B-28271, SEPTEMBER 14, 1942, 22 COMP. GEN. 222

B-28271, SEPTEMBER 14, 1942, 22 COMP. GEN. 222

CONTRACTS - COAL - DEDUCTIONS FOR INFERIOR DELIVERIES RESULTING IN BITUMINOUS COAL CODE, ETC., VIOLATIONS THERE IS NO AUTHORITY OF LAW FOR A CONTRACTING OFFICER OR OTHER ADMINISTRATIVE OFFICIAL OF THE GOVERNMENT TO REFUSE TO GIVE EFFECT TO A CONTRACT PROVISION WHICH AUTHORIZES A DEDUCTION FROM THE CONTRACT PRICE OF COAL IF THE COAL FURNISHED IS SHOWN UPON ANALYSIS TO CONTAIN AN ASH CONTENT IN EXCESS OF THAT SPECIFIED IN THE CONTRACT, EVEN THOUGH SUCH DEDUCTION WILL RESULT IN A NET PRICE BELOW THE MINIMUM PRICE ESTABLISHED UNDER THE BITUMINOUS COAL CODE, OR WILL RESULT IN THE VIOLATION BY THE CONTRACTOR OF SOME RULE OR REGULATION ISSUED BY THE BITUMINOUS COAL DIVISION.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF THE INTERIOR, SEPTEMBER 14, 1942:

I HAVE YOUR LETTER OF AUGUST 18, 1942, AS FOLLOWS:

ON AUGUST 15, 1941, W. W. HARRISON, ACTING PURCHASING OFFICER FOR THE DEPARTMENT OF THE INTERIOR, ENTERED INTO CONTRACT I-1-IND-24311 WITH THE WEST KENTUCKY COAL COMPANY, THE ORIGINAL OF WHICH IS ON FILE IN YOUR OFFICE, FOR A QUANTITY OF COAL FOR THE INDIAN FIELD SERVICE. STANDARD FORM 43 OF THE CONTRACT PROVIDED AMONG OTHER THINGS, THAT IF THE COAL DELIVERED WAS SUBJECT TO ANALYTIC TESTS, AND SUCH TESTS SHOWED AN EXCESSIVE ASH CONTENT IN THE COAL, THE GOVERNMENT HAS THE RIGHT TO:

"RETAIN THE COAL, IN WHICH EVENT A REDUCTION IN PRICE SHALL BE COMPUTED BY MULTIPLYING THE VALUE OF THE COAL (AS DETERMINED BY THE CONTRACT PRICE IF IT IS PURCHASED FOR DELIVERY AT DESTINATION, OR OTHERWISE AS DETERMINED BY THE CONTRACT PRICE PLUS FREIGHT CHARGES BY COMMON CARRIER TO DESTINATION) BY THE DIFFERENCE BETWEEN THE PERCENTAGE OF ASH BY ANALYSIS AND THE PERCENTAGE OF ASH AS SPECIFIED BY THE CONTRACTOR. THE RESULTANT PRODUCT COMPUTED TO THE NEAREST CENT, SHALL THEN BE DEDUCTED FROM THE CONTRACT PRICE.'

ITEM 19 HEREIN INVOLVED COVERS A QUANTITY OF COAL SIZE 1 1/4 INCHES X 2 INCHES NUT, AT $1.44 PER TON F.O.B. CARS AT MINE. FORM B, MADE A PART OF THE CONTRACT, GUARANTEED THAT THE COAL TO BE DELIVERED UNDER THIS ITEM WOULD NOT EXCEED 9.5 PERCENT IN ASH CONTENT. AN ANALYSIS OF THE 148.85 TONS DELIVERED ON ORDER 681 FOR THE PERIOD OCTOBER 30 TO NOVEMBER 8, 1941, REPORTED BY THE BUREAU OF MINES, SHOWS THAT THE PERCENTAGE OF ASH WAS 11.5 PERCENT, OR 2 PERCENT IN EXCESS OF THE GUARANTEE. ACCORDINGLY, THE SUPERINTENDENT OF THE SAC AND FOX SANATORIUM WAS INSTRUCTED TO INVESTIGATE THE REGULARITY OF THE METHOD OF SAMPLING, AND IF SATISFIED AS TO ITS REGULARITY TO CALL ON THE CONTRACTOR FOR A REFUND OF $13.40, ARRIVED AT AS FOLLOWS:

CHART

ASH CONTENT BY ANALYSIS ------------------- 11.5 PERCENT

ASH CONTENT GUARANTEED UNDER CONTRACT ----- 9.5 PERCENT

ASH CONTENT DIFFERENCE -------------------- 2.0 PERCENT

CONTRACT RATE F.O.B. STURGES, KY. ------------------- $1.44

NET FREIGHT TOLEDO, IOWA ---------------------------- 3.20

DELIVERY COST PER TON --------------------------- $4.64

DELIVERY COST PER TON $4.64 X 2.0 PERCENT EQUALS .09 PER TON

148.85 TONS X .09 EQUALS $13.40 TOTAL PENALTY.

THE CONTRACTOR ON BEING APPRISED OF THE PENALTY BY A COPY OF PURCHASING OFFICE LETTER ADDRESSED TO THE SUPERINTENDENT, VOICED HIS OBJECTION TO THE PAYMENT OF THE PENALTY ON THE PREMISE THAT TO DO SO WOULD BE IN VIOLATION OF ARTICLE 18 OF THE BITUMINOUS COAL ACT. THE MATTER WAS REFERRED TO MR. HARVEY L. WELLS, MGR. OF DISTRICT NO. 9 OF THE BITUMINOUS COAL DIVISION AT ASHLAND, KY., BY THE CONTRACTOR WHO WAS INFORMED BY MR. WELLS, COPY OF LETTER ATTACHED, THAT A "MERE DEFICIENCY IN THE ANALYTICAL PROPERTIES OF COAL IS NOT SUFFICIENT BASIS ON WHICH TO MAKE AN ALLOWANCE FOR SUBSTANDARD PREPARATION OR QUALITY.' THE MATTER WAS REFERRED TO THE ACTING DIRECTOR OF THE BITUMINOUS COAL DIVISION FOR HIS OPINION. THE ACTING DIRECTOR IN HIS REPLY, ORIGINAL MEMORANDUM ATTACHED, INDICATES HIS CONCURRENCE WITH THE OPINION EXPRESSED BY MR. WELLS.

THIS DEPARTMENT REGARDS CONTRACTS FOR THE PURCHASE OF COAL AS BEING SUBJECT TO THE RULES AND REGULATIONS PROMULGATED PURSUANT TO THE BITUMINOUS COAL ACT. ACCORDINGLY, THE PROVISION OF STANDARD FORM NO. 43, OF THE CONTRACT REFERRED TO ABOVE, WOULD APPEAR TO BE GOVERNED BY THE DIVISION'S RULING. WILL YOU KINDLY ADVISE THIS DEPARTMENT OF YOUR OPINION WITH RESPECT TO THIS MATTER?

PLEASE RETURN THE PAPERS SUBMITTED WHEN THEY HAVE SERVED THEIR PURPOSE.

THE COPY OF THE LETTER OF JANUARY 27, 1942, FROM THE MANAGER, DISTRICT NO. 9, BITUMINOUS COAL DIVISION, TO THE CONTRACTOR, IS AS FOLLOWS:

WE HAVE YOUR LETTER OF JANUARY 19TH, WITH REFERENCE TO A REFUND CLAIMED BY THE INDIAN FIELD SERVICE OF THE DEPARTMENT OF INTERIOR, DUE TO EXCESSIVE ASH CONTAINED IN THE COAL.

