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B-174750, B-174871, B-175117, MAR 27, 1972, 51 COMP GEN 613

B-174750,B-175117,B-174871 Mar 27, 1972
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EQUIPMENT - AUTOMATIC DATA PROCESSING SYSTEM - SELECTION AND PURCHASES - WARRANTIES AND DAMAGES ALTHOUGH THE REFUSAL OF THE GENERAL SERVICES ADMINISTRATION TO ACCEPT THE PROPOSALS OF AN OFFEROR TO FURNISH AUTOMATIC DATA PROCESSING EQUIPMENT FOR DEFENSE USER AGENCIES THAT INCLUDED A DISCLAIMER AGAINST IMPLIED WARRANTIES AND LIABILITY FOR CONSEQUENTIAL DAMAGES IS A MATTER OF PROCUREMENT POLICY WITHIN THE DISCRETION OF THE AGENCY. THE INTERESTS OF THE GOVERNMENT AND ITS CONTRACTORS WOULD BE BETTER SERVED IF THE GOVERNMENT'S POSITION WAS FULLY AND EXPLICITLY SET FORTH IN REGULATIONS OF GENERAL APPLICABILITY AND IN SOLICITATIONS FURNISHED PROSPECTIVE CONTRACTORS RATHER THAN ENUNCIATED DURING NEGOTIATIONS.

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B-174750, B-174871, B-175117, MAR 27, 1972, 51 COMP GEN 613

EQUIPMENT - AUTOMATIC DATA PROCESSING SYSTEM - SELECTION AND PURCHASES - WARRANTIES AND DAMAGES ALTHOUGH THE REFUSAL OF THE GENERAL SERVICES ADMINISTRATION TO ACCEPT THE PROPOSALS OF AN OFFEROR TO FURNISH AUTOMATIC DATA PROCESSING EQUIPMENT FOR DEFENSE USER AGENCIES THAT INCLUDED A DISCLAIMER AGAINST IMPLIED WARRANTIES AND LIABILITY FOR CONSEQUENTIAL DAMAGES IS A MATTER OF PROCUREMENT POLICY WITHIN THE DISCRETION OF THE AGENCY, THE INTERESTS OF THE GOVERNMENT AND ITS CONTRACTORS WOULD BE BETTER SERVED IF THE GOVERNMENT'S POSITION WAS FULLY AND EXPLICITLY SET FORTH IN REGULATIONS OF GENERAL APPLICABILITY AND IN SOLICITATIONS FURNISHED PROSPECTIVE CONTRACTORS RATHER THAN ENUNCIATED DURING NEGOTIATIONS, AND IT IS SUGGESTED THAT THE POLICY BE FURTHER EXAMINED, WITH CONSIDERATION GIVEN TO VARYING THE EXTENT OF CONTRACTOR LIABILITY FOR CONSEQUENTIAL DAMAGES, AND TO THE EFFECT OF SUCH VARIANCES ON THE COST TO THE GOVERNMENT AND THE DISPOSITION OF FIRMS TOWARD DOING BUSINESS WITH THE GOVERNMENT.

TO THE ACTING ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, MARCH 27, 1972:

REFERENCE IS MADE TO LETTERS DATED FEBRUARY 15, FEBRUARY 24 AND MARCH 6, 1972, FROM YOUR GENERAL COUNSEL, FURNISHING REPORTS CONCERNING THE PROTESTS BY INTERNATIONAL BUSINESS MACHINES CORPORATION (IBM) UNDER REQUESTS FOR PROPOSALS PROJECT REFERENCE MCS 43-67 AFLC (ALS), 700-68-R 0484 (DIDS) AND ADPESO PROJECT 002-69 (NAVSHIPS), RESPECTIVELY. THESE PROCUREMENTS ARE BEING CONDUCTED BY THE GENERAL SERVICES ADMINISTRATION (GSA) FOR DEPARTMENT OF DEFENSE USER AGENCIES. IN EACH OF THESE PROCUREMENTS, IBM HAS PROTESTED THE REJECTION, MADE ON THE BASIS OF CONFLICT WITH GSA POLICY, OF PROPOSALS CONTAINING EXCLUSIONARY CLAUSES REGARDING IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES.

AS WE ADVISED IBM IN OUR DECISION OF TODAY, COPY ENCLOSED, THERE IS NO STATUTORY OR REGULATORY PROVISION APPLICABLE TO THE INSTANT PROCUREMENTS WHICH PRECLUDES THE APPLICATION TO CONTRACTORS OF IMPLIED WARRANTIES OR WHICH WOULD PROHIBIT THE GOVERNMENT FROM SEEKING TO RECOVER CONSEQUENTIAL DAMAGES FROM THOSE CONTRACTORS. WE REGARD THE DEGREE, IF ANY, TO WHICH IMPLIED WARRANTIES MAY BE DISCLAIMED AND TO WHICH LIABILITY FOR CONSEQUENTIAL DAMAGES MAY BE EXCLUDED IN THE INSTANT PROCUREMENTS TO BE MATTERS OF POLICY.

