B-166995, SEP 16, 1969

B-166995: Sep 16, 1969

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ASSESSMENT OF LIQUIDATED DAMAGES IN ADDITION TO OR INSTEAD OF ACTUAL AND ASCERTAINABLE DAMAGES ON TERMINATION IS NOT PROPER. SINCE AMOUNT AVAILABLE IS LESS THAN TOTAL UNDERPAYMENTS UNDER SERVICE CONTRACT ACT OF 1965 AND PRO RATA DISTRIBUTION UNDER THAT ACT WOULD RESULT IN IDENTICAL PAYMENTS TO EACH EMPLOYEE AS WOULD SEPARATE COMPUTATIONS UNDER THAT ACT AND CONTRACT WORK HOURS STANDARDS ACT. SECRETARY: REFERENCE IS MADE TO LETTER DATED MAY 16. AT THE TIME HIS CONTRACT WAS TERMINATED FOR DEFAULT HE HAD SUCCESSFULLY COMPLETED 459 ACRES FOR A TOTAL EARNING OF $7. IT IS REPORTED THAT $3. 798 IS PRESENTLY BEING WITHHELD TO OFFSET ASSESSED LIQUIDATED DAMAGES AND OTHER COSTS RELATED TO CONTRACT TERMINATION.

B-166995, SEP 16, 1969

CONTRACTS - TIMBER SALES - DAMAGES DECISION TO SECRETARY OF AGRICULTURE REGARDING ASSESSMENT OF LIQUIDATED DAMAGES ASSESSED AGAINST JAMES NATSEWAY ON TERMINATION OF TIMBER SALES CONTRACT CONTAINING A NONSTANDARD LIQUIDATED DAMAGES CLAUSE. A LIQUIDATED DAMAGES PROVISION IN A TIMBER CONTRACT WHICH PROVIDED THAT THE CONTRACTOR WOULD BE LIABLE FOR EXCESS COSTS AND OTHER DAMAGES OCCASIONED BY DEFAULT WHEN GOVERNMENT TERMINATES THE CONTRACT AND FOR A SPECIFIED PER DIEM FOR DELAY IF GOVERNMENT DOES NOT TERMINATE SHOULD BE INTERPRETED UNDER UNITED STATES V. AMERICAN SURETY CO. CASE AND, THEREFORE, ASSESSMENT OF LIQUIDATED DAMAGES IN ADDITION TO OR INSTEAD OF ACTUAL AND ASCERTAINABLE DAMAGES ON TERMINATION IS NOT PROPER. COMPTROLLER GENERAL CONCURS IN PROPOSED ACTION TO REVISE NONSTANDARD DEFAULT CLAUSE. PAYMENTS WITHHELD SHOULD BE APPLIED TO WAGE UNDERPAYMENTS RATHER THAN APPLYING THEM TO LIQUIDATED DAMAGES. SINCE AMOUNT AVAILABLE IS LESS THAN TOTAL UNDERPAYMENTS UNDER SERVICE CONTRACT ACT OF 1965 AND PRO RATA DISTRIBUTION UNDER THAT ACT WOULD RESULT IN IDENTICAL PAYMENTS TO EACH EMPLOYEE AS WOULD SEPARATE COMPUTATIONS UNDER THAT ACT AND CONTRACT WORK HOURS STANDARDS ACT, THE AMOUNT WITHHELD MAY BE TRANSFERRED TO DEPARTMENT OF LABOR FOR DISTRIBUTION AFTER SATISFACTION OF EXCESS REPROCUREMENT COSTS.

MR. SECRETARY:

REFERENCE IS MADE TO LETTER DATED MAY 16, 1969, FROM THE ASSISTANT SECRETARY FOR ADMINISTRATION, AND LETTER DATED JULY 11, 1969, FROM THE DIRECTOR, OFFICE OF PLANT AND OPERATIONS, RELATIVE TO THE ASSESSMENT OF LIQUIDATED DAMAGES FOR DELAY AGAINST MR. JAMES NATSEWAY UNDER CONTRACT NO. 11-167 WITH THE FOREST SERVICE.

