B-157557, JAN. 7, 1966

B-157557: Jan 7, 1966

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UNITED STATES ATOMIC ENERGY COMMISSION: REFERENCE IS MADE TO A LETTER DATED AUGUST 25. THE LETTER STATES THAT THE ATOMIC ENERGY COMMISSION (AEC) IS CONCERNED ABOUT THE ADVISABILITY OF PROSECUTING THE CLAIM IN THE FACE OF A POTENTIAL. THIS SUBCONTRACT WAS A FIXED-PRICE AGREEMENT UNDER WHICH SPERRY RAND AGREED TO DESIGN. IT WAS PROVIDED IN THE SUBCONTRACT THAT THE DESIGN OF THE COMPUTER WOULD BE FROZEN AND CONSTRUCTION WOULD BEGIN WITH SIX SUBCONTRACT. (A FULLY EXECUTED SUBCONTRACT WAS RECEIVED BY SPERRY RAND ON SEPTEMBER 9. THE SUBCONTRACT FURTHER PROVIDED THAT TIME WAS OF THE ESSENCE OF THE SUBCONTRACT. THE INSTALLATION PERIOD WAS NOT FIXED BUT WAS ESTIMATED TO REQUIRE TWO MONTHS FOLLOWING DELIVERY.

B-157557, JAN. 7, 1966

TO THE HONORABLE GLENN T. SEABORG, CHAIRMAN, UNITED STATES ATOMIC ENERGY COMMISSION:

REFERENCE IS MADE TO A LETTER DATED AUGUST 25, 1965, AND ENCLOSURES, FROM YOUR GENERAL COUNSEL REFERRING FOR OUR CONSIDERATION AND ADVICE A DOUBTFUL CLAIM AGAINST THE SPERRY RAND CORPORATION. THE LETTER STATES THAT THE ATOMIC ENERGY COMMISSION (AEC) IS CONCERNED ABOUT THE ADVISABILITY OF PROSECUTING THE CLAIM IN THE FACE OF A POTENTIAL, AND MUCH LARGER, RELATED CLAIM BY SPERRY RAND AGAINST A COST-REIMBURSEMENT CONTRACTOR OF THE AEC. THE FACTS, AS RELATED BY THE GENERAL COUNSEL'S LETTER, MAY BE BRIEFLY SUMMARIZED AS FOLLOWS.

THE UNIVERSITY OF CALIFORNIA, AN AEC COST-REIMBURSEMENT CONTRACTOR UNDER PRIME CONTRACT NO. W-7405-ENG-48 AND OPERATOR OF THE AEC-OWNED LAWRENCE RADIATION LABORATORY, ENTERED INTO SUBCONTRACT NO. 90 WITH SPERRY RAND (FORMERLY REMINGTON RAND) CORPORATION EFFECTIVE SEPTEMBER 9, 1955. THIS SUBCONTRACT WAS A FIXED-PRICE AGREEMENT UNDER WHICH SPERRY RAND AGREED TO DESIGN, MANUFACTURE AND DELIVER TO THE LAWRENCE RADIATION LABORATORY A LARGE SCALE, HIGH SPEED DIGITAL COMPUTER KNOWN AS THE "LARC" FOR A PRICE OF $2,895,000 PLUS INCIDENTAL COSTS NOT HERE RELEVANT. IT WAS PROVIDED IN THE SUBCONTRACT THAT THE DESIGN OF THE COMPUTER WOULD BE FROZEN AND CONSTRUCTION WOULD BEGIN WITH SIX SUBCONTRACT, AND THAT THE DELIVERY DATE WOULD BE 29 MONTHS FROM THE DATE OF SUCH RECEIPT. (A FULLY EXECUTED SUBCONTRACT WAS RECEIVED BY SPERRY RAND ON SEPTEMBER 9, 1955). THE SUBCONTRACT FURTHER PROVIDED THAT TIME WAS OF THE ESSENCE OF THE SUBCONTRACT. THE INSTALLATION PERIOD WAS NOT FIXED BUT WAS ESTIMATED TO REQUIRE TWO MONTHS FOLLOWING DELIVERY.

