B-139431, JULY 8, 1959, 39 COMP. GEN. 7

B-139431: Jul 8, 1959

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IS APPLICABLE IN ANY CASE WHERE A CONSTRUCTION DIFFERENTIAL SUBSIDY IS APPLIED BY A PACIFIC COAST APPLICANT UNDER TITLE V OF THE MERCHANT MARINE ACT. WHETHER CONSTRUCTION IS TO BE DONE BY THE FEDERAL MARITIME BOARD OR BY A DOMESTIC SHIPYARD UNDER SECTION 504 OF THE ACT. 1959: REFERENCE IS MADE TO YOUR LETTER OF APRIL 29. YOU REQUEST OUR OPINION AS TO WHETHER THE FEDERAL MARITIME BOARD IS REQUIRED TO APPROVE AN AWARD TO TODD SHIPYARDS CORPORATION. YOU STATE THE FACTS TO BE AS FOLLOWS: BIDS HAVE BEEN RECEIVED AND OPENED UNDER THE INVITATION FOR BIDS OF AMERICAN MAIL LINE. FOR THE CONSTRUCTION OF THREE CARGO SHIPS WHICH ARE PROPOSED FOR CONSTRUCTION WITH CONSTRUCTION DIFFERENTIAL SUBSIDY AID.

B-139431, JULY 8, 1959, 39 COMP. GEN. 7

MARITIME MATTERS - SUBSIDIES - CONSTRUCTION BY APPLICANT IN LIEU OF FEDERAL MARITIME BOARD - PACIFIC COAST PREFERENCE THE REQUIREMENTS IN THE PUBLIC FINANCING PROVISIONS IN SECTION 502 (D) OF THE MERCHANT MARINE ACT, 1936, 46 U.S.C. 1152 (D), FOR THE APPROVAL BY THE FEDERAL MARITIME BOARD OF BIDS SUBMITTED BY THE PACIFIC COAST SHIPYARDS FOR CONSTRUCTION OF VESSELS, IS APPLICABLE IN ANY CASE WHERE A CONSTRUCTION DIFFERENTIAL SUBSIDY IS APPLIED BY A PACIFIC COAST APPLICANT UNDER TITLE V OF THE MERCHANT MARINE ACT, 1936, WHETHER CONSTRUCTION IS TO BE DONE BY THE FEDERAL MARITIME BOARD OR BY A DOMESTIC SHIPYARD UNDER SECTION 504 OF THE ACT, 46 U.S.C. 1154, AND EVEN THOUGH THERE MAY BE AN INCREASE IN COST IN PACIFIC COAST PREFERENCE CASES TO THE UNITED STATES AND TO THE OWNER.

TO THE CHAIRMAN, FEDERAL MARITIME BOARD, JULY 8, 1959:

REFERENCE IS MADE TO YOUR LETTER OF APRIL 29, 1959, TRANSMITTING A COPY OF A LEGAL OPINION PREPARED BY THE GENERAL COUNSEL OF THE FEDERAL MARITIME BOARD CONCERNING THE APPLICATION OF SECTIONS 502 (D) AND 504 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, 46 U.S.C. 1152 (D) AND 1154, TO THE AWARD OF A CONTRACT FOR CONSTRUCTION OF THREE CARGO VESSELS FOR AMERICAN MAIL LINE, LTD. YOU REQUEST OUR OPINION AS TO WHETHER THE FEDERAL MARITIME BOARD IS REQUIRED TO APPROVE AN AWARD TO TODD SHIPYARDS CORPORATION, LOS ANGELES DIVISION, A PACIFIC COAST SHIPBUILDER, WITH THE ATTENDANT INCREASE IN COST TO THE UNITED STATES AND POSSIBLY TO THE OWNER. IN BRIEF, YOU STATE THE FACTS TO BE AS FOLLOWS:

