B-141157, DEC. 5, 1960

B-141157: Dec 5, 1960

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WAS WITHHELD IN THE ACCOUNTS OF R. W-25-075-ENG-7886) FOR CERTAIN INSTALLATIONS AT THE ARSENAL WAS AMENDED BY TRANSFERRING TO THE LESSEE THE CHLORINE PLANT (GROUP III) AND THE UTILITIES SYSTEM (GROUP IV). BY THE SAME AMENDMENT THERE WAS ADDED TO THE LEASE CONDITION NO. 23 OBLIGATING THE LESSEE TO SUPPLY THE GOVERNMENT ALL ELECTRIC CURRENT. SUCH SERVICES WERE TO BE FURNISHED BY THE LESSEE UPON SUCH TERMS AND RATES AS SET FORTH IN CONTRACTS FOR THE SERVICES TO BE ENTERED INTO BETWEEN THE LESSEE AND THE CONTRACTING OFFICER. IT WAS SPECIFIED. WHICHEVER IS LOWER. 6 AND 7 WERE ENTERED INTO FOR COMPRESSED AIR STEAM. THE RATE SCHEDULE PROVIDED FOR IN PARAGRAPH 1 OF APPENDIX "A" OF THE CONTRACT WAS DELETED RETROACTIVELY AS OF JULY 1.

B-141157, DEC. 5, 1960

TO THE SECRETARY OF THE ARMY:

BY NOTICE OF EXCEPTION NO. 0-00002 DATED APRIL 8, 1960, CREDIT FOR PAYMENTS AGGREGATING $514,223.94 MADE ON VOUCHER NO. 3175 AND 33 OTHERS TO THE SHELL CHEMICAL CORPORATION, THE PRESENT LESSEE AND OPERATOR OF THE UTILITIES SYSTEM AT THE ROCKY MOUNTAIN ARSENAL, WAS WITHHELD IN THE ACCOUNTS OF R. H. RUHLAND, JR.

BY PARAGRAPH 7 OF SUPPLEMENTAL AGREEMENT NO. 5, DATED DECEMBER 29, 1949, THE BASIC LEASE (NO. W-25-075-ENG-7886) FOR CERTAIN INSTALLATIONS AT THE ARSENAL WAS AMENDED BY TRANSFERRING TO THE LESSEE THE CHLORINE PLANT (GROUP III) AND THE UTILITIES SYSTEM (GROUP IV). BY THE SAME AMENDMENT THERE WAS ADDED TO THE LEASE CONDITION NO. 23 OBLIGATING THE LESSEE TO SUPPLY THE GOVERNMENT ALL ELECTRIC CURRENT, STEAM FOR PROCESS AND HEATING PURPOSES, COMPRESSED AIR, AND POTABLE AND PROCESS WATER. SUCH SERVICES WERE TO BE FURNISHED BY THE LESSEE UPON SUCH TERMS AND RATES AS SET FORTH IN CONTRACTS FOR THE SERVICES TO BE ENTERED INTO BETWEEN THE LESSEE AND THE CONTRACTING OFFICER. IT WAS SPECIFIED, HOWEVER, THAT THE RATES TO BE CHARGED FOR SUCH SERVICES SHOULD IN NO EVENT EXCEED THE RATES AT WHICH SERVICES HAD BEEN SUPPLIED BY THE GOVERNMENT, OR THE REGULAR RATE SCHEDULE PRACTICES ESTABLISHED IN THE REGION FOR LIKE KIND AND CLASS OF SERVICES, WHICHEVER IS LOWER, PROVIDED FURTHER, HOWEVER, THAT THE RATES FOR THE GOVERNMENT SHOULD IN NO EVENT EXCEED THE COST TO THE GOVERNMENT OF PRODUCING SUCH SERVICES FOR ITS OWN USE. IN JANUARY 1950 CONTRACTS NOS. DA-05-021 GML-4, 5, 6 AND 7 WERE ENTERED INTO FOR COMPRESSED AIR STEAM, ELECTRIC AND WATER SERVICES. DA-05-021 CML-7 PROVIDED FOR THE DELIVERY OF POTABLE AND PROCESS WATER AND STIPULATED THAT THE WATER SUPPLY WOULD BE RECHLORINATED IN ACCORDANCE WITH THE STANDARD REQUIREMENTS OF THE DEPARTMENT OF THE ARMY. PARAGRAPH 12 PROVIDED THAT THE CONTRACTING OFFICER WITH THE APPROVAL OF THE CONTRACTOR MIGHT AT ANY TIME, MAKE CHANGES IN THE CONTRACT WITHIN THE GENERAL SCOPE THEREOF. ALSO, IT PROVIDED FOR AN EQUITABLE ADJUSTMENT AND MODIFICATION OF THE CONTRACT IN THE EVENT SUCH CHANGES CAUSED AN INCREASE OR DECREASE IN THE AMOUNT DUE. SUBPARAGRAPHS (A) AND (B) OF PARAGRAPH 3 OF APPENDIX "A" PROVIDED FOR AN ADJUSTMENT OF RATES IN THE EVENT OF AN INCREASE IN THE COST OF WATER FURNISHED BY THE CITY AND COUNTY OF DENVER, OR IN THE EVENT IT SHOULD BECOME NECESSARY FOR THE CONTRACTOR TO PURCHASE POTABLE WATER TO SUPPLEMENT THE SUPPLY OF PROCESS WATER. THE RATE SCHEDULE PROVIDED FOR IN PARAGRAPH 1 OF APPENDIX "A" OF THE CONTRACT WAS DELETED RETROACTIVELY AS OF JULY 1, 1951, BY SUPPLEMENTAL AGREEMENT NO. 1, DATED MARCH 1, 1952, AND NEW RATES WERE ESTABLISHED AND PROVIDED FOR IN THE EVENT OF CHANGE OF METHODS OF CHLORINATION OR THE INSTALLATION OF ADDITIONAL CHLORINATION FACILITIES.

