B-138491, APRIL 10, 1959, 38 COMP. GEN. 686

B-138491: Apr 10, 1959

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HAD SUBMITTED AN UNREALISTIC BID AND SHOULD BE LAST RATHER THAN FIRST FOR THE NEGOTIATED SET-ASIDE PORTION WAS WITHIN THE AUTHORITY OF THE ADMINISTRATIVE AGENCY UNDER NEGOTIATED PROCEDURES AND UNDER THE INVITATION WHICH PRECLUDED CONSIDERATION OF "TOKEN" OR "UNFAIR" BIDS IN DETERMINATION OF THE PRIORITY OF BIDDERS FOR THE SET-ASIDE. ACTION DENYING THE BIDDER THE RIGHT TO NEGOTIATE FOR THE RESERVED PORTION BECAUSE OF THE UNREALISTIC BID AND AWARDING HIM A SMALL PORTION OF THE UNRESERVED PROCUREMENT AT THE SAME UNREALISTIC PRICE IS UNDULY HARSH AND MIGHT EVEN BE PUNITIVE. 1959: REFERENCE IS MADE TO YOUR LETTER DATED MARCH 4. NEGOTIATION FOR THE SET-ASIDE PORTION WAS TO BE CONDUCTED AMONG SMALL BUSINESS CONCERNS WHICH SUBMITTED RESPONSIVE BIDS ON THE ADVERTISED PORTION OF THE PROCUREMENT WITHIN 120 PERCENT OF THE HIGHEST AWARD MADE.

B-138491, APRIL 10, 1959, 38 COMP. GEN. 686

CONTRACTS - AWARDS - SMALL BUSINESS CONCERNS - TOKEN BIDS ON UNRESERVED PROCUREMENTS AN ADMINISTRATIVE DETERMINATION THAT A SMALL BUSINESS CONCERN WHO, IN RESPONSE TO THE UNRESERVED PORTION OF A PROCUREMENT, SUBMITTED AN UNUSUALLY LOW SLIDING SCALE BID, IN ORDER TO RECEIVE PRIORITY IN NEGOTIATION FOR MUCH LARGER QUANTITIES IN THE RESERVED PORTION, HAD SUBMITTED AN UNREALISTIC BID AND SHOULD BE LAST RATHER THAN FIRST FOR THE NEGOTIATED SET-ASIDE PORTION WAS WITHIN THE AUTHORITY OF THE ADMINISTRATIVE AGENCY UNDER NEGOTIATED PROCEDURES AND UNDER THE INVITATION WHICH PRECLUDED CONSIDERATION OF "TOKEN" OR "UNFAIR" BIDS IN DETERMINATION OF THE PRIORITY OF BIDDERS FOR THE SET-ASIDE; HOWEVER, ACTION DENYING THE BIDDER THE RIGHT TO NEGOTIATE FOR THE RESERVED PORTION BECAUSE OF THE UNREALISTIC BID AND AWARDING HIM A SMALL PORTION OF THE UNRESERVED PROCUREMENT AT THE SAME UNREALISTIC PRICE IS UNDULY HARSH AND MIGHT EVEN BE PUNITIVE, THEREFORE THIS AWARD SHOULD BE CANCELED.

TO THE SECRETARY OF THE ARMY, APRIL 10, 1959:

REFERENCE IS MADE TO YOUR LETTER DATED MARCH 4, 1959, FROM THE ASSISTANT SECRETARY OF THE ARMY ( LOGISTICS) FURNISHING A REPORT RELATIVE TO THE PROTEST OF NANTEX-RIVIERA CORPORATION IN CONNECTION WITH INVITATION FOR BIDS NO. QM/CTM/-36-243-59-288 ISSUED BY THE MILITARY CLOTHING AND TEXTILE SUPPLY AGENCY, PHILADELPHIA QUARTERMASTER DEPOT.