UNDER THE CONTRACT MR. NATSEWAY AGREED, WITHIN 200 DAYS FROM RECEIPT OF NOTICE OF AWARD, TO THIN 717 ACRES OF PRECOMMERCIAL TIMBER ON SITGREAVES NATIONAL FOREST, ARIZONA, FOR A TOTAL PRICE OF $12,102.96. AT THE TIME HIS CONTRACT WAS TERMINATED FOR DEFAULT HE HAD SUCCESSFULLY COMPLETED 459 ACRES FOR A TOTAL EARNING OF $7,747.92. IT IS REPORTED THAT $3,798 IS PRESENTLY BEING WITHHELD TO OFFSET ASSESSED LIQUIDATED DAMAGES AND OTHER COSTS RELATED TO CONTRACT TERMINATION. THE CONTRACT PROVIDED THAT $20 WOULD BE ASSESSED FOR EACH DAY OF DELAY IN COMPLETING THE THINNING OPERATIONS. LIQUIDATED DAMAGES FOR 100 DAYS DELAY (64 DAYS OVERRUN ON WORKING TIME PLUS 36 DAYS OF REPROCUREMENT TIME) HAVE BEEN ASSESSED IN THE AMOUNT OF $2,000, TOGETHER WITH COSTS INCIDENT TO REPROCUREMENT IN THE AMOUNT OF $147.63. IN ADDITION, THERE ARE CLAIMS BY UNPAID FORMER EMPLOYEES AMOUNTING TO $4,506.60, AND LIQUIDATED DAMAGES ASSESSED PURSUANT TO THE CONTRACT WORK HOURS STANDARDS ACT, 40 U.S.C. 327, IN THE AMOUNT OF $2,250.

INITIALLY, THE MATTER WAS REFERRED HERE WITH A RECOMMENDATION THAT THE LIQUIDATED DAMAGES FOR DELAY BE REMITTED IN ACCORDANCE WITH THE PROVISIONS OF 41 U.S.C. 256A. YOUR DEPARTMENT STATED THE POSITION THAT SINCE NO FINANCIAL LOSS ACCRUED TO THE GOVERNMENT AS A RESULT OF THE CONTRACTOR'S DELAY, THE LIQUIDATED DAMAGES ASSESSED FOR THE DELAY SHOULD BE REMITTED IN ORDER THAT THE AMOUNT THEREOF COULD BE MADE AVAILABLE FOR PAYMENT TO UNPAID EMPLOYEES, THE BALANCE WITHHELD FROM CONTRACT PAYMENTS BEING INSUFFICIENT TO COVER BOTH. IN ADDITION, THE CONTRACTING OFFICER HAS TAKEN THE POSITION THAT THE RATE OF LIQUIDATED DAMAGES PROVIDED IN THE CONTRACT AMOUNTS TO A PENALTY AND SHOULD THEREFORE BE CONSIDERED AS INVALID.

THE NONSTANDARD GENERAL PROVISIONS OF THE CONTRACT INCLUDE THE FOLLOWING PROVISION:

"2. DEFAULT AND TERMINATION * * * * *

"(B) IN THE EVENT THE GOVERNMENT TERMINATES THIS CONTRACT *** THE CONTRACTOR SHALL BE LIABLE TO THE GOVERNMENT FOR EXCESS COSTS AND ANY OTHER DAMAGES OCCASIONED BY THE DEFAULT OF THE CONTRACTOR. IF THE GOVERNMENT DOES NOT TERMINATE THE CONTRACTOR'S RIGHT TO PROCEED, HE SHALL CONTINUE THE WORK AND SHALL BE LIABLE TO THE GOVERNMENT FOR ANY ACTUAL DAMAGES OCCASIONED BY THIS FAILURE TO PERFORM EXCEPT TO THE EXTENT THAT LIQUIDATED DAMAGES ARE STIPULATED IN LIEU THEREOF."

UNDER THE CONTRACT'S SPECIAL CONDITIONS, SECTION II - LIQUIDATED DAMAGES, IT IS PROVIDED THAT:

"LIQUIDATED DAMAGES FOR DELAY WILL BE ASSESSED FOR EACH CALENDAR DAY OF DELAY AFTER THE CALENDAR DAY PERIOD ALLOWED FOR COMPLETING THE CONTRACT."

