B-166950, DEC. 17, 1969

B-166950: Dec 17, 1969

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EXCESSIVE COSTS TO GOVERNMENT UPON TERMINATION FOR GOVERNMENT'S CONVENIENCE OF RESEARCH AND DEVELOPMENT COST-PLUS CONTRACT DUE TO EXCESSIVE UNAUTHORIZED OVERRUNS WHICH WERE PROHIBITED WITHOUT PRIOR APPROVAL. SETTLEMENT AGREEMENT WHICH WAS NEGOTIATED TO REIMBURSE CONTRACTOR FOR WORK PERFORMED REPRESENTED FULL AND COMPLETE SATISFACTION OF GOVT.'S OBLIGATION. CONTRACTORS CLAIM FOR ADDITIONAL OVERHEAD COSTS IS DENIED SINCE CONTRACT WHICH REFLECTS ACTUAL AGREEMENT OF PARTIES CANNOT BE REFORMED UNLESS MISTAKE OCCURRED IN REDUCING AGREEMENT TO WRITING BUT SINCE TERMINATION AGREEMENT EMBODIED ENTIRE AGREEMENT OF PARTIES AS INTENDED RELEASE CONSTITUTED FULL AMOUNT TO WHICH CONTRACTOR WAS ENTITLED.

B-166950, DEC. 17, 1969

TERMINATION--CONVENIENCE OF GOVERNMENT--EXCESSIVE COSTS TO GOVERNMENT UPON TERMINATION FOR GOVERNMENT'S CONVENIENCE OF RESEARCH AND DEVELOPMENT COST-PLUS CONTRACT DUE TO EXCESSIVE UNAUTHORIZED OVERRUNS WHICH WERE PROHIBITED WITHOUT PRIOR APPROVAL, SETTLEMENT AGREEMENT WHICH WAS NEGOTIATED TO REIMBURSE CONTRACTOR FOR WORK PERFORMED REPRESENTED FULL AND COMPLETE SATISFACTION OF GOVT.'S OBLIGATION, APPEAL TO ARMED SERVICES BOARD OF CONTRACT APPEALS HAVING BEEN WITHDRAWN SINCE NOT TIMELY FILED, AND CONTRACTORS CLAIM FOR ADDITIONAL OVERHEAD COSTS IS DENIED SINCE CONTRACT WHICH REFLECTS ACTUAL AGREEMENT OF PARTIES CANNOT BE REFORMED UNLESS MISTAKE OCCURRED IN REDUCING AGREEMENT TO WRITING BUT SINCE TERMINATION AGREEMENT EMBODIED ENTIRE AGREEMENT OF PARTIES AS INTENDED RELEASE CONSTITUTED FULL AMOUNT TO WHICH CONTRACTOR WAS ENTITLED.

TO V. KEITH YOUNG:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF MAY 12, 1969, AND SUBSEQUENT CORRESPONDENCE ON BEHALF OF GEO SPACE SYSTEMS, INC. (GEO), FORMERLY INSTRUMENT CORPORATION OF FLORIDA, CLAIMING AN ADDITIONAL $14,858.44 BY REASON OF CONTRACT NO. AF 19(628)-346, ISSUED BY THE UNITED STATES AIR FORCE.

THE SUBJECT CONTRACT, FOR RESEARCH AND DEVELOPMENT OF A GEODETIC STELLAR CAMERA SYSTEM ON A COST-PLUS-FIXED-FEE BASIS, WAS ENTERED INTO ON MARCH 26, 1962, WITH GEO. THE STIPULATED ESTIMATED COSTS AMOUNTED TO $83,017 AND THE FIXED FEE WAS $5,811. THEREAFTER, EFFECTIVE JANUARY 10, 1963, ADDITIONAL WORK WAS ADDED TO THE CONTRACT BY MODIFICATION NO. 1, INCREASING THE ESTIMATED COSTS TO $123,669, AND THE FIXED FEE TO $8,314. ALSO, NEW WORK WAS ADDED IN THE FIXED AMOUNT OF $48,500. IN ADDITION, CERTAIN EARLIER CONTRACT PROVISIONS WERE DELETED AND SUBSTITUTES WERE INSERTED. A NEW PART VI, ENTITLED "OVERHEAD" WAS ADDED WHICH PROVIDED IN PERTINENT PART AS FOLLOWS:

"A. EFFECTIVE WITH THIS MODIFICATION A NEGOTIATED FIXED CEILING OVERHEAD RATE OF 150% OF DIRECT LABOR DOLLARS AND A G&A RATE OF 14% WILL BE APPLICABLE, THROUGH THE COMPLETION DATE, SUCH RATES TO BE USED FOR APPLICATION PROSPECTIVELY PROVIDED THAT IN THE EVENT THE RATES DEVELOPED BY THE COGNIZANT AUDIT ACTIVITY ON THE BASIS OF ACTUAL ALLOWABLE COSTS ARE LESS THAN THE NEGOTIATED RATES, THE NEGOTIATED RATES WILL BE REDUCED ACCORDINGLY. THE GOVERNMENT WILL NOT BE OBLIGATED TO PAY ANY ADDITIONAL AMOUNT ON ACCOUNT OF OVERHEAD ABOVE THE NEGOTIATED FIXED CEILING RATES, NOR WILL ANY BURDEN COST INCURRED OVER AND ABOVE THE CEILING RATES ESTABLISHED IN THE CONTRACT BE APPLIED TO ANY OTHER GOVERNMENT CONTRACT."

THE GENERAL PROVISIONS INCORPORATED BY MODIFICATION NO. 1 INCLUDED A "LIMITATION OF COSTS" CLAUSE (FEBRUARY 1959 EDITION) REQUIRING (A) GEO TO NOTIFY THE CONTRACTING OFFICER IN WRITING WHEN IT HAD REASON TO BELIEVE THAT IT WOULD INCUR A COST OVERRUN, AND (B) PROVIDED THAT THE GOVERNMENT WAS NOT OBLIGATED TO REIMBURSE THE CONTRACTOR FOR SUCH AN OVERRUN UNLESS THE CONTRACTING OFFICER NOTIFIED THE CONTRACTOR THAT THE ESTIMATED COST HAD BEEN INCREASED.

THEREAFTER, ON NOVEMBER 1, 1963, AFTER GEO HAD BEEN REPEATEDLY REMINDED OF ITS RESPONSIBILITIES CONCERNING OVERRUNS, AND WHEN IT APPEARED THERE WAS TO BE AN UNAUTHORIZED OVERRUN OF APPROXIMATELY $75,000 THE CONTRACT WAS TERMINATED FOR THE CONVENIENCE OF THE GOVERNMENT. FOLLOWING THE TERMINATION, EXTENSIVE NEGOTIATIONS AND CORRESPONDENCE TOOK PLACE BETWEEN THE CONTRACTING OFFICER AND GEO CONCERNING THE TERMS OF THE FINAL SETTLEMENT. FINALLY, ON MAY 3, 1966, SUPPLEMENTAL AGREEMENT NUMBER 3 WAS EXECUTED BY THE PARTIES, WHEREIN, AMONG OTHER THINGS, THE PARTIES AGREED THAT THE BALANCE STATED AS BEING DUE GEO CONSTITUTED "PAYMENT IN FULL AND COMPLETE SETTLEMENT OF THE AMOUNTS DUE THE CONTRACTOR BY REASON OF THE COMPLETE TERMINATION OF WORK UNDER THE CONTRACT AND OF ALL OTHER CLAIMS AND LIABILITIES OF THE CONTRACTOR AND THE GOVERNMENT UNDER THE CONTRACT, EXCEPT AS HEREINAFTER PROVIDED IN ARTICLE 7." IN THIS REGARD, THE EXCLUSIONS OF ARTICLE 7 ARE NOT APPLICABLE.

