B-33863, MAY 11, 1943, 22 COMP. GEN. 1035

B-33863: May 11, 1943

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

CONTRACTS - DEFAULTING CONTRACTORS - EXTENT OF INCREASED COST LIABILITY WHERE A CONTRACTOR DEFAULTS UNDER ITS CONTRACT FOR FURNISHING SUPPLIES TO THE GOVERNMENT AND A REPLACING CONTRACT IS AWARDED TO ANOTHER CONTRACTOR ON THE BASIS OF SPECIFICATIONS IDENTICAL WITH THOSE MADE A PART OF THE DEFAULTED CONTRACT. THE RIGHTS AND LIABILITIES OF THE DEFAULTING CONTRACTOR ARE FIXED AT THE TIME THE SECOND CONTRACT IS MADE. THE DEFAULTING CONTRACTOR IS LIABLE FOR THE DIFFERENCE BETWEEN ITS CONTRACT PRICE AND THE HIGHER CONTRACT PRICE FIXED IN THE REPLACING CONTRACT. 1943: I HAVE YOUR LETTER OF APRIL 14. AS FOLLOWS: THERE IS SUBMITTED FOR YOUR CONSIDERATION THE QUESTION OF WHETHER THE LIABILITY OF A DEFAULTING CONTRACTOR IS DETERMINED UNQUALIFIEDLY AT THE TIME OF MAKING A NEW CONTRACT COVERING REPURCHASE OR WHETHER IT IS QUALIFIED BY SUCH CIRCUMSTANCES AS OCCUR IN INSTANCES WHEN CERTAIN SPECIFICATION REQUIREMENTS ARE WAIVED AND MATERIAL FURNISHED BY THE SECOND CONTRACTOR IS ACCEPTED AT A REDUCTION IN PRICE.

B-33863, MAY 11, 1943, 22 COMP. GEN. 1035

CONTRACTS - DEFAULTING CONTRACTORS - EXTENT OF INCREASED COST LIABILITY WHERE A CONTRACTOR DEFAULTS UNDER ITS CONTRACT FOR FURNISHING SUPPLIES TO THE GOVERNMENT AND A REPLACING CONTRACT IS AWARDED TO ANOTHER CONTRACTOR ON THE BASIS OF SPECIFICATIONS IDENTICAL WITH THOSE MADE A PART OF THE DEFAULTED CONTRACT, THE RIGHTS AND LIABILITIES OF THE DEFAULTING CONTRACTOR ARE FIXED AT THE TIME THE SECOND CONTRACT IS MADE, AND THE DEFAULTING CONTRACTOR IS LIABLE FOR THE DIFFERENCE BETWEEN ITS CONTRACT PRICE AND THE HIGHER CONTRACT PRICE FIXED IN THE REPLACING CONTRACT, REGARDLESS OF ANY SUBSEQUENT ADJUSTMENT IN PRICE THAT MAY BE MADE BETWEEN THE GOVERNMENT AND THE REPLACING CONTRACTOR TO COVER DAMAGES RESULTING FROM DELIVERY OF SUPPLIES NOT IN CONFORMITY WITH THE CONTRACT SPECIFICATIONS.

COMPTROLLER GENERAL WARREN TO THE ADMINISTRATOR OF VETERANS' AFFAIRS, MAY 11, 1943:

I HAVE YOUR LETTER OF APRIL 14, 1943, AS FOLLOWS:

THERE IS SUBMITTED FOR YOUR CONSIDERATION THE QUESTION OF WHETHER THE LIABILITY OF A DEFAULTING CONTRACTOR IS DETERMINED UNQUALIFIEDLY AT THE TIME OF MAKING A NEW CONTRACT COVERING REPURCHASE OR WHETHER IT IS QUALIFIED BY SUCH CIRCUMSTANCES AS OCCUR IN INSTANCES WHEN CERTAIN SPECIFICATION REQUIREMENTS ARE WAIVED AND MATERIAL FURNISHED BY THE SECOND CONTRACTOR IS ACCEPTED AT A REDUCTION IN PRICE. SUCH QUALIFICATION WOULD APPEAR NOT TO BE IN CONTRAVENTION WITH YOUR DECISION A 63562 (15 CG 149), WHEREIN IT IS STATED TO BE A GENERAL RULE OF LAW THAT WHEN A CONTRACTOR BREACHES ITS CONTRACT AND FAILS IN ITS PERFORMANCE, IT BECOMES LIABLE FOR WHATEVER DAMAGES SUCH BREACH OCCASIONS THE OTHER PARTY, AND THAT THE MEASURE OF SUCH DAMAGES IS THE AMOUNT THAT WILL COMPENSATE FOR THE LOSS WHICH A FULFILLMENT OF THE CONTRACT WOULD HAVE PREVENTED.

