B-164243, JUNE 20, 1968, 47 COMP. GEN. 756

B-164243: Jun 20, 1968

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HIGHWAYS - CONSTRUCTION - FEDERAL AID HIGHWAY PROGRAM - COST CONTRIBUTIONS - DAMAGE AWARD ALTHOUGH A DAMAGE AWARD IS NOT CONSIDERED A RECOGNIZABLE ELEMENT OF COST TO BE SHARED BY THE FEDERAL GOVERNMENT UNDER A FEDERAL-AID HIGHWAY AGREEMENT. IF THE FEDERAL HIGHWAY ADMINISTRATOR DETERMINES THE EVIDENCE SUPPORTING THE CONTRACTOR'S CLAIM WAS PROPERLY EVALUATED AND THE AMOUNT OF DAMAGES AWARDED CONSTITUTED A REASONABLE COST ELEMENT OF THE PROJECT. 900 WAS TO BE BORNE BY THE FEDERAL GOVERNMENT. THE AGREEMENT FURTHER STIPULATED THAT FEDERAL FUNDS WERE OBLIGATED FOR THE PROJECT AT NOT TO EXCEED THE AMOUNT SHOWN THEREIN. THE AMOUNTS STATED IN THE PROJECT AGREEMENT WERE BASED UPON A CONTRACT FOR CONSTRUCTION IN THE AMOUNT OF $4.

B-164243, JUNE 20, 1968, 47 COMP. GEN. 756

HIGHWAYS - CONSTRUCTION - FEDERAL AID HIGHWAY PROGRAM - COST CONTRIBUTIONS - DAMAGE AWARD ALTHOUGH A DAMAGE AWARD IS NOT CONSIDERED A RECOGNIZABLE ELEMENT OF COST TO BE SHARED BY THE FEDERAL GOVERNMENT UNDER A FEDERAL-AID HIGHWAY AGREEMENT, IF THE FEDERAL HIGHWAY ADMINISTRATOR DETERMINES THE EVIDENCE SUPPORTING THE CONTRACTOR'S CLAIM WAS PROPERLY EVALUATED AND THE AMOUNT OF DAMAGES AWARDED CONSTITUTED A REASONABLE COST ELEMENT OF THE PROJECT, THE AGREEMENT MAY BE MODIFIED TO RECOGNIZE THAT THE ADDITIONAL COSTS AWARDED THE CONTRACTOR STEMMED FROM RELIANCE UPON AN ERRONEOUS "SOIL PROFILE" FURNISHED BIDDERS BY THE STATE, AND THAT THIS INFORMATION NO DOUBT CONTRIBUTED TO AN UNREALISTICALLY LOW INITIAL CONTRACT PRICE.

TO T. R. MCVEY, DEPARTMENT OF TRANSPORTATION, JUNE 20, 1968:

BY LETTER OF APRIL 23, YOU REQUESTED OUR OPINION AS TO THE PROPRIETY OF CERTIFYING FOR PAYMENT A VOUCHER COVERING THE AMOUNT OF $652,500 CLAIMED BY THE COMMONWEALTH OF PENNSYLVANIA ON FEDERAL AID PROJECT I 81-1/4/45 UNDER THE FOLLOWING FACTS AND CIRCUMSTANCES.

ON JUNE 21, 1960, THE FEDERAL GOVERNMENT AND THE COMMONWEALTH OF PENNSYLVANIA, DEPARTMENT OF HIGHWAYS, ENTERED INTO A PROJECT AGREEMENT COVERING CONSTRUCTION OF A PORTION OF THE NATIONAL SYSTEM OF INTERSTATE AND DEFENSE HIGHWAYS (INTERSTATE SYSTEM) DESIGNATED AS PROJECT NO. I 81- 1/4/45. THE AGREEMENT STIPULATED THE ESTIMATED TOTAL COST OF THE PROJECT AT $5,641,000 OF WHICH 90 PERCENT OR $5,076,900 WAS TO BE BORNE BY THE FEDERAL GOVERNMENT. THE AGREEMENT FURTHER STIPULATED THAT FEDERAL FUNDS WERE OBLIGATED FOR THE PROJECT AT NOT TO EXCEED THE AMOUNT SHOWN THEREIN.