DURING THE PERIOD OF NEGOTIATION OF THE TERMS OF SETTLEMENT OF THE TERMINATION AGREEMENT GEO WAS ISSUED A LETTER ON MAY 26, 1964, DETERMINING OVERHEAD RATES FOR THE YEAR ENDED JUNE 30, 1963, WHICH WERE GENERALLY HIGHER THAN THE RATES PROVIDED FOR IN THE CONTRACT.

ON NOVEMBER 9, 1966, SOME SIX MONTHS AFTER THE EFFECTIVE DATE OF SUPPLEMENTAL AGREEMENT NUMBER 3, GEO SUBMITTED A VOUCHER TO THE CONTRACTING OFFICER FOR ADDITIONAL OVERHEAD COSTS ($14,838.44) BY APPLYING THE ALLEGEDLY APPROPRIATE RATES IN LIEU OF PROVISIONAL RATES BILLED, FOR THE PERIODS OCTOBER 1, 1962 THROUGH JUNE 30, 1963, AND JULY 1, 1963 THROUGH OCTOBER 31, 1963, RESPECTIVELY. ON JANUARY 5, 1967, THE CONTRACTING OFFICER DISAPPROVED THE CLAIM FOR ADDITIONAL COSTS AS BEING IN EXCESS OF THE NEGOTIATED ESTIMATED CONTRACT COSTS THROUGH SUPPLEMENTAL AGREEMENT NUMBER 3. BY LETTER OF FEBRUARY 6, 1967, GEO APPEALED THE DECISION OF THE CONTRACTING OFFICER, AND ON APRIL 27, 1967, THE CONTRACTING OFFICER ISSUED WHAT HE TERMED A FINAL DECISION UNDER THE "DISPUTES" CLAUSE OF THE CONTRACT AGAIN DENYING THE REQUEST FOR ADDITIONAL PAYMENT, AND INFORMED GEO THAT THE DECISION COULD, PURSUANT TO THE "DISPUTES" CLAUSE, BE APPEALED WITHIN 30 DAYS FROM RECEIPT OF THE DECISION.

THE FACTS INDICATE THAT THE FINAL DECISION WAS RECEIVED BY YOUR CLIENT ON MAY 2, 1967. THEREAFTER, BY LETTER DATED JUNE 1, 1967, GEO FILED A NOTICE OF APPEAL FROM THE FINAL DECISION OF THE CONTRACTING OFFICER. HOWEVER, THE METERED POSTMARK ON THE ENVELOPE CONTAINING THE LETTER BORE A DATE OF JUNE 2, 1967, FROM MELBOURNE, FLORIDA. BASED ON THIS FACT THAT THE NOTICE OF APPEAL OCCURRED ON THE 31ST DAY, THE GOVERNMENT ON JULY 31, 1967, FILED A MOTION TO DISMISS THE APPEAL THEN PENDING BEFORE THE ARMED SERVICES BOARD OF CONTRACT APPEALS (BOARD) IN CASE NUMBER 12561. THE GOVERNMENT, ALSO FILED A MOTION TO DISMISS BASED UPON A PLEA IN BAR CONTENDING THAT THE TERMINATION AGREEMENT CONSTITUTED A FULL RELEASE, ACCORD AND SATISFACTION, AND A COMPLETE SETTLEMENT OF ALL AMOUNTS DUE UNDER THE CONTRACT. BEFORE THE DATE SET FOR THE HEARING OF THE AFORESAID MOTIONS, YOU WITHDREW THE APPEAL ON BEHALF OF GEO, AND ON SEPTEMBER 8, 1967, THE BOARD DISMISSED THE APPEAL WITH PREJUDICE. THERE THE MATTER RESTED UNTIL YOUR LETTER OF MAY 12, 1969, EARLIER REFERENCED, WAS TRANSMITTED TO OUR OFFICE.

