B-140667, NOVEMBER 17, 1959, 39 COMP. GEN. 380

B-140667: Nov 17, 1959

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THE RULE OF CONTRACT CONSTRUCTION BEING THAT A CONTRACT WHICH EXPRESSES THE AGREEMENT OF THE PARTIES MAY NOT BE REFORMED BECAUSE ONE OR BOTH OF THE PARTIES WERE MISTAKEN AS TO ITS LEGAL IMPORT OR EFFECT. THE CONTRACT PRICE WAS TO BE CORRESPONDINGLY DECREASED OR THE AMOUNT OF SUCH RELIEF PAID OVER TO THE GOVERNMENT. THE IMPORT DUTY WHIDH WAS NOT REQUIRED TO BE PAID BECAUSE THE CONTRACTOR WAS PERMITTED TO SUBSTITUTE EQUIPMENT OF DOMESTIC ORIGIN FOR THE UNSATISFACTORY EQUIPMENT OF FOREIGN ORIGIN MUST BE REGARDED AS AN IMPORT DUTY SAVINGS WITHIN THE MEANING OF THE CONTRACT AND AS SUCH IS DUE TO THE GOVERNMENT. 1959: REFERENCE IS MADE TO YOUR LETTER OF AUGUST 12. WITH REQUEST FOR AN ADVANCE DECISION AS TO WHETHER PAYMENT THEREON IS AUTHORIZED.

B-140667, NOVEMBER 17, 1959, 39 COMP. GEN. 380

CONTRACTS - MODIFICATION - MISTAKE - PRICE ADJUSTMENT - IMPORT DUTY RELIEF THE FAILURE OF THE CONTRACTING OFFICER TO CONSIDER A CONTRACT PROVISION, WHICH ENTITLED THE GOVERNMENT TO THE SAVINGS DUE THE CONTRACTOR ON ANY IMPORT DUTY NOT REQUIRED TO BE PAID WHEN HE PERMITTED THE CONTRACTOR TO SUBSTITUTE EQUIPMENT OF A DOMESTIC MANUFACTURE FOR UNSATISFACTORY EQUIPMENT OF A FOREIGN MANUFACTURE, MAY NOT BE REGARDED AS A MISTAKE TO JUSTIFY REFORMATION OF THE CONTRACT TO GIVE THE CONTRACTOR THE BENEFIT OF THE IMPORT DUTY SAVINGS, THE RULE OF CONTRACT CONSTRUCTION BEING THAT A CONTRACT WHICH EXPRESSES THE AGREEMENT OF THE PARTIES MAY NOT BE REFORMED BECAUSE ONE OR BOTH OF THE PARTIES WERE MISTAKEN AS TO ITS LEGAL IMPORT OR EFFECT. UNDER A CONTRACT WHICH PROVIDED THAT, IF THE CONTRACTOR SHOULD BE RELIEVED FROM THE PAYMENT OR THE BURDEN OF ANY IMPORT DUTY INCLUDED IN THE CONTRACT PRICE, THE CONTRACT PRICE WAS TO BE CORRESPONDINGLY DECREASED OR THE AMOUNT OF SUCH RELIEF PAID OVER TO THE GOVERNMENT, THE IMPORT DUTY WHIDH WAS NOT REQUIRED TO BE PAID BECAUSE THE CONTRACTOR WAS PERMITTED TO SUBSTITUTE EQUIPMENT OF DOMESTIC ORIGIN FOR THE UNSATISFACTORY EQUIPMENT OF FOREIGN ORIGIN MUST BE REGARDED AS AN IMPORT DUTY SAVINGS WITHIN THE MEANING OF THE CONTRACT AND AS SUCH IS DUE TO THE GOVERNMENT. AN AUTHORIZATION BY THE GOVERNMENT WHICH PERMITTED A CONTRACTOR, AT HIS REQUEST, TO SUBSTITUTE EQUIPMENT OF DOMESTIC MANUFACTURE WHICH MET THE SPECIFICATIONS FOR UNSATISFACTORY EQUIPMENT OF FOREIGN MANUFACTURE MAY NOT BE REGARDED AS REFORMATION OF A CONTRACT WITH CONSIDERATION MOVING TO THE GOVERNMENT TO JUSTIFY THE RELINQUISHMENT BY THE GOVERNMENT OF ITS RIGHTS UNDER THE CONTRACT TO THE IMPORT DUTY SAVINGS, THE CONTRACTOR HAVING ALREADY BEEN BOUND TO FURNISH EQUIPMENT WHICH WOULD MEET THE SPECIFICATIONS OR BECOME LIABLE FOR EXCESS COSTS AND LIQUIDATED DAMAGES.

