B-146569, AUGUST 29, 1961, 41 COMP. GEN. 169

B-146569: Aug 29, 1961

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CONTRACTS - MODIFICATION - CONSIDERATION ALTHOUGH THE UNITED STATES IS NOT LEGALLY LIABLE FOR DEFECTS IN CONSTRUCTION OF A WATER AND SEWER PROJECT WHICH WAS CONVEYED WITHOUT WARRANTY TO THE CITY OF KODIAK. THE SIMILARITY BETWEEN THIS SITUATION AND CASES IN WHICH VENDORS WHO CONSTRUCTED HOUSES FOR PURCHASERS WERE HELD LIABLE UNDER IMPLIED WARRANTY FOR LATENT DEFECTS IN THE HOUSES CREATES DOUBT AS TO DISPOSITION BY A COURT OF A DAMAGE CLAIM BY THE CITY OF KODIAK AGAINST THE GOVERNMENT. IN LIGHT OF SUCH DOUBT A WAIVER BY THE CITY OF ALL CLAIMS AGAINST THE GOVERNMENT FOR DEFECTS IN CONSTRUCTION IS A REAL BENEFIT TO BE REGARDED AS CONSIDERATION FOR THE AMENDMENT OF THE REPAYMENT AGREEMENT TO EXTEND THE TIME FOR REPAYMENT WITHOUT ANY REDUCTION OF THE PRINCIPAL INDEBTEDNESS PROVIDED AN ADMINISTRATIVE DETERMINATION OF ADVANTAGE TO THE GOVERNMENT IS MADE.

B-146569, AUGUST 29, 1961, 41 COMP. GEN. 169

CONTRACTS - MODIFICATION - CONSIDERATION ALTHOUGH THE UNITED STATES IS NOT LEGALLY LIABLE FOR DEFECTS IN CONSTRUCTION OF A WATER AND SEWER PROJECT WHICH WAS CONVEYED WITHOUT WARRANTY TO THE CITY OF KODIAK, ALASKA, THE SIMILARITY BETWEEN THIS SITUATION AND CASES IN WHICH VENDORS WHO CONSTRUCTED HOUSES FOR PURCHASERS WERE HELD LIABLE UNDER IMPLIED WARRANTY FOR LATENT DEFECTS IN THE HOUSES CREATES DOUBT AS TO DISPOSITION BY A COURT OF A DAMAGE CLAIM BY THE CITY OF KODIAK AGAINST THE GOVERNMENT, AND IN LIGHT OF SUCH DOUBT A WAIVER BY THE CITY OF ALL CLAIMS AGAINST THE GOVERNMENT FOR DEFECTS IN CONSTRUCTION IS A REAL BENEFIT TO BE REGARDED AS CONSIDERATION FOR THE AMENDMENT OF THE REPAYMENT AGREEMENT TO EXTEND THE TIME FOR REPAYMENT WITHOUT ANY REDUCTION OF THE PRINCIPAL INDEBTEDNESS PROVIDED AN ADMINISTRATIVE DETERMINATION OF ADVANTAGE TO THE GOVERNMENT IS MADE.

TO THE SECRETARY OF THE INTERIOR, AUGUST 29, 1961:

BY LETTER OF JULY 31, 1961, THE DIRECTOR, OFFICE OF TERRITORIES, DEPARTMENT OF THE INTERIOR, REQUESTED OUR APPROVAL OF A PROPOSAL TO CHANGE THE PERIOD OF REPAYMENT AND REVISE THE SCHEDULE OF PAYMENTS ON A DEBT INCURRED BY THE CITY OF KODIAK, ALASKA, UNDER THE ALASKA PUBLIC WORKS ACT, 63 STAT. 627, 48 U.S.C. 486. FROM INFORMATION CONTAINED IN HIS LETTER AND THE ENCLOSURES THERETO THE PERTINENT FACTS IN THE MATTER MAY BE SUMMARIZED AS FOLLOWS:

THE CITY OF KODIAK IN 1950 REQUESTED THE GOVERNMENT TO PROVIDE IT, UNDER THE PROVISIONS OF THE ALASKA PUBLIC WORKS ACT, CERTAIN FACILITIES -- INCLUDING TWO DAMS--- CONSISTING OF IMPROVEMENTS AND ADDITIONS TO ITS WATER SUPPLY AND DISTRIBUTION SYSTEM. THE INITIAL PROJECT WAS EXPANDED TO INCLUDE EXTENSIONS OF THE CITY'S SEWER SYSTEM AND BY SUPPLEMENTAL AGREEMENT NO. 2, DATED AUGUST 20, 1954, TO THE INITIAL CONTRACT, NO. IT- 129, THE TOTAL PROJECT COST WAS STIPULATED AT $1,554,100 OF WHICH THE CITY WAS TO REIMBURSE THE GOVERNMENT $777,050 AS THE PURCHASE PRICE OF THE FACILITIES CONSTRUCTED, PURSUANT TO PROVISIONS OF THE ACT. A PORTION OF THE PURCHASE PRICE OF THE PROJECT WAS TO BE PAID IN CASH AT THE TIME OF ITS TRANSFER TO THE CITY AND THE REMAINDER WAS TO BE PAID IN ANNUAL INSTALLMENTS AS EVIDENCED BY GENERAL OBLIGATION BONDS DELIVERED TO THE UNITED STATES AT THE TIME OF TRANSFER.

THE WATER AND SEWER SYSTEMS WERE DEEDED TO THE CITY BY INSTRUMENT DATED JULY 16, 1956; AND THE CITY PAID THE UNITED STATES $27,050 IN CASH OBLIGATING ITSELF TO PAY THE REMAINING $750,000 IN ANNUAL INSTALLMENTS BEGINNING SEPTEMBER 1, 1957, IN ACCORDANCE WITH THE PROVISIONS OF ITS AUTHORIZED BONDS DELIVERED TO THE UNITED STATES. THE BONDS WERE GENERAL OBLIGATIONS OF THE CITY OF KODIAK, PAYABLE AS TO BOTH PRINCIPAL AND INTEREST FROM THE LEVY OF AD VALOREM TAXES AND FROM SUCH SPECIAL FUNDS AND REVENUES AS MIGHT BE MADE AVAILABLE. THE CITY FURTHER OBLIGATED ITSELF TO LEVY TAXES ANNUALLY IN AN AMOUNT SUFFICIENT TO PAY THE PRINCIPAL AND INTEREST ON THE BONDS AS DUE, IN THE EVENT OF ANY DEFICIENCY IN AMOUNTS OTHERWISE AVAILABLE. A SPECIAL FUND KNOWN AS THE " WATER AND SEWER UTILITY FUND" WAS CREATED AND ADMINISTERED BY THE CITY COUNCIL OF THE CITY OF KODIAK, INTO WHICH GROSS RECEIPTS OF BOTH THE WATER AND SEWER SYSTEMS ARE DEPOSITED AND FROM WHICH ALL OPERATING AND MAINTENANCE EXPENSES ARE PAID AND DEBT SERVICE DISBURSED. THE BONDS ARE DUE AND PAYABLE AS FOLLOWS: $25,000 ON SEPTEMBER 1, 1957, AND THE SAME AMOUNT ANNUALLY THEREAFTER THROUGH SEPTEMBER 1, 1960; $30,000 ANNUALLY FROM SEPTEMBER 1, 1961, THROUGH SEPTEMBER 1, 1964; $40,000 ANNUALLY FROM SEPTEMBER 1, 1965, THROUGH SEPTEMBER 1, 1971; AND $50,000 ANNUALLY FROM SEPTEMBER 1, 1972, THROUGH SEPTEMBER 1, 1976. INTEREST ON THE BONDS IS AT THE RATE OF 2 PERCENT SIMPLE INTEREST PER ANNUM PAYABLE SEMIANNUALLY. ALSO, ARTICLE 6 OF SUPPLEMENTAL AGREEMENT NO. 1, AS INCORPORATED BY ARTICLE 3 OF SUPPLEMENTAL AGREEMENT NO. 2, PROVIDES THAT IN THE EVENT OF DEFAULT OF THESE PAYMENT PROVISIONS, THE UNITED STATES MAY, AT ITS OPTION, DECLARE THE UNPAID BALANCE IMMEDIATELY DUE AND PAYABLE AND THAT ANY SUMS NOT PAID WHEN DUE SHALL BEAR SIMPLE INTEREST AT THE RATE OF 4 PERCENT PER ANNUM FROM THE DUE DATE TO DATE OF PAYMENT.