PARAGRAPH 3 (ADJUSTMENT CLAUSE) UNDER APPENDIX "A" OF THE CONTRACTS FOR FURNISHING STEAM SERVICE AND ELECTRIC SERVICE NOS. DA-05-021 CML-5 AND 6, RESPECTIVELY, PROVIDED FOR INCREASES OR DECREASES IN THE CONTRACT RATES IN THE EVENT OF CHANGES IN THE COST OF FUEL. PARAGRAPH 12 OF BOTH OF THESE CONTRACTS CONTAINED PROVISIONS FOR CHANGES BY THE CONTRACTOR AND FOR EQUITABLE ADJUSTMENTS IF SUCH CHANGES CAUSED INCREASES OR DECREASES IN THE AMOUNTS DUE.

WHILE THE CONTRACT FOR FURNISHING COMPRESSED AIR SERVICE DA-05-021 CML-4 CONTAINED THE SAME PROVISIONS FOR CHANGES IT CONTAINED NO PROVISION FOR ANY GENERAL RATE ADJUSTMENT.

THE UTILITY CONTRACTS REMAINED IN EFFECT UNTIL MAY 3, 1957, WHEN THEY WERE SUPERSEDED EFFECTIVE AS OF FEBRUARY 1, 1956, BY CONTRACT NO. DA-05- 021-401 CML 10,119, PURSUANT TO AMENDMENTS TO THE LEASE DOCUMENT EXECUTED THE SAME DATE (MAY 3, 1957), AND ALSO RETROACTIVELY EFFECTIVE AS OF FEBRUARY 1, 1956. THE RETROACTIVE AMENDMENT TO THE LEASE EFFECTED BY SUPPLEMENTAL AGREEMENT NO. 16 (PARA. 1) CHANGED THE ORIGINAL RATE LIMITATION TO PROVIDE THAT THE RATES IN NO EVENT SHOULD EXCEED THE COST TO THE GOVERNMENT OF PRODUCING SUCH SERVICES SOLELY FOR ITS OWN USE, CALCULATED ON A COST ACCOUNTING SYSTEM COMPARABLE TO THAT USED BY THE LESSEE. PARAGRAPH 2 OF SUPPLEMENTAL AGREEMENT NO. 16 INCREASED THE LESSEE'S LIABILITY FOR THE COST OF MAINTAINING THE WATER SYSTEM FROM $10,000 PER ANNUM TO $25,000 ON A NONCUMULATIVE BASIS.

