B-167527, AUG. 26, 1970

B-167527, AUG. 26, 1970

LEASE -- RENTAL ADJUSTMENT AFFIRMATION OF DECISION OF AUGUST 18, 1970, CONCLUDING THAT UNDER LEASE BETWEEN MRS. NGUYEN THI NHIEU AND AID THERE IS NO BASIS FOR A RENTAL ADJUSTMENT ON OTHER THAN THE OFFICIAL RATE OF EXCHANGE.

TO DR. HANNAH:

BY LETTER, WITH ENCLOSURES, DATED SEPTEMBER 26, 1969, YOUR GENERAL COUNSEL HAS REQUESTED, ON BEHALF OF MISS MARY E. VOLZ, CHIEF, VOUCHER EXAMINATION BRANCH, ADFM, UNITED STATES AID MISSION TO VIETNAM, RECONSIDERATION OF OUR DECISION B-167527 OF AUGUST 18, 1969.

THE DECISION OF AUGUST 18 CONCLUDED THAT IT WAS IMPROPER TO MAKE PAYMENT ON A VOUCHER STATED IN FAVOR OF MRS. NGUYEN THI NHIEU IN THE AMOUNT OF 93,232.10$ VN, COVERING A RENTAL ADJUSTMENT DURING THE PERIOD FROM MAY 29, 1968, THROUGH NOVEMBER 30, 1968, UNDER AGENCY FOR INTERNATIONAL DEVELOPMENT (AID) LEASE NO. AID-430-LE-578 DATED NOVEMBER 13, 1964. AS A RESULT OF OUR DECISION, THE PROPRIETY OF PAYMENT MADE ON A PRIOR VOUCHER STATED IN FAVOR OF THE LESSOR, COVERING A RENTAL ADJUSTMENT FOR THE PERIOD OF NOVEMBER 20, 1967, THROUGH MAY OF 1968, IS ALSO IN QUESTION.

BECAUSE OF THE ADDITIONAL INFORMATION AND ARGUMENTS CONTAINED IN THE GENERAL COUNSEL'S LETTER, WE BELIEVE IT NECESSARY TO RESTATE THE RELEVANT FACTS.

THE SUBJECT LEASE PROVIDED THAT AID WOULD LEASE FROM MRS. NGUYEN THI NHIEU THE PREMISES DESCRIBED THEREIN FOR 1 YEAR, COMMENCING ON NOVEMBER 20, 1964, SUBJECT TO THE OPTION RESERVED TO AID IN ARTICLE 3 TO RENEW THE LEASE ON THE SAME TERMS AND CONDITIONS FOR THREE ADDITIONAL 1-YEAR PERIODS. THE OPTION WAS FULLY EXERCISED.

ARTICLE 9 FIXED THE INITIAL RENTAL RATE AND PROVIDED FOR RENTAL ADJUSTMENTS, IN RELEVANT PART, AS FOLLOWS:

"THE LESSEE SHALL PAY THE LESSOR FOR THE PREMISES RENTED A MONTHLY RENTAL OF TWENTY FIVE THOUSAND VIETNAMESE PIASTERS (25, 000$VN.) (DEPENDENT UPON THE ANNUAL APPROPRIATION OF FUNDS BY THE CONGRESS OF THE UNITED STATES OF AMERICA). THE SAID RENTAL IS BASED ON THE CURRENT LIMITED ACCESS FREE MARKET RATE OF EXCHANGE OF THE VN PIASTERS (1 US $ 72.77 VN$); EVENTUAL FLUCTUATIONS EXCEEDING 15% OF THE ABOVE LIMITED ACCESS FREE MARKET OR OTHER OFFICIAL RATE OF EXCHANGE, OR OF THE EXISTING 40% SUPER RENT TAX WILL RESULT IN A REEVALUATION OF THE RENTAL FIGURES."

