B-65077, APRIL 10, 1947, 26 COMP. GEN. 775

B-65077: Apr 10, 1947

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PROVIDED IT BE ADMINISTRATIVELY DETERMINED THAT SUCH RESCISSION IS IN THE BEST INTERESTS OF THE UNITED STATES. THERE IS NO AUTHORITY TO WAIVE SUCH LIQUIDATED DAMAGE PROVISION OR TO REFUND ANY PART OF THE DEPOSIT RETAINED AS LIQUIDATED DAMAGES LEGALLY ACCRUING TO THE GOVERNMENT. A LIQUIDATED DAMAGE PROVISION IN AN EXECUTORY CONTRACT FOR THE SALE OF SURPLUS GOVERNMENT REAL PROPERTY AUTHORIZING THE RETENTION BY THE GOVERNMENT OF THE EARNEST MONEY DEPOSIT PAID BY THE OFFEROR IN EVENT OF HIS FAILURE TO PAY THE BALANCE OF THE PURCHASE PRICE WITHIN THE TIME SPECIFIED IS FOR ENFORCEMENT PURSUANT TO ITS TERMS WITHOUT THE NECESSITY OR EXAMINING INTO THE QUESTION OF ACTUAL DAMAGES. THERE IS NO LEGAL BASIS FOR REFUNDING ANY PART OF THE DEPOSIT.

B-65077, APRIL 10, 1947, 26 COMP. GEN. 775

SALES - SURPLUS GOVERNMENT REAL PROPERTY AN EXECUTORY CONTRACT FOR THE SALE OF SURPLUS GOVERNMENT REAL PROPERTY UNDER WHICH AN OFFEROR PAID 10 PERCENT OF THE PURCHASE PRICE AS EARNEST MONEY DEPOSIT MAY, PRIOR TO THE DATE SPECIFIED FOR PAYMENT OF THE BALANCE DUE, BE RESCINDED BY MUTUAL ASSENT AND REFUND MADE TO THE OFFEROR OF THE EARNEST MONEY DEPOSIT, PROVIDED IT BE ADMINISTRATIVELY DETERMINED THAT SUCH RESCISSION IS IN THE BEST INTERESTS OF THE UNITED STATES, NOTWITHSTANDING THAT THE ULTIMATE SALES PRICE OF THE PROPERTY WHEN SUBSEQUENTLY DISPOSED OF MAY BE LESS THAN ORIGINALLY PROVIDED FOR IN THE RESCINDED CONTRACT. UNDER AN EXECUTORY CONTRACT FOR THE SALE OF SURPLUS GOVERNMENT REAL PROPERTY WHICH PROVIDED THAT THE GOVERNMENT MAY RETAIN THE EARNEST MONEY DEPOSIT PAID BY THE OFFEROR AS LIQUIDATED DAMAGES IN THE EVENT THE OFFEROR FAILS TO PAY THE BALANCE OF THE PURCHASE PRICE WITHIN THE TIME SPECIFIED, THE GOVERNMENT HAS A VESTED RIGHT TO RETAIN SUCH EARNEST MONEY DEPOSIT UPON THE OFFEROR'S DEFAULT, AND THERE IS NO AUTHORITY TO WAIVE SUCH LIQUIDATED DAMAGE PROVISION OR TO REFUND ANY PART OF THE DEPOSIT RETAINED AS LIQUIDATED DAMAGES LEGALLY ACCRUING TO THE GOVERNMENT. A LIQUIDATED DAMAGE PROVISION IN AN EXECUTORY CONTRACT FOR THE SALE OF SURPLUS GOVERNMENT REAL PROPERTY AUTHORIZING THE RETENTION BY THE GOVERNMENT OF THE EARNEST MONEY DEPOSIT PAID BY THE OFFEROR IN EVENT OF HIS FAILURE TO PAY THE BALANCE OF THE PURCHASE PRICE WITHIN THE TIME SPECIFIED IS FOR ENFORCEMENT PURSUANT TO ITS TERMS WITHOUT THE NECESSITY OR EXAMINING INTO THE QUESTION OF ACTUAL DAMAGES; AND, EVEN THOUGH THE AMOUNT OF ACTUAL DAMAGES SUFFERED BY THE GOVERNMENT AS A RESULT OF AN OFFEROR'S DEFAULT BE LESS THAN THE RETAINED EARNEST MONEY DEPOSIT, THERE IS NO LEGAL BASIS FOR REFUNDING ANY PART OF THE DEPOSIT. THE HOLDINGS HEREIN RESPECTING THE RIGHT TO RESCIND BY MUTUAL ASSENT AN EXECUTORY CONTRACT FOR THE SALE OF SURPLUS GOVERNMENT REAL PROPERTY AND TO REFUND TO THE OFFEROR THE EARNEST MONEY DEPOSIT WHICH THE GOVERNMENT MAY RETAIN AS LIQUIDATED DAMAGES IN THE EVENT OF THE FAILURE OF THE OFFEROR TO PAY THE BALANCE OF THE PURCHASE PRICE WITHIN THE TIME SPECIFIED ARE BASED UPON THE FUNDAMENTAL PRINCIPLES OF THE LAW OF CONTRACTS AND, IN THE ABSENCE OF A STATUTE OR REGULATION TO THE CONTRARY, SUCH PRINCIPLES WOULD APPLY WITH EQUAL FORCE TO ANY OFFEROR, WHETHER A VETERAN, A HOLDER OF A PRIORITY OTHER THAN THAT OF A VETERAN, OR A HOLDER OF NO PRIORITY RIGHTS.