TO ALVA V. EBERSOLE, DEPARTMENT OF THE INTERIOR, NOVEMBER 17, 1959:

REFERENCE IS MADE TO YOUR LETTER OF AUGUST 12, 1959 (FORWARDED HERE BY THE OFFICE OF THE SECRETARY OF THE INTERIOR BY LETTER OF SEPTEMBER 2, 1959), TRANSMITTING BUREAU VOUCHER NO. 3893-59, PROVIDING FOR PAYMENT TO THE LEGNANO ELECTRIC CORPORATION, NEW YORK, NEW YORK, OF $2,131.50 UNDER CONTRACT NO. 14-06-D-2263, DATED MAY 15, 1956, WITH REQUEST FOR AN ADVANCE DECISION AS TO WHETHER PAYMENT THEREON IS AUTHORIZED.

UNDER INVITATION NO. DS-4633, SCHEDULE NO. 2, THE BUREAU OF RECLAMATION, DENVER FEDERAL CENTER, DENVER, COLORADO, INVITED BIDS, TO BE OPENED MARCH 22, 1956, FOR FURNISHING TWO 69-KILOVOLT POWER CIRCUIT BREAKERS, WITH APPLICABLE SPARE PARTS, TO BE DELIVERED F.O.B. CARS AT FORKS, NORTH DAKOTA. THE INVITATION STATED THAT DELIVERY WAS DESIRED WITHIN 330 CALENDAR DAYS AFTER DATE OF RECEIPT OF NOTICE OF AWARD. IN THE BIDDING SCHEDULE, UNDER THE HEAD " IMPORT DUTY," BIDDERS OFFERING MATERIALS OR EQUIPMENT OF FOREIGN ORIGIN OR MANUFACTURE WERE ADVISED THAT ANY APPLICABLE IMPORT DUTY WAS REQUIRED TO BE INCLUDED IN THEIR BID PRICES, AND THEY WERE REQUIRED TO STATE THE AMOUNT OF IMPORT DUTY WHICH HAD BEEN INCLUDED THEREIN. THEY WERE ALSO ADVISED THAT, IF THE AMOUNT OF IMPORT DUTY ACTUALLY PAID BY THE CONTRACTOR FOR SHIPMENT INTO THE UNITED STATES PROVED TO BE LESS THAN THE AMOUNT STATED IN THE BID, THE GOVERNMENT, IN ADDITION TO THE RIGHTS UNDER CLAUSE 10 OF STANDARD FORM 32, GENERAL PROVISIONS ( SUPPLY CONTRACT),"SHALL BE ENTITLED TO THE AMOUNT OF SUCH SAVINGS.' CLAUSE 10 OF STANDARD FORM 32, WHICH WAS INCORPORATED IN THE CONTRACT, PROVIDED IN PART:

(E) PRICE ADJUSTMENT.--- * * * IF, AFTER THE CONTRACT DATE, THE CONTRACTOR IS RELIEVED IN WHOLE OR IN PART FROM THE PAYMENT OR THE BURDEN OF ANY DIRECT TAX (THE TERM "DIRECT TAX" BEING DEFINED IN CLAUSE 10 (A) AS INCLUDING ANY DUTY DIRECTLY APPLICABLE TO THE IMPORTATION OF THE SUPPLIES COVERED BY THE CONTRACT) INCLUDED IN THE CONTRACT PRICE, OR ANY TAX DIRECTLY APPLICABLE TO THE MATERIALS OR COMPONENTS USED IN THE MANUFACTURE OR FURNISHING OF THE COMPLETED SUPPLIES OR SERVICES COVERED BY THIS CONTRACT, THE CONTRACTOR AGREES PROMPTLY TO NOTIFY THE CONTRACTING OFFICER OF SUCH RELIEF, AND THE CONTRACT PRICE SHALL BE CORRESPONDINGLY DECREASED OR THE AMOUNT OF SUCH RELIEF PAID OVER TO THE GOVERNMENT. * * *