THE INVITATION ISSUED ON OCTOBER 28, 1958, AND OPENED ON NOVEMBER 20, 1958, CALLED FOR THE MANUFACTURE OF 3,175,050 PAIRS OF MEN'S WHITE COTTON PRINT DRAWERS. THE INVITATION FURTHER PROVIDED FOR A SMALL BUSINESS SET- ASIDE OF A TOTAL OF 3,174,590 PAIRS. UNDER THE TERMS OF THE INVITATION, NEGOTIATION FOR THE SET-ASIDE PORTION WAS TO BE CONDUCTED AMONG SMALL BUSINESS CONCERNS WHICH SUBMITTED RESPONSIVE BIDS ON THE ADVERTISED PORTION OF THE PROCUREMENT WITHIN 120 PERCENT OF THE HIGHEST AWARD MADE, WITH NEGOTIATION COMMENCING WITH THE BIDDER WHICH SUBMITTED THE LOWEST RESPONSIVE BID UNDER THE UNRESERVED PORTION OF THE PROCUREMENT.

ADDENDUM NO. 1 TO THE INVITATION ISSUED ON NOVEMBER 10, 1958, CONTAINED, AMONG OTHER THINGS, THE FOLLOWING PROVISIONS:

NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS INVITATION FOR BIDS, THE GOVERNMENT RESERVES THE RIGHT IN DETERMINING ELIGIBILITY OF PRIORITY FOR SET-ASIDE NEGOTIATIONS NOT TO CONSIDER TOKEN PRICES OR PRICES DESIGNED TO SECURE AN UNFAIR ADVANTAGE OVER OTHER SMALL BUSINESS BIDDERS OR OFFERORS.

THE REASON FOR THE ABOVE PROVISION IS EXPLAINED IN A REPORT BY THE ASSOCIATE GENERAL COUNSEL AS FOLLOWS:

PRIOR TO JULY 1957 PROCEDURES FOR THE NEGOTIATION OF PARTIAL SMALL BUSINESS SET-ASIDES DIFFERED SUBSTANTIALLY FROM THE PROCEDURES NOW BEING USED. AT THAT TIME, WHEN MULTIPLE AWARDS WERE MADE ON THE UNRESTRICTED PORTION AT VARYING PRICES, THE PRICE PAID SMALL BUSINESS ON THE SET-ASIDE PORTION WAS A PRICE DETERMINED BY THE CONTRACTING OFFICER TO BE "FAIR AND REASONABLE" BUT IN NO EVENT A UNIT PRICE HIGHER THAN THE HIGHEST UNIT PRICE OF THE UNRESTRICTED PORTION. THE REGULATIONS THEN PROVIDED THAT IN THE ABSENCE OF CHANGES IN MARKET TRENDS, OR OTHER FACTORS, THE FAIR AND REASONABLE PRICE ON THE RESTRICTED PORTION WOULD BE THE "WEIGHTED AVERAGE" OF PRICES PAID ON THE UNRESTRICTED PORTION. NEGOTIATIONS UNDER THSE PROCEDURES WERE CONDUCTED WITH ALL ELIGIBLE SMALL BUSINESS CONCERNS RESPONDING TO THE INVITATION WITH PRICES WITHIN 120 PERCENT OF THE HIGHEST AWARD PRICES. THE COMPTROLLER GENERAL CONSIDERED THOSE PROCEDURES IN 36 COMP. GEN. 187.

4. REQUIRING SMALL BUSINESS CONCERNS TO MEET PRICES LOWER THAN AWARD PRICES ON UNRESTRICTED PORTIONS OF PROCUREMENTS MET WITH SEVERE CRITICISM. ACCORDINGLY, IN JULY 1957, THE DEPARTMENT OF DEFENSE ADOPTED THE CURRENT PROCEDURES. UNDER THESE PROCEDURES SMALL BUSINESS CONCERNS RECEIVING SET-ASIDE AWARDS ARE PAID A PRICE EQUAL TO THE HIGHEST AWARD PRICE PAID ON THE UNRESTRICTED PORTION. SINCE THE PRICE TO BE PAID ON THE SET-ASIDE PORTION IS PREDETERMINED, NO USEFUL PURPOSE WOULD BE SERVED BY NEGOTIATING WITH ALL ELIGIBLE SMALL BUSINESS CONCERNS. IT WAS THEREFORE DETERMINED THAT SMALL BUSINESS CONCERNS WOULD BE OFFERED THE SET-ASIDE QUANTITY "IN THE ORDER OF THEIR BIDS OR PROPOSALS ON THE NON-SET-ASIDE PORTION BEGINNING WITH THE LOWEST RESPONSIVE BID OR INITIAL PROPOSAL.'