COMPTROLLER GENERAL WARREN TO THE SECRETARY OF AGRICULTURE, APRIL 10, 1947:

THERE HAS BEEN RECEIVED YOUR LETTER OF APRIL 1, 1947, ENCLOSING A COPY OF A FORM CONTRACT," OFFER TO PURCHASE REAL ESTATE," UTILIZED BY THE FARM CREDIT ADMINISTRATION AS DISPOSAL AGENCY FOR THE DISPOSAL OF SURPLUS AGRICULTURAL, FOREST, GRAZING, OR MINERAL REAL PROPERTY UNDER THE PROVISIONS OF THE SURPLUS PROPERTY ACT OF 1944, 58 STAT. 765, AND REQUESTING A DECISION ON A NUMBER OF QUESTIONS WHICH HAVE ARISEN UNDER THE TERMS OF THE CONTRACT FORM IN CONNECTION WITH THE RIGHT OF THE DISPOSAL AGENCY TO RESCIND THE CONTRACT BY MUTUAL CONSENT AND REFUND THE EARNEST MONEY DEPOSIT AFTER THE OFFER SHALL HAVE BEEN ACCEPTED.

THE CIRCUMSTANCES GIVING RISE TO THE QUESTIONS ARE SET FORTH IN YOUR LETTER, IN PERTINENT PART, AS FOLLOWS:

* * * PARTICULAR REFERENCE IN THIS RESPECT IS MADE TO CONDITION (8), WHICH PROVIDES AS OLLOWS:

"/8) IF THIS OFFER IS ACCEPTED AND IF OFFEROR FAILS OR REFUSES TO PAY THE ENTIRE PURCHASE PRICE PROMPTLY ON HE DATE SPECIFIED HEREIN, THEN SELLER, SHALL HAVE THE RIGHT TO CANCEL THE CONTRACT AND RETAIN AS LIQUIDATED DAMAGES THE CASH PAID HEREUNDER.'

IN PRESENTING THE PROBLEM THE FOLLOWING ASSUMED CIRCUMSTANCES ARE SUBMITTED AS REPRESENTATIVE OF THE ACTUAL CASES ENCOUNTERED.

ASSUME THAT A VETERAN EXERCISING THE PRIORITY AND PURCHASING AT A FIXED PRICE AS PROVIDED BY SECTION 23 OF THE SURPLUS PROPERTY ACT OF 1944, AS AMENDED, SUBMITS AN OFFER TO PURCHASE SURPLUS REAL PROPERTY ON THE ENCLOSED FORM, DEPOSITS 10 PERCENT OF THE PURCHASE PRICE, AND IS GRANTED 30 DAYS FROM THE DATE THE OFFER IS ACCEPTED WITHIN WHICH TO PAY THE BALANCE REMAINING DUE. AFTER ACCEPTANCE OF THE OFFER BY THE DISPOSAL AGENCY, THE VETERAN, FOR MERITORIOUS REASONS, INFORMS AS A RESULT THE DISPOSAL AGENCY IN ITS ADMINISTRATIVE DISCRETION WISHES TO RELEASE THE VETERAN FROM HIS CONTRACTUAL OBLIGATION AND REFUND THE EARNEST MONEY DEPOSIT. USUALLY THERE ARE OTHER PROSPECTIVE PURCHASERS, EITHER WITH OR WITHOUT PRIORITY RIGHTS, WHO DESIRE TO ACQUIRE THE PROPERTY AT THE SAME OR A HIGHER PURCHASE PRICE. HOWEVER, THERE IS NO ASSURANCE THAT IN EVERY CASE THE PROPERTY MAY BE SUBSEQUENTLY SOLD FOR THE SAME OR A HIGHER PRICE THAN THAT PROVIDED FOR IN THE EXISTING CONTRACT.