WE WERE INITIALLY ADVISED IN MISS VOLZ'S LETTER OF JUNE 23, 1969, THAT FROM THE DATE THE LEASE WAS SIGNED THROUGH JULY 31, 1966, ALL PAYMENTS MADE BY AID AND OTHER UNITED STATES GOVERNMENT AGENCIES BORE, WHEN NECESSARY, THE EXCHANGE RATE OF 72.77$ VN OR 72.90$ VN TO $1. FROM AUGUST 1, 1966, TO SEPTEMBER 30, 1967, THE RATE USED WAS 80$ VN TO $1, AND SINCE OCTOBER 1, 1967, THE RATE OF 118$ VN TO $1 HAS BEEN USED. THE EXCHANGE RATE OF 80$ VN TO $1 WAS ESTABLISHED BY GOVERNMENT OF VIETNAM (GVN) DECREE LAW NO. 001/SLU OF JUNE 19, 1966, AS THE "OFFICIAL RATE" OF EXCHANGE, AND THE RATE OF 118$ VN TO $1 REPRESENTS THE "OFFICIAL RATE" AND A SUBSIDY OF 38$ VN TO $1, AS ESTABLISHED BY GVN DECREE LAW NO. 002/SLU OF JUNE 17, 1966. AT THIS TIME, THE LIMITED ACCESS FREE MARKET WAS ABOLISHED. DECREE LAW NO. 035/SLU OF AUGUST 29, 1967, THE APPLICATION OF THE 38$ VN TO $1 U.S. SUBSIDY WAS EXTENDED TO ALL FINANCIAL AND COMMERCIAL TRANSFERS FROM ABROAD TO VIETNAM, EFFECTIVE OCTOBER 1, 1967.

THE VOUCHER FORWARDED TO US FOR DECISION BY MISS VOLZ COVERED THE DIFFERENCE BETWEEN THE "OFFICIAL RATE" AND THE "SUBSIDY" FOR THE PERIOD PREVIOUSLY NOTED, AND THE PROPRIETY OF PAYMENT OF AN AMOUNT GREATER THAN THE "OFFICIAL RATE" WAS QUESTIONED IN LIGHT OF OUR DECISIONS B 163206, APRIL 11, 1968, AND B-163433, APRIL 17, 1968.

BOTH DECISIONS INVOLVED CONTRACT PAYMENTS IN VIETNAMESE CURRENCY, THE PROPRIETY OF WHICH WAS DRAWN INTO QUESTION BY ADJUSTMENTS IN THE EXCHANGE RATES DURING THE COURSE OF PERFORMANCE. THE DECISION OF APRIL 11, 1968, INVOLVED A DOLLAR DENOMINATED CONTRACT WITH A PROVISION FOR PAYMENT IN PIASTERS AT A RATE OF EXCHANGE RECOGNIZED BY THE UNITED STATES ON THE DATE PAYMENT WAS MADE. AT ISSUE WAS THE RATE OF EXCHANGE RECOGNIZED BY THE UNITED STATES.

IN RESOLVING THIS QUESTION, WE REQUESTED THE ADVICE OF RESPONSIBLE OFFICIALS OF THE DEPARTMENTS OF STATE AND THE TREASURY. WE RECEIVED REPLIES FROM THOSE DEPARTMENTS COMMENTING GENERALLY ON THE EFFECT OF THE GVN DECREE LAWS ESTABLISHING THE 80$ VN TO $1 "OFFICIAL RATE" AND THE 38$ VN TO $1 SUBSIDY. THE REPLY OF THE ACTING ASSISTANT SECRETARY OF THE TREASURY EXPRESSED THE VIEW OF THOSE DEPARTMENTS IN THE FOLLOWING TERMS:

"THE OFFICIAL RATE OF EXCHANGE, ESTABLISHED BY DECREE-LAW NO. 001-SLU OF JUNE 19, 1966, IS 80 VIETNAMESE PIASTERS TO U.S. $1.00. A 38 PIASTER SUBSIDY, ESTABLISHED BY DECREE-LAW NO. 002-SLU OF JUNE 17, 1966, ALSO APPLIED TO MANY TRANSACTIONS, WITH THE RESULT THAT THERE WERE TWO BUYING RATES. DECREE-LAW NO. 035-SLU OF AUGUST 29, 1967, AMENDED DECREE-LAW NO. 002-SLU BY EXTENDING THE APPLICATION OF THE 38 PIASTER SUBSIDY TO ALL FINANCIAL AND COMMERCIAL TRANSFERS FROM ABROAD TO VIET-NAM, EFFECTIVE OCTOBER 1, 1967. THUS THE OFFICIAL RATE REMAINS AT 80 PIASTERS TO U.S. $1.00, AND THIS RATE IS USED BY THE VIETNAMESE GOVERNMENT FOR PURPOSES OF CUSTOMS VALUATION. THE RATE AT WHICH THE U.S. GOVERNMENT PRESENTLY BUYS PIASTERS FROM THE VIETNAMESE GOVERNMENT IS EFFECTIVELY 118 PIASTERS TO U.S. $1.00."

ON THE BASIS OF THIS ADVICE AND IN THE ABSENCE OF OTHER EVIDENCE, IT WAS CONCLUDED THAT PAYMENT TO THE CONTRACTOR WAS PROPERLY LIMITED TO THE "OFFICIAL RATE" OF EXCHANGE SINCE "THE SUBSIDY OF 38 PIASTERS PER UNITED STATES DOLLAR GRANTED TO THE UNITED STATES BY THE GOVERNMENT OF VIETNAM WOULD APPEAR TO BE SOLELY FOR THE BENEFIT OF THE UNITED STATES AND SHOULD NOT BE PASSED ON TO THE CONTRACTORS HAVING CONTRACTS WITH THE UNITED STATES." THIS RATIONALE WAS APPLIED IN OUR DECISION B 163433, SUPRA; HOWEVER, IT WAS ALSO RECOGNIZED IN B-163206, B-163433, JULY 25, 1968, THAT UPON A SHOWING OF "CLEAR AND CONVINCING EVIDENCE OF INTENT," RELIANCE BY THE CONTRACTING PARTIES UPON SOME PREVAILING RATE OF EXCHANGE OTHER THAN THE "OFFICIAL RATE" OF 80$ VN TO $1 WOULD NOT BE QUESTIONED.

APPLYING THE FOREGOING PRINCIPLES, WE CONCLUDED GENERALLY IN OUR DECISION OF AUGUST 18, 1969, THAT THE FACTS AND CIRCUMSTANCES SURROUNDING THE EXECUTION OF THE LEASE CONTRACT DID NOT ESTABLISH THE PROPRIETY OF A RENTAL ADJUSTMENT BY RELIANCE ON THE 118$ VN TO $1 EXCHANGE RATE. SPECIFICALLY, WE HELD THAT UPON ELIMINATION OF THE LIMITED ACCESS FREE MARKET RATE, THERE WAS NO INDICATION IN THE SURROUNDING CIRCUMSTANCES OR TERMS OF THE LEASE THAT A FLUCTUATION REPRESENTED BY A SPECIAL EXCHANGE RATE SUBSIDY (SOLELY FOR THE BENEFIT OF THE UNITED STATES) WOULD AUTHORIZE AN ADJUSTMENT OF THE RENTAL RATES. THEREFORE, AND SINCE THE "OFFICIAL RATE" OF EXCHANGE WAS 80$ VN TO $1, "AN ADJUSTMENT *** COULD NOT BE MADE SINCE THE STATED VN$ 72.77 EXCHANGE RATE *** (HAD) NOT VARIED BY MORE THAN 15 PERCENT."

