 1951. THE PAYROLL STATISTICAL SHEET SHOWS THAT THE TOTAL PAYROLL FOR THE WEEK ENDING JANUARY 22, 1951, WAS $12,750.40, COMPRISED AS FOLLOWS:

CHART

BASE PAY $11,442.61

SHIFT DIFFERENTIAL 250.25

ANNUAL VACATION 65.84

CALL IN- EMERGENCY 11.67

OVERTIME EXCESS 916.67

SUPPLEMENTAL PENSION AND

SEVERANCE PAY 63.36

$12,750.40

ALSO, THE PAYROLL STATISTICAL SHEET SHOWED THAT THE AVERAGE BASE PAY RATE PER HOUR WAS $1.49709, AND THE AVERAGE PAID RATE PER HOUR WAS $1.66819--- THE BASE RATE STATED IN THE ESCALATION CLAUSE. THE DIFFERENTIAL (?17110) WAS REPRESENTED BY THE ELEMENTS OTHER THAN BASE PAY SHOWED IN THE TABULATION ABOVE.

THE GOVERNMENT AUDITOR STATED IN HIS REPORT THAT THE COMPANY INCREASED ITS PRICE OF CELL FEED BY COMPARING SUBSEQUENT WAGE RATES, WHICH INCLUDED A COST-OF-LIVING FACTOR, WITH THE BASE WAGE RATE, WHICH EXCLUDED SUCH FACTOR. IN THIS CONNECTION, THE GOVERNMENT AUDITOR USED THE TERM "BASE WAGE RATE" TO MEAN THE INCLUSION OF ALL CONSTITUENT ELEMENTS COMPRISING THE RATE OF $1.66819, AND NOT THE BASE PAY RATE, ONLY. HE CONCLUDED THAT COST-OF-LIVING PAYMENTS MADE SUBSEQUENT TO THE ESTABLISHMENT OF THE BASE PRICE SHOULD NOT BE INCLUDED IN CALCULATING PRICE ESCALATION, SINCE THE BASE RATE OF $1.66819 INCLUDED NO SUCH FACTOR, AND THE CONTRACT MADE NO PROVISION FOR THE CONSIDERATION OF SUCH PAYMENTS IN DETERMINING PRICE ESCALATION. BY IMPLICATION, THE GOVERNMENT AUDITOR CONCLUDED THAT THE AVERAGE PAID RATE PER HOUR FOR SUBSEQUENT QUARTERS MUST BE COMPUTED IN THE SAME MANNER AS THE AVERAGE PAID RATE PER HOUR EXISTING ON JANUARY 22, 1951. ON THIS BASIS, THE AUDITOR DETERMINED THAT THE COMPANY HAD OVERCHARGED THE DIAMOND MAGNESIUM COMPANY IN THE AMOUNT OF $221,372.33.

THE ATTORNEY FOR THE PUBLIC BUILDINGS SERVICE CONTENDED THAT THE WAGE RATE DOES NOT INCLUDE BONUSES. HE CONTENDED THAT THE TERM HAS A MEANING WELL SETTLED IN ACCEPTED USAGE AND BY THE COURTS. THE COST-OF LIVING BONUS IS A FRINGE BENEFIT WHICH IS SEPARATELY PAID AND HAS A DIFFERENT CONCEPT FROM THE TERM "HOURLY WAGE.' HE CONTENDED THAT, HAD IT BEEN THE INTENT OF THE PARTIES TO INCLUDE THE COST-OF-LIVING BONUS AS WELL AS OTHER FRINGE BENEFITS PROVIDED BY THE COLLECTIVE BARGAINING AGREEMENT, THIS WOULD HAVE BEEN SPELLED OUT. HE CONTENDED, ALSO, THAT THE CONTRACT WAS NOT AMBIGUOUS AND THAT, CONSEQUENTLY, THERE WAS NO NEED FOR CONSTRUCTION OR INTERPRETATION OF ITS TERMS.

THE COMPANY CONTENDED THAT THE CONTRACT WAS CLEAR AND UNAMBIGUOUS. THE COMPANY CONTENDED, ALSO, THAT THE PHRASE "AVERAGE PAID RATE PER HOUR FOR HOURLY PAID EMPLOYEES FOR THE PRECEDING CALENDAR QUARTER" CAN MEAN ONLY ONE THING AND THAT IS THE AMOUNT OF DOLLARS PAID TO HOURLY PAID EMPLOYEES DIVIDED BY THE NUMBER OF HOURS WORKED BY SUCH EMPLOYEES. THE AMOUNT OF DOLLARS PAID TO HOURLY EMPLOYEES INCLUDES LUMP SUM PAYMENTS TO SUCH EMPLOYEES AT THE END OF EACH QUARTER BASED UPON THE COST-OF LIVING INDEX FOR THE QUARTER, AND ANY OTHER PAYMENTS MADE TO COMPENSATE LABOR FOR ITS EFFORTS.

THE BOARD OF REVIEW AGREED WITH THE COMPANY'S CONTENTIONS AND RECOMMENDED THAT THE APPEAL BE GRANTED, SUBJECT TO OUR RULING ON THE LEGAL QUESTIONS INVOLVED. SINCE THE REPORT OF THE BOARD OF REVIEW CONTAINS A COMPREHENSIVE STATEMENT OF THE LEGAL PRINCIPLES GOVERNING THE INTERPRETATION OF THE CONTRACT WE WILL NOT REPEAT THEM HERE. FOR THE REASONS STATED BY THE BOARD OF REVIEW WE AGREE THAT THE APPEAL OF THE DOW CHEMICAL COMPANY LEGALLY SHOULD BE GRANTED.