B-157377, NOV. 3, 1965, 45 COMP. GEN. 224

B-157377: Nov 3, 1965

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IS A CONTRACT HAZARD THAT NEITHER EXCUSES NONPERFORMANCE NOR ENTITLES THE CONTRACTOR TO ADDITIONAL COMPENSATION WITHOUT A COMPENSATORY BENEFIT TO THE GOVERNMENT. THE CONTRACT WAS EXECUTED ON MARCH 1. AT THE TIME THE CONTRACT WAS EXECUTED. THE FIRST COSTS WERE ESTIMATED AT $42. OF WHICH AMOUNT THE ESTIMATED SHARE PAYABLE BY THE AUTHORITY WAS $5. 000 WAS PAID IN ADVANCE. THE BALANCE WAS AGREED TO BE PAID IN FIFTY EQUAL ANNUAL INSTALLMENTS OF $193. ANY OTHER FACILITIES ADDED AT THE REQUEST OF THE AUTHORITY IS LESS THAN THAT SET FORTH IN EXHIBIT A. IN THE EVENT THE ANNUAL PAYMENTS ARE INCREASED OR DECREASED. OF PAYMENTS MADE PRIOR TO THE DETERMINATION OF THE FINAL PROJECT COST SHALL BE MADE IN THE FIRST PAYMENT DUE AFTER SUCH COSTS ARE DETERMINED.

B-157377, NOV. 3, 1965, 45 COMP. GEN. 224

CONTRACTS - MODIFICATION - FRUSTRATION OF CONTRACT BASIS A CONTRACT ENTERED INTO PURSUANT TO 43 U.S.C. 390B GRANTING A STATE RIVER AUTHORITY WATER STORAGE SPACE IN A DAM AND RESERVOIR PROJECT CONSTRUCTED UNDER THE FLOOD CONTROL ACT, APPROVED SEPTEMBER 3, 1954, IN EXCHANGE FOR PAYMENT OF A PROPORTIONATE SHARE OF FIRST CONSTRUCTION COSTS MAY NOT BE MODIFIED TO RELIEVE THE AUTHORITY FROM LIABILITY FOR INCREASED COSTS OCCASIONED BY REPAIR OF A DAM EMBANKMENT SLIDE ON THE BASIS THE PURPOSE OF THE AUTHORITY IN ENTERING INTO THE CONTRACT TO SUPPLY WATER AT REASONABLE PRICES WOULD BE FRUSTRATED BY PAYMENT OF AN ADDITIONAL AMOUNT, AND THAT THE AUTHORITY IN ANTICIPATION OF RETIRING THE PROJECT INDEBTEDNESS FROM CURRENT REVENUES DID NOT SUBMIT THE PROJECT TO THE VOTERS AS REQUIRED BY STATE STATUTE, AND AS AN INCREASED COST, WHETHER OR NOT FORESEEN, IS A CONTRACT HAZARD THAT NEITHER EXCUSES NONPERFORMANCE NOR ENTITLES THE CONTRACTOR TO ADDITIONAL COMPENSATION WITHOUT A COMPENSATORY BENEFIT TO THE GOVERNMENT, THE VESTED RIGHTS OF THE GOVERNMENT TO AN INCREASED CONTRIBUTION FROM THE AUTHORITY MAY NOT BE SURRENDERED.

TO THE SECRETARY OF THE ARMY, NOVEMBER 3, 1965:

BY LETTER DATED JULY 29, 1965, THE EXECUTIVE, HEADQUARTERS, OFFICE OF THE CHIEF OF ENGINEERS, HAS REQUESTED OUR DECISION ON THE AMOUNT OF THE CONTRIBUTION PAYABLE BY THE BRAZOS RIVER AUTHORITY OF TEXAS TO THE FIRST CONSTRUCTION COSTS OF THE WACO DAM AND RESERVOIR UNDER CONTRACT NO. DA-41- 443-CIVENG-58-446.