IT IS FURTHER REPORTED THAT AFTER CONSIDERABLE NEGOTIATION, THE DESIGN OF LARC WAS AGREED UPON AND BY AMENDMENT NO. 1 (EFFECTIVE MARCH 9, 1956), THE DESIGN WAS FROZEN. ON JANUARY 25, 1957, THE PARTIES ENTERED INTO AMENDMENT NO. 2 WHICH ADDED A HIGH SPEED PRINTING CURVE PLOTTING OUTPUT DEVICE WITH ASSOCIATED EQUIPMENT TO RECORD THE OUTPUT DATA FROM THE LARC COMPUTING SYSTEM AND INCREASED THE CONTRACT PRICE TO $3,308,194.34, PLUS INCIDENTAL COSTS NOT HERE RELEVANT. NEITHER AMENDMENT, IT IS STATED, PROVIDED AN EXTENSION OF TIME.

UNDER THE TERMS OF THE SUBCONTRACT, DELIVERY OF LARC WAS REQUIRED BY FEBRUARY 9, 1958 (29 MONTHS AFTER SEPTEMBER 9, 1955). HOWEVER, DELIVERY ACTUALLY OCCURRED ON MAY 13, 1960. IT IS REPORTED THAT THE DELAY IN DELIVERY WAS CAUSED BY (1) DISAPPOINTMENT BY SPERRY RAND IN THE PERFORMANCE OF PRODUCTION RUN COMPONENTS FURNISHED BY ITS SUPPLIERS, WHICH IN MANY CASES FAILED TO MEET THE EXACTING REQUIREMENTS OF LARC; (2) UNDERESTIMATION BY SPERRY RAND OF THE ENGINEERING AND OTHER TECHNICAL COMPLEXITIES INVOLVED; AND (3) THE INSTITUTION BY SPERRY RAND OF A BUDGETARY CURTAILMENT OR LARC WHICH WAS IMPOSED AS THE RESULT OF IMPAIRMENT OF WORKING CAPITAL, THE 1957 1958 RECESSION, AND THE LARGE MONTHLY LOSSES INCURRED ON THE LARC PROJECT.

DURING THE RELIABILITY TESTING OF LARC AND PRIOR TO FINAL ACCEPTANCE OF THE COMPUTER ON APRIL 20, 1961, THE UNIVERSITY SUBMITTED A "RELEASE OF ALL CLAIMS BY SUBCONTRACTORS" TO SPERRY RAND FOR EXECUTION UPON FINAL PAYMENT OF THE $330,819.44 BEING WITHHELD BY THE UNIVERSITY FROM SPERRY RAND UNDER THE SUBCONTRACT. THE GENERAL COUNSEL OF SPERRY RAND PROPOSED IN A REPLY THAT THE COMPANY WOULD EXECUTE THE RELEASE UPON THE CONDITION THAT IT BE MADE A PART OF A MUTUAL RELEASE PROVIDING ADDITIONALLY THAT "ANY AND ALL CLAIMS WHATSOEVER BETWEEN THE REGENTS OF THE UNIVERSITY OF CALIFORNIA AND THE ATOMIC ENERGY COMMISSION GROWING OUT OF THE EXTENDED DELIVERY DATE UNDER SUBCONTRACT NO. 90 ARE BY THESE PRESENTS FULLY RELEASED.