BIDS HAVE BEEN RECEIVED AND OPENED UNDER THE INVITATION FOR BIDS OF AMERICAN MAIL LINE, LTD., FOR THE CONSTRUCTION OF THREE CARGO SHIPS WHICH ARE PROPOSED FOR CONSTRUCTION WITH CONSTRUCTION DIFFERENTIAL SUBSIDY AID. AMERICAN MAIL LINE'S APPLICATION WAS MADE UNDER THE PROVISIONS OF SECTION 504 OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, WHEREBY AMERICAN MAIL LINE PROPOSES TO FINANCE THE CONSTRUCTION OF THE PROPOSED VESSELS RATHER THAN PURCHASE THE VESSELS FROM THE BOARD UNDER THE PROVISIONS OF SECTION 502 OF THE 1936 ACT, 46 U.S.C. 1152. AMERICAN MAIL LINE, LTD. HAS AS ITS PRINCIPAL PLACE OF BUSINESS A PLACE ON THE PACIFIC COAST AND INTENDS TO OPERATE THE PROPOSED VESSELS IN FOREIGN TRADE IN A SERVICE, ROUTE OR LINE FROM PORTS ON THE PACIFIC COAST OF THE UNITED STATES. THE OPENING OF BIDS DISCLOSED THAT THE ADJUSTED PRICE BID OF TODD SHIPYARDS CORPORATION, LOS ANGELES DIVISION, DID NOT EXCEED THE ADJUSTED PRICE BID OF NEWPORT NEWS SHIPBUILDING AND DRYDOCK COMPANY, THE LOW ATLANTIC COAST BIDDER, BY MORE THAN SIX PERCENT.

IT IS ASSUMED THAT YOUR QUESTION IS BASED UPON A CONCLUSION THAT THE FIXED-PRICE BIDS ARE NOT TO BE CONSIDERED FOR AWARD.

SECTION 502 (D) OF THE MERCHANT MARINE ACT, 1936, AS AMENDED, READS AS FOLLOWS:

IN CASE A CONSTRUCTION DIFFERENTIAL SUBSIDY IS APPLIED FOR UNDER THIS TITLE BY AN APPLICANT WHO HAS AS HIS PRINCIPAL PLACE OF BUSINESS A PLACE ON THE PACIFIC COAST OF THE UNITED STATES (BUT NOT INCLUDING ONE WHO, HAVING BEEN IN BUSINESS ON OR BEFORE AUGUST 1, 1935, HAS CHANGED HIS PRINCIPAL PLACE OF BUSINESS TO A PLACE ON THE PACIFIC COAST OF THE UNITED STATES AFTER SUCH DATE) TO AID IN THE CONSTRUCTION OR RECONDITIONING OF A VESSEL TO BE OPERATED IN FOREIGN TRADE IN A SERVICE, ROUTE, OR LINE FROM PORTS ON THE PACIFIC COAST OF THE UNITED STATES, AND THE AMOUNT OF THE BID OF THE SHIPBUILDER ON THE PACIFIC COAST WHO IS THE LOWEST RESPONSIBLE BIDDER ON SUCH COAST FOR SUCH CONSTRUCTION OR RECONDITIONING DOES NOT EXCEED THE AMOUNT OF THE BID OF THE SHIPBUILDER ON THE ATLANTIC COAST OF THE UNITED STATES WHO IS THE LOWEST RESPONSIBLE BIDDER THEREFOR BY MORE THAN 6 PERCENTUM OF THE AMOUNT OF THE BID OF SUCH ATLANTIC COAST SHIPBUILDER, THE COMMISSION SHALL, EXCEPT AS PROVIDED IN SUBSECTION (E), APPROVE SUCH PACIFIC COAST BID, AND IN SUCH CASE NO PAYMENT SHALL BE MADE TO AID IN SUCH CONSTRUCTION OR RECONDITIONING UNLESS THE APPLICANT ACCEPTS THE BID OF SUCH PACIFIC COAST SHIPBUILDER AND AGREES TO DESIGNATE AND CONTINUE AS THE HOME PORT OF THE VESSEL TO BE CONSTRUCTED OR RECONDITIONED A PORT ON THE PACIFIC COAST. NOTHING IN THIS SECTION SHALL BE CONSTRUED AS AUTHORIZING THE COMMISSION TO APPROVE A CONSTRUCTION DIFFERENTIAL IN EXCESS OF 50 PERCENTUM OF THE CONSTRUCTION COST OF THE VESSEL PAID BY THE COMMISSION.