THE CONTRACT WAS EXECUTED ON MARCH 1, 1958, AND APPROVED BY THE SECRETARY OF THE ARMY ON APRIL 15, 1958. UNDER ITS TERMS, THE GOVERNMENT GRANTED TO THE AUTHORITY THE USE OF CERTAIN WATER STORAGE SPACE IN THE PROJECT IN EXCHANGE FOR PAYMENT BY THE AUTHORITY OF A PROPORTIONATE SHARE OF THE FIRST CONSTRUCTION COSTS, COMPUTED ON THE BASIS OF ALLOCATION OF SUCH COSTS BETWEEN THE FLOOD CONTROL AND WATER STORAGE FEATURES OF THE PROJECT. AT THE TIME THE CONTRACT WAS EXECUTED, THE FIRST COSTS WERE ESTIMATED AT $42,570,000, OF WHICH AMOUNT THE ESTIMATED SHARE PAYABLE BY THE AUTHORITY WAS $5,871,050. OF THE AUTHORITY'S SHARE, $250,000 WAS PAID IN ADVANCE, AND THE BALANCE WAS AGREED TO BE PAID IN FIFTY EQUAL ANNUAL INSTALLMENTS OF $193,353.46 EACH, INCLUDING INTEREST AT 2 1/2 PERCENT. ARTICLE 5 (3) OF THE CONTRACT PROVIDES FOR ADJUSTMENT OF SUCH PAYMENTS IN THE EVENT ACTUAL COST SHOULD EXCEED THE ESTIMATE, AS FOLLOWS:

IN THE EVENT THE ACTUAL FIRST COST OF THE PROJECT, INCLUDING THE ENTIRE COST OF OUTLET FACILITIES, AND ANY OTHER FACILITIES ADDED AT THE REQUEST OF THE AUTHORITY, EXCEEDS THE ESTIMATED COST AS SET FORTH IN EXHIBIT A, THE AFORESAID ANNUAL PAYMENTS SHALL BE INCREASED TO REFLECT THE ACTUAL COST, INCLUDING INTEREST DURING CONSTRUCTION, AS DETERMINED BY THE CONTRACTING OFFICER. IN THE EVENT SUCH FIRST COST OF THE PROJECT, INCLUDING THE ENTIRE COST OF OUTLET FACILITIES, AND ANY OTHER FACILITIES ADDED AT THE REQUEST OF THE AUTHORITY IS LESS THAN THAT SET FORTH IN EXHIBIT A, THE AFORESAID ANNUAL PAYMENTS SHALL BE DECREASED TO REFLECT THE ACTUAL COST, INCLUDING INTEREST DURING CONSTRUCTION,AS DETERMINED BY THE CONTRACTING OFFICER.

IN THE EVENT THE ANNUAL PAYMENTS ARE INCREASED OR DECREASED, AS PROVIDED ABOVE, AN ADJUSTMENT, AS DETERMINED BY THE CONTRACTING OFFICER, OF PAYMENTS MADE PRIOR TO THE DETERMINATION OF THE FINAL PROJECT COST SHALL BE MADE IN THE FIRST PAYMENT DUE AFTER SUCH COSTS ARE DETERMINED. AT THE TIME THE FINAL PROJECT COSTS ARE DETERMINED, EXHIBIT A SHALL BE MODIFIED TO REFLECT THE INCREASED OR DECREASED ANNUAL PAYMENTS AND SUCH MODIFICATION SHALL FORM A PART OF THIS CONTRACT.

THE SAME ARTICLE ALSO PROVIDES FOR PAYMENT BY THE AUTHORITY OF 14.134 PERCENT OF THE COST OF MAJOR REPAIRS.

THE PROJECT WAS AUTHORIZED BY THE FLOOD CONTROL ACT APPROVED SEPTEMBER 3, 1954 (PUBLIC LAW 780, 83D CONG., 68 STAT. 1248, 1259). THE AUTHORIZATION FOR THE CONTRACT BETWEEN THE GOVERNMENT AND THE AUTHORITY (WHICH SUPERSEDED A PRIOR CONTRACT BETWEEN THE GOVERNMENT AND THE CITY OF WACO AND IS SAID TO HAVE BEEN FOR THE SOLE BENEFIT OF THAT CITY) IS CONTAINED IN TITLE III OF THE WATER SUPPLY ACT OF 1958 (PUBLIC LAW 85-500), 43 U.S.C. 390B, WHICH READS, IN PART, AS FOLLOWS:

SEC. 390B. DEVELOPMENT OF WATER SUPPLIES FOR DOMESTIC, MUNICIPAL, INDUSTRIAL, AND OTHER PURPOSES.