THE BASIS OF YOUR CLAIM AS STATED IN YOUR REFERENCED LETTER IS:

"MY CLIENT'S CLAIM IS FOR $14,858.44 WHICH REPRESENTS BILLED BUT UNPAID OVERHEAD RATES WHICH WERE APPROVED BY THE GOVERNMENT.

"ON MAY 26, 1964, THE COGNIZANT GOVERNMENT CONTRACT MANAGEMENT AGENCY MADE A DETERMINATION OF OVERHEAD RATES FOR THE YEAR ENDING JUNE 30, 1964, * * *. THROUGH MISTAKE OUR CLIENT DID NOT RE-INVOICE AT THAT TIME TO REFLECT SAID ADJUSTMENT TO ITS RATES.

"ON OR ABOUT NOVEMBER 11, 1963, REFERENCED CONTRACT WAS TERMINATED AND ON OR ABOUT JUNE 1966, ENTERED INTO SUPPLEMENTAL AGREEMENT NO. 3, * * *.

"OBVIOUSLY, AT THE DATE OF SAID AGREEMENT'S EXECUTION, BOTH OUR CLIENT AND THE CONTRACTING OFFICER BELIEVED THAT THE AMOUNT OF MONIES PAID OUR CLIENT PURSUANT TO SAID AGREEMENT REPRESENTED FULL PAYMENT TO OUR CLIENT OF ALL MONEY IT WAS ENTITLED TO RECEIVE.

"THIS PROVED TO BE A MUTUAL MISTAKE, TO-WIT:

"SOMETIME AFTER JUNE 1966, A GOVERNMENT AUDITOR, * * * DISCOVERED THE MISTAKE AND OUR CLIENT TRANSMITTED A VOUCHER TO THE CONTRACTING OFFICER REFLECTING THE PROPER OVERHEAD ADJUSTMENTS, * * *. THIS WAS NOT PAID DUE TO THE FINAL RELEASE PROVISIONS OF SUPPLEMENTAL AGREEMENT NO. 3 WHICH DOES, WE AGREE, LIMIT A CONTRACTING OFFICER'S AUTHORITY."

ALSO IN YOUR LETTER OF SEPTEMBER 19, 1969, YOU STATED: "OUR POSITION IS THAT CLAUSE 102, ENTITLED 'NEGOTIATED OVERHEAD RATES,' SHOULD ALLOW THE REIMBURSEMENT OF THE AMOUNTS WE HAVE CLAIMED ON BEHALF OF OUR CLIENT."

CLAUSE 102 OF THE ADDITIONAL GENERAL PROVISIONS, UPON WHICH YOU RELY AS A BASIS OF RECOVERY, WAS SPECIFICALLY EXCLUDED FROM THE ORIGINAL CONTRACT PROVISIONS BY PART 1, PARAGRAPH A. LIKEWISE, THE GENERAL PROVISIONS ADOPTED BY MODIFICATION NO. 1 DID NOT CONTAIN SUCH A CLAUSE.

ADMINISTRATIVE OFFICERS OF THE GOVERNMENT ARE WITHOUT AUTHORITY TO REFORM CONTRACTS, AS REFORMATION OF CONTRACTS IS A JUDICIAL RATHER THAN ADMINISTRATIVE FUNCTION. 20 COMP. GEN. 782, 785 (1941). HOWEVER, SINCE THE GENERAL ACCOUNTING OFFICE HAS JURISDICTION TO MAKE FINAL SETTLEMENT BINDING ON THE EXECUTIVE BRANCH, THE PROCEDURE HAS LONG BEEN FOR THIS OFFICE TO AUTHORIZE CONTRACT REFORMATION IF THE FACTS SO JUSTIFY, THEREBY SAVING THE COSTS AND DELAYS OF COURT LITIGATION. 15 COMP. GEN. 238, 240 (1935).