THE AMOUNTS STATED IN THE PROJECT AGREEMENT WERE BASED UPON A CONTRACT FOR CONSTRUCTION IN THE AMOUNT OF $4,531,280.13 WHICH HAD BEEN AWARDED BY THE STATE DEPARTMENT OF HIGHWAYS, WITH FEDERAL CONCURRENCE, TO THE FIRM C.J. LAGENFELDER AND SON, INC., PLUS AMOUNTS OF $453,119.87 FOR ENGINEERING AND CONTINGENCY COSTS AND $656,600 FOR RIGHT-OF-WAY ACQUISITIONS FOR THE TOTAL OF $5,641,000.

AS THE RESULT OF A DISPUTE WHICH AROSE BETWEEN THE PARTIES TO THE CONTRACT, THE CONTRACTOR, PURSUANT TO CONTRACT PROVISIONS FOR SETTLING DISPUTES, BROUGHT AN ACTION AGAINST THE STATE BEFORE THE PENNSYLVANIA BOARD OF ARBITRATION OF CLAIMS REQUESTING ADDITIONAL COMPENSATION.

THE BOARD AWARDED $880,296.82 TO THE CONTRACTOR AND THE STATE APPEALED TO THE COURT OF COMMON PLEAS OF DAUPHIN COUNTY, PENNSYLVANIA. THE COURT FOUND THAT THE FACTS AS DETERMINED BY THE BOARD WERE SUPPORTED BY SUBSTANTIAL EVIDENCE AND THAT ITS CONCLUSIONS OF LAW WERE CONSISTENT WITH THE FACTS DETERMINED. IT WAS THE CONSIDERED JUDGMENT OF STATE LEGAL ADVISERS THAT A PETITION FOR WRIT OF CERTIORARI TO THE SUPREME COURT OF PENNSYLVANIA WOULD RESULT EITHER IN DENIAL OR, IF GRANTED, AFFIRMANCE OF THE RULINGS BY THE BOARD AND DAUPHIN COUNTY COURT. THE CASE WAS SETTLED FOR $725,000 ON THE BASIS THAT A WRIT OF CERTIORARI WOULD NOT BE SOUGHT.

THE ESSENTIAL CLAIM OF THE CONTRACTOR AROSE OUT OF ROCK EXCAVATION ENCOUNTERED ON THE PROJECT SUBSTANTIALLY IN EXCESS OF THAT SHOWN TO BE REQUIRED BY A SOIL PROFILE FURNISHED BY THE STATE DEPARTMENT OF HIGHWAYS.

THE BID PROPOSAL FOR THE CONTRACT IN QUESTION CONSISTED OF A COPY OF THE CONTRACT, THE CONSTRUCTION DRAWINGS, AND SPECIFICATIONS. IN ADDITION TO THE BID PROPOSAL, THE STATE ALSO ADVISED BIDDERS THAT, UPON REQUEST, THE DEPARTMENT OF HIGHWAYS WOULD SUPPLY BIDDERS WITH A COPY OF "SOIL PROFILE" AND LANGENFELDER, THE ULTIMATE CONTRACTOR, OBTAINED A COPY. THIS SOIL PROFILE HAD BEEN PREPARED FOR THE DEPARTMENT BY ENGINEERS WHO HAD ALSO PREPARED AN ACCOMPANYING "SOIL SURVEY REPORT.' THE SOIL SURVEY REPORT, WHICH WAS NOT MADE AVAILABLE TO BIDDERS, INCLUDED A STATEMENT THAT THE DEPTH TO TOP OF ROCK AS SHOWN ON THE SOIL PROFILE MIGHT BE GREATLY IN ERROR.