IN A LETTER DATED JUNE 24, 1969, THIS OFFICE REQUESTED ADVICE AS TO THE REASONS WHY YOUR DEPARTMENT HAD DESIGNED A NONSTANDARD GENERAL PROVISIONS (SERVICE CONTRACT) FORM FOR USE IN THIS TYPE OF CONTRACT AND WHETHER THE LIQUIDATED DAMAGES PROVISIONS USED WERE INTENDED TO ACHIEVE A DIFFERENT RESULT FROM THAT PROVIDED IN THE STANDARD CLAUSE. WE SPECIFICALLY ASKED, FOR EXAMPLE, WHETHER IT WAS INTENDED THAT LIQUIDATED DAMAGES BE ASSESSABLE ONLY IN THE EVENT THE CONTRACTOR'S RIGHT TO PROCEED WAS NOT TERMINATED. IN RESPONSE TO OUR REQUEST YOUR DEPARTMENT ADVISED BY LETTER OF JULY 11, THAT THE FILE ON THE DEVELOPMENT OF THIS FORM DOES NOT AID IN INTERPRETING THE CLAUSE, BUT REQUESTED THAT WE CONSIDER THE THRESHOLD QUESTION WHETHER THE NONSTANDARD LIQUIDATED DAMAGES PROVISIONS OF THE CONTRACT ARE SO AMBIGUOUS THAT DAMAGES SHOULD NOT HAVE BEEN ASSESSED THEREUNDER.

THE SUPREME COURT HAS CONSIDERED THE LEGAL AFFECT OF CONTRACT LANGUAGE SIMILAR TO THE ABOUVE-QUOTED CONTRACT PROVISIONS IN THE CASE UNITED STATES V. AMERICAN SURETY CO., 322 U.S. 96. IN THAT CASE THE CONTRACT PROVIDED THAT IN THE EVENT THE GOVERNMENT TERMINATED THE CONTRACT FOR FAILURE TO PROSECUTE THE WORK, THE CONTRACTOR WOULD BE LIABLE TO THE GOVERNMENT FOR ANY EXCESS COST OCCASIONED THE GOVERNMENT. IT WAS FURTHER PROVIDED THAT IF THE GOVERNMENT DID NOT TERMINATE THE RIGHT OF THE CONTRACTOR TO PROCEED, THE CONTRACTOR WAS REQUIRED TO PAY LIQUIDATED DAMAGES FOR EACH DAY OF DELAY UNTIL THE WORK WAS COMPLETED. THE CONTRACT ALSO PROVIDED IN PARAGRAPH 5 THAT THE CONTRACTOR WOULD PAY A STATED FIXED AMOUNT AS LIQUIDATED DAMAGES FOR EACH DAY'S DELAY IN COMPLETION OF THE CONTRACT. THE COURT HELD THAT PARAGRAPH 5 OF THE CONTRACT - WHICH IS NEARLY IDENTICAL TO THE ABOVE QUOTED SPECIAL CONDITIONS, SECTION II - LIQUIDATED DAMAGES PROVIDED IN THE NATSEWAY CONTRACT - MERELY PROVIDES THE AGREED RATE OF THE PER DIEM LIQUIDATED DAMAGES TO BE PAID AND DOES NOT SPELL OUT OR CONTROL THE SITUATIONS WHERE LIQUIDATED DAMAGES ARE TO BE PAID. THE COURT FURTHER HELD THAT THE CONTRACT LIMITED THE RIGHT TO LIQUIDATED DAMAGES TO SITUATIONS WHERE THE GOVERNMENT DOES NOT AT ANY TIME TERMINATE THE CONTRACTOR'S RIGHT TO PROCEED AND UPON TERMINATION OF THE CONTRACT IT WAS ENTITLED TO THE EXCESS COSTS OCCASIONED THEREBY BUT WAIVED ITS RIGHT TO LIQUIDATED DAMAGES.