1. UPON THE BASIS OF THE ASSUMED STATEMENT OF FACTS RECITED ABOVE AND IN THE LIGHT OF THE TERMS OF THE ENCLOSED FORM OF CONTRACT, YOUR DECISION OF THE FOLLOWING QUESTIONS WILL BE APPRECIATED:

A. MAY THE CONTRACT BE RESCINDED BY MUTUAL CONSENT AND THE EARNEST MONEY DEPOSIT REFUNDED TO THE OFFEROR AT ANY TIME AFTER ACCEPTANCE OF THE OFFER AND BEFORE THE TIME HAS EXPIRED FOR PAYMENT OF THE BALANCE REMAINING DUE AS PROVIDED FOR BY THE CONTRACT?

B. AFTER THE OFFER HAS BEEN ACCEPTED, THE TIME FOR PAYMENT OF THE BALANCE DUE HAS EXPIRED, AND THE OFFEROR IS IN DEFAULT, MAY THE RIGHT OF THE GOVERNMENT TO RETAIN THE AMOUNT OF THE DEPOSIT BE WAIVED AND THE DEPOSIT REFUNDED?

C. IN EITHER OR BOTH OF THE PRECEDING QUESTIONS, WOULD THE FACT THAT A SUBSEQUENT SALE OF THE PROPERTY WAS FOR A LESS AMOUNT AFFECT THE RIGHT TO RESCIND THE EXISTING CONTRACT AND REFUND THE DEPOSIT?

D. IN THE EVENT THE OFFEROR DEFAULTED IN PAYMENT OF THE PURCHASE PRICE UNDER THE TERMS OF THE CONTRACT AND THE DISPOSAL AGENCY DECLARED THE DEPOSIT FORFEITED AS LIQUIDATED DAMAGES AS PROVIDED FOR BY THE CONTRACT COULD THE DISPOSAL AGENCY IN THE EXERCISE OF ADMINISTRATIVE DISCRETION REFUND ONLY THE PORTION OF THE DEPOSIT IN EXCESS OF THE ACTUAL DAMAGES SUSTAINED BY THE UNITED STATES UPON A FINAL SALE OF THE PROPERTY TO ANOTHER PARTY?

2. WOULD YOUR DECISION OF THE QUESTIONS A, B, C, AND D IN THE PRECEDING PARAGRAPH BE CHANGED IF THE OFFEROR IN THE ASSUMED STATEMENT OF FACTS RECITED ABOVE WERE (A) A HOLDER OF A PRIORITY OTHER THAN THAT OF A VETERAN OR (B) A HOLDER OF NO PRIORITY RIGHTS?

WITH RESPECT TO QUESTION 1 (A), IT IS WELL SETTLED THAT THE PARTIES TO AN EXECUTORY CONTRACT, BEFORE A BREACH OF IT OCCURS, MAY RESCIND IT BY MUTUAL ASSENT. SAVAGE ARMS CORPORATION V. UNITED STATES, 266 U.S. 217. IT IS EQUALLY WELL SETTLED THAT WHEN A CONTRACT IS RESCINDED BY MUTUAL ASSENT ANY CONSIDERATION THERETOFORE RECEIVED BY ONE OF THE PARTIES MUST BE RETURNED IN ORDER TO PLACE THE PARTIES IN STATUS QUO. PULLMAN CAR CO. V. KRAUSE, 40 SO. 398, 4 L.R.A. ( NS) 103; BABCOCK V. FARWELL, 245 ILL. 14, 91 N.E. 683. IN VIEW THEREOF, AND SINCE IT IS A MATTER OF ADMINISTRATIVE DISCRETION TO DETERMINE WHETHER THE PUBLIC INTEREST REQUIRES SUCH ACTION THERE WOULD BE NO LEGAL OBJECTION TO RESCISSION OF THE CONTRACT AND REFUND OF THE EARNEST MONEY DEPOSIT PRIOR TO THE TIME SPECIFIED FOR PERFORMANCE, IF IT BE ADMINISTRATIVELY DETERMINED THAT SUCH TERMINATION IS THE BEST INTEREST OF THE UNITED STATES. 18 COMP. GEN. 826.