CLAUSE 5 OF STANDARD FORM 32 PROVIDED THAT THE CONTRACT ARTICLES WERE TO BE SUBJECT TO INSPECTION AND TEST BY THE GOVERNMENT AND THAT, IN CASE THEY WERE FOUND TO BE DEFECTIVE IN MATERIAL OR WORKMANSHIP OR OTHERWISE NOT IN CONFORMITY WITH THE REQUIREMENTS OF THE CONTRACT, THE GOVERNMENT WAS TO HAVE THE RIGHT EITHER TO REJECT THEM OR TO REQUIRE THEIR CORRECTION, AT THE EXPENSE OF THE CONTRACTOR. CLAUSE 11 THEREOF ( DEFAULT), AS SUPPLEMENTED BY PARAGRAPH B-8 OF THE SPECIAL REQUIREMENTS OF THE INVITATION ( DELAYS-LIQUIDATED DAMAGES). PROVIDED FOR THE ASSESSMENT OF LIQUIDATED DAMAGES AT THE RATE OF $20 FOR EACH CALENDAR DAY OF DELAY IN DELIVERY OF THE CONTRACT ARTICLES.

IN ITS BID DATED MARCH 20, 1955, THE LEGNANO ELECTRIC CORPORATION OFFERED TO FURNISH THE TWO CIRCUIT BREAKERS FOR $21,170, AND THE SPECIFIED SPARE PARTS THEREFOR FOR $1,000, AND TO COMPLETE DELIVERY THEREOF WITHIN 330 CALENDAR DAYS AFTER DARE OF RECEIPT OF NOTICE OF AWARD. IN THE SPACES PROVIDED THEREFOR IN THE BIDDING SCHEDULE, LEGNANO INDICATED THAT THE EQUIPMENT WHICH IT PROPOSED TO FURNISH WOULD BE MANUFACTURED BY OFFICE ELETTROMECCANICHE GALILIO, PADOVA, ITALY, AND THAT THE AMOUNT OF $3,160 HAD BEEN INCLUDED IN ITS BID PRICE FOR THE CIRCUIT BREAKERS TO COVER IMPORT DUTY THEREON, AND THE AMOUNT OF $143 HAD BEEN INCLUDED THEREIN TO COVER IMPORT DUTY ON THE SPARE PARTS. THE NEXT LOWEST BID RECEIVED IN RESPONSE TO THE INVITATION WAS THAT OF THE WESTINGHOUSE ELECTRIC CORPORATION, IN THE TOTAL AMOUNT OF $26,142.

THE RECORD SHOWS THAT THE CONTRACT FOR FURNISHING THE CIRCUIT BREAKERS AND SPARE PARTS WAS AWARDED TO LEGNANO ON MAY 15, 1956, AND THAT NOTICE OF AWARD WAS RECEIVED BY THE CONTRACTOR ON MAY 17, 1956, THUS FIXING APRIL 12, 1957, AS THE DATE WHEN DELIVERY OF THE CONTRACT ARTICLES WAS REQUIRED TO BE COMPLETED. DURING PERFORMANCE OF FACTORY TESTS, AS PROVIDED FOR IN THE SPECIFICATIONS, THE CIRCUIT BREAKER WHICH WAS BEING TESTED FAILED, AND BY LETTER OF JANUARY 21, 1958, LEGNANO REQUESTED THE CONTRACTING OFFICER'S PERMISSION TO FURNISH WESTINGHOUSE CIRCUIT BREAKERS OF DOMESTIC MANUFACTURE. THE CONTRACTING OFFICER REPLIED BY LETTER OF JANUARY 29, 1958, AS FOLLOWS:

THE ARRANGEMENTS YOU HAVE MADE WITH WESTINGHOUSE ELECTRIC CORPORATION FOR SUPPLYING THE TWO POWER CIRCUIT BREAKERS AS SET FORTH IN YOUR LETTER OF JANUARY 21, 1958, IS (ARE) ACCEPTABLE TO ME. YOU MAY PROCEED WITH THE UNDERSTANDING THAT THE ALTERNATE EQUIPMENT WILL MEET ALL THE REQUIREMENTS OF INVITATION NO. DS-4633 AND THAT DELIVERY WILL BE MADE WITHIN 13 TO 16 WEEKS.