AFTER ACCEPTANCE OF THE PROJECT BY THE CITY, AND OF A SUBSEQUENTLY AUTHORIZED PROJECT TO INCREASE THE HEIGHT OF THE DAMS, IT DEVELOPED THAT ONE OF THE DAMS WAS IN NEED OF REPAIR WORK, DUE OSTENSIBLY TO FAULTY CONSTRUCTION IN THE FIRST INSTANCE. THE CITY COUNCIL STATES THAT THE CITIZENS OF KODIAK SUFFERED SERIOUS WATER SHORTAGES DUE TO FAILURE OF ONE OF THE PROJECT DAMS; THAT CONSIDERABLE EXPENSE WAS INCURRED IN RECTIFYING CERTAIN CONSTRUCTION MISTAKES, THAT CONSIDERABLE EXPENSE IS ANTICIPATED IN RECTIFYING OTHER KNOWN AND PRESENTLY UNKNOWN FAULTS SUCH AS EXTREME LEAKAGE WITH RESULTING GLACIATION; AND THAT THE USEFUL LIFE EXPECTANCY OF THE PROJECT IS SERIOUSLY SHORTENED DUE TO FAULTY CONSTRUCTION. FOR THESE REASONS THE CITY FEELS THAT SOME ADJUSTMENT IN ITS PAYMENT OBLIGATIONS IS WARRANTED. THE CITY POINTS OUT THAT $28,494 WAS SPENT IN 1960 MAKING REPAIRS AND IMPROVEMENTS WHICH SHOULD NOT HAVE BEEN NECESSARY AND THAT WHILE $10,000 OF THIS SUM WAS RECEIVED FROM THE STATE OF ALASKA AS A DISASTER GRANT AND $2,375 FROM ALASKA PUBLIC WORKS UNDER A CHANGE ORDER, THERE REMAINS $16,110 OF EXCESS EXPENDITURES OVER WHAT SHOULD NORMALLY HAVE BEEN REQUIRED. THIS EXCESS EXPENDITURE HAS REDUCED THE CITY'S WATER AND SEWER UTILITY FUND OPERATING SURPLUS TO $14,000, WHICH IS NOT ENOUGH TO MEET DEBT SERVICE OBLIGATIONS.

AFTER CONSIDERING THE CITY'S POSITION, THE OFFICE OF TERRITORIES UNDERTOOK NEGOTIATIONS WITH OFFICIALS OF THE CITY ON THE BASIS THAT WHILE IT COULD NOT PROPERLY FORGIVE ANY PART OF ITS INDEBTEDNESS, IT MIGHT GRANT AN EXTENSION OF THE REPAYMENT PERIOD PREVIOUSLY AGREED UPON. SUCH NEGOTIATIONS HAVE BEEN CONCLUDED AND THERE ARE NOW SUBMITTED DRAFTS OF THE TENTATIVE ARRANGEMENTS REACHED, FOR THE APPROVAL OF THIS OFFICE PRIOR TO EXECUTION OF THE VARIOUS DOCUMENTS INVOLVED.