5. SHORTLY AFTER THE ADOPTION OF THIS PROCEDURE SMALL BUSINESS CONCERNS REALIZED THAT BY SUBMITTING A "TOKEN PRICE" FOR A SMALL QUANTITY ON THE UNRESTRICTED PORTION OF THE PROCUREMENT, THEY MIGHT QUALIFY THEMSELVES FOR THE ENTIRE SET-ASIDE PORTION. IN ADDITION, THE PRICE AT WHICH THEY WOULD BE OFFERED THE SET-ASIDE PORTION WOULD BE THE HIGHEST PRICE PAID ON THE UNRESTRICTED PORTION, NOTWITHSTANDING THEIR BID PRICE ON THE UNRESTRICTED PORTION.

6. THE ABUSE OF THE PROCEDURE BY USE OF "TOKEN BIDS" WAS RECOGNIZED, AND THE MATTER WAS REFERRED TO THE ARMED SERVICES PROCUREMENT REGULATION COMMITTEE FOR RESOLUTION. THE PRACTICE DEVELOPED TO SUCH AN EXTENT, HOWEVER, THAT ON A PROCUREMENT OF GLOVES ACCOMPLISHED BY THE MILITARY CLOTHING AND TEXTILE SUPPLY AGENCY, A BIDDER ORIGINALLY OFFERED TO PAY THE GOVERNMENT $2.50 FOR THE FIRST 10 PAIR; BID $0.000000000000001 ON THE NEXT 10 PAIR; $0.000001 ON THE NEXT 10 PAIRS; AND THEN BID 5,000 PAIR AT $2.05. THIS BID WAS MODIFIED PRIOR TO OPENING SO AS TO OFFER 105 PAIR AT $0.000095239 WITH THE NEXT BID OFFERING 5,000 PAIRS AT $2.05. SUBSEQUENT TO THE RECEIPT OF THIS BID, AND SINCE THE MANY COMPLEXITIES INVOLVED HAD DELAYED THE ASPR COMMITTEE'S RESOLUTION OF THE PROBLEM, AUTHORITY WAS OBTAINED FROM THE ASPR COMMITTEE TO UTILIZE THE CLAUSE BEING DISCUSSED.

SEVEN BIDS WERE RECEIVED IN RESPONSE TO THE INVITATION FOR BIDS HERE INVOLVED. THE PRICES QUOTED RANGED FROM $0.0497 TO $0.556 PER PAIR. NANTEX-RIVIERA CORPORATION (A SMALL BUSINESS CONCERN) SUBMITTED A BLOCK TYPE BID OF 98 BLOCKS WITH CORRESPONDING PRICES. THE BID COMMENCED WITH PRICE OF $0.0497 EACH FOR A QUANTITY OF FROM 600 TO 2,000 UNITS DEPENDING ON THE DESTINATION AND AROSE BY SMALL INCREMENTS TO A HIGH OF $0.4184 EACH FOR THE LAST 33,080 UNITS, F.O.B. DESTINATION, UTAH GENERAL DEPOT. THE SECOND LOW BID SUBMITTED BY A SMALL BUSINESS CONCERN QUOTED PRICES OF $0.3366 EACH, F.O.B. ORIGIN, FOR THE FIRST 226,686 UNITS; $0.3503 EACH FOR THE FIRST 226,686 F.O.B. DESTINATION, SCHENECTADY; $0.3695 FOR THE 209,500 UNITS F.O.B. ATLANTA; $0.3480 EACH FOR THE FIRST 138,360 UNITS, F.O.B. MEMPHIS; AND $0.37689 FOR THE 485,780 UNITS F.O.B. UTAH. THE LOW BIDDER (A LARGE BUSINESS CONCERN) ON THE MAJORITY OF THE UNRESTRICTED PORTION, WHICH RECEIVED AN AWARD OF 2,837,664 UNITS, QUOTED PRICES RANGING FROM $0.356 TO $0.361 BASED ON QUANTITY AND DESTINATION.