IT APPEARS FROM YOUR LETTER THAT THIS COAL WAS SOLD ON A CONTRACT CONTAINING A GUARANTEED ANALYSIS AND A PENALTY CLAUSE, ALTHOUGH THIS TERM DOES NOT APPEAR IN THE ABSTRACT OF THE CONTRACT WHICH YOU FILED WITH THIS OFFICE. IF THIS COAL WAS SOLD UNDER A CONTRACT CONTAINING A PENALTY CLAUSE, RULE 6, SECTION VIII OF THE MARKETING RULES AND REGULATIONS WOULD PROHIBIT MAKING AN ALLOWANCE WHICH WOULD PERMIT THE SALE OF THE COAL AT AN AGGREGATE CONTRACT PRICE BELOW THE APPLICABLE MINIMUM PRICE.

WITH REFERENCE TO SECTION X OF THE MARKETING RULES AND REGULATIONS, A MERE DEFICIENCY IN THE ANALYTICAL PROPERTIES OF COAL IS NOT SUFFICIENT BASIS ON WHICH TO MAKE AN ALLOWANCE FOR SUBSTANDARD PREPARATION OR QUALITY. YOUR FILE IS RETURNED HEREWITH.

THE MEMORANDUM OF APRIL 23, 1942, FROM THE ACTING DIRECTOR, BITUMINOUS COAL DIVISION, TO THE ACTING PURCHASING OFFICER, READS:

IN YOUR MEMORANDUM DATED APRIL 3, 1942, REFERENCE 12311-FER-1942, ENCLOSURE 2875377, YOU STATE THAT YOUR OFFICE ENTERED INTO A PENALTY CONTRACT WITH THE WEST KENTUCKY COAL COMPANY, ARLINGTON, KENTUCKY, FOR THE PURCHASE OF BITUMINOUS COAL FOR THE INDIAN FIELD SERVICE. YOU STATE THAT THE CONTRACTOR WAS AWARE AT THE TIME OF BIDDING THAT HE WOULD BE PENALIZED FOR ANY COAL DELIVERED WHICH WAS MORE THAN 2 PERCENT IN EXCESS OF THE ASH CONTENT SPECIFIED IN THE CONTRACT AND YOU FURTHER STATE THAT A PENALTY OF $13.40 HAS BEEN ASSESSED AGAINST THE WEST KENTUCKY COAL COMPANY FOR THE DELIVERY OF INFERIOR COAL UNDER THE ABOVE-MENTIONED CONTRACT. YOU INQUIRE WHETHER IT WOULD BE PROPER FOR THE CONTRACTOR TO MAKE A REFUND OF THIS AMOUNT PURSUANT TO SECTION X OF THE MARKETING RULES AND REGULATIONS ESTABLISHED BY THE BITUMINOUS COAL DIVISION AND YOU ENCLOSE A COPY OF A LETTER FROM MR. HARVEY L. WELLS DATED JANUARY 27, 1942, ADDRESSED TO THE WEST KENTUCKY COAL COMPANY ADVISING THAT COMPANY THAT A MERE DEFICIENCY IN THE ANALYTICAL QUALITIES OF COAL IS NOT IN ITSELF A SUFFICIENT BASIS UPON WHICH A PRODUCER MAY BE PERMITTED TO MAKE ALLOWANCE FOR SUBSTANDARD PREPARATION AND QUALITY PURSUANT TO SECTION X.

IT IS MY OPINION THAT THE STATEMENT CONTAINED IN MR. WELLS' LETTER IS CORRECT. ALLOWANCES MAY BE GRANTED PURSUANT TO SECTION X ONLY WHERE THE COAL IS SUBSTANDARD IN PREPARATION AND QUALITY AS COMPARED TO THE COAL NORMALLY PRODUCED FROM THE MINE; THIS IS TRUE REGARDLESS OF WHETHER THE COAL WAS SOLD PURSUANT TO A PENALTY CONTRACT. THEREFORE, IN THE SITUATION OUTLINED IN YOUR MEMORANDUM SECTION X MAY NOT BE USED BY THE PRODUCER, WEST KENTUCKY COAL COMPANY, TO JUSTIFY PENALTIES WHICH BRING THE AGGREGATE CONTRACT PRICE BELOW THE APPLICABLE MINIMUM PRICE, UNLESS WEST KENTUCKY COAL COMPANY CAN SHOW THAT THE COAL INVOLVED WAS SUBSTANDARD IN PREPARATION AND QUALITY AS COMPARED TO THE GRADE AND SIZE OF THE COAL REGULARLY PRODUCED FROM THE MINE.