ESSENTIALLY, THE TENTATIVE ARRANGEMENTS PROVIDE THAT IN CONSIDERATION OF THE CITY OF KODIAK RENOUNCING ANY AND ALL CLAIMS IT NOW HAS OR IN THE FUTURE MIGHT HAVE AGAINST THE UNITED STATES ON ACCOUNT OF ANY DEFECT IN THE PROJECT IN QUESTION, THE UNITED STATES AGREES TO AN EXTENTION OF THE CITY'S BONDED INDEBTEDNESS TO THE UNITED STATES--- THE PURCHASER TO PAY THE UNPAID PURCHASE PRICE OF $629,000 AT THE RATE OF $5,000 ANNUALLY FROM SEPTEMBER 1, 1961, THROUGH SEPTEMBER 1, 1964; $20,000 FROM SEPTEMBER 1, 1965, THROUGH SEPTEMBER 1, 1968; $25,000 FROM SEPTEMBER 1, 1969, THROUGH SEPTEMBER 1, 1976; $30,000 FROM SEPTEMBER 1, 1977, THROUGH SEPTEMBER 1, 1981; $35,000 FROM SEPTEMBER 1, 1982, THROUGH SEPTEMBER 1, 1985; AND $39,000 ON SEPTEMBER 1, 1986. ALL OTHER TERMS OF THE AGREEMENT OF AUGUST 20, 1954, ARE RETAINED. IT IS STATED THAT IT IS THE BELIEF OF THE OFFICE OF TERRITORIES THAT THE CITY'S PROPOSAL IS ACCEPTABLE AND SHOULD BE ACCEPTED BY THE UNITED STATES.

UNDER THE AGREEMENT SOUGHT TO BE AMENDED, THE UNITED STATES HAS THE RIGHT TO PAYMENT OF THE FULL INDEBTEDNESS UPON DEFAULT IN PAYMENT OF ANY AMOUNT DUE, AND ANY AMOUNT NOT PAID WHEN DUE BEARS INTEREST AT 4 PERCENT. MOREOVER, UNDER THE INITIAL AGREEMENT THE CITY PLEDGES ITSELF TO LEVY TAXES ANNUALLY IN AN AMOUNT SUFFICIENT TO ASSURE FUNDS FOR THE PAYMENT OF PRINCIPAL AND INTEREST AS THEY BECOME DUE. THE BASIC QUESTIONS FOR DETERMINATION, THEREFORE, ARE WHETHER THE OFFICE OF TERRITORIES IS AUTHORIZED: (1) TO RELEASE THE CITY FROM ITS OBLIGATION TO OBTAIN FUNDS TO MEET ITS PAYMENTS, AND (2) TO FOREGO THE GOVERNMENT'S RIGHT TO IMMEDIATE PAYMENT OF THE CITY'S FULL INDEBTEDNESS AND INTEREST THEREON AT 4 PERCENT IN THE EVENT THE CITY FAILS TO KEEP ITS PLEDGE TO LEVY ANY TAXES FOR REQUIRED FUNDS.

IT IS, OF COURSE, A WELL-ESTABLISHED RULE THAT NO OFFICER OF THE GOVERNMENT HAS AUTHORITY TO WAIVE CONTRACTUAL RIGHTS WHICH HAVE ACCRUED TO THE UNITED STATES, OR TO MODIFY EXISTING CONTRACTS WITHOUT A COMPENSATING BENEFIT TO THE UNITED STATES. 20 COMP. GEN. 448, 450; 18 ID. 114, 116. DOES THE CITY'S FORBEARANCE TO ASSERT ANY CLAIM AGAINST THE UNITED STATES ON ACCOUNT OF ALLEGED DEFECTS IN THE PROJECT CONSTITUTE SUCH A BENEFIT?

THE DEED OF CONVEYANCE UNDER WHICH THE PROJECT WAS TRANSFERRED TO THE CITY OF KODIAK RECITES THAT THE UNITED STATES:

* * * DOES HEREBY GRANT, BARGAIN, SELL AND CONVEY UNTO THE PURCHASER, WITHOUT WARRANTY, EITHER EXPRESS OR IMPLIED, ALL RIGHT, TITLE AND INTEREST OF THE UNITED STATES IN AND TO THE PROJECT * * * ( ITALICS SUPPLIED.)

