B-48339, APRIL 7, 1945, 24 COMP. GEN. 723

B-48339: Apr 7, 1945

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1945: I HAVE YOUR LETTER OF MARCH 3. ARTICLE 5 OF THE CONTRACT IS. FOR THE FURNISHING OF THE MOTOR ALTERNATOR SETS AND THAT THE INDICATED EXCESS COST TO THE GOVERNMENT IS $65. IT IS UNDERSTOOD THAT THE PRESENT FINANCIAL STRUCTURE OF THE QUALITY ELECTRIC COMPANY IS SUCH THAT COLLECTION BY THE GOVERNMENT OF THE EXCESS COST INVOLVED MIGHT JEOPARDIZE THE CONTINUED EXISTENCE OF THE COMPANY. STATES: REFERENCE IS MADE TO A LETTER FROM THIS OFFICE DATED AUGUST 18. AN ARRANGEMENT IS CURRENTLY IN PROGRESS WHEREBY ANOTHER SMALL CONCERN. WHICH IS REPORTED TO HAVE A GOOD PRODUCTION RECORD AND MORE ORDERS IN PROSPECT THAN IT CAN PROCESS WITH ITS OWN FACILITIES. IS BUYING CONTROL OF THE SUBJECT. THESE RECENT DEVELOPMENTS ARE REGARDED AS PROVIDING AN OPPORTUNITY FOR THE COMPANY TO WORK OUT OF THE UNFAVORABLE POSITION IT REACHED BY REASON OF HAVING ENGAGED IN WAR PRODUCTION OF A TYPE AND ON A SCALE FOR WHICH IT WAS NOT EQUIPPED.

B-48339, APRIL 7, 1945, 24 COMP. GEN. 723

CONTRACTS - MODIFICATION TO FACILITATE PROSECUTION OF WAR - AFTER CONTRACT TERMINATION THE AUTHORITY OF THE CIVIL AERONAUTICS ADMINISTRATION UNDER SECTION 201 OF THE FIRST WAR POWERS ACT, 1941, AND EXECUTIVE ORDERS ISSUED PURSUANT THERETO, TO AMEND OR MODIFY CONTRACTS "HERETOFORE OR HEREAFTER MADE," WITHOUT REGARD TO THE PROVISIONS OF LAW RELATING TO THE AMENDMENT, MODIFICATION, ETC., OF CONTRACTS, TO FACILITATE PROSECUTION OF THE WAR, DOES NOT INCLUDE AUTHORITY TO MODIFY A CONTRACT AFTER IT HAS BEEN TERMINATED BECAUSE OF THE CONTRACTOR'S DEFAULT, AND, THEREFORE, SUCH A CONTRACT MAY NOT BE MODIFIED TO RELIEVE THE CONTRACTOR OF ITS CONTRACTUAL LIABILITY FOR EXCESS COSTS INCURRED BY THE GOVERNMENT IN PROCURING THE CONTRACT SUPPLIES ELSEWHERE.

ACTING COMPTROLLER GENERAL YATES TO THE SECRETARY OF COMMERCE APRIL 7, 1945:

I HAVE YOUR LETTER OF MARCH 3, 1945, WITH ENCLOSURES, WHEREIN YOU REQUEST A DECISION AS TO THE LEGAL VALIDITY OF A PROPOSED MODIFICATION, UNDER AUTHORITY CONTAINED IN EXECUTIVE ORDER 9116, OF CONTRACT NO. CCA 16804, DATED JUNE 18, 1942, WITH THE QUALITY ELECTRIC COMPANY, LTD., TO RELIEVE THE CONTRACTOR OF EXCESS COSTS INCURRED BY THE GOVERNMENT AS A RESULT OF ITS DEFAULT UNDER THE SAID CONTRACT.

THE ESSENTIAL FACTS OF THE MATTER, AS DISCLOSED BY THE RECORD, APPEAR TO BE THESE: UNDER THE TERMS OF THE CONTRACT, THE QUALITY ELECTRIC COMPANY AGREED TO FURNISH A QUANTITY OF MOTOR ALTERNATOR SETS IN COMPLIANCE WITH DESIGNATED SPECIFICATIONS AND IN ACCORDANCE WITH A SPECIFIED DELIVERY SCHEDULE. ARTICLE 5 OF THE CONTRACT IS, IN PERTINENT PART, AS FOLLOWS:

DELAYS--- DAMAGES.--- IF THE CONTRACTOR REFUSES OR FAILS TO MAKE DELIVERIES OF THE MATERIALS OR SUPPLIES WITHIN THE TIME SPECIFIED IN ARTICLE 1, OR ANY EXTENSION THEREOF, THE GOVERNMENT MAY BY WRITTEN NOTICE TERMINATE THE RIGHT OF THE CONTRACTOR TO PROCEED WITH DELIVERIES OR SUCH PART OR PARTS THEREOF AS TO WHICH THERE HAS BEEN DELAY. IN SUCH EVENT, THE GOVERNMENT MAY PURCHASE SIMILAR MATERIALS OR SUPPLIES IN THE OPEN MARKET OR SECURE THE MANUFACTURE AND DELIVERY OF THE MATERIALS AND SUPPLIES BY CONTRACT OR OTHERWISE, AND THE CONTRACTOR AND HIS SURETIES SHALL BE LIABLE TO THE GOVERNMENT FOR ANY EXCESS COST OCCASIONED THE GOVERNMENT THEREBY * * *.