HOWEVER, IT IS OUR OPINION THAT THE QUESTION WHETHER THE GOVERNMENT'S BEST INTERESTS WILL BE SERVED IN THIS TYPE OF PROCUREMENT BY REQUIRING CONTRACTORS TO ASSUME NO LIABILITY, LIMITED LIABILITY, OR UNLIMITED LIABILITY FOR IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES DESERVES MORE EXTENSIVE CONSIDERATION AND COMPREHENSIVE EXPRESSION THAN THAT WHICH APPEARS FROM THE PRESENT RECORD TO HAVE PRECEDED PROMULGATION OF THE PRESENT POLICY. IN THIS REGARD, WE OBSERVE THAT THE DEPARTMENT OF DEFENSE HAS ESTABLISHED A POLICY, NOW SET FORTH IN ARMED SERVICES PROCUREMENT REGULATION (ASPR) 1-330, OF LIMITING CONTRACTOR LIABILITY FOR LOSS OF, OR DAMAGE TO, PROPERTY OF THE GOVERNMENT OCCURRING AFTER FINAL ACCEPTANCE OF SUPPLIES DELIVERED TO THE GOVERNMENT AND RESULTING FROM ANY DEFECTS OR DEFICIENCIES IN SUCH SUPPLIES. THE POLICY AND ITS IMPLEMENTING CONTRACT CLAUSES "ARE THE RESULT OF A LONG PERIOD OF STUDY AND ARE AIMED AT REDUCING GOVERNMENT PROCUREMENT COSTS BY LIMITING THE CONTRACTOR'S RISK." DEFENSE PROCUREMENT CIRCULAR NO. 86, FEBRUARY 12, 1971. THE MINUTES OF THE ASPR COMMITTEE DISCLOSE THAT THE DEPARTMENT OF DEFENSE POLICY CONCERNING CONTRACTOR LIABILITY FOR DEFECTIVE SUPPLIES WAS PROMULGATED ONLY AFTER MOST EXHAUSTIVE DISCUSSION, INCLUDING THE CONSIDERATION OF COMMENTS FROM INDUSTRY AND OTHER GOVERNMENT AGENCIES.

MANY OF THE PROBLEMS WHICH ARE REFLECTED IN THE MINUTES OF THE ASPR COMMITTEE MAY ALSO HAVE RECEIVED CONSIDERATION BY GSA. HOWEVER, SUCH CONSIDERATION DOES NOT APPEAR FROM THE RECORD BEFORE US. WE BELIEVE THE ADMINISTRATIVE REPORTS FILED IN RESPONSE TO THESE PROTESTS MAY FAIRLY BE CHARACTERIZED AS STATING THAT CONTRACTUAL SILENCE ON IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES "THUS RELEGATING THE DETERMINATION OF LIABILITY TO THE GENERAL LAW OF DAMAGES," WAS A "MINIMUM NEED OF THE GOVERNMENT." THE ADMINISTRATIVE REPORT OF FEBRUARY 15, 1972, STATES:

THUS IBM WAS CLEARLY INFORMED THAT GSA HAD DETERMINED THAT THE QUESTION OF CONSEQUENTIAL DAMAGES INVOLVED A VITAL INTEREST OF THE GOVERNMENT WHICH GSA WOULD NOT COMPROMISE.

HOWEVER, WE ARE ADVISED BY THE SAME REPORT THAT IBM'S LIABILITY "UNDER THE GENERAL LEGAL PRINCIPLES GOVERNING CONSEQUENTIAL DAMAGES" IS "SO LIMITED THAT THE GOVERNMENT, TO OUR KNOWLEDGE, HAS NEVER ATTEMPTED TO HOLD A VENDOR OF GENERAL-PURPOSE AUTOMATIC DATA PROCESSING EQUIPMENT (ADPE) LIABLE FOR CONSEQUENTIAL DAMAGES *** ." WE BELIEVE THE FACT THAT THIS TYPE OF LIABILITY APPARENTLY NEVER HAS BEEN ASSERTED REQUIRES A REEXAMINATION OF HOW VITAL AN INTEREST THE GOVERNMENT HAS IN INSISTING THAT IT BE ASSUMED BY RESPONSIBLE BIDDERS WHO ARE UNWILLING TO COMPETE ON THAT BASIS.