INASMUCH AS LIQUIDATED DAMAGES WILL ACCRUE UNTIL DELIVERY OF CIRCUIT BREAKERS IS MADE, IT WILL BE TO YOUR ADVANTAGE TO REDUCE THE DELIVERY TIME TO A MINIMUM.

DELIVERY OF THE WESTINGHOUSE CIRCUIT BREAKERS AND SPARE PARTS APPEARS TO HAVE BEEN SUBSTANTIALLY COMPLETED ON MAY 15, 1958, AND BY LETTER OF APRIL 28, 1959, TRANSMITTING BILL FOR COLLECTION NO. MS-261 59, DATED APRIL 28, 1959, ATTACHED TO COPY OF RETENTION PAYMENT ( BUREAU) VOUCHER NO. 3386-59, DATED AUGUST 13, 1958, THE BUREAU OF RECLAMATION INVOICED THE CONTRACTOR FOR THE AMOUNT OF $1,171.50. AS INDICATED BY THE INFORMATION ON THE VOUCHER, THIS AMOUNT REPRESENTED THE DIFFERENCE BETWEEN THE AMOUNT OF $2,131.50, REPRESENTING THE BALANCE DUE THE CONTRACTOR ON THE BASIS OF THE ORIGINAL CONTRACT PRICE ($22,170) AFTER DEDUCTING $7,960 (COVERING LIQUIDATED DAMAGES AT THE STIPULATED RATE FOR THE DELAY IN DELIVERY OF 398 DAYS WHICH HAD OCCURRED) AND ALSO DEDUCTING $12,078.50 (REPRESENTING THE AMOUNT WHICH ALREADY HAD BEEN PAID TO THE CONTRACTOR UNDER THE CONTRACT), AND THE SUM OF $3,303, REPRESENTING THE TOTAL AMOUNT WHICH HAD BEEN INCLUDED IN THE CONTRACT PRICE TO COVER IMPORT DUTY ON THE CIRCUIT BREAKERS AND SPARE PARTS, WHICH THE CONTRACTOR HAD NOT BEEN REQUIRED TO PAY.

THE CONTRACTOR REPLIED BY LETTER OF MAY 6, 1959, PROTESTING THE DEDUCTION OF $3,303 FROM THE CONTRACT PRICE ON THE BASIS THAT SINCE ITS ORIGINAL OFFER, ACCEPTED BY THE BUREAU, WAS TO SUPPLY ITALIAN EQUIPMENT AND SPARE PARTS, WHEREAS THE ALTERNATE EQUIPMENT AND SPARE PARTS WERE FURNISHED FROM AMERICAN SOURCES, THE CONDITION IN THE ORIGINAL CONTRACT PERTAINING TO THE GOVERNMENT'S RIGHT TO ANY SAVINGS REALIZED WITH RESPECT TO THE IMPORT DUTY FACTOR SHOULD NOT APPLY. THE LETTER STATES THAT, IN "ACCEPTING" TO FURNISH AN ALTERNATE SUPPLY, THE CONTRACTOR WAS OF THE UNDERSTANDING THAT ITS ORIGINAL CONTRACT PRICE, WITHOUT ANY DEDUCTION OTHER THAN THE LIQUIDATED DAMAGES FOR LATE DELIVERY, WOULD BE PAID TO IT UPON COMPLETION OF THE CONTRACT, AND THAT SUCH DERSTANDING,"ALTHOUGH NOT SPECIFICALLY DEFINED, WAS ACKNOWLEDGED BY THE BUREAU WITH THEIR LETTER DATED JANUARY 29, 1959, (1958), D-280.'