THE DEPARTMENT OF HIGHWAYS ARGUED THAT BIDDERS WERE ON NOTICE THAT THE SOIL PROFILE WAS NOT TO BE RELIED UPON AND WAS NOT TO BE CONSIDERED A PART OF THE PLANS NOR AS A FACTOR IN COMPUTING BID PRICES.

THE CONTRACTOR SUCCESSFULLY CONTENDED THAT THE SOIL PROFILE FURNISHED BY THE DEPARTMENT WAS IN ERROR AND THAT SINCE SUFFICIENT TIME FOR HIM TO CONDUCT HIS OWN INVESTIGATION OF SUBSURFACE CONDITIONS WAS NOT ALLOWED, THE DEPARTMENT'S FAILURE TO FURNISH THE REPORT INDICATING ERROR IN THE SOIL PROFILE WAS TANTAMOUNT TO FRAUD BY CONCEALMENT.

IN LIGHT OF THE FACT THAT THE CONTRACTOR'S CLAIM WAS ALLOWED BY PROPER ADMINISTRATIVE PROCESS AND AFFIRMED BY A COURT OF COMPETENT JURISDICTION, WE CANNOT TAKE ISSUE ON THE QUESTION OF THE STATE'S LEGAL OBLIGATION. NOR, ON THE BASIS OF THE RECORD BEFORE US, CAN WE QUESTION THE VIGOR OF THE STATE'S DEFENSE OR THE SOUNDNESS OF THE DETERMINATION FOR SETTLING THE CLAIM WITHOUT SEEKING FURTHER REVIEW.

UNDER THE AGREEMENT BETWEEN THE COMMONWEALTH OF PENNSYLVANIA AND THE FEDERAL GOVERNMENT COVERING THE PROJECT IN QUESTION, THE MAXIMUM FEDERAL OBLIGATION IS FIXED. THE AGREEMENT ESTABLISHES THE BASIS UPON WHICH THE FEDERAL CONTRIBUTION TOWARD CONSTRUCTION OF THE PROJECT WILL BE MADE. THE PROJECT ITSELF IS A STATE PROJECT, THE FEDERAL GOVERNMENT NOT BEING A PARTY TO THE CONTRACT FOR CONSTRUCTION AND THE STATE NOT ACTING AS AGENT FOR THE FEDERAL GOVERNMENT. THE FEDERAL GOVERNMENT, THEREFORE, IS NOT LIABLE TO CONTRACTORS FOR WRONGFUL ACTS OR OMISSIONS OF STATES IN CONNECTION WITH THEIR CONTRACTS. SEE D.R. SMALLEY AND SONS, INC. V UNITED STATES, 178 CT. CL. 593, 372 F.2D 505. WE FIND NO REASONABLE BASIS FOR FINDING THAT THE FEDERAL GOVERNMENT WOULD NEVERTHELESS BE LIABLE TO A STATE FOR INCREASED PROJECT COSTS OCCASIONED BY ITS OWN NEGLIGENCE.

IN OUR OPINION, HOWEVER, THE REAL QUESTION POSED BY THE INSTANT SITUATION IS NOT WHETHER THE FEDERAL GOVERNMENT IS LEGALLY LIABLE FOR A PROPORTIONATE SHARE OF THE AMOUNT FOR WHICH THE CONTRACTOR'S CLAIM WAS SETTLED BY THE COMMONWEALTH OF PENNSYLVANIA, BUT RATHER, IT IS WHETHER AUTHORITY EXISTS FOR A VOLUNTARY MODIFICATION OF THE PROJECT AGREEMENT BY THE FEDERAL GOVERNMENT TO RECOGNIZE THE ADDITIONAL COST INCURRED BY THE STATE.