THE CONTRACTING OFFICER DETERMINED THAT THE BID OF NANTEX-RIVIERA ON THE UNRESTRICTED PORTION WAS SPECIFICALLY DESIGNED TO SECURE AN UNFAIR ADVANTAGE OVER OTHER SMALL BUSINESS CONCERNS ON THE SET ASIDE PORTION. THIS DETERMINATION MADE IN ACCORDANCE WITH THE PROVISIONS OF ADDENDUM NO. 1 QUOTED ABOVE WAS BASED ON THE FACT THAT THE BID OF NANTEX-RIVIERA HAD NO RELATION TO AND FAILED TO REFLECT PRODUCTION COSTS, AND THE QUANTITY BID ON DID NOT REFLECT AN OPTIMUM PRODUCTION RUN. IT WAS ALSO DETERMINED THAT THE BID WAS SO CONSTRUCTED THAT THE INCREMENTS IN QUANTITY AND PRICE WERE GRADUAL, MAKING IT IMPOSSIBLE TO DETECT A CLEAVAGE SEPARATING THE PORTION OF THE BID DESIGNED TO GAIN AN UNFAIR ADVANTAGE AND THAT, THEREFORE, NANTEX-RIVIERA SHOULD BE GIVEN THE LAST, RATHER THAN THE FIRST, PRIORITY FOR THE SET-ASIDE PORTION.

IN ACCORDANCE WITH THE ABOVE DETERMINATION, THE FIRST PRIORITY TO NEGOTIATE FOR THE SET-ASIDE PORTION WAS GIVEN TO THE SECOND LOW SMALL BUSINESS CONCERN BIDDER AND THIS CONCERN WAS AWARDED THE COMPLETE SET ASIDE PORTION OF 3,174,590 UNITS. AN AWARD WAS MADE TO NANTEX-RIVIERA CORPORATION UNDER THE UNRESTRICTED PORTION OF A TOTAL 110,700 UNITS MADE UP OF RATHER SMALL QUANTITIES TO EACH OF THE 4 DESTINATIONS AS FOLLOWS: 55,000 AT $0.2803 F.O.B. ORIGIN; 5,500 AT $0.2769 F.O.B. ATLANTA; 33,700 AT AN AVERAGE UNIT PRICE OF APPROXIMATELY $0.2786 F.O.B. MEMPHIS AND 16,500 AT $0.2826 F.O.B. UTAH.

NANTEX-RIVIERA CORPORATION PROTESTED THE ACTION TAKEN BY THE CONTRACTING OFFICER ON THE BASIS (1) THE BID SHOULD NOT HAVE BEEN CONSIDERED AS A BID DESIGNED TO OBTAIN AN UNFAIR ADVANTAGE, (2) THAT IT SHOULD HAVE BEEN GRANTED THE FIRST PRIORITY FOR THE SET-ASIDE PORTION, AND (3) IF THE BID WAS NOT CONSIDERED ELIGIBLE FOR THE FIRST PRIORITY FOR TH SET-ASIDE PORTION, THAT THE ENTIRE BID SHOULD HAVE BEEN DECLARED NONRESPONSIVE AND NOT CONSIDERED FOR AWARD ON THE FORMAL PORTION.