THE PRESENT VOUCHER IS DESIGNATED "AMENDED RETENTION PAYMENT VOUCHER SCHEDULED NO. 2--- SUPERSEDES RETENTION PAYMENT VOUCHER NO. 3386, DATED 8- 13-58," AND THE AMOUNT OF $2,131.50 PROPOSED TO BE PAID THEREON REPRESENTS THE BALANCE DUE THE CONTRACTOR ON THE BASIS OF THE ORIGINAL CONTRACT PRICE, AFTER DEDUCTION OF THE REFERRED-TO AMOUNT OF $7,960, FOR LIQUIDATED DAMAGES, BUT WITHOUT ANY DEDUCTION ON ACCOUNT OF THE IMPORT DUTY FACTOR. IN RECOMMENDING IN A MEMORANDUM DATED AUGUST 4, 1959, TO THE PROJECT MANAGER OF THE RECLAMATION PROJECT INVOLVED THAT THE VOUCHER BE PAID, THE CONTRACTING OFFICER STATES:

* * * WHEN CONSIDERING THE CONTRACTOR'S PROPOSAL TO SUBSTITUTE DOMESTIC CIRCUIT BREAKERS ( WESTINGHOUSE) FOR THE BREAKERS OF FOREIGN ORIGIN OFFERED IN HIS BID, I DID NOT THINK OF THE QUESTION AS TO WHETHER THE GOVERNMENT WOULD BE ENTITLED TO ANY SAVINGS TO THE CONTRACTOR IN IMPORT DUTY, WHICH HE INCLUDED IN HIS BID AS A COMPONENT OF THE BID PRICE, RESULTING FROM THE SUBSTITUTION. I DOUBT THAT THE CONTRACTOR CONSIDERED THE QUESTION. HAD IT BEEN CONSIDERED, I BELIEVE I WOULD HAVE REGARDED A REDUCTION IN THE CONTRACT PRICE EQUAL TO THE AMOUNT SAVED BY THE CONTRACTOR AS INEQUITABLE, AND I WOULD HAVE SOUGHT A RULING BY THE COMPTROLLER GENERAL APPROVING THE SUBSTITUTION WITH WAIVER OF THE RECOUPING PROVISION IN THE IMPORT DUTY STATEMENT OF THE CONTRACT. REGARD OUR FAILURE TO CONSIDER THAT QUESTION AS A MUTUAL MISTAKE OF FACT, AND RECOMMEND THAT THE CONTRACT BE REFORMED TO ELIMINATE THE RECOUPING PROVISION WITH RELATION TO CONTRACTOR'S FAILURE TO PAY THE REPRESENTED IMPORT DUTY COMPONENT.

SINCE THE CONTRACTING OFFICER ADMITTEDLY "DID NOT THINK OF THE QUESTION AS TO WHETHER THE GOVERNMENT WOULD BE ENTITLED TO ANY SAVINGS TO THE CONTRACTOR IN IMPORT DUTY * * * RESULTING FROM THE SUBSTITUTION" AT THE TIME HE AUTHORIZED THE CONTRACTOR TO DELIVER WESTINGHOUSE CIRCUIT BREAKERS OF DOMESTIC MANUFACTURE IN LIEU OF THE EQUIPMENT MADE BY THE ITALIAN CONCERN, HE MAY NOT BE SAID TO HAVE MADE ANY MISTAKE IN RESPECT TO THE TRANSACTION. IN VIEW THEREOF, AND SINCE THERE IS NOTHING IN HIS ABOVE- QUOTED LETTER OF JANUARY 29, 1958, WHICH REASONABLY COULD BE TAKEN BY THE CONTRACTOR AS INDICATING THAT THE GOVERNMENT WOULD NOT EXPECT TO TAKE CREDIT FOR THE SAVINGS TO THE CONTRACTOR IN IMPORT DUTY FROM THE SUBSTITUTION OF EQUIPMENT, NO BASIS EXISTS FOR REFORMING THE PROVISIONS OF THE CONTRACT RELATING TO IMPORT DUTY ON THE BASIS OF MISTAKE SO AS TO GIVE THE CONTRACTOR THE BENEFIT OF THE SAVINGS WHICH WERE INVOLVED. IT IS WELL SETTLED THAT WHERE A CONTRACT EXPRESSES THE TRUE AGREEMENT OF THE PARTIES- -- AND IN THIS RESPECT THE CORRECTNESS OF THE PROVISIONS OF THE INSTANT CONTRACT RELATING TO IMPORT DUTY HAVE NOT BEEN QUESTIONED--- IT CANNOT BE REFORMED BECAUSE ONE OR BOTH OF THE PARTIES WERE MISTAKEN AS TO ITS LEGAL IMPORT OR EFFECT. SEE TOKIO MARINE AND FIRE INS. CO. V. NATIONAL UNION FIRE INS. CO., C.C.A.N.Y., 91 F.2D 964; SHELL PETROLEUM CORPORATION V. CORN, C.C.A. KANS., 54 F.2D 766; GODWIN V. ORGAIN, D.C. ALA., 160 F.1SUPP. 757. FURTHERMORE, IT IS NOT ENOUGH TO JUSTIFY REFORMATION THAT A COURT MAY BE SATISFIED THAT THE PARTIES WOULD HAVE COME TO A CERTAIN AGREEMENT HAD THEY BEEN AWARE OF THE ACTUAL FACTS. SEE 26 COMP. GEN. 654, 657, CITING COURT CASES.