YOU ARE ADVISED THAT SUPREME THREAD COMPANY, NEW YORK, NEW YORK WAS DECLARED IN DEFAULT BECAUSE OF FAILURE TO DELIVER COTTON MACHINE THREAD IN ACCORDANCE WITH SPECIFICATION REQUIREMENTS ON PURCHASE ORDER 41-VA-13492, CONTRACT VAP-16920 AND ITEM 1, PURCHASE ORDER 41-VA 16604, CONTRACT VAP- 17239, COPIES ON FILE IN YOUR OFFICE, AND CONTRACTOR'S RIGHT TO PROCEED UNDER THESE CONTRACTS WAS TERMINATED BY LETTERS DATED DECEMBER 6, 1941, JANUARY 27, 1942 AND JANUARY 24, 1942, COPIES ATTACHED. THIS THREAD FAILED TO COMPLY WITH SPECIFICATION REQUIREMENTS IN THE FOLLOWING RESPECTS:

CHART

PURCHASE ORDER 41-VA-13492 ITEM SIZE WHITE, 500-YD. SPOOLS --------------

4 30 19 DOZ. SPOOLS, 300-YD. SPOOLS FURNISHED.

25 DOZ. SPOOLS, PARTIAL DELIVERY NOT TESTED INASMUCH

AS CONTRACTOR FAILED TO MAKE REPLACEMENT OF

REJECTED 19 DOZ. SPOOLS. ---------------------- ------------------------

ITEM 5, SIZE 40 ITEM 6, SIZE 50 ITEM 7, SIZE 60

REQUIRE- RESULT REQUIRE- RESULT REQUIRE- RESULT

MENT OF TEST MENT OF TEST MENT OF TEST

----------------- ----------------- ------------- --- LENGTH PER SPOOL, YD.

500 474 500 500 500 514 YARDS PER POUND --- - 10,190 9,110 12,770 10,659 14,210 17,267 TWIST ------------ -- RIGHT LEFT RIGHT LEFT RIGHT LEFT PLY - --------------- 6 4 6 4 6 2 BREAKING STRENGTH,

LB. ----------- 2.50 2.8 2.00 3.4 1.80 1.9 ------------------------------ ------------------------------------- ------ ITEM SIZE WHITE, 500-YD. SPOOLS --------------------------- ---------------------------------------

870 15 DOZ. SPOOLS, 400-YD. SPOOLS FURNISHED.

BLACK, 500-YD. SPOOLS

9 24 FAILED TO DELIVER.

10 40 45 DOZ. SPOOLS, 400-YD. SPOOLS FURNISHED. -------- ---------------

PURCHASE ORDER 41-VA-16604 ITEM 1, SIZE 60, WHITE--- 6,000 YD. CONES. FAILED TO DELIVER.

REPURCHASE OF 12 DOZEN SPOOLS OF COTTON MACHINE THREAD, SIZE 70, WHITE, 500 YARDS EACH, WAS MADE FROM THE SPOOL COTTON COMPANY, NEW YORK, NEW YORK AT $20.88 NET, F.O.B. DESTINATION, ON PURCHASE ORDER 42-VA-14154, ABSTRACT 36518. REPRESENTATIVE SAMPLES OF THIS DELIVERY WERE TESTED AND FOUND TO CONTAIN A SHORTAGE IN LENGTH OF 10 YARDS PER SPOOL, REPRESENTING 2 PERCENT OF THE MINIMUM REQUIREMENT. DUE TO THE URGENT NEED, THIS THREAD WAS ACCEPTED AT A REDUCTION OF 2 PERCENT FROM THE INVOICE PRICE AND CONTRACTOR'S ACCOUNT WAS PAID BY D.O. VOUCHER NO. 317378 DATED AUGUST 12, 1942, IN THE AMOUNT OF $20.46, G. F. ALLEN, SYMBOL 11-559. ABSTRACT 36518 AND COPY OF PURCHASE ORDER 42-VA-14154 ARE ON FILE IN YOUR OFFICE WITH VOUCHER IN THE AMOUNT OF $20.88 IN FAVOR OF THE SPOOL COTTON COMPANY.

REPURCHASE OF THE REMAINING ITEMS WAS MADE FROM THE AMERICAN THREAD COMPANY, PHILADELPHIA, PENNSYLVANIA, ON PURCHASE ORDER 42-VA-12562, CONTRACT VAP-18264, ON FILE IN YOUR OFFICE. REPRESENTATIVE SAMPLES OF THE DELIVERY WERE TESTED AND FOUND TO COMPLY WITH SPECIFICATION REQUIREMENTS WITH THE EXCEPTION OF ITEMS 5, 9, AND 250 CONES OF ITEM 11.