IN SUPPORT OF ITS PROTEST NANTEX-RIVIERA STATES THAT THE BID WAS THE FIRST SLIDING SCALE BID WHICH IT HAD MADE TO THE QUARTERMASTER AND THAT THE REASON FOR THE BID EVOLVED FROM THE CIRCUMSTANCES CREATED BY THE NEW SET-ASIDE PROCEDURE UNDER WHICH A SMALL BUSINESS CONCERN, BY QUOTING A VERY LOW PRICE FOR A SMALL QUANTITY UNDER THE UNRESTRICTED PORTION, HAS FOUND ITSELF ELIGIBLE FOR A VERY LARGE QUANTITY UNDER THE SET-ASIDE PORTION AT A PRICE FAR EXCEEDING ITS PRICE ON THE UNRESTRICTED PORTION. IT IS STATED THAT IN CONVERSATIONS WITH THE CONTRACTING AGENCY PRIOR TO THE ISSUANCE OF ADDENDUM NO. 1 PROTEST WAS MADE AGAINST THE PRESENT PROCEDURE OF AWARDING THE SET ASIDE PORTION BECAUSE ALL BIDDERS WERE NOW INVOLVED IN THE PSYCHOLOGICAL TACTIC OF ACHIEVING A ,LOW-PRICE-FOR-A-SMALL -QUANTITY" TO ACHIEVE A STATUS OF ELIGIBILITY FOR THE SET-ASIDE PORTION AT A HIGHER PRICE. THE PROTESTANT CONTENDS THAT THE PROVISION CONTAINED IN ADDENDUM NO. 1 WHILE ATTEMPTING TO COPE WITH THE SITUATION ONLY ADDED TO THE CONFUSION AND UNCERTAINTY IN THE BIDDING PROCEDURE. WITHOUT ANY FIXED STANDARDS FOR THE TERM "TOKEN PRICE" AND "UNFAIR ADVANTAGE" THE BIDDERS WERE CONFRONTED WITH THE SAME PROBLEM AND WITH THE ADDITIONAL COMPLICATION THAT THERE WAS NO WAY IN WHICH TO DETERMINE WHAT, IN THE OPINION OF THE CONTRACTING OFFICER, WOULD CONSTITUTE A ,TOKEN PRICE" AND "UNFAIR ADVANTAGE.' IT IS STATED THAT NANTEX-RIVIERA WAS THEREFORE STILL CONFRONTED WITH THE SAME QUESTION: "WHAT WOULD CONSTITUTE THE LOWEST ACCEPTABLE BID AS TO PRICE AND QUANTITY AND HOW WOULD THE BIDDING OF OUR COMPETITORS GO? "

IN VIEW OF THE CIRCUMSTANCES, NANTEX-RIVIERA STATES THAT AFTER EXTENSIVE STUDY IT DECIDED TO SUBMIT A SLIDING SCALE BID FOR EACH DESTINATION LISTING A LONG SERIES OF PRICES FOR EACH. IT IS ALLEGED THAT THE PRICES QUOTED WERE NOT "TOKEN PRICES" OR FOR THE PURPOSE OF OBTAINING AN "UNFAIR ADVANTAGE.' RATHER THE ECONOMIC CONSEQUENCES OF THE BID WERE REALIZED. IT WAS CONSIDERED THAT, WHILE THE LOWER PRICES IN THE BID WOULD ENTAIL A LOSS, IT WAS TO THE COMPANY'S ADVANTAGE TO ACCEPT A LOSS ON THE UNRESTRICTED PORTION IF THE COMPANY COULD OBTAIN THE AWARD OF A MUCH GREATER QUANTITY UNDER THE SET-ASIDE PORTION. NANTEX-RIVIERA ALLEGES THAT THE EVIDENCE INDICATES THAT THE SECOND LOW BIDDER DID THE SAME THING BUT TO A LESSER DEGREE.