THE TRANSFER IS PREMISED, AS FURTHER STIPULATED IN THE DEED, UPON THE PROJECT HAVING BEEN COMPLETED TO THE SATISFACTION OF THE UNITED STATES AND THE PURCHASER. ALSO, THE BOND ORDINANCE AUTHORIZING THE CITY OF KODIAK TO ACCEPT THE DEED SPECIFICALLY APPROVES THE PROJECT AS TO CONSTRUCTION. ADDITION, THESE STIPULATIONS WERE MADE WITH RESPECT TO TRANSFER OF THE PROJECT INCREASING THE HEIGHT OF THE DAMS. THERE IS NO EVIDENCE OR ALLEGATION THAT THERE WAS ANY FRAUD, MISREPRESENTATION, DECEIT OR CONCEALMENT OF MATERIAL FACTS ON THE PART OF GOVERNMENT REPRESENTATIVES NOR ANY SUCH GROSS ERROR OF JUDGMENT AS TO IMPUTE AN ATTEMPT TO DEFRAUD. IT WOULD APPEAR, THEREFORE, ON THE BASIS OF THE PRESENT RECORD, THAT THE UNITED STATES IS UNDER NO LEGAL OBLIGATION WITH RESPECT TO ANY DEFECTS IN CONSTRUCTION WHICH MIGHT BE DISCOVERED. ORDINARILY, THERE CAN BE NO IMPLIED WARRANTIES IN SALES OF REAL ESTATE. 4 WILLISTON ON CONTRACTS SECTION 926. AND IF THE UNITED STATES IS NOT LIABLE TO THE CITY OF KODIAK UNDER CLAIMS FOR DEFECTS IN CONSTRUCTION, IT WOULD SEEM TO FOLLOW THAT THE CITY'S FORBEARANCE TO ASSERT SUCH CLAIMS DOES NOT CONFER ANY REAL BENEFIT UPON THE GOVERNMENT.

HOWEVER, IT HAS BEEN HELD THAT WHERE VENDORS AGREED TO BUILD A DWELLING HOUSE FOR PURCHASERS AND TITLE TO THE COMPLETED HOUSE WAS CONVEYED BY THE VENDORS TO THE PURCHASERS, THE PURCHASERS WERE NOT PRECLUDED FROM SHOWING A FAILURE OF CONSIDERATION UNDER AN IMPLIED WARRANTY THAT THE HOUSE WOULD BE FREE FROM LATENT DEFECTS IN CONSTRUCTION. SEE TRIPLETT V. OSTROSKI, 145 N.E. 2D 209; AND HOYE V. CENTURY BUILDERS, 329 P.2D 474. IN THE INSTANT CASE THE GOVERNMENT AGREED TO BUILD A WATER AND SEWER PROJECT FOR THE CITY OF KODIAK, AND THERE DOES NOT APPEAR TO BE ANY QUESTION BUT THAT IN CERTAIN RESPECTS IT WAS IMPROPERLY CONSTRUCTED. WHILE THE DETAILED FACTS IN THIS CASE CAN BE DISTINGUISHED FROM THOSE IN THE CASES CITED, THEY ARE SUFFICIENTLY SIMILAR TO ALLOW THE CONCLUSION THAT THERE IS DOUBT AS TO HOW A COURT WOULD DISPOSE OF A CLAIM FOR DAMAGES BY THE CITY AGAINST THE GOVERNMENT. IN LIGHT OF SUCH DOUBT, IT CANNOT BE SAID THAT THE GOVERNMENT WILL NOT BENEFIT FROM A WAIVER BY THE CITY OF KODIAK OF ALL CLAIMS IT MAY HAVE AGAINST THE UNITED STATES FOR DEFECTS IN THE CONSTRUCTION OF THE PROJECT. FURTHERMORE, THE PROPOSED AMENDMENTS DO NOT FORGIVE ANY PART OF THE CITY'S PRINCIPAL INDEBTEDNESS BUT MERELY EXTEND THE PERIOD OVER WHICH SUCH INDEBTEDNESS WILL BE REPAID.

ACCORDINGLY, IF IT IS ADMINISTRATIVELY DETERMINED TO BE TO THE GOVERNMENT'S ADVANTAGE, THIS OFFICE WILL NOT OBJECT, SO FAR AS CONCERNS THE QUESTIONS HEREIN CONSIDERED, TO EXECUTION OF THE DOCUMENTS TRANSMITTED WITH THE DIRECTOR'S LETTER.