ON THE BASIS OF THE RATES ESTABLISHED BY THE AGREEMENTS EXECUTED ON MAY 3, 1957, THE LESSEE WAS PAID AN ADDITIONAL AMOUNT OF $229,055.56 FOR UTILITIES FURNISHED DURING THE PERIOD FEBRUARY 1, 1956, THROUGH APRIL 30, 1957. PRESUMABLY UNDER A PROVISION OF THE NEW CONTRACT (PARAGRAPH 4, APPENDIX "A") FOR ANNUAL REVIEW AND REVISIONS OF RATES, THE RATES AGAIN WERE REVISED BY MODIFICATION NO. 1, EXECUTED ON FEBRUARY 5, 1958, EFFECTIVE FEBRUARY 1, 1957, ON THE BASIS OF INFORMATION SUBMITTED BY THE LESSEE ON MARCH 29, 1957. THE LESSEE WAS THEN PAID $15,677.95 NET INCREASE FOR THE PERIOD FEBRUARY 1, 1957, THROUGH MARCH 31, 1958; $6,088.75 OF WHICH AMOUNT APPLIED TO THE PERIOD FEBRUARY 1, 1957, THROUGH APRIL 30, 1957.

IT WAS CONTENDED BY THE CONTRACTING OFFICER AND THE DISBURSING OFFICER, IN RESPONSE TO INFORMAL INQUIRY BY OUR REGIONAL OFFICE AT DENVER, THAT THE LESSEE'S ASSUMPTION OF THE ADDITIONAL MAINTENANCE LIABILITY CONSTITUTED SUFFICIENT CONSIDERATION TO JUSTIFY THE NEW UTILITY RATES PROVIDED FOR UNDER CONTRACT NO. DA-05-021-401 CML 10,119 AND THAT, THEREFORE, THERE WAS NO WAIVER OF VESTED RIGHTS AND THAT IN VIEW OF THE ADDITIONAL CONSIDERATION MOVING TO THE GOVERNMENT AFTER FEBRUARY 1, 1956, THE GOVERNMENT HAD NO RIGHT TO SERVICES AT THE RATES STIPULATED IN THE ORIGINAL UTILITY CONTRACTS (DA-05-021 CML 4-7).

THE NOTICE OF EXCEPTION WAS STATED IN PERTINENT PART, AS FOLLOWS:

"* * * SINCE SUPPLEMENTAL AGREEMENT NO. 16 WAS EXECUTED MAY 3, 1957, THE SAME DATE AS CONTRACT NO. DA-05-021-401-CML-10,119, IT IS APPARENT THAT THE ACTUAL CONSIDERATION INVOLVED IN NEGOTIATING CONTRACT NO. DA-05-021- 401-CML-10,119 WAS IN EXCESS OF $200,000 (FIRST RETROACTIVE INCREASE IN UTILITY RATES) ON THE PART OF THE GOVERNMENT, AS AGAINST A MAXIMUM OF LESS THAN $18,000 ON THE PART OF SHELL CHEMICAL CORPORATION. WE DO NOT BELIEVE THAT THE GOVERNMENT CAN BE BOUND TO SUCH A BARGAIN. SEE HUME V. UNITED STATES, 132 U.S. 406.

"IN OUR OPINION, THE PROVISIONS OF CONTRACT NO. DA-05-021-401-CML 10,119 AND SUPPLEMENTAL AGREEMENT NO. 16 CONSTITUTE WAIVERS OF VESTED RIGHTS OF THE GOVERNMENT WITHOUT LEGALLY SUFFICIENT CONSIDERATION AND HAVE NO BINDING EFFECT TO OBLIGATE THE UNITED STATES TO PAY ANYTHING IN EXCESS OF THE RATES PROVIDED FOR IN THE ORIGINAL UTILITY CONTRACTS NUMBERED DA-05- 021-CML-4, 5, 6, AND 7. ACCORDINGLY, EXCEPTION IS BEING TAKEN TO THE OVERPAYMENTS OF $514,223.94 TO SHELL CHEMICAL CORPORATION MADE DURING THE PERIOD MAY 1957 THROUGH JANUARY 1960.

