B-154177, JUL. 14, 1964

B-154177, JUL. 14, 1964

TO MAJOR GENERAL ROBERT J. FLEMING, JR., GOVERNOR OF CANAL ZONE GOVERNMENT:

REFERENCE IS MADE TO YOUR LETTER DATED MAY 7, 1964, REQUESTING THE ADVICE OF THIS OFFICE ON WHETHER THE CANAL ZONE GOVERNMENT MAY PROPERLY WITHHOLD THE AMOUNT OF $80,989.10 FROM AMOUNTS DUE THE ROYAL INDEMNITY COMPANY FOR INCREMENTAL CONSTRUCTION WORK RENDERED AS TAKE-OVER CONTRACTOR PURSUANT TO AN INTERIM AGREEMENT DATED JANUARY 24, 1964. THE INTERIM AGREEMENT WAS ENTERED INTO BY THE COMPANY AS SURETY ON PERFORMANCE AND PAYMENT BONDS TO CONTINUE PERFORMANCE OF CERTAIN ALTERATIONS AND ADDITIONS TO GORGAS HOSPITAL, ANCON, CANAL ZONE, UNDER THE TERMS OF CONTRACT NO. CG-2-211 UNTIL MORE ADEQUATE ARRANGEMENTS COULD BE MADE AFTER THE DEFAULT OF THE ORIGINAL CONTRACTOR, WILLIAM BAYNE UHLHORN, AN INDIVIDUAL, AND UHLHORN INTERNATIONAL, S.A., A JOINT VENTURE.

THE ORIGINAL CONTRACT WITH UHLHORN HAD BEEN ENTERED INTO ON JUNE 13, 1961, AND, AS MODIFIED BY SUBSEQUENT CHANGE ORDERS, CALLED FOR COMPLETION OF THE WORK BY APRIL 15, 1964, WITH LIQUIDATED DAMAGES TO BE ASSESSED AT THE RATE OF $500 PER DAY FOR EVERY DAY OF DELAY. IT APPEARS FROM YOUR LETTER THAT THE CONTRACT WAS TERMINATED FOR DEFAULT ON JANUARY 15, 1964. BETWEEN JANUARY 24, 1964, THE DATE OF THE INTERIM AGREEMENT, AND MARCH 31, 1964, THE SURETY PERFORMED WORK ON THE PROJECT IN PLACE OF THE ORIGINAL CONTRACTOR AND SUBJECT TO THE TERMS OF THE ORIGINAL AGREEMENT. ON APRIL 1, 1964, A FIXED-PRICE CONTRACT IN THE AMOUNT OF $1,099,645, WAS LET TO ROBERT R. PRANN CONTRACTING COMPANY, INCORPORATED, FOR THE BALANCE OF THE WORK. THE REPROCUREMENT CONTRACT CONTAINS A LIQUIDATED DAMAGES CLAUSE SIMILAR TO THE ONE IN THE UHLHORN CONTRACT AND STIPULATES A COMPLETION DATE OF OCTOBER 15, 1964. THUS, AS OF THE DATE OF THIS LETTER, THE WORK IS SCHEDULED TO BE STILL IN PROGRESS.

IT IS STATED IN YOUR LETTER DATED MAY 7, 1964, THAT THERE IS NOW OWING AND UNPAID TO THE ROYAL INDEMNITY COMPANY IN ITS OWN RIGHT A PROGRESS PAYMENT OF $105,505.27 (THE NET SUM OF $58,720.43 EARNED DURING THE MONTH OF MARCH, 1964, HAS BEEN PAID OVER TO THE SURETY PURSUANT TO PAYMENT ESTIMATE 36) FOR THE VALUE OF WORK PERFORMED BETWEEN JANUARY 24, 1964, AND FEBRUARY 29, 1964, NOT INCLUDING RETAINAGE AND A REDUCTION FROM INVENTORY. YOU ESTIMATE THE MAGNITUDE OF THE GOVERNMENT'S DAMAGES, FLOWING FROM DEFAULT, TO BE $587,564.11: $496,064.11 BEING THE AMOUNT OF THE EXCESS COSTS OF REPROCUREMENT, AND $91,500 BEING THE LIQUIDATED DAMAGES FOR THE PERIOD RUNNING FROM APRIL 15, 1964, THROUGH OCTOBER 15, 1964. SINCE THE CANAL ZONE GOVERNMENT IS IN POSSESSION OF THE SUM OF $506,575.01 (RETAINAGE THROUGH MARCH 31, 1964, AND THE DEFAULTINGCONTRACTOR'S UNPAID PROGRESS ESTIMATES FOR DECEMBER, 1963, AND JANUARY 1 TO 15, 1964, INCLUDING 25 PERCENT ON MATERIALS, AFTER SET-OFF OF COMPANY-GOVERNMENT ACCOUNTS RECEIVABLE FROM THE DEFAULTING CONTRACTOR TOTALLING $14,961.73) OWED TO THE DEFAULTING CONTRACTOR OR TO HIS SURETY (OVER AND ABOVE THE $105,505.27, WITH RESPECT TO THE LATTER), YOU CONCLUDE THAT THERE REMAINS THE AMOUNT OF $80,989.10 ($587,565.11 MINUS $506,575.01) WHICH WILL EVENTUALLY BE FOUND TO BE OWING BY THE SURETY TO THE GOVERNMENT FOR WHICH THE GOVERNMENT LACKS SECURITY OTHER THAN THE PAYMENTS ($105,505.27) NOW REQUESTED BY THE SURETY.