OUR CONCERN IS ALSO DERIVED FROM THE CIRCUMSTANCES THAT, APART FROM A GENERAL EXPRESSION OF DESIRE ON THE PART OF GSA TO PRESERVE IMPLIED WARRANTIES AND NOT TO BE PREVENTED FROM THE RECOVERY OF CONSEQUENTIAL DAMAGES, NO OTHER CONSIDERATIONS UNDERLYING ITS POLICY APPEAR IN THE PRESENT RECORD. THE FOLLOWING ISSUE RAISED BY IBM IS ILLUSTRATIVE OF PROBLEMS WHICH APPEAR WORTHY OF CONSIDERATION.

IBM HAS ALLEGED THAT DURING NEGOTIATIONS UNDER THE ALS PROCUREMENT, IT WAS ORALLY ADVISED BY THE CONTRACTING OFFICER THAT IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WERE APPLICABLE TO THE CONTRACT, WHICH WOULD CONTAIN THE STANDARD INSPECTION CLAUSE. THIS ALLEGATION HAS NOT BEEN REFUTED IN THE ADMINISTRATIVE REPORT SUBMITTED TO OUR OFFICE, AND WE ARE NOT CALLED UPON TO DETERMINE WHETHER THE CONTRACTING OFFICER'S POSITION IS SOUND OR UNSOUND. HOWEVER, WE NOTE THAT A CONCERN OF THE ASPR COMMITTEE WAS THE RELATIONSHIP OF ITS PROPOSED COVERAGE TO OTHER CONTRACT PROVISIONS, SUCH AS THE STANDARD INSPECTION CLAUSE. THE OPINION WAS EXPRESSED DURING ONE COMMITTEE MEETING "THAT THE EXISTING INSPECTION CLAUSE AS CURRENTLY INTERPRETED TERMINATES ALL WARRANTIES (UNLESS OTHERWISE SPECIFICALLY PROVIDED FOR IN THE CONTRACT) EXCEPT FOR LATENT DEFECTS." THE DECISION IN REPUBLIC AVIATION CORP., ASBCA NOS. 9934 & 10104, MARCH 31, 1966, 1966-1 BCA 5482, HAS BEEN VIEWED AS AUTHORITY FOR THE PROPOSITION THAT IMPLIED WARRANTIES DO NOT SURVIVE INSPECTION AND ACCEPTANCE UNDER CONTRACTS CONTAINING THE STANDARD INSPECTION CLAUSE. HADDOCK, UNIFORM COMMERCIAL CODE WARRANTIES - APPLICATION TO GOVERNMENT PURCHASES, 1 PUB. CONT. L.J. 77 (1968); NOTE, POST-ACCEPTANCE LIABILITY IN DEFENSE SUPPLY CONTRACTING, 56 U. VA. L. REV. 923, 929 (1970). CONTRA, SPRIGGS, IMPLIED WARRANTIES UNDER GOVERNMENT CONTRACTS, 4 PUB. CONT. L.J. 80, 83-85 (1971). SEE ALSO, RISHE, UCC BRIEF NO. 12: THE EFFECT OF INSPECTION UNDER GOVERNMENT CONTRACTS AND THE UCC, 15 PRAC. LAW. 75, 79-80 (1969).

THE CONTRACTING OFFICER'S POSITION, APART FROM ITS SOUNDNESS, HAS BEEN TAKEN IN A CONTROVERSIAL AND UNSETTLED AREA. WE UNDERSTAND THE ADMINISTRATIVE REPORTS TO SAY THAT THE INTERESTS OF THE GOVERNMENT ARE SERVED BY MAINTAINING CONTRACTUAL SILENCE ON THE MATTER AND BY AWAITING THE JUDGMENT OF A COURT, IN AN APPROPRIATE CASE, AS TO WHETHER IMPLIED WARRANTIES ARE APPLICABLE TO A CONTRACT AND, IF SO, WHETHER THEY SURVIVE INSPECTION AND ACCEPTANCE UNDER THE INSPECTION CLAUSE. WE BELIEVE THE INTERESTS OF THE GOVERNMENT AND ITS CONTRACTORS WOULD BE BETTER SERVED IF, PURSUANT TO THOROUGH CONSIDERATION, THE GOVERNMENT'S POSITION WAS FULLY AND EXPLICITLY SET FORTH IN REGULATIONS OF GENERAL APPLICABILITY AND IN SOLICITATIONS FURNISHED TO PROSPECTIVE CONTRACTORS, RATHER THAN ENUNCIATED DURING NEGOTIATIONS WITH INDIVIDUAL CONTRACTORS UNDER INDIVIDUAL SOLICIATIONS.