DUE TO THE FAILURE OF THE CONTRACTOR TO DELIVER ANY OF THE SETS AS SPECIFIED, THE CONTRACTING OFFICER, BY TELEGRAM DATED FEBRUARY 22, 1944, TERMINATED ITS RIGHT TO PROCEED (LATER CONFIRMED BY LETTER DATED APRIL 7, 1944). BY LETTERS OF MAY 12 AND MAY 24, 1944, THE CONTRACTOR APPEALED THE ACTION TAKEN BY THE CONTRACTING OFFICER IN DECLARING THE COMPANY IN DEFAULT AND TERMINATING ITS RIGHT TO PROCEED AND, UPON REVIEW, THE DEPUTY ADMINISTRATOR, CIVIL AERONAUTICS ADMINISTRATION, FOUND NO EVIDENCE WHICH WOULD JUSTIFY ANY CHANGE IN THE ACTION TAKEN AND CONCLUDED THAT " CANCELLATION OR AMENDMENT OF THE ACTION TAKEN WOULD BE IN DIRECT CONFLICT WITH THE FACTS AND THE GOVERNMENT'S INTERESTS.' IN YOUR LETTER YOU STATE THAT A CONTRACT HAS BEEN NEGOTIATED WITH THE CONTINENTAL ELECTRIC COMPANY, INC., FOR THE FURNISHING OF THE MOTOR ALTERNATOR SETS AND THAT THE INDICATED EXCESS COST TO THE GOVERNMENT IS $65,231.25.

FROM THE REPRESENTATIONS SET FORTH IN YOUR LETTER AND THE ATTACHMENTS THERETO, IT IS UNDERSTOOD THAT THE PRESENT FINANCIAL STRUCTURE OF THE QUALITY ELECTRIC COMPANY IS SUCH THAT COLLECTION BY THE GOVERNMENT OF THE EXCESS COST INVOLVED MIGHT JEOPARDIZE THE CONTINUED EXISTENCE OF THE COMPANY. IN THIS CONNECTION, THE CHIEF, ADVANCE PAYMENT AND LOAN BRANCH, SPECIAL FINANCIAL SERVICES DIVISION, WAR DEPARTMENT, IN A LETTER DATED FEBRUARY 10, 1945, TO THE CIVIL AERONAUTICS ADMINISTRATION, STATES:

REFERENCE IS MADE TO A LETTER FROM THIS OFFICE DATED AUGUST 18, 1944 CONCERNING PURCHASE ORDER CONTRACT CCA-16894 WITH QUALITY ELECTRIC COMPANY, LTD., LOS ANGELES, CALIFORNIA, WHICH HAS A SUBSTANTIAL LOAN GUARANTEED BY THE WAR DEPARTMENT.

AN ARRANGEMENT IS CURRENTLY IN PROGRESS WHEREBY ANOTHER SMALL CONCERN, WHICH IS REPORTED TO HAVE A GOOD PRODUCTION RECORD AND MORE ORDERS IN PROSPECT THAN IT CAN PROCESS WITH ITS OWN FACILITIES, IS BUYING CONTROL OF THE SUBJECT. THIS PURCHASE INCLUDES A SMALL ADDITION TO CAPITAL A COMPROMISE AND STANDBY AGREEMENT WITH RESPECT TO DELINQUENT TRADE DEBTS, A CHANGE IN THE ACTIVE MANAGEMENT OF PRODUCTION, AND AN AGREEMENT TO SUPPLY THE SUBJECT WITH APPROPRIATE SUBCONTRACTS AND TO PROCESS CERTAIN CLAIMS ARISING FROM CANCELLATIONS FOR THE CONVENIENCE OF THE GOVERNMENT.

IN ADDITION TO THE ABOVE, THE COMPANY HAS RECENTLY BEEN GRANTED A REFUND OF INCOME AND EXCESS PROFITS TAXES BECAUSE OF SUBSTANTIAL OPERATING LOSSES.

