B-151469, MAY 27, 1963

B-151469: May 27, 1963

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TO THE SECRETARY OF THE INTERIOR: REFERENCE IS MADE TO LETTER OF MAY 2. THE LAST OF THE FOUR GENERATORS WAS PUT INTO SERVICE ON MAY 6. THE CONTRACTING OFFICER CONTENDED THAT THAT FAILURE WAS DUE TO A DEFECT IN THE CONTRACTOR'S DESIGN AND WAS IN BREACH OF AN IMPLIED WARRANTY OF FITNESS OF THE EQUIPMENT FOR USE. CONTENDED THAT ITS LIABILITY IS LIMITED BY THE ONE-YEAR EXPRESS WARRANTY ON LATENT DEFECTS IN THE CONTRACT AND DISPUTED THE BASIS OF THE CAUSE OF DAMAGE. A DETERIORATION IN THE STATOR COILS ON TWO GENERATORS OTHER THAN THE LAST GENERATOR WAS OBSERVED. THE CONTRACTING OFFICER BELIEVES THAT THESE LATTER DEFECTS ARE COVERED ONLY BY THE ONE YEAR CONTRACT WARRANTY AND THAT THE CONTRACTOR THEREFORE WOULD NOT BE LIABLE FOR THEM.

B-151469, MAY 27, 1963

TO THE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO LETTER OF MAY 2, 1963, FROM THE ADMINISTRATIVE ASSISTANT SECRETARY, REQUESTING A DECISION WHETHER A SETTLEMENT OFFER PROPOSED BY PACIFIC OERLIBON COMPANY IN SATISFACTION OF A CLAIM BY THE BUREAU OF RECLAMATION ARISING OUT OF CONTRACT 14-06-D-385 SHOULD BE ACCEPTED.

UNDER THE SUBJECT CONTRACT THE PACIFIC OERLIBON COMPANY AGREED TO FURNISH AND INSTALL FOUR GENERATORS ACCORDING TO SPECIFICATION DC-3904 AS SUPPLEMENTED. THE LAST OF THE FOUR GENERATORS WAS PUT INTO SERVICE ON MAY 6, 1958. THEREAFTER, ON JUNE 29, 1961, A FAILURE OCCURRED IN THE ROTOR OF THE LAST UNIT WHICH RESULTED IN DAMAGE TO THE UNIT INCLUDING THE ROTOR AND STATOR COILS. THE CONTRACTING OFFICER CONTENDED THAT THAT FAILURE WAS DUE TO A DEFECT IN THE CONTRACTOR'S DESIGN AND WAS IN BREACH OF AN IMPLIED WARRANTY OF FITNESS OF THE EQUIPMENT FOR USE. THE CONTRACTOR, ON THE OTHER HAND, CONTENDED THAT ITS LIABILITY IS LIMITED BY THE ONE-YEAR EXPRESS WARRANTY ON LATENT DEFECTS IN THE CONTRACT AND DISPUTED THE BASIS OF THE CAUSE OF DAMAGE. BUT, DESPITE THE DENIAL OF LIABILITY, THE CONTRACTOR REPLACED THE ROTOR AMORTISSEUR WINDINGS FOR EACH OF THE FOUR GENERATOR UNITS AND PROVIDED THE SERVICES OF AN ERECTING ENGINEER. HOWEVER, COMPLETE REPAIR OF THE DAMAGED UNIT AND INSTALLATION OF THE FOUR NEW AMORTISSEUR WINDINGS COST THE BUREAU $171,218.51.

SUBSEQUENTLY, A DETERIORATION IN THE STATOR COILS ON TWO GENERATORS OTHER THAN THE LAST GENERATOR WAS OBSERVED. HOWEVER, THE CONTRACTING OFFICER BELIEVES THAT THESE LATTER DEFECTS ARE COVERED ONLY BY THE ONE YEAR CONTRACT WARRANTY AND THAT THE CONTRACTOR THEREFORE WOULD NOT BE LIABLE FOR THEM. NEVERTHELESS, IN PURSUING THE CLAIM FOR REIMBURSEMENT FOR THE EXPENSE IN CONNECTION WITH THE DAMAGED GENERATOR, THE BUREAU HAS RECEIVED AN OFFER FROM THE CONTRACTOR PROPOSING TO FURNISH FOR ONE UNIT A NEW STATOR WINDING OF BETTER DESIGN AND GRADE AND SERVICES OF AN ERECTING ENGINEER AT NO COST TO THE GOVERNMENT AND A SIMILAR STATOR WINDING FOR THE OTHER UNIT AT A REDUCTION IN ITS REGULAR PRICE WITH THE UNDERSTANDING THAT THIS WILL BE DONE IN SATISFACTION OF THE BUREAU'S CLAIM.