ORDINARILY, WHERE EXCESS COSTS ARE INCURRED BY REASON OF STATE NEGLIGENCE GIVING RISE TO JUSTIFIED CLAIMS FOR DAMAGES, IT WOULD NOT BE APPROPRIATE TO INCREASE CORRESPONDINGLY THE FEDERAL CONTRIBUTION, SINCE SUCH INCREASED COSTS ARE GENERALLY AVOIDABLE AND WOULD NOT BE INCURRED BUT FOR THE STATE'S IMPROPER ACTION OR INACTION. HERE, THOUGH, THERE IS AT LEAST ROOM FOR ARGUING THAT THE STATE'S ACTIONS SERVED TO RESULT IN A CONTRACT PRICE WHICH INITIALLY WAS UNREALISTICALLY LOW. IF THE STATE HAD NOT WITHHELD THE SOIL SURVEY REPORT, THERE IS REASON TO CONJECTURE THAT THE INITIAL CONTRACT PRICE WOULD HAVE BEEN HIGHER. IN OTHER WORDS, RATHER THAN BEING FACED WITH A SITUATION WHERE THE STATE'S ACTIONS HAVE RESULTED IN OTHERWISE AVOIDABLE INCREASED COSTS, WE HAVE SITUATION WHERE THE STATE WAS NOT ALLOWED TO TAKE ADVANTAGE OF A POSSIBLY LOWER CONTRACT PRICE ARRIVED AT ON THE BASIS OF MISINFORMATION. MOREOVER, AND PERHAPS MOST SIGNIFICANT, IF THE BOARD OF ARBITRATION WAS CORRECT ON THE FACTS, ONCE THE CONTRACT WAS ENTERED INTO, THERE WAS NO WAY IN WHICH THE STATE COULD HAVE AVOIDED THE ADDITIONAL AMOUNT IT WAS REQUIRED TO PAY, SUCH ADDITIONAL AMOUNT HAVING STEMMED FROM THE VERY BASIS UPON WHICH THE CONTRACT WAS AWARDED.

THERE IS NO INDICATION IN THE RECORD THAT THE STATE'S ACTION IN AWARDING THE CONTRACT WAS, IN FACT, FRAUDULENTLY CONCEIVED, DESPITE THE LEGAL CONCLUSION THAT A CONSTRUCTIVE FRAUD WAS PERPETRATED ON THE CONTRACTOR. IN VIEW OF THE FEDERAL GOVERNMENT'S APPROVAL OF THE CONTRACT AWARD AND OF THE CLOSE RELATIONSHIP EXISTING BETWEEN THE FEDERAL GOVERNMENT AND THE VARIOUS STATES IN PROSECUTION OF THE FEDERAL-AID HIGHWAY PROGRAM, THE FEDERAL GOVERNMENT MIGHT WELL RECOGNIZE BY APPROPRIATE MODIFICATION OF ITS PROJECT AGREEMENT AN INCREASE IN COSTS WHICH FLOWED INEVITABLY, IN LIGHT OF SOIL CONDITIONS ENCOUNTERED BY THE CONTRACTOR, FROM THE CIRCUMSTANCES SURROUNDING AWARD OF THE CONTRACT. WHETHER THE INCREASED COSTS SHOULD BE SO RECOGNIZED WOULD DEPEND UPON ADMINISTRATIVE CONCLUSIONS CONCERNING THE FACTUAL BASIS UPON WHICH THE BOARD OF ARBITRATION MADE ITS AWARD AND THE PROPRIETY THEREOF.

