B-175267, APR 18, 1972

B-175267: Apr 18, 1972

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IT IS WELL SETTLED THAT AGREEMENTS TO PAY FIXED SUMS WITHOUT REASONABLE RELATION TO ANY PROBABLE DAMAGES WHICH MAY FOLLOW A BREACH OF CONTRACT WILL NOT BE ENFORCED AS AGREEMENTS FOR LIQUIDATED DAMAGES. 46 COMP. SECRETARY: REFERENCE IS MADE TO A LETTER DATED FEBRUARY 18. IT IS REPORTED THAT THE FOREST SERVICE CORRECTLY CALCULATED DAMAGES IN ACCORDANCE WITH THE CONTRACT PROVISIONS. WITH RESPECT TO SEVERAL ADDITIONAL PENDING CASES AND OTHERS WHICH MAY ARISE WHICH ARE THE SAME IN PRINCIPLE AS THE CASE DECIDED BY THE BOARD. THE FOREST SERVICE REQUESTS THAT IT BE AUTHORIZED NOT TO ASSESS DAMAGES FOR LOSS OF BID PREMIUM WHERE THE RESALE RETURN TO THE GOVERNMENT IS EQUAL TO OR GREATER THAN THE AMOUNT WHICH WOULD HAVE BEEN DERIVED UNDER THE ORIGINAL CONTRACT.

B-175267, APR 18, 1972

TIMBER SALE CONTRACT - DAMAGE ASSESSMENT FOR BREACH - IMPROPER METHOD OF COMPUTATION CONCERNING A REQUEST OF THE FOREST SERVICE FOR AUTHORITY TO COMPLY WITH A DECISION OF THE BOARD OF FOREST APPEALS BY CANCELLING A DAMAGE ASSESSMENT AGAINST THE IDAHO TIMBER COMPANY, SPALDING, IDAHO, FOR FAILING TO CUT CERTAIN TIMBER IN THE UMATILLA NATIONAL FOREST. IT IS WELL SETTLED THAT AGREEMENTS TO PAY FIXED SUMS WITHOUT REASONABLE RELATION TO ANY PROBABLE DAMAGES WHICH MAY FOLLOW A BREACH OF CONTRACT WILL NOT BE ENFORCED AS AGREEMENTS FOR LIQUIDATED DAMAGES. 46 COMP. GEN. 252 (1966). ACCORDINGLY, THE COMP. GEN. WOULD NOT BE REQUIRED TO OBJECT TO THE PROPOSED CANCELLATION IN THIS OR SIMILAR CASES ARISING UNDER THE SAME PRINCIPLE.

TO MR. SECRETARY:

REFERENCE IS MADE TO A LETTER DATED FEBRUARY 18, 1972 (2450), FROM THE DEPUTY CHIEF, FOREST SERVICE, RELATIVE TO A DECISION RENDERED ON NOVEMBER 24, 1971, BY THE BOARD OF FOREST APPEALS, F. S. DOCKET NO. 191, ON APPEAL OF THE IDAHO TIMBER COMPANY, SPALDING, IDAHO, FROM A DECISION OF THE REGIONAL FORESTER, DATED MAY 13, 1970, WHICH ASSESSED DAMAGES FOR FAILURE TO CUT CERTAIN TIMBER IN THE UMATILLA NATIONAL FOREST UNDER THE JONES RIDGE TIMBER SALE CONTRACT NO. 00032, ON FOREST SERVICE FORM 2400-5, ENTERED INTO BY THE PARTIES ON DECEMBER 21, 1966, AND TERMINATED ON JUNE 30, 1969.

IT IS REPORTED THAT THE FOREST SERVICE CORRECTLY CALCULATED DAMAGES IN ACCORDANCE WITH THE CONTRACT PROVISIONS, BUT THE BOARD OF FOREST APPEALS DIRECTED THE FOREST SERVICE TO CANCEL THE ASSESSMENT BECAUSE THE BASIS FOR ASSESSMENT PROVIDED FOR BY THE TIMBER SALE CONTRACT CONSTITUTED AN UNENFORCEABLE PENALTY. THE FOREST SERVICE DESIRES TO ABIDE BY THE BOARD'S DECISION AND REQUESTS AUTHORITY TO CANCEL THE DAMAGE ASSESSMENT. WITH RESPECT TO SEVERAL ADDITIONAL PENDING CASES AND OTHERS WHICH MAY ARISE WHICH ARE THE SAME IN PRINCIPLE AS THE CASE DECIDED BY THE BOARD, THE FOREST SERVICE REQUESTS THAT IT BE AUTHORIZED NOT TO ASSESS DAMAGES FOR LOSS OF BID PREMIUM WHERE THE RESALE RETURN TO THE GOVERNMENT IS EQUAL TO OR GREATER THAN THE AMOUNT WHICH WOULD HAVE BEEN DERIVED UNDER THE ORIGINAL CONTRACT.