"THE PAYMENTS IN QUESTION ALSO INCLUDED AMOUNTS PAID IN ACCORDANCE WITH APPENDIX A OF CONTRACT NO. DA-05-021-CML-10,119 WHICH PROVIDES FOR AN ALLOWANCE OF 4 CENTS PER 1,000 GALLONS FOR RECHLORINATION OF POTABLE WATER. THIS PROVISION ALSO APPEARS AS A PART OF MODIFICATION NO. 1 TO CONTRACT NO. DA-05-021-CML-7. RECHLORINATION OF POTABLE WATER BY THE CONTRACTOR IN ACCORDANCE WITH DEPARTMENT OF ARMY STANDARD REQUIREMENTS WAS PROVIDED FOR UNDER THE ORIGINAL CONTRACT UNDER THE ORIGINAL RATES, AND ACCORDINGLY MODIFICATION NO. 1 IS HELD TO BE A RATE INCREASE OF A CONTRACT WITHOUT SUFFICIENT JUSTIFICATION FOR SUCH INCREASE.

"LETTERS OF APRIL 10, 1959, AND MARCH 25, 1960, FROM R. H. RUHLAND, JR. STATING THAT THE PAYMENTS WERE MADE PURSUANT TO RENEGOTIATED RATES UNDER THE NEW CONTRACT, THE NEW CONTRACT WAS EXECUTED UNDER MODIFICATION OF THE BASIC LEASE, SUCH MODIFICATION INCLUDED BENEFITS MOVING TO THE GOVERNMENT WHICH CONSTITUTE VALID CONSIDERATION, THAT THE ORIGINAL POTABLE WATER RATES DID NOT PROVIDE FOR RECHLORINATION AND THAT IF AND WHEN RECHLORINATION BECAME NECESSARY THE RATES WOULD BE RENEGOTIATED, HAVE BEEN NOTED.'

IN REPLY TO THE EXCEPTION THERE WAS FORWARDED TO THE REGIONAL MANAGER GAO AT DENVER, THROUGH THE ACTING CHIEF COLLECTION DIVISION, 1ST INDORSEMENT OF JULY 29, 1960, (CMLMC (16 JUNE 1960) ( FROM THE FINANCE AND ACCOUNTING OFFICER, HEADQUARTERS, ROCKY MOUNTAIN ARSENAL, ENCLOSING LETTER OF JULY 29, 1960, FROM THE SHELL CHEMICAL COMPANY (COPY ATTACHED) AND STATING THAT THE CONTRACTOR INFORMALLY NOTIFIED THE ARSENAL THAT REMITTANCE WOULD BE MADE SHOULD REQUEST FOR REVIEW BE DENIED, IN WHICH EVENT EQUITY WOULD BE SOUGHT IN THE COURT OF CLAIMS.