IN THE FINAL ANALYSIS WHAT WE HAVE HERE IS A SITUATION WHERE THE STATE AND THE FEDERAL GOVERNMENT HAVE AGREED TO THE CONSTRUCTION OF A STATE HIGHWAY PROJECT WITH THE FEDERAL GOVERNMENT AGREEING TO REIMBURSE THE STATE A PORTION OF THE COSTS INVOLVED AT CERTAIN STIPULATED APPROVED AMOUNTS. UNDER SECTION 106 OF TITLE 23, U.S.C. APPROVAL OF THE PROJECT CONSTITUTED A CONTRACTUAL OBLIGATION OF THE FEDERAL GOVERNMENT FOR PAYMENTS OF ITS PROPORTIONAL CONTRIBUTION THERETO AND THIS OBLIGATION WAS REDUCED TO PRECISE TERMS IN THE FORMAL PROJECT AGREEMENT CALLED FOR BY SECTION 110. A STATE COURT HAS DECREED THAT THE STATE IS LIABLE TO THE CONTRACTOR INVOLVED FOR AN AMOUNT SIGNIFICANTLY IN EXCESS OF THE COSTS UPON WHICH THE FEDERAL STATE AGREEMENT FOR COST-SHARING WAS BASED. IT IS TRUE THAT THE STATE, BEING BOUND BY COURT RULING, IS CAUGHT IN THE MIDDLE, IF THE FEDERAL GOVERNMENT REFUSES TO RECOGNIZE THE PROPRIETY OF THE STATE COURT RULING. BUT THE FEDERAL GOVERNMENT IS NOT A VITAL PARTY TO THE CONTRACTOR'S ACTION AGAINST THE STATE; AND TO REQUIRE A MODIFICATION BY THE FEDERAL GOVERNMENT OF THE PROJECT AGREEMENT ON THE BASIS OF STATE COURT CONCLUSIONS WITH WHICH IT DOES NOT AGREE IS TO PLACE THE FEDERAL GOVERNMENT IN A SIMILARLY UNTENABLE POSITION.

IN OUR OPINION, THE FEDERAL GOVERNMENT MAY NOT PROPERLY BE DENIED BY STATE COURT RULINGS OF ITS ADMINISTRATIVE CONTROL OVER THE EXPENDITURE OF FEDERAL FUNDS WHERE SUCH RULINGS RELATE TO ELEMENTS OF COST BEYOND THOSE IN WHICH THE FEDERAL GOVERNMENT HAS AGREED TO SHARE. SEE COMMONWEALTH OF MASSACHUSETTS V CONNER, (1966) 248 F.SUPP. 656, 659, AFFIRMED 366 F.2D 778, WHERE THE COURT TATES: "* * * CERTAINLY IT IS NOT PLAIN FROM THE WORDING OF ACT WHETHER HE (THE SECRETARY OF COMMERCE) MUST, AS MASSACHUSETTS CONTENDS, ACCEPT A STATE COURT JUDGMENT AS FINAL * * *.' SEE ALSO 9 COMP. GEN. 175 WHEREIN WE HELD IN 1929 UNDER THEN EXISTING FEDERAL-AID ROAD LEGISLATION THAT THERE IS NO OBLIGATION ON THE PART OF THE UNITED STATES TO PAY TO A STATE ANY SUM IN ADDITION TO THE APPROVED ESTIMATE FOR CONSTRUCTION OF A FEDERAL AIDED HIGHWAY.

HOWEVER, IF THE FEDERAL HIGHWAY ADMINISTRATOR, AFTER CONSIDERATION OF THE FACTS AND CIRCUMSTANCES WHICH LED TO THE SUCCESSFUL PROSECUTION OF THE CONTRACTOR'S CLAIM AGAINST THE STATE, DETERMINES THAT THE BOARD OF ARBITRATION PROPERLY EVALUATED THE EVIDENCE BEFORE IT AND THAT THE AMOUNT OF DAMAGES AGREED UPON CONSTITUTES A REASONABLE COST ELEMENT OF THE PROJECT INVOLVED, WE FIND NO LEGAL OBJECTION TO AN APPROPRIATE MODIFICATION OF THE PROJECT AGREEMENT TO REFLECT SUCH DETERMINATIONS. CF. OUR DECISIONS OF OCTOBER 11, 1967, B-162539; AND 47 COMP. GEN. 309 TO THE FEDERAL HIGHWAY ADMINISTRATOR, WHEREIN WE CONCLUDED THAT THE FEDERAL GOVERNMENT SHOULD SHARE IN RECOVERIES MADE BY STATES IN ANTITRUST PROCEEDINGS RELATED TO FEDERAL-AID HIGHWAY CONTRACTS.

THE QUESTION PRESENTED IS ANSWERED ACCORDINGLY; THE PAPERS ACCOMPANYING YOUR LETTER ARE RETURNED.