THE IDAHO TIMBER COMPANY FAILED TO CUT AND REMOVE ALL OF THE TIMBER SOLD UNDER THE TIMBER SALE CONTRACT. THE ESTIMATED SALE VOLUME WAS 2,100,000 BOARD FEET AND THE CRUISE ESTIMATE AS OF THE DATE OF CONTRACT TERMINATION SHOWED A REMAINING UNCUT TIMBER VOLUME OF APPROXIMATELY 1,650,000 BOARD FEET. THE REMAINING TIMBER WAS SOLD AT A REOFFERING RATE OF $31,596.60 AND A REOFFERING BID PREMIUM OF $500.40 (THE AMOUNT BY WHICH THE BID PRICE EXCEEDED THE ADVERTISED PRICE). THE REOFFERING RATE EXCEEDED THE RATE UNDER THE TERMINATED CONTRACT, THE FOREST SERVICE REALIZED A GREATER RETURN (BY $15,000) AS THE RESULT OF THE CONTRACT TERMINATION THAN IF THE SALE HAD BEEN COMPLETED UNDER THE ORIGINAL CONTRACT. HOWEVER, DAMAGES OF $6,634.29 WERE ASSESSED AGAINST THE TIMBER SALE PURCHASER.

SECTION B9.2 OF THE TERMINATED TIMBER SALE CONTRACT PROVIDES IN PART THAT THE DAMAGE RATE FOR FAILURE TO CUT PORTIONS OF THE TIMBER INCLUDED IN THE SALE AREA SHALL BE EITHER (1) BID PREMIUM RATES OR (2) THE RATE BY WHICH CURRENT CONTRACT RATES IN EFFECT IMMEDIATELY PRIOR TO TERMINATION EXCEEDS RESALE VALUE RATES, WHICHEVER RATE IS GREATER. TIMBER SALE CONTRACT FORM 2400-6(7/70) IS CURRENTLY PRESCRIBED FOR USE IN NEW SALES AND IT CONTAINS A DIFFERENT DAMAGE CLAUSE FOR FAILURE TO CUT TIMBER THAN IN FOREST SERVICE TIMBER SALE CONTRACT FORM 2400-5. THE NEW PROVISION IN SECTION B9.4 OF FORM 2400-6 PROVIDES THAT DAMAGES FOR FAILURE TO CUT AND REMOVE TIMBER SHALL BE THE AMOUNT BY WHICH CURRENT CONTRACT VALUE PLUS COST OF RESALE EXCEEDS THE RESALE VALUE AT THE NEW BID RATES AND THAT, IF THERE IS NO RESALE, DAMAGES SHALL BE DETERMINED BY SUBTRACTING APPRAISED VALUE FROM CURRENT CONTRACT VALUE. NO REFERENCE IS MADE TO BID PREMIUMS IN THE NEW DAMAGE CLAUSE.

THE BOARD OF FOREST APPEALS CONSIDERED THAT THE BID PREMIUM RATE PROVISION OF SECTION B9.2 OF THE TERMINATED CONTRACT IS NOT ENFORCEABLE SINCE A DIFFERENCE BETWEEN BID PREMIUM RATES WOULD BEAR NO REASONABLE RELATION TO THE AMOUNT OF DAMAGES WHICH COULD BE SUSTAINED BY THE GOVERNMENT AS A RESULT OF A FAILURE OF THE CONTRACTOR TO CUT AND REMOVE TIMBER INCLUDED IN THE SALE AREA. THE BOARD'S DECISION INDICATES THAT THE PROVISION USED IN THE INSTANT CONTRACT WAS INTENDED TO ELIMINATE IRRESPONSIBLE AND SPECULATIVE BIDDING ON TIMBER SALES. THE CONTRACT IS STATED TO HAVE CONTEMPLATED THAT A PURCHASER WOULD NEVER ESCAPE RESPONSIBILITY FOR PAYING THE BID PREMIUM ON THE TOTAL APPRAISED VOLUME EVEN THOUGH THE CONTRACT MIGHT TERMINATE WITHOUT ALL OF THE TIMBER INCLUDED IN THE SALE AREA HAVING BEEN CUT.