WITH RESPECT TO QUESTION 1 (B), IN VIEW OF THE ABOVE-QUOTED LANGUAGE OF CONDITION (8) OF THE CONTRACT FORM IT SEEMS CLEAR THAT THE EARNEST MONEY DEPOSIT IS INTENDED AS A LIQUIDATION/OF THE DAMAGES WHICH MIGHT RESULT FROM THE OFFEROR'S DEFAULT AND SHOULD BE SO REGARDED. SEE, IN THIS CONNECTION, LAMPORT MFG. SUPPLY CO. V. UNITED STATES, 65 C.1CLS. 579, 609; JOHN T. HICKEY V. UNITED STATES, 65 C.1CLS. 729, 736; ASIA INVESTMENT CO. V. LEVIN, 118 WASH. 620, 204 P. 808. THUS, IT APPEARS THAT, IN CASES WHERE THE OFFEROR DEFAULTS, THE RIGHT TO RETAIN THE EARNEST MONEY DEPOSIT AS LIQUIDATED DAMAGES AS PROVIDED BY THE CONTRACT THEREUPON VESTS IN THE GOVERNMENT AND, UNDER SUCH CIRCUMSTANCES, THER IS NO LEGAL BASIS FOR REFUNDING ANY PART OF THE DEPOSIT, IT HAVING BEEN HELD CONSISTENTLY BY THE COURTS THAT NO OFFICER OR EMPLOYEE OF THE GOVERNMENT HAS AUTHORITY TO WAIVE A VALID LIQUIDATED DAMAGE PROVISION OF A CONTRACT OR TO REMIT A CLAIM OF THE GOVERNMENT FOR THE AMOUNT OF LIQUIDATED DAMAGES LEGALLY ACCRUING TO THE UNITED STATES THEREUNDER. PACIFIC HARDWARE AND STEEL COMPANY V. UNITED STATES, 49 C.1CLS. 327, 335; BAUSCH AND LOMB OPTICAL COMPANY V. UNITED STATES, 78 C.1CLS. 584, 607. ACCORDINGLY, THIS QUESTION IS ANSWERED IN THE NEGATIVE.

RELATIVE TO QUESTION 1 (C), IT APPEARS THAT, UNDER THE CIRCUMSTANCES ENUMERATED IN QUESTION 1 (A), THE RIGHT TO RESCIND A CONTRACT BY MUTUAL ASSENT IS NOT DEPENDENT ON WHETHER OR NOT THE PROPERTY SUBSEQUENTLY MAY BE SOLD FOR A LESSER PRICE BUT RATHER ON THE WILL OF THE PARTIES OT THE CONTRACT AND, CONSEQUENTLY, IT IS OBVIOUS THAT ANY SUBSEQUENT DISPOSITION OF THE PROPERTY COULD NOT AFFECT THAT RIGHT, NOTWITHSTANDING THE FACT THAT THE ULTIMATE SALES PRICE OF THE PROPERTY MAY BE LESS THAN ORIGINALLY PROVIDED FOR BY THE RESCINDED CONTRACT. ALSO, SINCE THERE IS NO LEGAL BASIS TO REFUND THE EARNEST MONEY DEPOSIT UNDER THE CIRCUMSTANCES SET FORTH IN QUESTION 1 (B), IT WOULD SEEM TO FOLLOW THAT, ONCE THE GOVERNMENT HAS EXERCISED ITS RIGHT TO RETAIN THE EARNEST MONEY DEPOSIT IN LIQUIDATION OF THE DAMAGES SUFFERED AND HAS DECLARED THE CONTRACT TERMINATED, ANY SUBSEQUENT SALE OF THE PROPERTY AT A LESSER PRICE WOULD NOT AFFECT SUCH RIGHT.

WITH RESPECT TO QUESTION 1 (D), SINCE THE CONTRACT FORM UNDER PARAGRAPH 8 THEREOF, SPECIFICALLY PROVIDES THAT THE EARNEST MONEY DEPOSIT IS INTENDED TO BE THE MEASURE OF THE DAMAGES WHICH MIGHT RESULT FROM THE OFFEROR'S DEFAULT, THE SAID LIQUIDATED DAMAGE PROVISION IS FOR ENFORCEMENT PURSUANT TO ITS TERMS WITHOUT THE NECESSITY OF EXAMINING INTO THE QUESTION OF ACTUAL DAMAGES. IN OTHER WORDS, WHILE IT MAY DEVELOP THAT THE ACTUAL DAMAGES SUFFERED BY THE GOVERNMENT AS A RESULT OF AN OFFEROR'S DEFAULT ARE LESS THAN THE AMOUNT ACCRUING UNDER THE LIQUIDATED DAMAGE PROVISION OF THE CONTRACT, THAT FACT WOULD AFFORD NO LEGAL BASIS FOR REFUNDING ANY PART OF THE DEPOSIT. SEE 18 COMP. GEN. 709, 711.

WITH RESPECT TO QUESTION 2 (A) AND (B) YOU ARE ADVISED THAT THE ANSWERS TO YOUR PRECEDING QUESTIONS ARE BASED UPON FUNDAMENTAL PRINCIPLES OF THE LAW OF CONTRACTS AND THAT, NATURALLY, IN THE ABSENCE OF A STATUTE OR STATUTORY REGULATION TO THE CONTRARY SUCH PRINCIPLES WOULD APPLY WITH EQUAL FORCE AND EFFECT IN ALL CASES, IRRESPECTIVE OF THE STATUS OF THE OFFEROR.