B-142129, MAY 16, 1960

B-142129: May 16, 1960

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UNITED STATES ATOMIC ENERGY COMMISSION: REFERENCE IS MADE TO A LETTER OF FEBRUARY 24. 785.02 TO THE CONTRACTOR IN PAYMENT OF THE SUMS THAT HAVE BEEN SUSPENDED DURING THE PERIOD BETWEEN THE EFFECTIVE DATE OF THE ORIGINAL CONTRACT. WAS ORIGINALLY ENTERED INTO ON JUNE 4. THE RECORD SUBMITTED SHOWS THAT AT THE TIME THE CONTRACT WAS ENTERED INTO IT WAS MUTUALLY UNDERSTOOD THAT CERTAIN MANUFACTURED ITEMS. WERE TO BE PROCURED BY THE CONTRACTOR'S CONTRACT DRILLING DIVISION FROM ITS MANUFACTURING DIVISION FOR USE UNDER THE CONTRACT. WHICHEVER IS LESS. THE PARTIES HERETO HAVE GIVEN FULL CONSIDERATION TO THE FACT THAT SOME OF THE MANUFACTURED ITEMS FOR USE HEREUNDER WILL BE OBTAINED FROM THE MANUFACTURING DIVISION AT A PRICE WHICH IS IN EXCESS OF COST AND WHICH INCLUDES AMONG OTHER THINGS.

B-142129, MAY 16, 1960

TO THE HONORABLE JOHN A. MCCONE, CHAIRMAN, UNITED STATES ATOMIC ENERGY COMMISSION:

REFERENCE IS MADE TO A LETTER OF FEBRUARY 24, 1960, FROM YOUR ASSISTANT GENERAL MANAGER FOR ADMINISTRATION, REQUESTING OUR DECISION AS TO THE PROPRIETY OF AMENDING CONTRACT NO. AT/29-2/-568 WITH THE E. J. LONG YEAR COMPANY, MINNEAPOLIS, MINNESOTA, SO AS TO REMIT $24,785.02 TO THE CONTRACTOR IN PAYMENT OF THE SUMS THAT HAVE BEEN SUSPENDED DURING THE PERIOD BETWEEN THE EFFECTIVE DATE OF THE ORIGINAL CONTRACT, MAY 23, 1957, AND THE EFFECTIVE DATE OF MODIFICATION NO. 4 TO THE CONTRACT, APRIL 1, 1958.

CONTRACT NO. AT/29-2/-568, WAS ORIGINALLY ENTERED INTO ON JUNE 4, 1957, EFFECTIVE MAY 23, 1957, BETWEEN THE UNITED STATES ATOMIC ENERGY COMMISSION AND E. J. LONG YEAR COMPANY, A CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, WITH GENERAL OFFICES IN MINNEAPOLIS, MINNESOTA, FOR THE PERFORMANCE BY THE CONTRACTOR OF CERTAIN DRILLING OPERATIONS AND RELATED ACTIVITIES PRIMARILY AT THE COMMISSION'S NEVADA TEST SITE. THE CONTRACT PROVIDES FOR PAYMENT ON A COST PLUS FIXED FEE BASIS.

THE RECORD SUBMITTED SHOWS THAT AT THE TIME THE CONTRACT WAS ENTERED INTO IT WAS MUTUALLY UNDERSTOOD THAT CERTAIN MANUFACTURED ITEMS, BOTH SPECIAL AND STANDARD, WERE TO BE PROCURED BY THE CONTRACTOR'S CONTRACT DRILLING DIVISION FROM ITS MANUFACTURING DIVISION FOR USE UNDER THE CONTRACT, AND THAT SUCH MANUFACTURED ITEMS WOULD BE PAID FOR BY THE AEC AT PRICES WHICH WOULD INCLUDE A MARKUP COVERING PROFIT AND CERTAIN OVERHEAD ON SUCH ITEMS. IN NEGOTIATING THE FIXED FEE UNDER THE CONTRACT, BOTH PARTIES GAVE CONSIDERATION TO THIS FACT, AS SET FORTH IN PARAGRAPH 3, ARTICLE XVII OF THE ORIGINAL CONTRACT, WHICH PROVIDES IN PART AS FOLLOWS:

"* * * IN THE CASE OF PROCUREMENT BY THE CONTRACT DRILLING DIVISION FROM THE MANUFACTURING DIVISION FOR USE HEREUNDER, THE PRICE CHARGED THE CONTRACT DRILLING DIVISION SHALL BE COMPUTED BY THE CONTRACTOR'S NORMAL METHOD, LIKE QUANTITIES CONSIDERED, FOR ITEMS MANUFACTURED FOR THE CONTRACT DRILLING DIVISION OR FOR ITEMS MANUFACTURED FOR COMMERCIAL SALE TO THE CONTRACTOR'S MOST FAVORED CUSTOMER INCLUDING THE GOVERNMENT, WHICHEVER IS LESS. IN NEGOTIATING THE FIXED FEE HEREUNDER, THE PARTIES HERETO HAVE GIVEN FULL CONSIDERATION TO THE FACT THAT SOME OF THE MANUFACTURED ITEMS FOR USE HEREUNDER WILL BE OBTAINED FROM THE MANUFACTURING DIVISION AT A PRICE WHICH IS IN EXCESS OF COST AND WHICH INCLUDES AMONG OTHER THINGS, THE CONTRACTOR'S PROFIT ON SUCH ITEMS. * *

AFTER THE EXECUTION OF THE CONTRACT, IT WAS BROUGHT TO THE ATTENTION OF THE AEC BY THE CONTRACTOR, DURING 1957 AND AT A MEETING ON APRIL 2, 1958, BETWEEN THE REPRESENTATIVES OF THE PARTIES TO THE CONTRACT, THAT IN CASES OF INTRACOMPANY PROCUREMENT, THE NORMAL METHOD OF PRICING WAS THAT THE MANUFACTURING DIVISION WOULD CHARGE THE CONTRACT DRILLING DIVISION ONLY THE MANUFACTURING COST, AND THE MARKUP COVERING PROFIT AND OVERHEAD WOULD BE ADDED BY THE CONTRACT DRILLING DIVISION AT THE TIME OF SALE OF THE ITEMS TO A COMMERCIAL PURCHASER. IT WAS POINTED OUT THAT LITERAL APPLICATION OF THE ORIGINAL CONTRACT LANGUAGE ABOVE QUOTED WHICH LIMITED THE PRICE TO BE CHARGED BY THE MANUFACTURING DIVISION TO THAT PRICE NORMALLY CHARGED FOR ITEMS MANUFACTURED FOR THE CONTRACT DRILLING DIVISION, WOULD DEFEAT THE INTENTION OF BOTH PARTIES TO THE CONTRACT THAT THE CONTRACTOR'S MARKUP WOULD BE INCLUDED IN THE COST PAID BY THE GOVERNMENT FOR THESE ITEMS. THE CONTRACTOR THEREFORE REQUESTED A REFORMATION OF THE CONTRACT.

THE CONTRACTING OFFICER STATES THAT HE DID NOT PERSONALLY PARTICIPATE IN THE NEGOTIATIONS OF THE LONG YEAR CONTRACT, BUT THAT THEY WERE CARRIED ON BY A CONTRACT PANEL, THE MEMBERS OF WHICH WOULD BE BEST QUALIFIED TO EXPRESS THE INTENDED FUNCTIONS OF THE VARIOUS SECTIONS OF THE ORIGINAL CONTRACT.