IN DECISION OF AUGUST 31, 1956, 36 COMP. GEN. 187, WE CONSIDERED THE REGULATIONS IN EFFECT PRIOR TO JULY 1957, WITH RESPECT TO THE NEGOTIATION OF PARTIAL SMALL BUSINESS SET-ASIDE. UNDER THOSE REGULATIONS THE PRICE TO BE NEGOTIATED FOR THE RESTRICTED PORTION GENERALLY WAS LIMITED TO THE ,WEIGHTED AVERAGE" OF THE PRICES BASED ON THE UNRESTRICTED PORTION. IT IS STATED IN THE DECISION, IN VIEW OF THE PROVISIONS OF SECTION 214 OF THE SMALL BUSINESS ACT, 15 U.S.C. 643, THAT WE DID NOT BELIEVE IT WAS NECESSARY TO RESTRICT NEGOTIATED AWARDS TO SMALL BUSINESS CONCERNS TO THE "WEIGHTED AVERAGE" OF THE PRICES PAID UNDER THE UNRESTRICTED PORTION AND THAT WE WOULD NOT OBJECT TO SMALL BUSINESS AWARDS AT A PRICE WHICH WAS NOT HIGHER THAN THE HIGHEST PRICE PAID UNDER THE UNRESTRICTED PORTION. HOWEVER, WE DID NOT MEAN THAT NEGOTIATED AWARDS MUST BE NEGOTIATED AT THE HIGHEST PRICES PAID UNDER THE UNRESTRICTED PORTION.

UNDER THE PROVISIONS OF THE PRESENT REGULATIONS, SMALL BUSINESS CONCERNS RECEIVING SET-ASIDE AWARDS ARE PAID A PRICE EQUAL TO THE HIGHEST PRICE PAID UNDER THE UNRESTRICTED PORTION. THUS, SINCE THE PRICE TO BE PAID ON THE SET-ASIDE PORTION IS PREDETERMINED AND FIXED, NO USEFUL PURPOSE IS SERVED BY NEGOTIATING WITH ALL ELIGIBLE SMALL BUSINESS CONCERNS, AND, THEREFORE, SMALL BUSINESS CONCERNS ARE OFFERED THE SET-ASIDE QUANTITY "IN THE ORDER OF THEIR BID OR PROPOSALS ON THE NON-SET-ASIDE PORTION BEGINNING WITH THE LOWEST RESPONSIVE BID OR INITIAL PROPOSAL.'

APPARENTLY, THE NEW REGULATIONS WERE BASED ON THE BELIEF THAT SMALL BUSINESS CONCERNS COULD NOT BID LOW ENOUGH TO RECEIVE AWARDS ON THE UNRESTRICTED PORTION. HOWEVER, IT APPEARS THAT SMALL BUSINESS CONCERNS MAY BE ABLE TO PRODUCE FOR LESS THAN THE HIGHEST PRICE PAID FOR THE UNRESTRICTED PORTION AND AT LEAST THEY APPEAR TO BE WILLING TO MAKE SOME PRICE CONCESSIONS TO OBTAIN THE FIRST OPTION ON THE SET-ASIDE PORTION, PERHAPS BEING FORCED TO DO SO BY COMPETITION. IT IS STATED IN THE ASSISTANT SECRETARY'S LETTER THAT THE SUBMISSION OF "TOKEN" BID PRICES HAS CREATED A DIFFICULT PROBLEM AND THAT THE ARMED SERVICES PROCUREMENT REGULATION COMMITTEE HAS THE MATTER UNDER CONSIDERATION WITH THE VIEW OF PROVIDING MORE EXPLICIT GUIDANCE TO PROCURING ACTIVITIES FOR USE IN FUTURE PROCUREMENTS RESERVED FOR SMALL BUSINESS CONCERNS.

ONE SOLUTION TO THE PROBLEM MIGHT BE REGULATIONS TO PROVIDE THAT NEGOTIATED AWARDS FOR THE SET-ASIDE PORTION ARE TO BE MADE AT THE HIGHEST PRICE PAID ON THE UNRESTRICTED PORTION BUT LIMITED TO THE QUANTITY AND PRICE ACTUALLY QUOTED BY THE PARTICULAR SMALL BUSINESS CONCERN ON THE UNRESTRICTED PORTION.