(A) DECLARATION OF POLICY.--- IT IS DECLARED TO BE THE POLICY OF THE CONGRESS TO RECOGNIZE THE PRIMARY RESPONSIBILITIES OF THE STATES AND LOCAL INTERESTS IN DEVELOPING WATER SUPPLIES FOR DOMESTIC, MUNICIPAL, INDUSTRIAL, AND OTHER PURPOSES AND THAT THE FEDERAL GOVERNMENT SHOULD PARTICIPATE AND COOPERATE WITH STATES AND LOCAL INTERESTS IN DEVELOPING SUCH WATER SUPPLIES IN CONNECTION WITH THE CONSTRUCTION, MAINTENANCE, AND OPERATION OF FEDERAL NAVIGATION, FLOOD CONTROL, IRRIGATION, OR MULTIPLE PURPOSE PROJECTS.

(B) STORAGE IN RESERVOIR PROJECTS; AGREEMENTS FOR PAYMENT OF COST OF CONSTRUCTION OR MODIFICATION OF PROJECTS.--- IN CARRYING OUT THE POLICY SET FORTH IN THIS SECTION, IT IS PROVIDED THAT STORAGE MAY BE INCLUDED IN ANY RESERVOIR PROJECT SURVEYED, PLANNED, CONSTRUCTED OR TO BE PLANNED, SURVEYED AND/OR CONSTRUCTED BY THE CORPS OF ENGINEERS OR THE BUREAU OF RECLAMATION TO IMPOUND WATER FOR PRESENT OR ANTICIPATED FUTURE DEMAND OR NEED FOR MUNICIPAL OR INDUSTRIAL WATER, AND THE REASONABLE VALUE THEREOF MAY BE TAKEN INTO ACCOUNT IN ESTIMATING THE ECONOMIC VALUE OF THE ENTIRE PROJECT: PROVIDED, THAT BEFORE CONSTRUCTION OR MODIFICATION OF ANY PROJECT INCLUDING WATER SUPPLY PROVISIONS IS INITIATED, STATE OR LOCAL INTERESTS SHALL AGREE TO PAY FOR THE COST OF SUCH PROVISIONS ON THE BASIS THAT ALL AUTHORIZED PURPOSES SERVED BY THE PROJECT SHALL SHARE EQUITABLY IN THE BENEFITS OF MULTIPLE PURPOSE CONSTRUCTION AS DETERMINED BY THE SECRETARY OF THE ARMY OR THE SECRETARY OF THE INTERIOR AS THE CASE MAY BE: PROVIDED FURTHER, THAT NOT TO EXCEED 30 PERCENTUM OF THE TOTAL ESTIMATED COST OF ANY PROJECT MAY BE ALLOCATED TO ANTICIPATED FUTURE DEMANDS WHERE STATES OR LOCAL INTERESTS GIVE REASONABLE ASSURANCES THAT THEY WILL CONTRACT FOR THE USE OF STORAGE FOR ANTICIPATED FUTURE DEMANDS WITHIN A PERIOD OF TIME WHICH WILL PERMIT PAYING OUT THE COSTS ALLOCATED TO WATER SUPPLY WITHIN THE LIFE OF THE PROJECT: AND PROVIDED FURTHER, THAT THE ENTIRE AMOUNT OF THE CONSTRUCTION COSTS, INCLUDING INTEREST DURING CONSTRUCTION, ALLOCATED TO WATER SUPPLY SHALL BE REPAID WITHIN THE LIFE OF THE PROJECT BUT IN NO EVENT TO EXCEED FIFTY YEARS AFTER THE PROJECT IS FIRST USED FOR THE STORAGE OF WATER FOR WATER SUPPLY PURPOSES, EXCEPT THAT (1) NO PAYMENT NEED BE MADE WITH RESPECT TO STORAGE FOR FUTURE WATER SUPPLY UNTIL SUCH SUPPLY IS FIRST USED, AND (2) NO INTEREST SHALL BE CHARGED ON SUCH COST UNTIL SUCH SUPPLY IS FIRST USED, BUT IN NO CASE SHALL THE INTEREST-FREE PERIOD EXCEED TEN YEARS. * * *