THE REFERENCE IN YOUR LETTER OF AUGUST 18, TO THE OBJECTION BY THE CONTRACTOR TO PAYMENT OF THE PENALTY ON THE GROUND THAT TO DO SO WOULD CONSTITUTE A "VIOLATION OF ARTICLE 18 OF THE BITUMINOUS COAL ACT" IS NOT UNDERSTOOD, AND IT IS ASSUMED THAT THE CONTRACTOR OBJECTED FOR THE REASON STATED IN THE LETTER OF JANUARY 27, 1942, SUPRA, FROM THE MANAGER, DISTRICT NO. 9, BITUMINOUS COAL DIVISION; THAT IS, ON THE GROUND THAT PAYMENT OF THE EXCESSIVE ASH CONTENT PENALTY WILL CONSTITUTE A VIOLATION BY THE CONTRACTOR OF SECTION VIII, RULE 6, OF THE MARKETING RULES AND REGULATIONS OF THE BITUMINOUS COAL DIVISION, WHICH PROVIDES AS FOLLOWS:

RULE 6. FROM AND AFTER THE EFFECTIVE DATE OF THESE MARKETING RULES AND REGULATIONS, NO CODE MEMBER, HIS SALES AGENT OR A DISTRIBUTOR SHALL ENTER INTO OR PERFORM ANY AGREEMENT MADE UPON A PENALTY OR A PREMIUM AND PENALTY BASIS WHICH WILL PERMIT THE SALE OF COAL AT AN AGGREGATE CONTRACT PRICE BELOW THE APPLICABLE MINIMUM PRICE OR PRICES ESTABLISHED BY THE DIVISION FOR THE COAL SOLD AND DELIVERED UPON SUCH AGREEMENT SUBSEQUENT TO SAID EFFECTIVE DATE.

SECTION X OF THE MARKETING RULES AND REGULATIONS, REFERRED TO IN THE MEMORANDUM OF APRIL 23, SUPRA, FROM THE ACTING DIRECTOR, BITUMINOUS COAL DIVISION PROVIDES, IN PERTINENT PART, AS FOLLOWS:

WHERE ANY CLAIM OF ALLOWANCE OR COUNTERCLAIM IS REQUESTED BY A BUYER FOR ANY DELIVERY OF COAL CLAIMED TO BE SUBSTANDARD IN PREPARATION OR QUALITY, OR WHERE IT IS CLAIMED BY THE BUYER THAT DUE TO AN ERROR ON THE PART OF THE SHIPPER THE BUYER HAS INCURRED ADDITIONAL EXPENSE IN ACCEPTING THE SHIPMENT, THE CODE MEMBER, HIS SALES AGENT OR A DISTRIBUTOR MAY, WITHIN A REASONABLE TIME AFTER DELIVERY OF THE COAL, MAKE SETTLEMENT AND AGREE WITH THE BUYER UPON AN AMOUNT REASONABLY TO BE DEDUCTED FOR SUCH INFERIOR COAL OR ON ACCOUNT OF SUCH ERROR AND MAY ACCEPT PAYMENT THEREFOR AT LESS THAN THE APPLICABLE MINIMUM PRICE: * * *