THE FIRST CONTENTION IN THE CONTRACTOR'S LETTER IS THAT THE STATEMENT IN THE NOTICE OF EXCEPTION, TO THE EFFECT THAT THE PROVISIONS OF CONTRACT NO. DA-05-021-401 CML 10,119 AND SUPPLEMENTAL AGREEMENT NO. 16 CONSTITUTED WAIVERS OF VESTED RIGHTS OF THE GOVERNMENT WITHOUT LEGALLY SUFFICIENT CONSIDERATION, FAILS TO RECOGNIZE THAT THE SIGNIFICANT CONSIDERATION FOR MODIFICATION OF THE UTILITY RATES WAS THE CONTINUANCE OF THE OPERATION OF THE UTILITY SYSTEM BY THE LESSEE AND PREVENTING THE SURRENDER OF THAT SYSTEM AND THE CHLORINE PLANT BY THE LESSEE--- ARGUMENTS WHICH HAVE NOT BEEN PREVIOUSLY ADVANCED BY THE CONTRACTING OFFICER OR ADMINISTRATIVELY CONFIRMED. SPECIFICALLY, SHELL REFERS TO THE RIGHT GRANTED THE LESSEE UNDER PARAGRAPH 11 OF SUPPLEMENTAL AGREEMENT NO. 5 TO TERMINATE UPON 6 MONTHS NOTICE THAT PART OF THE LEASE INVOLVING THE FACILITIES COMPRISING GROUPS III AND IV. IT STATES THAT AS EARLY AS 1954, WITH ALL PARTIES COGNIZANT OF THIS RIGHT AND THE POSSIBILITY THAT THE LESSEE MIGHT EXERCISE SAME IN THE EVENT RATE RELIEF WAS NOT GRANTED, NEGOTIATIONS WERE INSTITUTED FOR ESTABLISHING NEW RATES BASED UPON THE LESSEE'S COST OF OPERATION.

IN CONTENTION NO. 2 CONCERNING THE PAYMENT OF $0.04 PER THOUSAND GALLONS FOR RECHLORINATING THE POTABLE WATER AS PROVIDED FOR IN CONTRACT NO. DA-05 -021 CML-7 AS AMENDED BY SUPPLEMENTAL AGREEMENT NO. 1, DATED MARCH 1, 1952, AND SUBSEQUENTLY CARRIED OVER INTO CONTRACT NO. DA-05-021-401 CML 10,119, SHELL STATES THAT WHEN ITS PREDECESSOR TOOK OVER THE OPERATION OF THE UTILITY SYSTEM ON FEBRUARY 1, 1950, THE POTABLE WATER WAS BEING USED AS DELIVERED BY THE BOARD OF WATER COMMISSIONERS OF THE CITY AND COUNTY OF DENVER; THAT THE LESSEE HAD NO EXPERIENCE WITH RECHLORINATION AND SINCE THE ARSENAL HAD NOT DEVELOPED ANY COSTS FOR RECHLORINATION THERE WERE NO COST FIGURES AVAILABLE; THAT WHEN THE COMMANDING OFFICER REQUESTED SHELL TO RECHLORINATE THE POTABLE WATER IN 1951, THE PROVISIONS OF PARAGRAPH 3 OF CONTRACT DA-05-021 CML 7 REQUIRED THE LESSEE TO COMPLY WITH SUCH REQUEST BUT THAT SINCE THERE WAS INVOLVED A NEW SERVICE NOT PREVIOUSLY SUPPLIED BY THE LESSEE THE MATTER OF COMPENSATION THEREFORE WAS CONTROLLED BY PARAGRAPH 12 PROVIDING FOR CHANGES WITHIN THE GENERAL SCOPE OF THE CONTRACT. SHELL STATES FURTHER THAT ON FEBRUARY 28, 1951, THE ORIGINAL LESSEE SUPPLIED THE CONTRACTING OFFICER WITH COST FIGURES FOR RECHLORINATING POTABLE WATER; THAT THESE FIGURES DISCLOSED THAT $0.07 PER THOUSAND GALLONS COULD BE SAVED BY NOT RECHLORINATING; AND THAT AS A RESULT OF NEGOTIATIONS THE CONTRACTING OFFICER ALLOWED $0.04 PER THOUSAND GALLONS TO COVER THE COST OF RECHLORINATION WHICH ALLOWANCE WAS PROVIDED FOR BY SUPPLEMENTAL AGREEMENT NO. 1, DATED MARCH 1, 1952, EFFECTIVE RETROACTIVELY TO JULY 1, 1951. AS JUSTIFICATION FOR THE AMENDMENT TO THE CONTRACT SHELL POINTS OUT THAT WHILE THE LAST PARAGRAPH OF PARAGRAPH 1 OF APPENDIX "A" TO THE CONTRACT PROVIDES THAT THE RATES SET FORTH THEREIN ($0.18 PER 1000 GALLONS FOR ALL POTABLE WATER FURNISHED EACH MONTH) REFLECT THE COST TO THE CONTRACTOR OF THE WATER SUPPLIED BY THE CITY AND COUNTY OF DENVER, PLUS THE COST TO THE CONTRACTOR FOR THE OPERATION AND MAINTENANCE OF THE WATER DISTRIBUTION SYSTEM, LOSSES FROM LEAKAGE, RECHLORINATION, OR TREATMENT OR PROCESSING ARE NOT MENTIONED AS BEING INCLUDED IN THE RATE. IN ADDITION SHELL ASSERTS THAT THE ORIGINAL CONTRACT NO. DA-05-021 CML-7 AND SUPPLEMENTAL AGREEMENT NO. 1 WERE APPROVED BY THE DEPUTY ARMY POWER PROCUREMENT OFFICER ON THE SAME DATE AND DELIVERED TO THE LESSEE'S PREDECESSOR ON JULY 11, 1952, AS IF THEY WERE ONE DOCUMENT, THUS NEGATING THE CONCLUSION THAT THE RATE INCREASE WAS WITHOUT SUFFICIENT JUSTIFICATION.