RELYING ON OUR DECISIONS B-163206, B-163433, JULY 25, 1968, YOUR GENERAL COUNSEL URGES THAT SUBSTITUTION OF THE PRESENT "OFFICIAL RATE" OF 80$ VN TO $1 FOR THE ELIMINATED LIMITED FREE ACCESS MARKET DOES NOT COMPORT WITH THE INTENT OF THE PARTIES AT THE TIME THE LEASE WAS EXECUTED, AND HE FURTHER MAINTAINS THAT ARTICLE 9 IS IN PARI MATERIA WITH THE CLAUSE UPHELD IN THE DECISION OF JULY 25, 1968. IT IS POINTED OUT THAT AT THE TIME THE LEASE WAS EXECUTED THE "OFFICIAL RATE" OF EXCHANGE WAS 35$ VN TO $1, AND THAT THIS RATE WAS "A BASE TO WHICH INCREMENTS HAVE BEEN ADDED TO ACHIEVE THE LAWFUL RATE AT WHICH THE EXCHANGE CONTROL AUTHORITIES IN VIETNAM HAVE OFFICIALLY AND FORMALLY EFFECTED EXCHANGE TRANSACTIONS." ALSO, IT IS INDICATED THAT EXCHANGE TRANSACTIONS TAKING PLACE AT THE THEN "OFFICIAL RATE" WERE LIMITED TO THE SUBSIDIZED SALE OF DOLLARS TO CERTAIN VIETNAMESE STUDENTS STUDYING ABROAD, AND THAT THE "LIMITED ACCESS FREE MARKET" RATE OF EXCHANGE SET FORTH IN THE LEASE WAS THE RATE AT WHICH DOLLARS WERE SOLD "(A) TO VIETNAMESE FOR TRAVEL OUTSIDE VIETNAM AND (B) TO FOREIGNERS DOING BUSINESS IN VIETNAM FOR REPATRIATING PROFITS AND INVESTMENT CAPITAL," CITING THE SIXTEENTH ANNUAL REPORT ON EXCHANGE RESTRICTIONS 576, 579-82 (INTERNATIONAL MONETARY FUND (IMF), 1965). THUS, IT IS MAINTAINED THAT "THE PARTIES WERE NOT LOOKING TO THE NON-UTILIZED 'OFFICIAL RATE' AS THE REFERENCE POINT FOR ADJUSTING RENTAL PAYMENTS, THEY WERE LOOKING TO A LAWFUL EFFECTIVE RATE."

WITH RESPECT TO THE SELECTION OF A "LAWFUL EFFECTIVE RATE," YOUR GENERAL COUNSEL FURTHER OBSERVES THAT THE TRANSACTIONS PREVIOUSLY EFFECTED AT THE LIMITED ACCESS FREE MARKET RATE ARE NOW CONSUMMATED AT THE 118$ VN TO $1 EXCHANGE RATE. IN SUPPORT OF THIS OBSERVATION, ATTENTION IS DRAWN TO A COPY OF A CERTIFICATION BY THE SECRETARY OF THE IMF TO THE SECRETARY OF THE TREASURY, INCLUDED IN THE RECORD. THE CERTIFICATION PROVIDES AS FOLLOWS:

"THE FUND HEREBY CERTIFIES AS FOLLOWS: NO PAR VALUE FOR THE VIETNAMESE PIASTRE HAS BEEN ESTABLISHED WITH THE FUND. IN ACCORDANCE WITH THE MEMBERSHIP RESOLUTION FOR IT, THE REPUBLIC OF VIET-NAM UNDERTOOK THAT BEFORE THE ESTABLISHMENT OF AN INITIAL PAR VALUE IT 'SHALL NOT CHANGE ITS EXCHANGE RATES PREVAILING AT THE TIME OF ACCEPTING MEMBERSHIP WITHOUT AGREEMENT WITH THE FUND AFTER PRIOR CONSULTATION.' ON JUNE 18, 1966 THE VIETNAMESE GOVERNMENT INTRODUCED, WITH THE AGREEMENT OF THE FUND, THE RATE OF VN$80 PER U.S. DOLLAR AS THE EXCHANGE RATE FOR THE VIETNAMESE PIASTRE. THIS RATE WAS REFERRED TO BY THE VIETNAMESE GOVERNMENT IN ITS COMMUNICATION TO THE FUND AS THE 'OFFICIAL' RATE. HOWEVER, THE FOLLOWING RATES OF EXCHANGE BETWEEN THE VIETNAMESE PIASTRE AND THE U.S. DOLLAR WERE MAINTAINED ON JULY 1, 1967, OCTOBER 1, 1967, AND ON JULY 1, 1968, WITH THE AGREEMENT OF THE FUND:

"(A) JULY 1, 1967

(1) BUYING RATES

(I) APPLICABLE TO PURCHASES FROM BASED ON

FOREIGN GOVERNMENTS, INTERNATIONAL THE 'OFFICIAL'

ORGANIZATIONS AND FOREIGN RATE

CONTRACTORS

(II) APPLICABLE TO ALL OTHER PURCHASES

(INCLUSIVE OF CONSOLIDATION

PREMIUM) VN$117.20 (2)

SELLING RATES

APPLICABLE TO ALL TRANSACTIONS

EXCEPT CERTAIN STUDENT REMITTANCES

(INCLUSIVE OF CONSOLIDATION TAX) VN$118.80

APPLICABLE TO CERTAIN STUDENT BASED ON THE

REMITTANCES 'OFFICIAL' RATE

"(B) OCTOBER 1, 1967

(1) BUYING RATE

APPLICABLE TO ALL PURCHASES (INCLUSIVE VN$117.20

OF CONSOLIDATION PREMIUM) (2) SELLING RATES

SAME AS ON JULY 1, 1967

"(C) JULY 1, 1968

SAME AS ON OCTOBER 1, 1967 "FURTHERMORE, AS THE RESULT OF THE IMPOSITION OF CERTAIN TAXES, CALLED 'PEREQUATION' TAXES, RANGING FROM VN$10 TO VN$140 PER U.S. DOLLAR ON JULY 1, 1967 AND ON OCTOBER 1, 1967, AND FROM VN$10 TO VN$215 PER U.S. DOLLAR ON JULY 1, 1968, IT IS POSSIBLE THAT THE EFFECTIVE RATES FOR THE SALE OF EXCHANGE FOR SOME IMPORTS WERE DIFFERENT FROM THOSE SHOWN ON ALL OR SOME OF THE THREE PERTINENT DATES, BUT THE INFORMATION AVAILABLE TO THE FUND IS INCOMPLETE IN THIS RESPECT."

THE SELECTION OF THE APPROPRIATE EXCHANGE RATE STANDARD AS A RESULT OF THE ELIMINATION OF THE LIMITED ACCESS FREE MARKET RATE OF EXCHANGE IS, OF COURSE, THE CORE PROBLEM. AT THIS POINT, IT MUST BE NOTED THAT THE RECORD CONTAINS NO CONTEMPORANEOUS EVIDENCE BEARING ON THE INTENT OF THE PARTIES. WE ARE LEFT THEN WITH THE LANGUAGE OF ARTICLE 9, AND THE INFERENCES TO BE DRAWN FROM A REVIEW OF THE FRAMEWORK OF CURRENCY TRANSACTIONS AS OUTLINED BY THE IMF. WHILE THE POSITION OF YOUR AGENCY IN THE MATTER IS FULLY APPRECIATED BY OUR OFFICE, WE DO NOT BELIEVE THAT THE PHRASE, "OR OTHER OFFICIAL RATE OF EXCHANGE," USED IN ARTICLE 9 MUST BE VIEWED AS ALSO INCLUDING A SUBSIDY ADDED TO THE PRESENT "OFFICIAL RATE" OF 80$ VN TO $1.

ACCORDINGLY, OUR DECISION OF AUGUST 18, 1969, IS AFFIRMED.