THEREFORE, IN THE ABSENCE OF ANY BASIS FOR REFORMATION OF THE CONTRACT, THE TERMS OF THE CONTRACT AS WRITTEN GOVERN THE RIGHTS AND OBLIGATIONS OF THE PARTIES. UNDER THE ABOVE-QUOTED PROVISIONS OF CLAUSE 10 (E) OF STANDARD FORM 32, IT WAS AGREED THAT IF THE CONTRACTOR SHOULD BE RELIEVED FROM THE PAYMENT OR THE BURDEN OF ANY IMPORT DUTY INCLUDED IN THE CONTRACT PRICE, THE CONTRACT PRICE WAS TO BE CORRESPONDINGLY DECREASED OR THE AMOUNT OF SUCH RELIEF PAID OVER TO THE GOVERNMENT. IN VIEW THEREOF, AND OF THE PROVISIONS MADE IN THE BIDDING SCHEDULE FOR THE RECOUPMENT BY THE GOVERNMENT OF ANY PART OF THE AMOUNT SHOWN TO HAVE BEEN INCLUDED IN THE CONTRACT PRICE FOR IMPORT DUTY WHICH THE CONTRACTOR WAS NOT REQUIRED TO PAY, THERE WOULD APPEAR TO BE NO QUESTION AS TO THE GOVERNMENT'S RIGHT TO DEDUCT THE SUM OF $3,303 HERE INVOLVED FROM THE CONTRACT PRICE OF THE EQUIPMENT NOTWITHSTANDING THE FACT THAT THE SAVINGS WITH RESPECT TO IMPORT DUTY RESULTED FROM THE CONTRACTOR'S FURNISHING EQUIPMENT OF DOMESTIC MANUFACTURE UNDER THE CONTRACT. THE SAVINGS WERE NEVERTHELESS REALIZED BY THE CONTRACTOR AND ARE BY THE TERMS OF THE CONTRACT DUE THE GOVERNMENT. SEE UNITED STATES V. KANSAS FLOUR CORPORATION, 314 U.S. 212.

IN CONCLUSION, IT SEEMS PERTINENT TO OBSERVE THAT THE AUTHORIZATION TO SUBSTITUTE WESTINGHOUSE CIRCUIT BREAKERS OF DOMESTIC MANUFACTURE FOR THE EQUIPMENT OF ITALIAN MANUFACTURE SPECIFIED TO BE FURNISHED UNDER THE CONTRACT WAS GRANTED AT THE REQUEST OF THE CONTRACTOR TO ENABLE IT TO FURNISH CIRCUIT BREAKERS WHICH MET THE REQUIREMENTS OF THE SPECIFICATIONS, WHICH IT HAD NOT, UP UNTIL THAT TIME, BEEN UNABLE TO DO. SINCE THE CONTRACTOR WAS ALREADY BOUND TO DO THIS UNDER THE CONTRACT, OR BECOME LIABLE FOR EXCESS COSTS AND FURTHER LIQUIDATED DAMAGES THEREUNDER, THERE WOULD BE NO CONSIDERATION MOVING TO THE GOVERNMENT FOR RELINQUISHMENT OF ITS RIGHT TO THE SAVINGS WITH RESPECT TO IMPORT DUTY.

ACCORDINGLY, BUREAU VOUCHER NO. 3893-59, TOGETHER WITH SUPPORTING PAPERS, IS RETURNED HEREWITH AND YOU ARE ADVISED THAT PAYMENT THEREON IS NOT AUTHORIZED.