AND SECTION 504 OF THE ACT PROVIDES AS FOLLOWS:

WHERE AN ELIGIBLE APPLICANT UNDER THE TERMS OF THIS TITLE DESIRES TO FINANCE THE CONSTRUCTION OF A PROPOSED VESSEL ACCORDING TO APPROVED PLANS AND SPECIFICATIONS RATHER THAN PURCHASE THE SAME VESSEL FROM THE COMMISSION AS HEREINABOVE AUTHORIZED, THE COMMISSION MAY PERMIT THE APPLICANT TO OBTAIN AND SUBMIT TO IT COMPETITIVE BIDS FROM DOMESTIC SHIPYARDS FOR SUCH WORK. IF THE COMMISSION CONSIDERS THE BID OF THE SHIPYARD IN WHICH THE APPLICANT DESIRES TO HAVE THE VESSEL BUILT FAIR AND REASONABLE, IT MAY APPROVE SUCH BID AND BECOME A PARTY TO THE CONTRACT OR CONTRACTS OR OTHER ARRANGEMENTS FOR THE CONSTRUCTION OF SUCH PROPOSED VESSEL AND MAY AGREE TO PAY A CONSTRUCTION-DIFFERENTIAL SUBSIDY IN AN AMOUNT DETERMINED BY THE COMMISSION IN ACCORDANCE WITH SECTION 502 OF THIS TITLE, AND FOR THE COST OF NATIONAL-DEFENSE FEATURES. THE CONSTRUCTION- DIFFERENTIAL SUBSIDY AND PAYMENTS FOR NATIONAL-DEFENSE FEATURES SHALL BE BASED ON THE LOWEST RESPONSIBLE DOMESTIC BID. NO CONSTRUCTION- DIFFERENTIAL SUBSIDY, AS PROVIDED IN THIS SECTION, SHALL BE PAID UNLESS THE SAID CONTRACT OR CONTRACTS OR OTHER ARRANGEMENTS CONTAIN SUCH PROVISIONS AS ARE PROVIDED IN THIS TITLE TO PROTECT THE INTERESTS OF THE UNITED STATES AS THE COMMISSION DEEMS NECESSARY. SUCH VESSEL SHALL BE DOCUMENTED UNDER THE LAWS OF THE UNITED STATES AS PROVIDED IN SECTION 503 OF THIS TITLE. THE CONTRACT OF SALE, AND THE MORTGAGE GIVEN TO SECURE THE PAYMENT OF THE UNPAID BALANCE OF THE PURCHASE PRICE, SHALL NOT RESTRICT THE LAWFUL OR PROPER USE OR OPERATION OF THE VESSEL, EXCEPT TO THE EXTENT EXPRESSLY REQUIRED BY LAW.

WE BELIEVE IT IMPORTANT TO NOTE THAT THE CONSTRUCTION-DIFFERENTIAL SUBSIDY PROVISIONS OF TITLE V OF THE ACT, 46 U.S.C. 1151, PROVIDE ALTERNATE METHODS OF FINANCING THE CONSTRUCTION OF A VESSEL FOR WHICH A CONSTRUCTION-DIFFERENTIAL SUBSIDY IS SOUGHT. EITHER THE FEDERAL MARITIME BOARD MAY BUILD THE VESSEL AND SELL IT TO THE APPLICANT UNDER SECTION 502 (A), 46 U.S.C. 1152 (A), OR THE APPLICANT MAY FINANCE THE CONSTRUCTION OF THE VESSEL AND THE BOARD MAY PERMIT THE APPLICANT TO OBTAIN AND SUBMIT COMPETITIVE BIDS FROM DOMESTIC SHIPYARDS FOR SUCH WORK UNDER SECTION 504. WITH RESPECT TO THE LATTER, IF THE BOARD CONSIDERS THE BID OF THE SHIPYARD IN WHICH THE APPLICANT DESIRES TO HAVE THE VESSEL BUILT FAIR AND REASONABLE, IT MAY APPROVE THE BID, BECOME A PARTY TO THE CONTRACT, AND AGREE TO PAY A CONSTRUCTION DIFFERENTIAL SUBSIDY IN AN AMOUNT DETERMINED IN ACCORDANCE WITH SECTION 502 OF THE ACT, AND FOR THE COST OF NATIONAL DEFENSE FEATURES.

