B-84138, JANUARY 8, 1951, 30 COMP. GEN. 270

B-84138: Jan 8, 1951

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THAT A PRICE REVISION ARTICLE OF A CONTRACT PROVIDING FOR RETENTION OR REPAYMENT OF ANY AMOUNTS BY WHICH THE CONTRACT PRICE IS FOUND TO EXCEED A FAIR AND REASONABLE PRICE IS ENFORCEABLE AGAINST AN ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940. 1951: REFERENCE IS MADE TO YOUR LETTER OF NOVEMBER 22. WHICH WAS IN RESPONSE TO A REQUEST FROM THE ACTING SECRETARY OF THE ARMY. SINCE IT APPEARS THAT SOME MISUNDERSTANDING AS TO THE SCOPE OF THAT DECISION MAY HAVE ARISEN. WAS RESTRICTED TO THE FACTUAL SITUATION THERE PRESENTED. IS INDICATED BY THE STATEMENT IN YOUR LETTER THAT THE DECISION IS BASED ON THE "SOMEWHAT UNTRIED" LEGAL CONCEPT THAT A BANK. "AND IS ON NOTICE THAT THE CONTRACTOR HAS OBLIGATED HIMSELF CONTINGENTLY AT SOME FUTURE DATE FOR SOME INDETERMINABLE SUMS OF MONEY.'.

B-84138, JANUARY 8, 1951, 30 COMP. GEN. 270

CONTRACTS - RENEGOTIATION - ASSIGNEE'S LIABILITY UNDER ASSIGNMENT OF CLAIMS ACT OF 1940 HOLDING BY THE COMPTROLLER GENERAL IN DECISION B-84138, MAY 17, 1949, THAT A PRICE REVISION ARTICLE OF A CONTRACT PROVIDING FOR RETENTION OR REPAYMENT OF ANY AMOUNTS BY WHICH THE CONTRACT PRICE IS FOUND TO EXCEED A FAIR AND REASONABLE PRICE IS ENFORCEABLE AGAINST AN ASSIGNEE UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, SHOULD NOT BE REGARDED AS APPLICABLE TO RENEGOTIATION CASES, AS THE QUESTION OF THE GOVERNMENT'S RIGHT TO RECOVER FROM AN ASSIGNEE AMOUNTS PAID UNDER A CONTRACT BECAUSE OF A SUBSEQUENT DETERMINATION IN RENEGOTIATION PROCEEDINGS THAT THE CONTRACTOR ASSIGNOR HAD EARNED EXCESSIVE PROFITS UNDER HIS RENEGOTIABLE GOVERNMENT CONTRACT HAS NOT BEEN THE SUBJECT OF A DECISION BY THE COMPTROLLER GENERAL.

LETTER OF COMPTROLLER GENERAL WARREN, JANUARY 8, 1951:

REFERENCE IS MADE TO YOUR LETTER OF NOVEMBER 22, 1950, REQUESTING RECONSIDERATION AND MODIFICATION OF A DECISION OF THIS OFFICE, B-84138, DATED MAY 17, 1949.

AS YOU MAY BE AWARE, AUTHORITATIVE DECISIONS MAY BE RENDERED BY THIS OFFICE ONLY TO CLAIMANTS, TO DISBURSING AND CERTIFYING OFFICERS ON QUESTIONS ARISING IN CONNECTION WITH CONTEMPLATED PAYMENTS FROM APPROPRIATED FUNDS, OR TO BE THE HEADS OF EXECUTIVE DEPARTMENTS OR AGENCIES. THE DECISION OF MAY 17, 1949, WHICH WAS IN RESPONSE TO A REQUEST FROM THE ACTING SECRETARY OF THE ARMY, MAY NOT, THEREFORE, BE MODIFIED UPON THE BASIS OF YOUR LETTER. HOWEVER, SINCE IT APPEARS THAT SOME MISUNDERSTANDING AS TO THE SCOPE OF THAT DECISION MAY HAVE ARISEN, IT SEEMS DESIRABLE TO COMMENT BRIEFLY UPON THE HOLDING THEREIN IN CONNECTION WITH THE POINTS RAISED IN YOUR LETTER AND ACCOMPANYING MEMORANDUM BRIEF.