IT IS NOT CLEAR FROM THE PRESENT RECORD WHETHER GSA'S POLICY OF REJECTING PROPOSALS CONTAINING EXCLUSIONARY CLAUSES RELATING TO IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES IS APPLICABLE TO ALL PROCUREMENTS OF AUTOMATIC DATA PROCESSING EQUIPMENT, OR ONLY SELECTED PROCUREMENTS. WE BELIEVE CONSIDERATION MAY PROPERLY BE GIVEN TO VARYING THE EXTENT OF CONTRACTOR LIABILITY FOR CONSEQUENTIAL DAMAGES, PERHAPS THROUGH THE ESTABLISHMENT IN CERTAIN SOLICITATIONS OF A CEILING UPON A CONTRACTOR'S LIABILITY.

UNDER CERTAIN CIRCUMSTANCES, AS IN THE INSTANT CASE, THE QUESTION OF LIABILITIES MAY AFFECT THE WILLINGNESS OF SOME FIRMS TO BID ON GOVERNMENT WORK. FURTHER, IT APPEARS TO BE GENERALLY AGREED THAT CONTRACTORS' PRICES REFLECT THE POST-ACCEPTANCE RISKS OF LIABILITY THEY ARE REQUIRED TO ASSUME. THUS, AN ANNOUNCED PURPOSE OF THE DEPARTMENT OF DEFENSE POLICY REGARDING CONTRACTOR LIABILITY FOR DEFECTIVE SUPPLIES IS TO REDUCE "GOVERNMENT PROCUREMENT COSTS BY LIMITING THE CONTRACTOR'S RISK." DEFENSE PROCUREMENT CIRCULAR NO. 86, FEBRUARY 12, 1971. SEE ALSO HADDOCK, SUPRA, AT 89-90; PAYNE, GOVERNMENT CONTRACT WARRANTIES: ISN'T THE CAVEAT VENDITOR RATHER THAN EMPTOR?, 4 NAT. CONT. MAN. J. 31, 59-60 (1970); SPRIGGS, SUPRA, AT 89; TWOMEY, WARRANTIES UNDER GOVERNMENT CONTRACTS, 1 INS. L.J. 464, 468-69 (1970); NOTE, SUPRA, AT 937-41. IN VIEW THEREOF, WE ARE OF THE OPINION THAT ANY CONSIDERATION OF THE PROPRIETY OF YOUR PRESENT POLICY MUST INCLUDE CONSIDERATION OF ITS COST TO THE GOVERNMENT. WE THEREFORE SUGGEST THAT CONSIDERATION BE GIVEN TO OBTAINING DATA ON THE COST, IF ANY, WHICH BIDDERS MIGHT ADD TO PROPOSED PRICES UNDER VARYING DEGREES OF ASSUMED LIABILITY AND THAT AN ASSESSMENT BE MADE AS TO THE EFFECT OF SUCH VARIANCES UPON THE DISPOSITION OF FIRMS TOWARD DOING BUSINESS WITH THE GOVERNMENT.

IN THE ALS AND NAVSHIPS PROCUREMENTS, IBM'S PROPSALS CONTAINING EXCLUSIONARY CLAUSES REGARDING ITS LIABILITY WERE REJECTED AS BEING IN DEROGATION OF "STANDARD" OR "MODEL" CONTRACTS MADE A PART OF THOSE SOLICITATIONS. FOR THE REASONS STATED IN OUR DECISION OF TODAY TO IBM, WE HAVE DENIED ITS PROTESTS AGAINST THE USE OF "MODEL" CONTRACTS.

IT IS NOT OUR INTENTION TO INJECT THIS OFFICE INTO THE DISCRETIONARY CONSIDERATIONS LEADING TO THE AWARD OF CONTRACTS. HOWEVER, WE ARE OF THE CONVICTION THAT AN INFORMED EXERCISE OF DISCRETION BY YOUR ADMINISTRATION, AND ANY REVIEW BY THIS OFFICE, REQUIRES FURTHER EXAMINATION OF THE POLICY ADOPTED BY GSA REGARDING IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES. THE ABOVE OBSERVATIONS ARE DIRECTED TO THAT END.

WE REQUEST TO BE ADVISED OF FURTHER DEVELOPMENTS IN GSA POLICY REGARDING IMPLIED WARRANTIES AND CONSEQUENTIAL DAMAGES, AND TO BE PROVIDED AN OPPORTUNITY TO COMMENT THEREON. WE WILL, OF COURSE, BE GLAD TO DISCUSS THESE MATTERS FURTHER, IF YOU SO DESIRE.

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