THESE RECENT DEVELOPMENTS ARE REGARDED AS PROVIDING AN OPPORTUNITY FOR THE COMPANY TO WORK OUT OF THE UNFAVORABLE POSITION IT REACHED BY REASON OF HAVING ENGAGED IN WAR PRODUCTION OF A TYPE AND ON A SCALE FOR WHICH IT WAS NOT EQUIPPED. AS THE SPECIFIC IMPROVEMENTS THUS FAR HAVE NOT SIGNIFICANTLY STRENGTHENED ITS FINANCIAL POSITION, IT IS EXPECTED THAT A SUBSTANTIAL LOSS ON THE GUARANTEED LOAN TO THIS BORROWER WILL BE SUSTAINED BY THE WAR DEPARTMENT.

THERE IS, HOWEVER, SOME POSSIBILITY THAT THE NEW MANAGEMENT WILL BE ABLE TO REHABILITATE THE COMPANY, AND IT IS DESIRED TO ENCOURAGE THIS POSSIBILITY AND AVOID ACTION WHICH WOULD IMPAIR THE PROSPECTS. IT IS BELIEVED THAT ACTION AT THIS TIME TO COLLECT DAMAGES RESULTING FROM THE CANCELLATION FOR FAULT REFERRED TO IN THE FIRST PARAGRAPH WOULD NOT ONLY IMPAIR PROSPECTS OF RECOVERY FOR THE COMPANY AND ON THE GUARANTEED LOAN BUT WOULD MAKE IT IMPOSSIBLE TO CONCLUDE THE CURRENT FAVORABLE ARRANGEMENTS.

ACCORDINGLY, THE CONTINUED COOPERATION OF YOUR OFFICE IN REFRAINING FROM THE INSTITUTION OF A SUIT FOR DAMAGES WILL BE APPRECIATED.

ON THE BASIS OF THE FOREGOING, IT IS STATED AS YOUR OPINION THAT THE WAR EFFORT MAY BEST BE SERVED BY RELIEVING THE QUALITY ELECTRIC COMPANY OF THE EXCESS COST INVOLVED.

TITLE II, SECTION 201 OF THE FIRST WAR POWERS ACT, 1941, APPROVED DECEMBER 18, 1941, 55 STAT. 838, 839, PROVIDES:

THE PRESIDENT MAY AUTHORIZE ANY DEPARTMENT OR AGENCY OF THE GOVERNMENT EXERCISING FUNCTIONS IN CONNECTION WITH THE PROSECUTION OF THE WAR EFFORT, IN ACCORDANCE WITH REGULATIONS PRESCRIBED BY THE PRESIDENT FOR THE PROTECTION OF THE INTERESTS OF THE GOVERNMENT, TO ENTER INTO CONTRACTS AND INTO AMENDMENTS OR MODIFICATIONS OF CONTRACTS HERETOFORE OR HEREAFTER MADE AND TO MAKE ADVANCE, PROGRESS AND OTHER PAYMENTS THEREON, WITHOUT REGARD TO THE PROVISIONS OF LAW RELATING TO THE MAKING, PERFORMANCE, AMENDMENT, OR MODIFICATION OF CONTRACTS WHENEVER HE DEEMS SUCH ACTION WOULD FACILITATE THE PROSECUTION OF THE WAR: PROVIDED, THAT NOTHING HEREIN SHALL BE CONSTRUED TO AUTHORIZE THE USE OF THE COST-PLUS-A-PERCENTAGE-OF-COST SYSTEM OF CONTRACTING: PROVIDED FURTHER, THAT NOTHING HEREIN SHALL BE CONSTRUED TO AUTHORIZE ANY CONTRACTS IN VIOLATION OF EXISTING LAW RELATING TO LIMITATION OF PROFITS: PROVIDED FURTHER, THAT ALL ACTS UNDER THE AUTHORITY OF THIS SECTION SHALL BE MADE A MATTER OF PUBLIC RECORD UNDER REGULATIONS PRESCRIBED BY THE PRESIDENT AND WHEN DEEMED BY HIM NOT TO BE INCOMPATIBLE WITH THE PUBLIC INTEREST.

PURSUANT THERETO, UNDER DATE OF DECEMBER 27, 1941, THE PRESIDENT ISSUED EXECUTIVE ORDER 9001, AUTHORIZING THE WAR AND NAVY DEPARTMENTS AND THE UNITED STATES MARITIME COMMISSION, WITH RESPECT TO "AGREEMENTS OF ALL KINDS" COVERING "ALL TYPES AND KINDS OF THINGS AND SERVICES NECESSARY, APPROPRIATE OR CONVENIENT FOR THE PROSECUTION OF WAR" TO:

* * * ENTER INTO CONTRACTS AND INTO AMENDMENTS OR MODIFICATIONS OF CONTRACTS HERETOFORE OR HEREAFTER MADE, AND TO MAKE ADVANCE, PROGRESS, AND OTHER PAYMENTS THEREON, WITHOUT REGARD TO THE PROVISIONS OF LAW RELATING TO THE MAKING, PERFORMANCE, AMENDMENT, OR MODIFICATION OF CONTRACTS. * * * BY EXECUTIVE ORDER NO. 9116 OF MARCH 30, 1942, THE PROVISIONS OF EXECUTIVE ORDER NO. 9001 WERE EXTENDED TO THE CIVIL AERONAUTICS ADMINISTRATION.