UNDER EITHER METHOD OF FINANCING, HOWEVER, THE SHIPOWNER IS AN "APPLICANT" FOR A CONSTRUCTION-DIFFERENTIAL SUBSIDY UNDER TITLE IV OF THE ACT, AND UNDER EITHER PLAN THE SUBSIDY PAYMENT IS ABSORBED BY THE GOVERNMENT. THE BASIC DIFFERENCE BETWEEN THE TWO SECTIONS IS IN THE METHOD OF FINANCING THE CONSTRUCTION OF THE VESSEL. HOWEVER, SECTION 502 (D) PRESCRIBES AN ADDED PROVISION REQUIRING THE APPROVAL OF A BID FROM THE LOWEST RESPONSIBLE PACIFIC COAST BIDDER IF THE AMOUNT OF HIS BID DOES NOT EXCEED THE AMOUNT OF THE LOWEST RESPONSIBLE BID OF THE SHIPBUILDER ON THE ATLANTIC COAST BY MORE THAN 6 PERCENTUM OF THE AMOUNT OF SUCH ATLANTIC COAST BID. IN ADDITION, IN ORDER TO CLARIFY THE CALCULATION OF THE CONSTRUCTION-DIFFERENTIAL SUBSIDY IN SUCH A CIRCUMSTANCE, SECTION 502 (D) FURTHER PROVIDES THAT THE SUBSIDY PAYMENT SHALL NOT EXCEED 50 PERCENTUM OF THE CONSTRUCTION COST OF THE VESSEL.

A REVIEW OF THE LEGISLATIVE HISTORY OF THE TWO SECTIONS FAILS TO DISCLOSE ANY CONCLUSIVE EVIDEMCE AS TO WHETHER THE PROVISIONS OF SECTION 502 (D) ARE OR ARE NOT INTENDED TO APPLY IN THE CASE OF CONSTRUCTION UNDER SECTION 504. THE LANGUAGE OF SECTION 502 (D) READ LITERALLY WOULD SEEM TO BE APPLICABLE IN ANY CASE WHERE A CONSTRUCTION DIFFERENTIAL SUBSIDY IS APPLIED FOR UNDER THIS TITLE BY AN APPLICANT WHO HAS AS HIS PRINCIPAL PLACE OF BUSINESS A PLACE ON THE PACIFIC COAST OF THE UNITED STATES. THE LAST SENTENCE OF 502 (D), HOWEVER, WHICH WAS ADDED BY THE 1938 AMENDMENTS AND WHICH LIMITS THE SUBSIDY, INCLUDING THE PACIFIC COAST PREFERENCE, TO 50 PERCENT OF THE CONSTRUCTION COST, USES THE PHRASE "COST OF THE VESSEL PAID BY THE COMMISSION.' UNDER SECTION 504 SUCH TOTAL COST IS NOT PAID BY THE COMMISSION SINCE THE APPLICANT PAYS HIS PORTION. HOWEVER, SIMILAR INCONSISTENCIES ARE FOUND IN OTHER SECTIONS OF TITLE V. WE ARE NOT INCLINED TO GIVE AS MUCH WEIGHT TO THE PHRASE "PAID BY THE COMMISSION," WHICH WAS ADDED IN 1938, AS WE ARE TO THE PHRASE "UNDER THIS TITLE," WHICH WAS A PART OF THE ORIGINAL ACT.