IT APPEARS THAT UNDER THE TERMS OF THE CONTRACT HERE INVOLVED BOTH YOUR DEPARTMENT AND THE CONTRACTOR DEFINITELY INTENDED TO MAKE PROVISION FOR THE DEDUCTION OF A PENALTY FROM THE CONTRACT PRICE IN THE EVENT COAL WAS FURNISHED THEREUNDER AND USED BY THE GOVERNMENT WHICH WAS SHOWN UPON ANALYSIS TO HAVE AN ASH CONTENT IN EXCESS OF THAT SPECIFIED IN THE CONTRACT. MOREOVER, SUCH PROVISION WAS NOT SUBJECT TO ANY QUALIFICATION OR CONDITION THAT IT WOULD BE INOPERATIVE IF THE DEDUCTION OF THE PENALTY RESULTED IN A VIOLATION BY THE CONTRACTOR OF SOME PROVISION OF THE BITUMINOUS COAL CODE OR THE REGULATIONS ISSUED THEREUNDER. IN THIS CONNECTION, THE INVITATION FOR BIDS STIPULATED EXPRESSLY THAT---

STANDARD FORM NO. 43 ( STANDARD GOVERNMENT PURCHASE CONDITIONS FOR COAL) IS A PART OF THIS BID. * * * AND PARAGRAPH 16 THEREOF, QUOTED IN PART IN YOUR LETTER OF AUGUST 18, PROVIDED THAT IN THE EVENT COAL WAS DELIVERED WHICH UPON TEST SHOWED AN EXCESSIVE ASH CONTENT OF 2 PERCENT OR MORE OVER WHAT SPECIFIED BY THE CONTRACTOR IN ITS BID, THE GOVERNMENT WOULD HAVE THE RIGHT TO RETAIN THE COAL SUBJECT TO THE DEDUCTION FROM THE CONTRACT PRICE, AS A PENALTY, OF AN AMOUNT COMPUTED IN ACCORDANCE WITH THE METHOD OUTLINED THEREIN. ALSO, PARAGRAPH 2 OF " GENERAL CONDITIONS APPLICABLE TO ALL BITUMINOUS COAL CONTRACTS," WHICH WAS MADE A PART OF THE INSTANT CONTRACT PROVIDED THAT SAMPLES OF COAL WOULD BE ASSEMBLED, PREPARED, AND FORWARDED IMMEDIATELY TO THE BUREAU OF MINES FOR ANALYSIS AND TESTS AT NO COST TO THE CONTRACTOR.

THEREFORE, THE QUESTION PRESENTED BY YOUR LETTER IS, IN SUBSTANCE, WHETHER A GOVERNMENT CONTRACTOR MAY BE REQUIRED TO PAY A PENALTY WHICH IS PROPER FOR ASSESSMENT IN ACCORDANCE WITH THE PLAIN TERMS OF ITS CONTRACT, BECAUSE COAL FURNISHED THEREUNDER HAS AN EXCESS ASH CONTENT OVER THAT SPECIFIED, WHEN THE PAYMENT OF SUCH PENALTY WILL RESULT IN THE NET PRICE OF THE COAL BEING BELOW THE MINIMUM PRICE ESTABLISHED UNDER THE BITUMINOUS COAL CODE, OR WILL RESULT IN THE VIOLATION BY THE CONTRACTOR OF SOME RULE OR REGULATION ISSUED BY THE BITUMINOUS COAL DIVISION.