THE AUTHORITY, WHICH WAS ESTABLISHED UNDER THE LAWS OF TEXAS, ARTICLE 8280-101, VERNON'S TEXAS CIVIL STATUTES, IS AUTHORIZED TO CONTROL, STORE, PRESERVE, USE, DISTRIBUTE, AND SELL THE WATERS OF THE BRAZOS AND BOSQUE RIVERS. SECTION 10 OF THE AUTHORIZING STATUTE REQUIRES THAT THE AUTHORITY SHALL NOT INCUR ANY INDEBTEDNESS FOR IMPROVEMENTS COMPREHENDED BY THE STATUTE WITHOUT FIRST SUBMITTING THE PROPOSAL TO THE QUALIFIED TAXPAYING VOTERS AND OBTAINING APPROVAL OF A MAJORITY OF THOSE VOTING. HOWEVER, SINCE IT WAS THE INTENT OF THE AUTHORITY TO RETIRE THE INDEBTEDNESS FROM CURRENT REVENUES, SUCH SUBMISSION WAS CONSIDERED UNNECESSARY IN VIEW OF THE HOLDING IN TEXAS AGRICULTURAL ASSOCIATION V. HIDALGO COUNTY WATER CONTROL AND IMPROVEMENT DISTRICT NO. 1, 125 F.2D 829, THAT AN INDEBTEDNESS OF A WATER CONTROL IMPROVEMENT DISTRICT ORGANIZED UNDER TEXAS LAW, WHICH IS PAYABLE OUT OF CURRENT REVENUES, NEED NOT BE SUBMITTED TO THE VOTERS FOR APPROVAL.

ON OCTOBER 4, 1961, THE GOVERNMENT DISCOVERED THAT A SLIDE HAD OCCURRED IN THE DAM EMBANKMENT. IT IS ESTIMATED THAT REPAIR OF THE SLIDE WILL INCREASE THE FIRST CONSTRUCTION COSTS OF THE PROJECT BY $7,729,700, OF WHICH AMOUNT $1,174,000 MUST BE CONTRIBUTED BY THE AUTHORITY UNDER THE CONTRACT TERMS. IN DECEMBER 1961, THE AUTHORITY REQUESTED TO BE RELEASED FROM OBLIGATION FOR PAYMENT OF ANY PORTION OF THE SLIDE REPAIR COSTS. IS STATED THAT THE AUTHORITY'S PURPOSE OR OBJECT IN ENTERING INTO THE CONTRACT WAS TO RETIRE THE INDEBTEDNESS FROM CURRENT REVENUES AND THAT THE INCREASE OF ITS SHARE TO THE EXTENT NECESSITATED BY THE UNANTICIPATED SLIDE REPAIR COSTS WILL DESTROY SUCH PURPOSE SINCE CURRENT REVENUES WOULD NOT BE SUFFICIENT TO RETIRE THE INDEBTEDNESS.

IT IS THE RECOMMENDATION OF THE CORPS OF ENGINEERS THAT THE CONTRACT BE AMENDED TO REFLECT THE ADDITIONAL COSTS NECESSARY TO CORRECT THE SLIDE, BUT THAT A MODIFICATION BE EXECUTED PROVIDING THAT THE AUTHORITY IS RELIEVED FROM ANY LIABILITY FOR CONTRIBUTION THERETO. THE RECOMMENDATION IS BASED ON THE DOCTRINE OF "FRUSTRATION OF CONTRACTS," IN THAT THE PURPOSE FOR WHICH THE AUTHORITY ENTERED INTO THE CONTRACT, WHICH PURPOSE IS STATED BY THE AUTHORITY AS SUPPLYING WATER TO THE CITY OF WACO AT REASONABLE PRICES, WOULD BE FRUSTRATED WERE THE AUTHORITY FORCED TO PAY THE ADDITIONAL AMOUNT, AND THE AUTHORITY BEING WITHOUT FAULT IS THEREBY DISCHARGED FROM ITS CONTRACTUAL OBLIGATIONS. IN ADDITION TO QUOTATIONS FROM CORBIN ON CONTRACTS AND RESTATEMENT OF THE LAW OF CONTRACTS, SEVERAL COURT CASES ARE CITED FOR THE PROPOSITION THAT THE COST INCREASE IS A SUPERVENING EVENT OF SUCH CHARACTER THAT IT COULD NOT BE REASONABLY ANTICIPATED AND THAT WHILE PERFORMANCE REMAINS POSSIBLE, THE EXPECTED VALUE OF THE PERFORMANCE TO THE AUTHORITY HAS BEEN DESTROYED SO AS TO CAUSE A FAILURE OF CONSIDERATION. ACCORDINGLY, IT IS CONTENDED, THE AUTHORITY HAS THE RIGHT TO RESCIND THE CONTRACT, AND, THEREFORE, THE RELINQUISHMENT OF SUCH RIGHT WOULD CONSTITUTE A COMPENSATING BENEFIT TO THE GOVERNMENT FOR RELIEVING THE AUTHORITY FROM PAYMENT OF ANY PART OF THE SLIDE REPAIR COSTS.