WE BELIEVE THE LANGUAGE IN THE NATSEWAY CONTRACT SHOULD BE INTERPRETED IN A SIMILAR MANNER. IN BOTH SITUATIONS THE ONLY SPECIFIC CONTRACT PROVISION FOR ASSESSING LIQUIDATED DAMAGES FOR DELAY IS IN THE EVENT THE GOVERNMENT DOES NOT TERMINATE THE CONTRACTOR'S RIGHT TO PROCEED. ALTHOUGH IN THE EVENT OF TERMINATION THE NATSEWAY CONTRACT PROVIDES THAT "THE CONTRACTOR SHALL BE LIABLE TO THE GOVERNMENT FOR EXCESS COSTS AND ANY OTHER DAMAGES OCCASIONED BY THE DEFAULT OF THE CONTRACTOR," WE SEE NO BASIS FOR CONSTRUING THIS LANGUAGE TO REQUIRE THE ASSESSMENT OF LIQUIDATED DAMAGES IN ADDITION TO OR INSTEAD OF THE ACTUAL AND ASCERTAINABLE DAMAGES WHICH MAY HAVE ACCRUED AND BE CONTEMPLATED BY THE LANGUAGE "EXCESS COSTS AND ANY OTHER DAMAGES OCCASIONED."

FOR THESE REASONS WE MUST CONCLUDE THAT LIQUIDATED DAMAGES WERE ERRONEOUSLY ASSESSED UNDER THE NATSEWAY CONTRACT AND WE THEREFORE SEE NO NEED FOR CONSIDERING THE OTHER BASES SUGGESTED FOR GRANTING RELIEF. ALSO WISH TO EXPRESS OUR CONCURRENCE WITH THE CORRECTIVE ACTION PROPOSED IN YOUR DEPARTMENT'S LETTER OF JULY 11, TO THE EFFECT THAT THE NONSTANDARD GENERAL PROVISIONS (SERVICE CONTRACT) CURRENTLY BEING USED BE REVISED TO INCLUDE ONE OF THE STANDARD DEFAULT CLAUSES CONTAINED IN THE FEDERAL PROCUREMENT REGULATIONS.

WE ALSO NOTE THAT YOUR DEPARTMENT'S LETTER OF MAY 16 INDICATES THAT THE SECRETARY OF LABOR HAS BEEN REQUESTED TO REMIT, FOR THE PURPOSE OF MAKING PAYMENT TO THE UNPAID EMPLOYEES, THE LIQUIDATED DAMAGES ASSESSED FOR VIOLATION OF THE CONTRACT WORK HOURS STANDARDS ACT. IN THIS REGARD WE BRING TO YOUR ATTENTION A RECENT DECISION OF OUR OFFICE TO THE SECRETARY OF LABOR, B-167000, JUNE 26, 1969, COPY ENCLOSED, WHEREIN WE STATED THAT THE LANGUAGE OF THE ABOVE ACT MAKES IT CLEAR CONGRESS INTENDED THAT THE FULL AMOUNT WITHHELD SHOULD FIRST BE APPLIED TO UNDERPAYMENTS OWED THE EMPLOYEES RATHER THAN APPLYING THE FUNDS TO THE LIQUIDATED DAMAGES ASSESSED UNDER THE ACT.

UNDER THE CONTRACT WORK HOURS STANDARDS ACT THE COMPTROLLER GENERAL IS AUTHORIZED AND DIRECTED TO PAY AGGRIEVED EMPLOYEES. IT APPEARS, HOWEVER, THAT IN THIS CASE THE SAME EMPLOYEES ARE ALSO TO BE PAID WAGES OWED UNDER THE SERVICE CONTRACT ACT OF 1965 AND THAT THE REGIONAL DIRECTOR, DEPARTMENT OF LABOR, HAS REQUESTED THAT THE FUNDS BE FORWARDED TO HIM FOR DISTRIBUTION TO THE EMPLOYEES IN ACCORDANCE WITH THAT ACT. SINCE THE AMOUNT AVAILABLE IS LESS THAN THE TOTAL UNDERPAYMENTS UNDER THE SERVICE CONTRACT ACT, AND IT APPEARS THAT PRO RATA DISTRIBUTION UNDER THAT ACT WOULD RESULT IN VIRTUALLY IDENTICAL PAYMENTS TO EACH WORKER AS WOULD SEPARATE COMPUTATIONS UNDER THE TWO ACTS, WE WOULD HAVE NO OBJECTION TO YOUR TRANSMITTING TO THE DEPARTMENT OF LABOR THE BALANCE OF THE AMOUNT WITHHELD, AFTER SATISFACTION OF THE EXCESS REPROCUREMENT COSTS.