IT WAS HELD IN DECISION PUBLISHED IN 19 COMP. GEN. 453 THAT CONTRACTING OFFICERS OF THE GOVERNMENT ARE NOT REQUIRED OR AUTHORIZED TO REJECT BIDS FOR THE FURNISHING OF BITUMINOUS COAL TO THE GOVERNMENT ON THE GROUND THAT THE PRICES QUOTED THEREIN ARE BELOW THE MINIMUM PRICES ESTABLISHED PURSUANT TO THE BITUMINOUS COAL ACT OF APR. 26, 1937, 50 STAT. 72. HOWEVER, IN MY DECISION OF NOVEMBER 13, 1940, B 12894, 20 COMP. GEN. 259, THE ADMINISTRATOR OF VETERANS' AFFAIRS WAS ADVISED THAT NO OBJECTION WOULD BE MADE TO A PARAGRAPH IN AN INVITATION FOR BIDS DESIGNED FOR THE PROTECTION OF THOSE BIDDERS WHO WISH TO COMPLY IN ALL RESPECTS WITH THE BITUMINOUS COAL ACT OF 1937, PROVIDED THAT SUCH INVITATION CONTAINED, ALSO, SUITABLE PROVISIONS AUTHORIZING THE SUBMISSION OF BIDS ON AN ALTERNATIVE BASIS SO THAT THE RIGHT OF THE GOVERNMENT TO OBTAIN COAL FROM A BIDDER ON OTHER TERMS WOULD NOT BE FORECLOSED. WITH RESPECT TO THE PROVISIONS OF PARAGRAPH 16, STANDARD GOVERNMENT PURCHASING CONDITIONS ( COAL), STANDARD FORM NO. 43, PERTAINING TO THE ANALYSIS, SAMPLING AND PAYMENT FOR COAL FURNISHED, INCLUDING THE RIGHT OF THE GOVERNMENT TO MAKE A DEDUCTION FROM THE CONTRACT PRICE IN THE EVENT COAL CONTAINED EXCESS ASH, THE ADMINISTRATOR OF VETERANS' AFFAIRS WAS ADVISED IN THE LATTER DECISION THAT IF A BIDDER WISHED TO SUBMIT A QUOTATION NOT SUBJECT TO SUCH PROVISIONS BECAUSE OF RESTRICTIONS IN THE BITUMINOUS COAL ACT, NO REASON WAS APPARENT WHY IT MIGHT NOT DO SO OR WHY THE ADVERTISEMENT SHOULD NOT BE SO PREPARED AS TO PROVIDE FOR THE RECEIPT AND CONSIDERATION OF SUCH BIDS SO LONG AS THOSE RESTRICTIONS ARE RETAINED IN THE ADVERTISEMENT FOR APPLICATION TO OTHER BIDDERS WHO MIGHT NOT OBJECT THERETO.

THEREFORE, WHILE THE CONTRACTOR HERE INVOLVED COULD HAVE SUBMITTED A BID ON THE CONDITION THAT THE PRICES QUOTED FOR THE COAL WOULD NOT BE SUBJECT TO A DEDUCTION BECAUSE OF EXCESSIVE ASH CONTENT IF SUCH DEDUCTION RESULTED IN A VIOLATION OF THE BITUMINOUS COAL CODE OR THE RULES AND REGULATIONS ISSUED THEREUNDER, IT APPEARS, AS IS STATED ABOVE, THAT THE CONTRACTOR'S BID WAS NOT MADE SUBJECT TO SUCH QUALIFICATION BUT THAT THE CONTRACTOR DEFINITELY AGREED, WITHOUT ANY EXCEPTION, THAT THE DEDUCTION BECAUSE OF EXCESS ASH COULD BE MADE FROM ITS CONTRACT PRICE. IN VIEW THEREOF, AND SINCE THERE IS NO AUTHORITY OF LAW FOR A CONTRACTING OFFICER OR OTHER ADMINISTRATIVE OFFICIAL OF THE GOVERNMENT TO REFUSE TO GIVE EFFECT TO A CONTRACT PROVISION MERELY BECAUSE THE ENFORCEMENT THEREOF WILL RESULT IN THE VIOLATION BY THE CONTRACTOR OF THE BITUMINOUS COAL CODE OR THE RULES AND REGULATIONS ISSUED THEREUNDER (19 COMP. GEN. 453), YOU ARE ADVISED THAT THERE IS NO AUTHORITY OF LAW FOR THE WAIVER OF THE PENALTY DEDUCTION IN THIS CASE. ACCORDINGLY, THE SUM OF $13.40 SHOULD BE COLLECTED BY YOUR DEPARTMENT FROM THE CONTRACTOR EITHER DIRECTLY OR BY DEDUCTION FROM AMOUNTS WHICH OTHERWISE MAY BE DUE TO IT EITHER UNDER THE INSTANT OR OTHER CONTRACTS.