THE AEC CONTRACT PANEL MEMBERS WHO NEGOTIATED THIS CONTRACT RECONVENED IN A MEETING HELD ON JUNE 11, 1958, TO CONSIDER THE CONTRACTOR'S REQUEST FOR REFORMATION, AND THE MINUTES OF THAT MEETING SHOW THAT, AFTER REFERENCE TO SUCH NOTES AND MEMORANDA AS WERE AVAILABLE, AND ON THE BASIS OF THEIR RECOLLECTION OF THE NEGOTIATIONS, THE NEGOTIATORS STATED THAT IT WAS THEIR INTENTION AND UNDERSTANDING DURING THE NEGOTIATIONS AND AT THE TIME OF THE EXECUTION OF THE ORIGINAL CONTRACT, THAT IN THE CASE OF PROCUREMENT OF SPECIALLY MANUFACTURED ITEMS BY LONG YEAR'S CONTRACT DRILLING DIVISION FROM ITS MANUFACTURING DIVISION FOR USE UNDER THE CONTRACT, THE PRICE TO BE CHARGED AEC FOR EACH SUCH ITEM WAS TO BE ACTUAL MANUFACTURING COST PLUS A FIXED MARKUP COVERING THE CONTRACTOR'S PROFIT AND CERTAIN ITEMS OF OVERHEAD. BUT THE AEC WAS TO BE IN A POSITION AT LEAST FAVORABLE, COSTWISE, AS THAT OF THE CONTRACTOR'S MOST FAVORED CUSTOMER, INCLUDING ANY AGENCY OF THE GOVERNMENT. IT IS FURTHER STATED THAT IT WAS NOT MADE CLEAR TO THE PANEL MEMBERS AT THE TIME THE CONTRACT WAS ORIGINALLY NEGOTIATED AND SIGNED THAT UNDER LONG YEAR'S INTERNAL PRICING POLICY THE CONTRACT DRILLING DIVISION COULD PROCURE SPECIALLY MANUFACTURED ITEMS FROM THE MANUFACTURING DIVISION AT MANUFACTURING COST ALONE, AND ITSELF ADD PROFIT AND OVERHEAD IN PRICING THE ITEMS FOR SALE TO A PURCHASER.

YOUR AGENCY IS OF THE OPINION THAT A REFORMATION OF THE CONTRACT WHICH WOULD PERMIT PAYMENT BY THE AEC OF THE NORMAL PROFIT UPON SUCH MANUFACTURED ITEMS--- WITHIN THE LIMITS AGREED UPON--- WOULD PROPERLY CARRY OUT THE INTENTION OF THE PARTIES.

WHEN BY REASON OF MUTUAL MISTAKE, A CONTRACT AS REDUCED TO WRITING DOES NOT REFLECT THE ACTUAL AGREEMENT OF THE PARTIES, THE WRITTEN INSTRUMENT MAY BE REFORMED IF IT CAN BE ESTABLISHED WHAT THE AGREEMENT ACTUALLY WAS. SEE 30 COMP. GEN. 220; 21 ID. 533, AND CASES THERE CITED. SINCE IT APPEARS THAT IT WAS THE UNDERSTANDING AND INTENTION OF THE PARTIES TO THE CONTRACT THAT THE CONTRACTOR'S PRICE ON THE SPECIALLY MANUFACTURED ITEMS PROCURED FROM ITS MANUFACTURING DIVISION FOR THE AEC UNDER THE CONTRACT SHOULD INCLUDE A PROFIT MARKUP, AND THAT LANGUAGE TO THE CONTRARY CONTAINED IN THE ORIGINAL CONTRACT WAS DUE TO A MISUNDERSTANDING BY THE DRAFTERS OF THE CONTRACT AS TO THE CONTRACTOR'S INTRADIVISIONAL NORMAL PRICING POLICY AND PRACTICE, YOU ARE ADVISED THAT WE OFFER NO OBJECTION TO THE EXECUTION OF A PROPER MODIFICATION TO CONFORM THE CONTRACT TO THE ACTUAL INTENTION OF THE PARTIES.