GOING BACK TO THE BID OF NANTEX-RIVIERA THERE CAN BE NO DOUBT THAT THE BID ON THE UNRESTRICTED PORTION WAS DESIGNED PRIMARILY FOR THE PURPOSE OF OBTAINING THE FIRST OPTION ON THE SET-ASIDE PORTION REGARDLESS OF WHETHER, UNDER THE CIRCUMSTANCES, THE PRICES QUOTED MIGHT OR MIGHT NOT BE CALLED "TOKEN" OR "UNFAIR.' IN VIEW OF THE PROVISION IN ADDENDUM NO. OF THE INVITATION AND THE AUTHORITY OF THE ADMINISTRATIVE AGENCY WITH RESPECT TO NEGOTIATED PROCUREMENTS, WE WOULD NOT BE WARRANTED IN QUESTIONING THE ADMINISTRATIVE DETERMINATION RESTRICTING NANTEX-RIVIERA TO THE LAST, RATHER THAN THE FIRST, OPTION ON THE SET-ASIDE PORTION. THE DETERMINATION THAT THE PRICES IN THE BID OF NANTEX-RIVIERA WERE TOKEN PRICES OR WERE DESIGNED TO SECURE AN UNFAIR ADVANTAGE WAS BASED ON THE FACT THAT THE PRICES QUOTED WERE NOT REALISTIC AND WERE QUOTED FOR THE SOLE PURPOSE OF OBTAINING AN ADVANTAGE IN THE AWARD OF MUCH LARGER QUANTITIES AT A HIGHER PRICE. IT MIGHT BE ARGUED THAT NANTEX-RIVIERA WAS NOT DENIED ENTIRELY THE POSSIBILITY OF BEING ABLE TO OBTAIN THE SET-ASIDE PORTION SINCE IT WAS ONLY MOVED FROM THE FIRST TO THE LAST PRIORITY. HOWEVER, THE PRACTICAL EFFECT OF SUCH ACTION WAS TO DENY NANTEX-RIVIERA THE RIGHT TO NEGOTIATE FOR THE RESTRICTED PORTION. ALTHOUGH IT MIGHT BE THAT THE ACTION TAKEN WITH RESEPCT TO THE AWARD MADE UNDER THE UNRESTRICTED PORTION WAS JUSTIFIABLE, STRICTLY SPEAKING, IT IS NOT BELIEVED THAT THE REALITIES OF THE SITUATION WERE TAKEN INTO CONSIDERATION.

THE AWARD TO NANTEX-RIVIERA WAS AT AN AVERAGE PRICE OF LESS THAN $0.28 PER UNIT FOR 110,700 UNITS AGAINST AN AWARD TO A LARGE BUSINESS CONCERN FOR THE MAJOR PART OF THE UNRESTRICTED PORTION AT AN AVERAGE PRICE IN EXCESS OF ?35 PER UNIT FOR 2,837,664 UNITS. IT WAS KNOWN THAT THE PRICE OF APPROXIMATELY $0.28 PER UNIT WAS NOT REALISTIC AND WAS QUOTED FOR THE PURPOSE OF OBTAINING THE FIRST OPTION FOR THE RESTRICTED PORTION. IT IS OUR OPINION THAT TO EFFECTIVELY DENY THE BIDDER THE OPPORTUNITY TO OBTAIN THE AWARD FOR THE RESTRICTED PORTION FOR THE REASON THAT THE BID ON THE UNRESTRICTED PORTION WAS NOT REALISTIC AND AT THE TIME ACCEPT THE BID ON THE UNRESTRICTED PORTION ON THE BASIS OF THE SAME UNREALISTIC PRICE IS UNDULY HARSH AND MIGHT BE CONSIDERED PUNITIVE ACTION UNDER THE CIRCUMSTANCES.

ACCORDINGLY, YOU ARE ADVISED THAT WE BELIEVE CONTRACT NO. DA-36-243 QM (CTM/-3518 COVERING THE AWARD OF 110,700 UNITS TO NANTEX-RIVIERA CORPORATION UNDER THE UNRESTRICTED PORTION OF THE INVITATION SHOULD BE CANCELED.