YOUR LETTER POINTS OUT THAT THE SURETY IS LIKELY TO CONTEST ALL OR PART OF THE GOVERNMENT'S CLAIM FOR DAMAGES. LITIGATION, WHICH MAY WELL RESULT, WOULD HAVE TO BE INITIATED BY THE GOVERNMENT IF THE AMOUNT AT ISSUE IS NOT WITHHELD, BUT BY THE SURETY IF THE WITHHOLDING IS EFFECTED.

THE ROYAL INDEMNITY COMPANY IS LIABLE TO THE GOVERNMENT FOR DAMAGES RESULTING FROM THE ORIGINAL CONTRACTOR'S DEFAULT UP TO THE PENAL SUMS OF THE APPLICABLE BONDS. SUBSEQUENT TO THE ORIGINAL CONTRACTOR'S DEFAULT, THE SURETY EXECUTED THE INTERIM AGREEMENT AND ENTERED UPON PERFORMANCE OF THE WORK ITSELF.

IT HAS BEEN RECOGNIZED THAT A DEBTOR HAS A RIGHT TO WITHHOLD PAYMENTS OTHERWISE DUE IN AN AMOUNT SUFFICIENT TO COVER DAMAGES REASONABLY CLAIMED AGAINST THE CREDITOR BY REASON OF A BREACH OF CONTRACT. SEE WILLISTON ON CONTRACTS, THIRD EDITION, SECTION 887G. FURTHER, THE COMPANY HAS BROAD AUTHORITY UNDER SECTION 65 (A) (5) OF PUBLIC LAW 87-845, 76A STAT. 11, TO DETERMINE THE CHARACTER AND NECESSITY FOR ITS OBLIGATIONS AND EXPENDITURES AND THE MANNER IN WHICH THEY SHALL BE INCURRED AND PAID. CF. 27 COMP. GEN. 429, 432. THEREFORE, WE FIND NO BASIS TO QUESTION THE LEGALITY OF THE PROPOSED WITHHOLDING.

IT MUST BE RECOGNIZED, HOWEVER, THAT THE SURETY WAS UNDER NO OBLIGATION TO MAINTAIN THE CONTINUITY OF THE WORK BY ENTERING INTO THE INTERIM AGREEMENT, AND THAT IF IT HAD NOT DONE SO, THERE WOULD BE NO FUNDS AVAILABLE FOR WITHHOLDING FROM THE SURETY. ALSO, THE INTERIM AGREEMENT COULD HAVE PROVIDED SPECIFICALLY AGAINST SUCH WITHHOLDING. THE SURETY CONTENDS THAT ITS EXECUTION OF THE INTERIM AGREEMENT WAS AS MUCH FOR THE BENEFIT OF THE UNITED STATES IN MITIGATING INTERNATIONAL TENSION AS FOR ITS OWN FINANCIAL BENEFIT IN MINIMIZING EXCESS COSTS. WE THEREFORE MAKE NO RECOMMENDATION AS TO WHETHER THE COMPANY SHOULD OR SHOULD NOT CONTINUE TO WITHHOLD THE FUNDS IN QUESTION. THIS IS A MATTER FOR ADMINISTRATIVE DETERMINATION AFTER CONSIDERATION OF ALL THE FACTORS INVOLVED.

WE ARE RETURNING THE CONTRACT FILE FURNISHED UNDER LETTER OF JUNE 19, 1964.