AMERICAN MAIL LINE, LTD. HAS ITS PRINCIPAL PLACE OF BUSINESS ON THE PACIFIC COAST AND HAS APPLIED FOR A CONSTRUCTION DIFFERENTIAL SUBSIDY UNDER TITLE V OF THE ACT. WHILE SUCH APPLICATION INVOLVES PRIVATE FINANCING UNDER SECTION 504, THE FACT REMAINS THAT SECTION 504 IS PART OF TITLE IV AND, THEREFORE, THE APPLICATION IS MADE UNDER TITLE IV. IN VIEW OF THE PRECISE LANGUAGE OF SECTION 502 (D) WHICH STATES: "/D) IN CASE A CONSTRUCTION-DIFFERENTIAL SUBSIDY IS APPLIED FOR UNDER THIS TITLE BY AN APPLICANT WHO HAS AS HIS PRINCIPAL PLACE OF BUSINESS A PLACE ON THE PACIFIC COAST OF THE UNITED STATES * * *. ") ITALICS SUPPLIED), AND THE ABSENCE OF ANY LEGISLATIVE HISTORY TO THE EFFECT THAT SECTION 502 (D) IS NOT INTENDED TO APPLY WHERE APPLICATION IS MADE UNDER SECTION 504, WE AGREE WITH THE OPINION OF YOUR GENERAL COUNSEL THAT SECTION 502 (D) IS FOR APPLICATION IN THE AMERICAN MAIL LINE CASE.

IT IS RECOGNIZED THAT THE EFFECT OF APPLYING SECTION 502 (D) RESULTS IN ADDITIONAL COST TO THE GOVERNMENT AND COULD RESULT IN ADDITIONAL COST TO THE APPLICANT WHERE, AS IN THE PRESENT CASE, THE ACCEPTANCE OF THE PACIFIC COAST BID MAY RESULT IN THE DIFFERENCE BETWEEN FOREIGN COSTS AND DOMESTIC COSTS EXCEEDING THE 50 PERCENT CONSTRUCTION DIFFERENTIAL LIMITATION. HOWEVER, THIS WOULD ALSO BE THE RESULT IN THE CASE OF PUBLIC FINANCING WHERE A PACIFIC COAST PREFERENCE IS FOR APPLICATION. APPLICATION OF SECTION 502 (D) WOULD ALSO MAKE INOPERATIVE, IN PACIFIC COAST PREFERENCE CASES, THAT PART OF SECTION 504 WHICH GIVES THE APPLICANT A RIGHT TO CONSTRUCT A VESSEL IN A YARD OF HIS CHOICE. HOWEVER, IT MUST BE NOTED THAT SUCH RIGHT DID NOT EXIST UNDER SECTION 504 AS ORIGINALLY ENACTED, AND WE ARE UNABLE TO LOCATE ANY CONVINCING EVIDENCE THAT PUBLIC LAW 705, 75TH CONGRESS, 46 U.S.C. 112 WHICH AMENDED SECTION 504 IN 1938 TO GIVE AN APPLICANT THE RIGHT TO ACCEPT A HIGHER BID IF HE PAID THE DIFFERENCE, WAS INTENDED TO OVERRIDE, REPLACE, OR REPEAL THE APPLICATION OF SECTION 502 (D) TO SECTION 504 CONSTRUCTION. WHILE THESE FACTORS ARE OF SERIOUS CONSEQUENCE, WE DO NOT BELIEVE THEY CAN SERVE TO OVERCOME THE SPECIFIC PROVISIONS OF SECTION 502 (D). THE REMEDY FOR ANY INEQUITIES THAT RESULT, OR FOR ANY ADVERSE EFFECT ON NEW CONSTRUCTION, LIES IN AMENDMENT OF THE ACT.