BY LETTER DATED APRIL 30, 1962, SPERRY RAND'S COUNSEL SUBMITTED A BRIEF ARGUMENT FOR THE EXCUSE OF SPERRY RAND'S DELAY TOGETHER WITH A STATEMENT READING AS FOLLOWS:

"AS ADDITIONAL GROUNDS IN SUPPORT OF EXECUTION BY THE GOVERNMENT OF THE JOINT RELEASE NOW IN YOUR HANDS, REFERENCE IS MADE TO THE FACT THAT THE CONTRACTOR SUFFERED A LOSS OF TEN MILLION DOLLARS IN THE PERFORMANCE OF THE ATOMIC ENERGY LARC CONTRACT. THE CONTRACTOR HAS A CLAIM PENDING FOR THAT AMOUNT WHICH, IN THE ABSENCE OF A JOINT RELEASE AND PROMPT PAYMENT TO THE CONTRACTOR OF THE BALANCE DUE IT ON THE CONTRACT PRICE, WILL BE VIGOROUSLY PROSECUTED. THE UNDERSIGNED BELIEVES THAT THERE ARE GOOD LEGAL BASES FOR THE CONTRACTOR'S CLAIM AND THAT THE GOVERNMENT MIGHT HAVE TO PAY AN ADDITIONAL TEN MILLION DOLLARS IF SETTLEMENT IS NOT MADE ON THE BASIS OF THE CONTRACT.

ON MARCH 5, 1963, THE BOARD OF REGENTS OF THE UNIVERSITY FORMALLY ASSIGNED TO THE AEC ALL ITS RIGHTS, CLAIMS AND CAUSES OF ACTION AGAINST SPERRY RAND ARISING OUT OF OR UNDER SUBCONTRACT NO. 90. MORE RECENTLY, IT IS REPORTED, THE UNIVERSITY HAS COMPLETED ITS COMPUTATION OF THE DAMAGES OCCASIONED BY SPERRY RAND'S LATE DELIVERY OF THE LARC. TWO APPROACHES WERE USED IN CALCULATING DAMAGES: (1) AN ESTIMATE OF THE ACTUAL OUT-OF- POCKET COSTS INCURRED BY THE UNIVERSITY DURING AND AS A RESULT OF THE DELAY, AND (2) AN ESTIMATE OF THE RENTAL VALUE (AS ESTIMATED BY SPERRY RAND IN 1959) OF THE LARC COMPUTER FOR THE PERIOD OF DELAY. THE FIGURE ARRIVED AT BY UTILIZATION OF THESE TWO APPROACHES IS $4,000,000 UNDER THE FORMER AND $7,000,000 UNDER THE LATTER. IT IS STATED THAT THERE IS REASON TO BELIEVE, AS SHOWN IN AN ENCLOSED AEC LEGAL MEMORANDUM, THAT THE RENTAL VALUE OF THE LARC COMPUTER FOR THE PERIOD OF DELAYED DELIVERY WOULD BE THE PROPER MEASURE OF DAMAGES IF THE AEC'S CLAIM AGAINST SPERRY RAND WERE SUCCESSFULLY PROSECUTED TO JUDGMENT.

AFTER A COMPREHENSIVE DISCUSSION OF THE LEGAL PRINCIPLES AND AUTHORITIES INVOLVED IN THE MATTER, THE GENERAL COUNSEL'S LETTER CONCLUDES AS FOLLOWS:

AS NOTED ABOVE, TWO OF THE THEORIES UPON WHICH SPERRY RAND HAS INDICATED IT MIGHT RELY IN OPPOSING A SUIT BY THE GOVERNMENT, NAMELY, THE DOCTRINES OF IMPOSSIBILITY OF PERFORMANCE AND MUTUAL MISTAKE, MAY NOT ONLY BE GROUNDS FOR EXCUSING NONPERFORMANCE OR LATER PERFORMANCE, BUT MAY ALSO ENABLE THE PARTY WHOSE PERFORMANCE PROVED UNEXPECTEDLY COSTLY TO RECOUP SOME OR ALL OF HIS LOSSES. ALSO AS EXPLAINED ABOVE, THE COURTS IN THE JURISDICTION WHOSE LAW WOULD PROBABLY GOVERN IN ANY SUCH LITIGATION HAVE DEMONSTRATED A SOMEWHAT LIBERAL ATTITUDE WITH RESPECT TO EXCUSING PERFORMANCE AND ALLOWING RECOVERY OF LOSSES ON THE GROUND OF IMPOSSIBILITY OF PERFORMANCE. IN THE PRESENT CASE, SPERRY RAND'S LOSSES ON THE SUBCONTRACT ARE KNOWN TO BE VERY SUBSTANTIAL AND MAY, IN FACT, APPROACH THE $12 MILLION FIGURE ADVANCED BY SPERRY RAND'S COUNSEL. AND, ALTHOUGH SPERRY RAND WAS AWARE IN ADVANCE OF ENTERING INTO THE SUBCONTRACT THAT IT WOULD BEAR SOME LOSS IN COMPLETING THE CONTRACT (BOTH SPERRY RAND AND IBM, THE ONLY OTHER COMPANY SUBMITTING A BID ON THE PROJECT, ADVISED THE UNIVERSITY THAT THEIR BIDS REPRESENTED SUBSTANTIAL FINANCIAL CONTRIBUTION BY THEM AND THAT THE PRICES QUOTED WERE CONSIDERABLY LESS THAN THE ACTUAL COSTS OF THE COMPUTER BID UPON), THERE IS AN ABUNDANCE OF EVIDENCE THAT THE LOSS ULTIMATELY INCURRED BY SPERRY RAND GREATLY EXCEEDED THAT WHICH IT CONTEMPLATED AT THE TIME OF CONTRACTING. WE ARE CONVINCED, THEREFORE, THAT SPERRY RAND'S CLAIM OF HUGE LOSSES ON THE SUBCONTRACT IS NOT FRIVOLOUS. MOREOVER, WE DO NOT BELIEVE THAT SPERRY RAND'S ASSERTION THAT IT HAS A CLAIM WHICH IT IS PREPARED TO PRESS IF THE AEC INITIATES SUIT WAS AN AFTER-THOUGHT, A MERE STRATAGEM TO DISCOURAGE THE UNIVERSITY (AND LATER THE AEC) FROM INITIATING LITIGATION. EVEN BEFORE CONSTRUCTION OF LARC WAS COMPLETE AND DELIVERY MADE, REPRESENTATIVES OF SPERRY RAND APPROACHED THE UNIVERSITY ON SEVERAL OCCASIONS TO DISCUSS A POSSIBLE CLAIM BY SPERRY RAND UNDER THE DISPUTES PROCEDURE FOR AN EQUITABLE ADJUSTMENT IN THE PURCHASE PRICE OF LARC * * *.

VIEWED IN THE LIGHT OF ABSTRACT LEGAL PRINCIPLES THE GOVERNMENT'S CLAIM AGAINST SPERRY RAND FOR ITS PROLONGED DELAY IN PERFORMANCE APPEARS TO OFFER AT LEAST AN EVEN CHANCE OF SUCCESS IF SUBMITTED TO A COURT TEST. THERE ARE, HOWEVER, ACKNOWLEDGED AREAS OF WEAKNESS IN THE GOVERNMENT'S CLAIM WHICH MAKE IT VIRTUALLY IMPOSSIBLE TO PREDICT WITH REASONABLE CONFIDENCE WHAT A COURT WOULD DO IF PRESENTED WITH THE QUESTION. MOREOVER, SPERRY RAND'S POSITION IS NOT WITHOUT SUBSTANTIAL EQUITABLE APPEAL (NOR, AS EXPLAINED ABOVE, IS IT COMPLETELY WITHOUT SUPPORT IN THE CASES). RATHER THAN CEASING ITS ENDEAVORS TO CONSTRUCT THE COMPUTER AND HAVING THE SUBCONTRACT TERMINATED FOR DEFAULT IN EARLY 1958, WHEN THE UNIVERSITY WOULD HAVE BEEN HARD PRESSED TO ESTABLISH ACTUAL DAMAGES, SPERRY RAND CONTINUED ITS GOOD FAITH AND VERY COSTLY EFFORTS TO BUILD A COMPUTER WHICH, AT THE TIME SUBCONTRACT NO. 90 WAS LET, WAS UNDOUBTEDLY THE MOST ADVANCED COMPUTER THEN CONCEIVED, AND WHICH, WHEN SUCCESSFULLY COMPLETED, MORE THAN SATISFIED SPECIFICATIONS. IN THESE CIRCUMSTANCES, A SUIT BY THE GOVERNMENT FOR VERY SUBSTANTIAL DAMAGES MIGHT WELL GIVE THE IMPRESSION OF OVERREACHING AND PROMPT A COURT SYMPATHETIC TO SPERRY RAND'S POSITION TO LOOK WITH AN EXTREMELY CRITICAL EYE UPON THE GOVERNMENT'S CLAIM AND WITH FAVOR UPON THE COUNTERCLAIM THAT SPERRY RAND ASSURES IT WILL "VIGOROUSLY PROSECUTE" IF SUED IN THIS MATTER. THESE CONSIDERATIONS RAISE SERIOUS QUESTIONS IN OUR MIND AS TO THE PRESENT ADVISABILITY OF INSTITUTING A SUIT FOR RECOVERY ON THE GOVERNMENT'S CLAIM.