IN THE BOARD'S OPINION, PROVISION (1) OF SECTION B9.2 OF THE TERMINATED CONTRACT COULD NOT HAVE REPRESENTED A REASONABLE FORECAST OF JUST COMPENSATION FOR THE HARM THAT MIGHT BE CAUSED BY A FAILURE TO CUT ALL THE TIMBER INCLUDED IN THE TIMBER SALE AREA. THE BOARD CITED COURT DECISIONS AND A DECISION OF OUR OFFICE, 46 COMP. GEN. 252 (1966), IN SUPPORT OF STATEMENTS THAT THE PARTIES TO A CONTRACT MAY AGREE TO A SUM CERTAIN TO BE FORFEITED AS LIQUIDATED DAMAGES FOR BREACH OF THE CONTRACT WITHOUT REFERENCE TO ACTUAL DAMAGES FOUND AT THE TIME OF BREACH; THAT, IF SUCH AGREEMENT IS FOR A PENALTY, IT IS VOID AND THE CONTRACT MUST BE CONSIDERED AS A WHOLE AS OF THE DATE OF ITS EXECUTION; THAT, IF THE PROVISION APPEARS TO BE A REASONABLE PROTECTION AGAINST FUTURE LITIGATION, IT MAY BE ENFORCED; BUT THAT A PROVISION TO PAY FIXED SUMS WITHOUT REASONABLE RELATION TO ANY PROBABLE DAMAGE MAY NOT BE ENFORCED.

AS INDICATED IN 46 COMP. GEN. 252, AT PAGE 258, THE QUESTION WHETHER A CONTRACT STIPULATION FOR LIQUIDATED DAMAGES IS VALID, OR WHETHER IT CONSTITUTES A PENALTY, DEPENDS UPON THE RELATION BETWEEN THE AMOUNT STIPULATED AS LIQUIDATED DAMAGES AND LOSSES WHICH WERE IN CONTEMPLATION BETWEEN THE PARTIES WHEN THE AGREEMENT WAS MADE. REASONABLE AGREEMENTS FOR LIQUIDATED DAMAGES ARE UNIFORMLY UPHELD.

HOWEVER, AGREEMENTS TO PAY FIXED SUMS WITHOUT REASONABLE RELATION TO ANY PROBABLE DAMAGES WHICH MAY FOLLOW A BREACH OF CONTRACT WILL NOT BE ENFORCED AS AGREEMENTS FOR LIQUIDATED DAMAGES. THE EFFECT OF A CLAUSE FOR STIPULATED DAMAGES IN A CONTRACT IS TO SUBSTITUTE THE AMOUNT AGREED UPON AS LIQUIDATED DAMAGES FOR THE ACTUAL DAMAGES RESULTING FROM BREACH OF THE CONTRACT, AND THEREBY PREVENTS A CONTROVERSY BETWEEN THE PARTIES AS TO THE AMOUNT OF DAMAGES. IF A PROVISION IS CONSTRUED TO BE ONE FOR LIQUIDATED DAMAGES, THE SUM STIPULATED FORMS, IN GENERAL, THE MEASURE OF DAMAGES IN CASE OF A BREACH, AND THE RECOVERY MUST BE FOR THAT AMOUNT. NO LARGER OR SMALLER SUM CAN BE AWARDED EVEN THOUGH THE ACTUAL LOSS MAY BE GREATER OR LESS. SEE SECTIONS 219 AND 235 OF 22 AM. JUR. 2D, DAMAGES, AT PAGES 306 AND 321.

IT WOULD APPEAR, AS HAS BEEN FOUND BY THE BOARD OF FOREST APPEALS, THAT PROVISION (1) OF SECTION B9.2 OF THE TERMINATED CONTRACT IS UNENFORCEABLE AS A PENALTY BECAUSE THE BID PREMIUM RATES OF A TERMINATED CONTRACT AND OF A RESALE CONTRACT DO NOT APPEAR TO BEAR ANY RELATION TO THE DAMAGES WHICH MIGHT RESULT FROM A FAILURE TO CUT AND REMOVE ALL THE TIMBER IN THE SALE AREA. IN ANY EVENT, IF AN AGREEMENT FOR LIQUIDATED DAMAGES WAS INTENDED, IT IS OBVIOUS THAT THE GOVERNMENT SHOULD NOT HAVE BEEN PLACED IN THE POSITION, AS PERMITTED UNDER THE TERMS OF SECTION B9.2 OF THE TERMINATED CONTRACT, OF HAVING THE RIGHT TO ASSESS DAMAGES ON THE BASIS OF EITHER A RATE REPRESENTING ACTUAL DAMAGES OR THE LIQUIDATED DAMAGE RATE (DIFFERENCE BETWEEN BID PREMIUMS), "WHICHEVER RATE IS THE GREATER."

ACCORDINGLY, WE WOULD NOT BE REQUIRED TO OBJECT TO THE PROPOSALS OF THE FOREST SERVICE UNDER WHICH IT WOULD ABIDE BY THE DECISION OF THE BOARD IN THE MATTER OF THE ASSESSMENT OF $6,634.29 AGAINST THE IDAHO TIMBER COMPANY, AND NOT ASSESS DAMAGES FOR LOSS OF BID PREMIUM IN OTHER PENDING CASES AND OTHERS WHICH MAY ARISE WHICH ARE THE SAME IN PRINCIPLE AS THE CASE DECIDED BY THE BOARD.