ONE HUNDRED EIGHTY DOZEN SPOOLS OF WHITE THREAD, SIZE 40, ITEM 5, WERE ACCEPTED AT A REDUCTION OF 4 PERCENT FROM THE INVOICE PRICE DUE TO DEVIATION FROM THE SPECIFICATION REQUIREMENTS WITH RESPECT TO BREAKING STRENGTH. THIS REDUCTION WAS COMPUTED ON THE BASIS OF ACTUAL DEFICIENCY IN TENSILE STRENGTH; REPRESENTATIVE SAMPLES TESTED HAVING A BREAKING STRENGTH OF 2.40 POUNDS IN LIEU OF A MINIMUM OF 2.50 POUNDS AS REQUIRED BY THE SPECIFICATIONS.

TWO HUNDRED FIFTY CONES, 12,000 YARDS EACH, SIZE 60, WHITE THREAD PARTIAL DELIVERY OF ITEM 11 FROM THE AMERICAN THREAD COMPANY, WERE ACCEPTED AT A REDUCTION OF 5 1/2 PERCENT FROM THE INVOICE PRICE, DUE TO DEVIATION FROM THE SPECIFICATION REQUIREMENTS WITH RESPECT TO BREAKING STRENGTH. THIS REDUCTION WAS COMPUTED ON THE BASIS OF ACTUAL DEFICIENCY IN TENSILE STRENGTH; REPRESENTATIVE SAMPLES TESTED HAVING A BREAKING STRENGTH OF 1.70 POUNDS IN LIEU OF A MINIMUM OF 1.80 POUNDS AS REQUIRED BY THE SPECIFICATIONS.

PAYMENT OF THE REMAINING 150 CONES WAS MADE AT THE CONTRACT PRICE INASMUCH AS REPRESENTATIVE SAMPLES OF THIS QUANTITY WERE FOUND TO COMPLY WITH SPECIFICATION REQUIREMENTS AND DELIVERY OF ITEM 11 WAS CONSIDERED COMPLETE WITH 400 CONES. IT WILL BE NOTED REPURCHASE WAS MADE OF 406 CONES, 12,000 YARDS EACH WHEREAS DEFAULTING CONTRACTOR WAS TO HAVE FURNISHED 811 CONES, 6000 YARDS EACH, SIZE 60, WHITE COTTON MACHINE THREAD.

PAYMENT OF THESE ACCOUNTS IN FAVOR OF THE AMERICAN THREAD COMPANY WAS MADE ON CERTIFICATE OF SETTLEMENT 10707910 DATED JANUARY 2, 1943, BY D.O. VOUCHER NO. 1345740 DATED JANUARY 11, 1943, IN THE AMOUNT OF $1933.16, G. F. ALLEN, SYMBOL 11-559.

DELIVERY OF 13 DOZEN SPOOLS, SIZE 24, BLACK COTTON MACHINE THREAD ITEM 9, FROM THE AMERICAN THREAD COMPANY, WAS ACCEPTED AT A REDUCTION OF 2.2 PERCENT FROM THE INVOICE PRICE DUE TO DEVIATION FROM THE SPECIFICATION REQUIREMENTS WITH RESPECT TO LENGTH PER SPOOL; REPRESENTATIVE SAMPLES HAVING BEEN FOUND TO CONTAIN AN AVERAGE SHORTAGE OF 11 YARDS PER SPOOL REPRESENTING 2.2 PERCENT OF THE MINIMUM REQUIREMENT. VOUCHER IN FAVOR OF THE AMERICAN THREAD COMPANY IN THE AMOUNT OF $27.35, COVERING THIS DELIVERY, WAS FORWARDED TO THE GENERAL ACCOUNTING OFFICE ON FEBRUARY 10, 1943, FOR DIRECT SETTLEMENT. IT WILL BE NOTED THE CONTRACTOR MADE AN OVER -DELIVERY OF 1 DOZEN SPOOLS, SIZE 24, BLACK THREAD, WHICH WAS ACCEPTED AT THE SAME REDUCTION IN PRICE AS WAS THE CONTRACT QUALITY.

IN OTHER WORDS, SHOULD THE SUPREME THREAD COMPANY BE CHARGED EXCESS COST IN THE AMOUNT OF THE DIFFERENCE BETWEEN ITS CONTRACT PRICES AND THE CONTRACT PRICES OF THE SPOOL COTTON COMPANY AND AMERICAN THREAD COMPANY OR EXCESS COST IN THE AMOUNT OF THE DIFFERENCE BETWEEN ITS CONTRACT PRICES AND THE AMOUNTS ACTUALLY PAID TO SPOOL COTTON COMPANY AND AMERICAN THREAD COMPANY, WHICH WERE DUE TO VARIATIONS FROM THE SPECIFICATIONS?