IN REGARD TO CONTENTION NO. 3, SHELL APPARENTLY HAS ERRONEOUSLY ASSUMED THAT THE AUDIT ACTION WAS ON THE BASIS THAT THE RATE INCREASE FOR POTABLE WATER FROM $0.18 TO $0.19 PER 1000 GALLONS EFFECTED BY SUPPLEMENTAL AGREEMENT NO. 2 OF AUGUST 1, 1952, WAS REGARDED AS WITHOUT SUFFICIENT JUSTIFICATION. OUR AUDITORS HAVE REPORTED, HOWEVER, THAT THEIR COMPUTATIONS PROVIDED FOR AN INCREASE IN THE COST OF WATER PURCHASED FROM THE DENVER WATER BOARD AND THAT THE WORKPAPERS EXPLAINING HOW THE AUDIT ADJUSTMENT WAS MADE WERE SHOWN TO THE ARSENAL PERSONNEL BUT THAT THEY APPARENTLY DID NOT FULLY UNDERSTAND THAT THE INCREASED COST OF WATER WAS CONSIDERED AS A REDUCTION OF THE COMPUTED OVERPAYMENTS.

IT HAS BEEN HELD THAT A LEASE AGREEMENT PURPORTING TO BE RETROACTIVELY EFFECTIVE OVER A PERIOD DURING WHICH A PRIOR AGREEMENT AT A LOWER RENTAL RATE WAS IN FULL FORCE AND EFFECT IS VOID, AND THAT PAYMENTS IN EXCESS OF THE RATE IN THE PRIOR AGREEMENT FOR THE PERIOD OF OCCUPANCY THEREUNDER ARE UNAUTHORIZED. 16 COMP. GEN. 463. SEE ALSO 17 COMP. GEN. 59; ID. 279. WHILE THE GENERAL RULE IS THAT A VALUABLE CONSIDERATION HOWEVER SMALL OR NOMINAL, IF GIVEN IN GOOD FAITH IS SUFFICIENT TO SUPPORT A CONTRACT, IT IS WELL ESTABLISHED THAT NO OFFICER OR AGENT OF THE GOVERNMENT HAS AUTHORITY TO RELEASE RIGHTS VESTED IN THE UNITED STATES WITHOUT ADEQUATE LEGAL CONSIDERATION. 15 COMP. GEN. 25; 18 ID. 114, 116. IN THIS INSTANCE SUPPLEMENTAL AGREEMENT NO. 16, WHICH FURNISHED THE BASIS FOR THE EXECUTION OF CONTRACT NO. DA-05-021-041 CML 10,119, CONTAINS RECITALS, AMONG OTHERS, TO THE EFFECT THAT THE PROVISIONS IN SUPPLEMENTAL AGREEMENT NO. 5 LIMITING THE CONTRACTOR'S MAINTENANCE OBLIGATION FOR THE WATER SYSTEM AND IMPOSING RESTRICTIONS ON THE RATES TO BE CHARGED FOR THE UTILITIES HAVE WORKED UNDUE HARDSHIPS ON BOTH THE CONTRACTING PARTIES AND THAT IT IS TO THE ADVANTAGE OF THE UNITED STATES TO MODIFY THE LEASE. AS HERETOFORE INDICATED, SHELL NOW CONTENDS THAT OTHER CONSIDERATIONS IN ADDITION TO THE INCREASED MAINTENANCE OBLIGATION OF THE WATER SYSTEM WERE INVOLVED IN THE NEGOTIATION OF SUPPLEMENTAL AGREEMENT NO. 16, AND IT INDICATES THAT THE GOVERNMENT'S REPRESENTATIVES WERE IN EFFECT INFORMED THAT UNLESS RELIEF FROM THE RATES PROVIDED FOR IN THE ORIGINAL UTILITY CONTRACTS WAS GRANTED THE LEASE FOR THE UTILITY FACILITIES WOULD BE CANCELLED AS PROVIDED FOR UNDER PARAGRAPH 11 OF SUPPLEMENTAL AGREEMENT NO. 5.