IT IS ESTIMATED THAT THE OFFER OF THE CONTRACTOR WILL COST THE BUREAU ABOUT $154,800. IF THE CONTRACTOR'S OFFER IS NOT ACCEPTED, IT IS ESTIMATED THAT NEW WINDINGS FOR THE UNITS INVOLVED WILL COST THE BUREAU ABOUT $300,000. IT IS POINTED OUT THAT IF THE CONTRACTOR'S OFFER IS NOT ACCEPTED AND THE GOVERNMENT IS SUCCESSFUL IN RECOVERING ITS CLAIM FOR $171,218.51, THE EXPENSE TO THE GOVERNMENT STANDS TO BE, AT LEAST ABOUT $300,000, WHEREAS IF THE CONTRACTOR'S PROPOSED SETTLEMENT IS ACCEPTED THE EXPENSE TO THE GOVERNMENT STANDS TO BE ABOUT $326,018.51, OR $26,018.51 MORE THAN THE MOST OPTIMISTIC CONCLUSION, FOR IF THE GOVERNMENT IS UNSUCCESSFUL IN RECOVERING ON ITS CLAIM AND HAS THE ADDED ADDITIONAL EXPENSE OF $300,000 FOR THE NEW WINDINGS, IT STANDS TO BE OUT ABOUT $171,218.51 OR $145,200 MORE THAN IF IT ACCEPTED THE SETTLEMENT.

THE CONTRACTING OFFICER HAS RECOMMENDED APPROVAL OF THE CONTRACTOR'S OFFER. THE RECOMMENDATION IS BASED UPON A BELIEF THAT IF THE SETTLEMENT OFFER IS NOT ACCEPTED THE GOVERNMENT WILL HAVE TO RESORT TO LITIGATION TO ENFORCE ITS CLAIM, SINCE THE CONTRACTOR HAS STEADFASTLY DENIED ANY OBLIGATION, AND THAT THE GOVERNMENT WILL BE PUT TO THE EXPENSE OF PROVING THE CLAIM. CONSIDERING THAT THERE WILL BE PROBLEMS AND COSTS INVOLVED IN SUCH A COURSE OF ACTION AND THAT THERE IS ONLY $26,018.51 BETWEEN THE MOST SUCCESSFUL COURT ACTION AND THE PROPOSED SETTLEMENT, THE CONTRACTING OFFICER BELIEVES IT WOULD BE TO THE GOVERNMENT'S ADVANTAGE TO ACCEPT THE PROPOSAL. IT IS REPORTED THAT BOTH THE COMMISSIONER OF THE BUREAU OF RECLAMATION AND YOUR DEPARTMENT CONCUR IN THE RECOMMENDATION. IF OUR OFFICE AGREES WITH THE PROPOSED DISPOSITION, IT IS PROPOSED THAT A SUPPLEMENTAL AGREEMENT TO THE ORIGINAL CONTRACT EMBODYING THE SETTLEMENT WILL BE EXECUTED WITH A PROVISION THAT THE EXPENDITURE OF ANY MONEY UNDER THE AGREEMENT WILL BE CONTINGENT UPON CONGRESS PROVIDING NECESSARY APPROPRIATIONS, SINCE FUNDS ARE NOT NOW AVAILABLE TO MEET THE EXPENDITURE.

WHILE THE CONTRACTING OFFICER IS PREPARED TO CONTEND THAT THE FAILURE OF THE LAST INSTALLED UNIT IS THE RESULT OF DEFICIENCIES IN THE CONTRACTOR'S DESIGN, IT APPEARS THAT HE ANTICIPATES THAT THE ESTABLISHMENT OF THE CONTENTION WILL BE DIFFICULT AND UNCERTAIN IN THE FACE OF THE CONTRACTOR'S VIGOROUS DENIAL AND COUNTERCONTENTIONS AS TO THE CAUSE. SOME DOUBT THEREFORE SEEMS TO PERVADE THE CHANCE OF RECOVERY ON ALL OR ANY PART OF THE CLAIM. IN THE CIRCUMSTANCES, IT SEEMS THAT THE PROPOSED SETTLEMENT WOULD WELL BE ADVANTAGEOUS TO THE GOVERNMENT AND OUR OFFICE WOULD HAVE NO OBJECTION IF IT WERE ACCEPTED.

THERE ARE RETURNED, AS REQUESTED, THE ENCLOSURES THAT ACCOMPANIED THE LETTER OF MAY 2.