IT IS REQUESTED THAT THIS ADMINISTRATION BE FURNISHED WITH YOUR DECISION AT YOUR EARLIEST OPPORTUNITY.

THE REPLACEMENT PURCHASES FROM THE SPOOL COTTON COMPANY AND THE AMERICAN THREAD COMPANY APPEAR TO HAVE BEEN MADE AFTER THE SOLICITATION OF BIDS ON THE BASIS OF SPECIFICATIONS IDENTICAL WITH THOSE MADE A PART OF THE CONTRACT WITH THE SUPREME THREAD COMPANY AND THE BIDS RECEIVED FROM THOSE TWO CONCERNS WERE THE LOWEST MEETING THE GOVERNMENT'S SPECIFICATIONS BUT WERE IN EXCESS OF THE PRICES FOR WHICH THE SUPREME THREAD COMPANY HAD AGREED TO FURNISH THE REQUIRED THREAD.

THE ESTABLISHED RULE TO BE FOLLOWED IN CASES INVOLVING FACTS SUCH AS STATED IN YOUR SUBMISSION IS THAT THE LIABILITY OF THE DEFAULTING CONTRACTOR IS FIXED AT THE TIME THE SECOND CONTRACT IS MADE, REGARDLESS OF ANY FAILURE OF THE SUBSTITUTE CONTRACTOR TO COMPLY WITH ITS CONTRACT; AND THAT THE DEFAULTING CONTRACTOR IS NOT ENTITLED TO ANY BENEFIT BY REASON OF A SUBSEQUENT DEFAULT, OR DEVIATION FROM THE CONTRACT REQUIREMENTS ON THE PART OF THE CONTRACTOR FROM WHOM THE REPLACEMENT SUPPLIES MAY BE OBTAINED. THAT IS TO SAY, THE AMOUNT OF DAMAGES IS THE DIFFERENCE BETWEEN THE CONTRACT PRICE OF THE ARTICLE WHICH THE DEFAULTING CONTRACTOR AGREED TO FURNISH AND THE PRICE AT WHICH A REPLACEMENT COULD HAVE BEEN OBTAINED AT THE TIME OF DEFAULT. SEE BURGIE V. HICKS, 203 F. 340; SAWYER V. EATON, 293 F. 898; REYNVELD V. DUPUIS, 39 F. (2D) 399; BOARD OF EDUCATION V. MARYLAND CASUALTY COMPANY, 27 F. (2D) 20. IN THE LAST CITED CASE THE COURT SAID, WITH RESPECT TO A SIMILAR SITUATION:

* * * WHERE AFTER BREACH A CONTRACT FOR COMPLETION HAS BEEN LET ON TERMS IDENTICAL WITH THOSE OF THE FIRST CONTRACT EXCEPT AS TO PRICE, AS IN THIS CASE, COURTS HAVE PRONOUNCED THAT THE MEASURE OF DAMAGES IS THE DIFFERENCE BETWEEN THE DEFAULTER'S PRICE AND THE PRICE OF THE SUBSEQUENT LETTING. CITY OF GOLDSBORO V. MOFFETT ( C.C.) 49 F. 213, 216; SCHUYLER COUNTY V. MISSOURI BRIDGE AND IRON CO., 173 ILL. APP. 435, ID., 256 ILL. 348, 100 N.E. 239. THIS RULE IS APPLIED IN SUCH CASES BECAUSE OF THE POSITIVE PROOF OF DAMAGES MADE AVAILABLE BY THE COST PRICE NAMED IN THE SECOND CONTRACT INTO WHICH THE OWNER HAD BEEN FORCED TO ENTER BY THE BREACH OF THE FIRST CONTRACT AND THIS PROOF OF DAMAGES BEING AT HAND MAY AT ONCE BE USED IN A SUIT TO RECOVER.

ACCORDINGLY, I HAVE TO ADVISE THAT IN VIEW OF THE PRINCIPLES ESTABLISHED IN THE ABOVE CITED CASES, THE ADJUSTMENTS IN PRICES MADE WITH THE SPOOL COTTON COMPANY AND THE AMERICAN THREAD COMPANY TO COVER DAMAGES RESULTING FROM VARIATIONS FROM THE SPECIFICATIONS UNDER WHICH THE REPLACEMENT SUPPLIES WERE PURCHASED, ARE NOT FOR CONSIDERATION IN DETERMINING THE RIGHTS AND LIABILITIES OF THE SUPREME THREAD COMPANY. IN OTHER WORDS, THE SUPREME THREAD COMPANY SHOULD BE CHARGED EXCESS COST IN THE AMOUNT OF THE DIFFERENCE BETWEEN ITS CONTRACT PRICES AND THE CONTRACT PRICES OF THE SPOOL COTTON COMPANY AND AMERICAN THREAD COMPANY.