HOWEVER, IT CLEARLY IS WITHIN THE JURISDICTION OF THE GENERAL ACCOUNTING OFFICE TO DETERMINE WHETHER THE FACTS OF A PARTICULAR CASE ARE SUCH AS TO BRING IT WITHIN THE SCOPE OF THE FIRST WAR POWERS ACT AND THE EXECUTIVE ORDERS ISSUED PURSUANT THERETO.

IN THE PRESENT CASE YOU STATE THAT IT WAS DECIDED TO TERMINATE THE CONTRACT ONLY AFTER IT CLEARLY APPEARED THAT SATISFACTORY PERFORMANCE BY THE QUALITY ELECTRIC COMPANY NO LONGER COULD BE EXPECTED. HENCE, THERE IS NO ROOM FOR DOUBT THAT UNDER THE TERMS OF ARTICLE 5 OF THE CONTRACT, SUPRA, UPON SUCH TERMINATION THERE BECAME VESTED IN THE GOVERNMENT THE RIGHT TO SECURE THE SUPPLIES FROM ANOTHER SOURCE AND HOLD THE CONTRACTOR LIABLE FOR ANY EXCESS COSTS OCCASIONED THE GOVERNMENT THEREBY.

THIS OFFICE CONSISTENTLY HAS HELD THAT THE PROVISIONS OF THE FIRST WAR POWERS ACT HAVE NO APPLICATION TO A CONTRACT WHICH HAS BEEN FULLY COMPLETED--- THAT IS TO SAY, WHERE THE WORK HAS BEEN PERFORMED AND FINAL PAYMENT MADE THEREFOR. THE BASIS FOR SUCH HOLDING IS THAT AFTER COMPLETION THERE CEASES TO EXIST A CONTRACT UPON WHICH THE PROVISIONS OF THE ACT AND EXECUTIVE ORDERS ISSUED PURSUANT THERETO LEGALLY CAN OPERATE. LIKEWISE, AND FOR THE SAME REASON, THE SAID ACT AND EXECUTIVE ORDERS ARE NOT APPLICABLE TO A CASE WHERE, AS HERE, THE CONTRACT HAS BEEN TERMINATED DUE TO THE CONTRACTOR'S FAILURE TO PERFORM IN ACCORDANCE WITH THE TERMS THEREOF. TERMINATION OR CANCELLATION OF A CONTRACT MEANS TO ABROGATE SO MUCH OF IT AS REMAINS UNPERFORMED, DOING AWAY WITH THE EXISTING AGREEMENT UNDER THE TERMS AND WITH THE CONSEQUENCES MENTIONED IN THE WRITING. SANBORN V. BALLANFONTE, 277 P. 152, 155.

ACCORDINGLY, ON THE BASIS OF THE FOREGOING, I AM CONSTRAINED TO HOLD THAT THE GRANTING OF RELIEF SUCH AS PROPOSED IN THIS CASE DOES NOT FALL WITHIN THE CONTEMPLATION OF THE PROVISIONS OF THE FIRST WAR POWERS ACT AND EXECUTIVE ORDER NO. 9116 ISSUED PURSUANT THERETO AND, THEREFORE, WOULD BE UNAUTHORIZED.

IN REACHING THE CONCLUSION STATED ABOVE, I AM, OF COURSE, MINDFUL OF THE DESIRE OF YOUR DEPARTMENT TO REFRAIN FROM SUCH COLLECTION PROCEEDINGS AS MIGHT JEOPARDIZE OTHER CONTRACTS CURRENTLY BEING PERFORMED BY THE QUALITY ELECTRIC COMPANY FOR THE WAR AND NAVY DEPARTMENTS. ACCORDINGLY, I MIGHT SUGGEST THAT, RATHER THAN INSTITUTE STEPS AT THIS TIME TO COLLECT THE ENTIRE AMOUNT DETERMINED TO BE DUE THE GOVERNMENT AS A RESULT OF THE DEFAULT, THE DEBTOR BE PERMITTED TO LIQUIDATE ITS INDEBTEDNESS BY MAKING PAYMENTS THEREON IN MONTHLY INSTALLMENTS IN AN AMOUNT SUFFICIENT TO LIQUIDATE THE ENTIRE INDEBTEDNESS WITHIN TWELVE TO EIGHTEEN MONTHS.