OTHER THAN THE STATEMENT IN THE FIRST INDORSEMENT OF JULY 29, 1960, BY THE FINANCE AND ACCOUNTING OFFICER TO THE EFFECT THAT IT IS BELIEVED THAT SHELL'S LETTER FURNISHES SUFFICIENT DATA REGARDING THE ADEQUACY OF THE CONSIDERATION FOR SUPPLEMENTAL AGREEMENT NO. 16, THERE HAS BEEN NO ADMINISTRATIVE CONFIRMATION OF NOR COMMENT ON THE FACTS AS REPORTED BY SHELL CONCERNING THE CIRCUMSTANCES LEADING UP TO THE EXECUTION OF SUPPLEMENTAL AGREEMENT NO. 16. ON THE CONTRARY, WITH RESPECT TO THE CONTRACTOR'S STATEMENT THAT THE OPERATION OF THE UTILITIES AT THE RATES PROVIDED FOR UNDER CONTRACTS DA-05-021 CML 4-7 WAS BURDENSOME AND UNPROFITABLE TO THE POINT NECESSITATING CANCELLATION OF THE LEASE AS TO GROUPS III AND IV, THE RECORD INDICATES THAT IN 1954 A DETAILED STUDY WAS MADE OF THE OPERATION OF THE UTILITIES FOR THE YEAR 1953 AND THAT THIS STUDY DISCLOSED THAT SHELL'S PREDECESSOR, THE HYMAN COMPANY, MADE AN ESTIMATED PROFIT OF $150,000 ON THE SALE OF UTILITIES FOR THAT YEAR. ALSO, AN EXAMINATION OF CERTAIN ADMINISTRATIVE CORRESPONDENCE AND MEMORANDUMS APPEARS TO SHOW CLEARLY THAT THE CONTRACTING OFFICER IN EXECUTING CONTRACT NO. DA-05-021-401 CML 10,119 AND SUPPLEMENTAL AGREEMENT NO 16 JUSTIFIED SUCH ACTION SOLELY ON THE BASIS THAT THE LESSEE'S ASSUMPTION OF ADDITIONAL LIABILITY OF $15,000 PER ANNUM FOR MAINTENANCE OF THE WATER SYSTEM CONSTITUTED SUFFICIENT CONSIDERATION FOR WAIVER OF THE GOVERNMENT'S VESTED RIGHTS UNDER THE ORIGINAL UTILITY CONTRACTS.

IN THE LIGHT OF THE FOREGOING A FULL REPORT IS REQUESTED CONCERNING THE ALLEGATIONS IN SHELL'S LETTER OF JULY 29, 1960, TOGETHER WITH SUCH COMMENTS AS YOU MAY CARE TO MAKE CONCERNING THE PROPRIETY OF THE TRANSACTIONS TO WHICH AUDIT EXCEPTIONS HAVE BEEN TAKEN IN THIS CASE.