FROM THE FACTS OF RECORD, THERE IS NO INDICATION THAT THE SLIDE WAS CAUSED BY ANY NEGLIGENCE ON THE PART OF THE GOVERNMENT NOR IS THERE ANY EVIDENCE THAT SUCH AN OCCURRENCE IS WHOLLY UNEXPECTED IN THE TYPE OF PROJECT INVOLVED. RATHER, THE ABSENCE FROM ARTICLE 5 (3) OF LANGUAGE EXCEPTING ACTS OF GOD OR UNFORESEEN DIFFICULTIES FROM THE COST ADJUSTMENT OR REPAIR COST PROVISIONS EVIDENCES THAT THE INTENT OF BOTH PARTIES WAS TO COMPUTE THEIR RESPECTIVE SHARES OF THE PROJECT COSTS ON THE BASIS OF ALL ACTUAL COSTS.

WE FIND NO ADEQUATE SUPPORT FOR THE VIEW THAT THERE HAS BEEN A FAILURE OF CONSIDERATION OR FRUSTRATION OF THE PURPOSE OF THE CONTRACT. THE AUTHORITY BARGAINED FOR STORAGE SPACE IN THE PROJECT UNDER CERTAIN TERMS, AND THE GOVERNMENT, WE UNDERSTAND, IS FURNISHING THE SPACE IN ACCORDANCE WITH SUCH TERMS. WHILE THE AUTHORITY MIGHT WELL HAVE INTENDED THAT THE CONTRACT EXPENSES SHOULD NOT EXCEED ITS CURRENT REVENUES, SUCH INTENT CANNOT BE REGARDED AS BEING WITHIN THE PURPOSE OF THE CONTRACT.

THEREFORE, IN THE ABSENCE OF ANY PROVISION IN THE CONTRACT OR IN THE WATER SUPPLY ACT OF 1958 FURNISHING A BASIS FOR THE GOVERNMENT TO AUTHORIZE RELIEF IN THE CIRCUMSTANCES IN QUESTION, IT IS OUR VIEW THAT THERE IS FOR APPLICATION THE GENERALLY ACCEPTED RULE THAT UNEXPECTED OR INCREASED COST OF PERFORMANCE, WHETHER FORESEEN OR UNFORESEEN, IS ONE OF THE HAZARDS OF A CONTRACT WHICH NEITHER EXCUSES NONPERFORMANCE NOR ENTITLES THE CONTRACTOR TO ADDITIONAL COMPENSATION. 37 COMP. GEN. 642, 645; SATTERLEE ADMX. V. UNITED STATES, 30 CT.CL. 31. THERE IS ALSO FOR APPLICATION HERE THE RULE THAT WITHOUT A COMPENSATING BENEFIT TO THE UNITED STATES, ITS AGENTS AND OFFICERS HAVE NO AUTHORITY TO DISPOSE OF THE MONEY OR PROPERTY OF THE UNITED STATES, TO MODIFY EXISTING CONTRACTS, OR TO SURRENDER OR WAIVE CONTRACT RIGHTS THAT HAVE VESTED IN THE GOVERNMENT. 40 COMP. GEN. 684 AND COURT CASES THEREIN CITED. HAVING CONCLUDED THAT THE AUTHORITY HAS NO RIGHT TO RESCIND THE CONTRACT, WE MUST FURTHER CONCLUDE THAT THERE WOULD BE NO CONSIDERATION MOVING TO THE GOVERNMENT FOR THE RELINQUISHMENT OF ITS VESTED RIGHT UNDER THE CONTRACT TO ADJUSTMENT OF THE AUTHORITY'S CONTRIBUTION TO THE PROJECT COSTS ON THE BASIS OF THE INCREASE ATTRIBUTABLE TO THE REPAIR OF THE SLIDE.

WE THEREFORE CANNOT APPROVE THE RECOMMENDATION THAT THE AUTHORITY BE RELIEVED FROM ANY LIABILITY FOR CONTRIBUTIONS TO THE COST OF CORRECTING THE SLIDE.