THE DECISION OF MAY 17, 1949, WAS RESTRICTED TO THE FACTUAL SITUATION THERE PRESENTED, NAMELY, THE RIGHT OF THE GOVERNMENT TO REFUSE TO PAY A FAIR AND REASONABLE PRICE PURSUANT TO A PRICE REVISION ARTICLE IN THE ASSIGNED CONTRACT BY THE TERMS OF WHICH THE CONTRACTOR SPECIFICALLY HAD AGREED TO SUCH RETENTION OR REPAYMENT. WHILE YOU STATE IN YOUR LETTER OF NOVEMBER 22, 1950, THAT YOU CONSTRUE PRICE REVISION AND RENEGOTIATION SIMILARLY, IT MAY BE STATED THAT THE DECISION OF MAY 17, 1949, DID NOT PURPORT TO APPLY TO SITUATIONS INVOLVING RENEGOTIATION DEBTS. THE QUESTION AS TO THE GOVERNMENT'S RIGHT TO RECOVER FROM AN ASSIGNEE AMOUNTS PAID UNDER A CONTRACT BECAUSE OF A SUBSEQUENT DETERMINATION IN RENEGOTIATION PROCEEDINGS THAT THE CONTRACTOR ASSIGNOR HAD EARNED EXCESSIVE PROFITS UNDER HIS RENEGOTIABLE GOVERNMENT CONTRACTS HAS NOT BEEN THE SUBJECT OF A DECISION BY THIS OFFICE. IN VIEW OF THE DIFFERENCES BETWEEN THAT QUESTION AND THE QUESTION CONSIDERED IN THE DECISION B-84138, SUPRA, THE HOLDING IN THAT DECISION SHOULD NOT BE REGARDED AS CLEARLY APPLICABLE TO RENEGOTIATION CASES.

A FURTHER MISAPPREHENSION AS TO THE BASIS FOR THE DECISION OF MAY 17, 1949, IS INDICATED BY THE STATEMENT IN YOUR LETTER THAT THE DECISION IS BASED ON THE "SOMEWHAT UNTRIED" LEGAL CONCEPT THAT A BANK, IN TAKING AN ASSIGNMENT OF MONEYS DUE UNDER A GOVERNMENT CONTRACT CAN SUCCEED ONLY TO THE RIGHTS OF THE CONTRACTOR,"AND IS ON NOTICE THAT THE CONTRACTOR HAS OBLIGATED HIMSELF CONTINGENTLY AT SOME FUTURE DATE FOR SOME INDETERMINABLE SUMS OF MONEY.' I ASSUME THAT THE ABOVE STATEMENT WAS NOT INTENDED TO QUESTION THE VALIDITY OF THE BASIC LEGAL PRINCIPLE THAT AN ASSIGNEE CAN ACQUIRE NO GREATER RIGHTS TO ASSIGNED MONEYS THAN HIS ASSIGNOR HAD, BUT WAS DIRECTED AGAINST THE APPLICABILITY OF THAT PRINCIPLE TO THE FACTUAL SITUATION INVOLVED IN THE DECISION. ON THAT ASSUMPTION, IT MAY BE POINTED OUT THAT AN ASSIGNEE BANK COULD HARDLY BE HELD NOT TO BE ON NOTICE OF THE PROVISIONS OF A CONTRACT UNDER WHICH IT ACCEPTS AN ASSIGNMENT WHERE, AS UNDER THE ASSIGNMENT OF CLAIMS ACT OF 1940, 54 STAT. 1029, ITS RIGHTS ARE RESTRICTED TO MONEYS DUE UNDER THAT VERY CONTRACT. IT MAY ALSO BE POINTED OUT THAT THE PRICE REVISION ARTICLE UNDER CONSIDERATION IN THE DECISION OF MAY 17, 1949, CREATED MORE THAN A MERE GENERAL CONTINGENT OBLIGATION ON THE PART OF THE CONTRACTOR TO PAY "SOME INDETERMINABLE SUMS OF MONEY," UNRELATED TO MONEYS DUE UNDER THE CONTRACT. IT WAS AN ESSENTIAL MODIFICATION OF THE CONTRACT PRICE ITSELF, ANALOGOUS TO A PROVISION WHEREBY THE CONTRACTOR AGREES TO REDUCE A STIPULATED FIXED PRICE RETROACTIVELY IN THE EVENT HIS TOTAL CONTRACT COSTS ARE DETERMINED UPON FINAL AUDIT TO BE LESS THAN A CERTAIN PERCENTAGE OF THE AMOUNTS HE HAS RECEIVED. MONEYS PAID UNDER SUCH A CONTRACT ARE NOT NECESSARILY "MONEYS DUE" UNDER THE CONTRACT UNTIL AFTER A FINAL COST AUDIT HAS BEEN MADE, AND ASE KNOWN BOTH BY THE CONTRACTOR AND HIS ASSIGNEE TO BE IN THE NATURE OF CONTINGENT PAYMENTS TO WHICH NO ABSOLUTE RIGHT OF RETENTION ATTACHES. AND IT IS THIS VERY KNOWLEDGE ON THE PART OF THE ASSIGNEE OF THE CONTINGENT NATURE OF SUCH PAYMENTS WHICH DISTINGUISHES SUCH A FACTUAL SITUATION FROM THOSE PRESENT IN THE VARIOUS CASES CITED IN THE MEMORANDUM BRIEF ACCOMPANYING YOUR LETTER, IN EACH OF WHICH THE ASSIGNEE HAD NO KNOWLEDGE OR NOTICE OF ANY CLAIM OR DEFENSE, CONTINGENT OR OTHERWISE, WHICH THE OBLIGOR HAD WITH RESPECT TO THE MONEYS PAID. THIS PRINCIPLE IS CLEARLY STATED IN THE EXCERPT FROM THE RESTATEMENT OF THE LAW OF RESTITUTION QUOTED IN YOUR MEMORANDUM BRIEF AS FOLLOWS:

AN ASSIGNEE OF A NON-NEGOTIABLE CHOSE IN ACTION, WHO HAVING PAID VALUE THEREFOR, HAS RECEIVED PAYMENT FROM THE OBLIGOR IS UNDER NO DUTY TO MAKE RESTITUTION ALTHOUGH THE OBLIGOR HAS A DEFENSE THERETO, IF THE TRANSFEREE MADE NO MISREPRESENTATION AND DID NOT HAVE NOTICE OF THE DEFENSE. (ITALICS SUPPLIES.)

I APPRECIATE THE FACT THAT THE DECISION OF MAY 17, 1949, MAY, TO SOME EXTENT, HAVE AFFECTED THE WILLINGNESS OF COMMERCIAL BANKS TO FINANCE DEFENSE PROCUREMENT, BUT UNDER THE LAW AS IT NOW STANDS, NO OTHER CONCLUSION ON THE QUESTION THERE INVOLVED COULD HAVE BEEN REACHED. HOWEVER, IN VIEW OF THE PROVISIONS OF SECTION 301 OF THE DEFENSE PRODUCTION ACT OF 1950, APPROVED SEPTEMBER 8, 1950, IT WOULD APPEAR THAT THE DECISION NEED NOT ADVERSELY AFFECT THE EXTENSION OF CREDIT FOR FINANCING DEFENSE PRODUCTION. SECTION 301 OF THE DEFENSE PRODUCTION ACT OF 1950, 64 STAT. 800, EMPOWERS THE PRESIDENT TO AUTHORIZE DEFENSE PROCUREMENT AGENCIES:

* * * TO GUARANTEE * * * ANY * * * FINANCING INSTITUTION * * * AGAINST LOSS OF PRINCIPAL OR INTEREST ON ANY LOAN * * * MADE * * * FOR THE PURPOSE OF FINANCING ANY CONTRACTOR * * * IN CONNECTION WITH THE PERFORMANCE * * * OF ANY CONTRACT * * * FOR THE PROCUREMENT OF MATERIALS OR THE PERFORMANCE OF SERVICES FOR THE NATIONAL DEFENSE. FINANCING INSTITUTIONS WOULD APPEAR TO BE ADEQUATELY PROTECTED AGAINST THE RISK OF LOSS ON LOANS GUARANTEED UNDER THE ABOVE-QUOTED PROVISION OF LAW, REGARDLESS OF THEIR RIGHTS UNDER ASSIGNMENTS EXECUTED PURSUANT TO THE ASSIGNMENT OF CLAIMS ACT OF 1940.