REMAINING FULLY COGNIZANT OF THE CONSIDERATIONS SET FORTH ABOVE, IT MUST ALSO BE RECOGNIZED THAT THE AEC SUSTAINED SUBSTANTIAL DAMAGES IN THIS MATTER AS A RESULT OF THE UNIVERSITY'S RENTAL OF SUBSTITUTE COMPUTER EQUIPMENT DURING THE PERIOD OF SPERRY RAND'S DELAY. WHILE, AS INDICATED, SUIT FOR THE FULL AMOUNT OF THESE DAMAGES MIGHT WELL PROVE UNSUCCESSFUL, THE GOVERNMENT'S POSITION, IN OUR OPINION, HAS SUFFICIENT MERIT TO WARRANT SEEKING BY NEGOTIATED SETTLEMENT A LESSER THOUGH STILL SUBSTANTIAL AMOUNT. * * *

WE HAVE REVIEWED THE FILE TRANSMITTED WITH THE GENERAL COUNSEL'S LETTER AND AGREE WITH THE OPINION OF YOUR GENERAL COUNSEL THAT, WHILE THERE ARE AREAS OF WEAKNESS IN THE GOVERNMENT'S CLAIM, THE GOVERNMENT'S POSITION HAS SUFFICIENT MERIT TO WARRANT SEEKING BY NEGOTIATED SETTLEMENT A LESSER THOUGH STILL SUBSTANTIAL AMOUNT. ACCORDINGLY, OUR OFFICE WOULD INTERPOSE NO OBJECTION TO THE PROPOSED ATTEMPT TO NEGOTIATE A SETTLEMENT WITH SPERRY RAND WHICH WOULD RESULT IN THE REDUCTION OF THE LARC CONTRACT PRICE IN AN AMOUNT WHICH IS IN THE RANGE SUGGESTED IN YOUR GENERAL COUNSEL'S LETTER. HOWEVER, SINCE ANY AGREEMENT REACHED WITH SPERRY RAND ON THE MATTER WOULD, IN EFFECT, BE A COMPROMISE SETTLEMENT, OUR OFFICE WOULD BE REQUIRED TO RECOMMEND ITS ACCEPTANCE OR REJECTION TO THE DEPARTMENT OF JUSTICE. ACCORDINGLY, IF AND WHEN A TENTATIVE AGREEMENT IS REACHED WITH SPERRY RAND IT SHOULD BE SUBMITTED TO OUR OFFICE IN THE FORM OF AN OFFER BY SPERRY RAND, TOGETHER WITH THE RECOMMENDATION OF YOUR AGENCY AND ALL PAPERS AND DOCUMENTS WHICH MAY BE ..END :