THE RULE OF LAW IS THAT WHERE, BY REASONS OF MISTAKE, A CONTRACT AS REDUCED TO WRITING DOES NOT REFLECT THE ACTUAL AGREEMENT OF THE PARTIES, THE WRITTEN INSTRUMENT MAY BE REFORMED IF IT CAN BE ESTABLISHED WHAT THE ACTUAL AGREEMENT WAS. ACKERLIND V. UNITED STATES, 240 U.S. 531; 39 COMP. GEN. 363, 365 (1959); 30 COMP. GEN. 220, 221 (1950). WHILE A RELEASE, LIKE ANY CONTRACTUAL OBLIGATION, ALSO HAS FOR ITS PRIMARY RULE OF CONSTRUCTION THE INTENTION OF THE PARTIES, IT HAS BEEN HELD THAT SUCH INTENTION MUST BE ASCERTAINED FROM THE WORDS USED IN THE INSTRUMENT, AND NOT FROM MATTERS OUTSIDE OF THE INSTRUMENT. IN RE ATWATER ET AL; 266 F. 278, AFFIRMED 254 U.S. 423. THUS WE STATED IN 39 COMP. GEN. 660, 664 (1960):

"THE PURPOSE OF REFORMATION IS NOT TO MAKE A NEW AGREEMENT BETWEEN THE PARTIES, BUT, RATHER TO ESTABLISH THE TRUE EXISTING ONE; THAT IS, TO MAKE THE CONTRACT EXPRESS THE REAL AGREEMENT OF THE PARTIES. IN ORDER TO JUSTIFY REFORMATION OF ANY INSTRUMENT, THE MISTAKE MUST HAVE BEEN IN DRAWING THE INSTRUMENT AND NOT IN MAKING THE AGREEMENT ITSELF. THE MISTAKE MUST OCCUR IN REDUCING TO WRITING THE CONTRACT UPON WHICH THE PARTIES AGREED. REFORMATION IS NOT AUTHORIZED EVEN IF IT BE CLEARLY SHOWN THAT THE PARTIES WOULD HAVE COME TO A CERTAIN AGREEMENT HAD THEY BEEN AWARE OF THE ACTUAL FACTS. SEE SECTION 1548, WILLISTON ON CONTRACT (REV. ED)."

THE FINAL SETTLEMENT IN THIS CONTRACT, AS IN MOST CONTRACTS TERMINATED BY AGREEMENT OF THE PARTIES, WAS THE CULMINATION OF AN EXTENDED PERIOD OF NEGOTIATIONS BETWEEN THE PARTIES, AND WHEN FINALLY THE PARTIES FOUND THEMSELVES IN SUBSTANTIAL AGREEMENT AS TO THE AMOUNT WHICH WHEN PAID WOULD END ONCE AND FOR ALL THE GOVERNMENT'S OBLIGATIONS UNDER THE CONTRACT, PAYMENT WAS MADE AND A RELEASE EXECUTED. THUS, THE RELEASE WAS BY NO MEANS INTENDED ONLY AS A PART-WAY MEASURE BUT INDICATED, AS THE SUPREME COURT STATED IN UNITED STATES V. WILLIAM CRAMP & SONS CO; 206 U.S. 118, "A PURPOSE TO MAKE AN ENDING OF EVERY MATTER ARISING UNDER OR BY VIRTUE OF THE CONTRACT."

WITH RESPECT TO THE CONSIDERATION GENERALLY OF CLAIMS OF THE TYPE HERE PRESENTED, IN A DECISION PUBLISHED IN 23 COMP. DEC. 424 (1917), IT WAS STATED THAT:

"* * * THE RELEASE WENT TO THE MATTER AS A WHOLE AND NOT TO ONE ITEM ANY MORE OR LESS THAN TO ANOTHER. THE PROBABILITY OF UNKNOWN MISTAKES ON EITHER SIDE, IN COMPUTING THE AMOUNT TO BE PAID, WOULD BE ONE OF THE VERY REASONS FOR INCLUDING IT IN THE LEGAL EFFECT OF THE RELEASE, RATHER THAN OF EXCLUDING IT THEREFROM, OTHERWISE NOTHING WOULD BE SETTLED AND ITS SUBSTANTIAL LEGAL EFFECT WOULD BE GONE -- THAT THE VERITY OF THE FACTS WAS TO BE TAKEN AS THEN STATED AND THAT THE PARTIES HAD AGREED ON ALL THAT WAS TO BE PAID AND TO FOREVER PUT IT OUT OF POWER TO COMPEL THE PAYMENT OF ANYTHING MORE."

ON THE BASIS OF THE PRESENT RECORD IT MUST BE CONCLUDED THAT THE TERMINATION AGREEMENT, (SUPPLEMENTAL AGREEMENT NO. 3) AS EXECUTED, EMBODIED THE ENTIRE AGREEMENT OF THE PARTIES; THAT IS, THEY MADE THE EXACT CONTRACT THEY INTENDED TO MAKE.

IN ADDITION, YOUR ARGUMENT THAT GEO IS ENTITLED TO ADDITIONAL AMOUNTS BASED ON THE HIGHER OVERHEAD RATES COMPLETELY OVERLOOKS THE FACT THAT THE OBLIGATION OF THE GOVERNMENT FOR COSTS INCURRED BY THE CONTRACTOR WAS SPECIFICALLY LIMITED BY THE "LIMITATION OF COSTS" CLAUSE, AND THERE IS NO BASIS FOR THE ALLOWANCE OF THE CLAIM FOR THE ADDITIONAL COSTS EVEN IF IT WAS CONCLUDED THAT THE CONTRACTOR WAS OTHERWISE ENTITLED TO REIMBURSEMENT FOR SUCH COSTS. THE CONTRACTOR FULLY UNDERSTOOD THIS AS EVIDENCED BY ITS LETTER OF OCTOBER 28, 1963, TO THE AGENCY, WHICH STATED IN PART:

"THE ATTACHED COST DATA EVIDENCES THE FACT THAT WE HAVE EXPENDED FUNDS BEYOND THOSE AUTHORIZED. SUCH ACTION ON OUR PART WAS TAKEN WITH THE FULL KNOWLEDGE THAT THE GOVERNMENT WAS UNDER NO OBLIGATION TO REIMBURSE THOSE COSTS. ACCORDING TO ESTIMATES MADE PRIOR TO EXCEEDING THE ESTIMATED COST, THE PROSPECTIVE OVERRUN WAS SUCH THAT WE WOULD HAVE BEEN WILLING AND ABLE TO ABSORB IT. OUR POSITION AT THE TIME WAS BASED UPON TWO FACTORS: (1) THE AMOUNT OF THE OVERRUN, AND (2) THE SALES POTENTIAL OF THE ITEMS UNDER DEVELOPMENT. BOTH OF THESE FACTORS NOW HAVE CHANGED SO DRAMATICALLY THAT WE HAVE BEEN FORCED TO REEVALUATE OUR POSITION. NOT ONLY HAS THE DEVELOPMENT PROGRAM BEEN FAR MORE DIFFICULT THAN EXPECTED, BUT ALSO THE SALES POTENTIAL HAS BEEN CUT BY ONE-HALF.

"THE PRESENT PROJECT STATUS IS SUCH THAT WE HAVE RELUCTANTLY CONCLUDED THAT WE CAN CARRY IT NO FURTHER ON OUR OWN FUNDS."

ACCORDINGLY, SINCE THE OBLIGATIONS OF THE GOVERNMENT WITH RESPECT TO THE CONTRACT HAVE BEEN COMPLETELY SATISFIED, AND THE CONTRACTOR HAS BEEN REIMBURSED TO THE FULL AMOUNT TO WHICH IT WAS ENTITLED FOR COSTS INCURRED, YOUR CLAIM ON BEHALF OF GEO IS DENIED.