B-156126, MAR. 25, 1969

B-156126, MAR. 25, 1969

TO MR. FULLERTON:

REFERENCE IS MADE TO YOUR LETTER DATED FEBRUARY 6, 1969, WITH ENCLOSURES, RELATIVE TO CERTAIN QUESTIONS WHICH HAVE ARISEN IN CONNECTION WITH THE CONSIDERATION OF A BILLING SUBMITTED BY THE ATCHISON, TOPEKA AND SANTA FE RAILROAD COMPANY (HEREINAFTER REFERRED TO AS "SANTA FE"), FOR RELOCATION AND ALTERATION WORK PERFORMED UNDER CONTRACT NO. IBM-67-95, ENTERED INTO ON BEHALF OF THE UNITED STATES AND MEXICO, WITH SANTA FE, THE SOUTHERN PACIFIC COMPANY AND THE TEXAS AND PACIFIC RAILWAY COMPANY, PURSUANT TO THE AMERICAN-MEXICAN CHAMIZAL CONVENTION ACT OF 1964, PUBLIC LAW 88-300, APPROVED APRIL 29, 1964, 78 STAT. 184.

UNDER PUBLIC LAW 88-300, THE SECRETARY OF STATE, ACTING THROUGH THE UNITED STATES COMMISSIONER, IS AUTHORIZED TO CONDUCT INVESTIGATIONS, TO ACQUIRE LANDS FOR TRANSFER TO THE GOVERNMENT OF MEXICO AS PROVIDED IN THE AMERICAN-MEXICAN CHAMIZAL CONVENTION SIGNED AUGUST 29, 1963, FOR THE CONSTRUCTION OF THAT PORTION OF THE NEW RIVER CHANNEL AND THE ADJOINING LEVEE IN THE TERRITORY OF THE UNITED STATES AND FOR RELOCATION OF HIGHWAYS, ROADWAYS, RAILROADS, TELEGRAPH, TELEPHONE, ELECTRIC TRANSMISSION LINES, BRIDGES, RELATED FACILITIES, AND ANY PUBLICLY OWNED STRUCTURE OR FACILITY, THE RELOCATION OF WHICH, IN THE JUDGMENT OF THE UNITED STATES COMMISSIONER, IS NECESSITATED BY THE PROJECT. ADDITIONAL AUTHORITY WAS GRANTED, INCLUDING THE AUTHORITY (1) TO PERFORM ANY AND ALL WORK INVOLVED IN SAID RELOCATIONS, (2) TO ENTER INTO CONTRACTS WITH THE OWNERS OF PROPERTIES TO BE RELOCATED WHEREBY THEY UNDERTAKE TO ACQUIRE ANY OR ALL PROPERTIES NEEDED FOR SUCH RELOCATIONS, OR UNDERTAKE TO PERFORM ANY OR ALL WORK INVOLVED IN RELOCATIONS, AND (3) TO CONVEY OR EXCHANGE PROPERTIES ACQUIRED OR IMPROVED BY THE UNITED STATES UNDER THE STATUTE OR THE CONVENTION, WITH OR WITHOUT IMPROVEMENTS, OR TO GRANT TERM OR PERPETUAL EASEMENTS THEREIN OR THERE OVER.

AS A PART OF ITS UNDERTAKING UNDER CONTRACT NO. IBM-67-95 WITH THE THREE RAILROAD COMPANIES, THE GOVERNMENT AGREED TO PERFORM A PART OF THE WORK INVOLVED IN RELOCATING AND ALTERING THEIR FACILITIES AND THE COMPANIES AGREED TO PERFORM, AT THE EXPENSE OF THE GOVERNMENT, CERTAIN FEATURES OF THE REQUIRED RELOCATIONS AND ALTERATIONS. IN THE CASE OF SANTA FE, IT IS PROVIDED IN ARTICLE II OF THE CONTRACT THAT SANTA FE, AT THE EXPENSE OF THE GOVERNMENT, SHALL FURNISH ALL MATERIALS. SERVICES, LABOR, TOOLS AND EQUIPMENT NECESSARY TO PERFORM CERTAIN FEATURES OF THE RELOCATION INDICATED ON EXHIBITS "A-1" AND "B" AND SUCH DETAIL PLANS AND SPECIFICATIONS, AND MODIFICATIONS THEREOF, AS MAY BE APPROVED BY THE GOVERNMENT AND THE RAILROAD. THE COST OF THE WORK TO BE PERFORMED BY SANTA FE WAS ESTIMATED TO BE $245,000.

A COPY OF EXHIBIT "B" IS NOT ATTACHED TO THE COPY OF THE CONTRACT WHICH WAS SUBMITTED WITH YOUR LETTER, BUT IT IS REFERRED TO IN THE CONTRACT AS "SHOWING PLANS OF THE REPLACING AND REPLACED FACILITIES.' EXHIBIT "A-1" CONSISTS OF BASIC DESIGN CRITERIA FOR THE RELOCATION AND ALTERATION OF SANTA FE'S FACILITIES, AND THE CRITERIA ESTABLISHED FOR "ROADBED AND TRACK" UNDER SECTION 3 OF THAT EXHIBIT INCLUDE "/5) RAIL MAIN LINE AND YARD TRACKS TO BE OF NEW OR USED 90 POUNDS PER YARD RAIL, SATISFACTORY TO SANTA FE, TOGETHER WITH 36 INCH JOINT BARS AND TIE PLATES TO MATCH, PER RAILROAD'S STANDARDS.'

A CONTROVERSY DEVELOPED AS TO WHETHER SANTA FE IS ENTITLED TO FULL REIMBURSEMENT FOR ITS MATERIAL COSTS SINCE, IN RELOCATING OR ALTERING CERTAIN RAILROAD TRACKS, IT UTILIZED EITHER NEW OR USED RAIL IN EXCESS OF 90 POUNDS PER YARD AND ACCESSORIES NEEDED IN CONNECTION WITH THE PLACEMENT OF THE HEAVIER TYPE RAIL. IT IS REPORTED THAT, IN SOME INSTANCES THE CLAIMED COST IS LESS THAN THE COST OF NEW 90-POUND PER YARD RAIL AND ACCESSORIES WHICH WOULD HAVE MET THE REQUIREMENTS OF EXHIBIT "A-1" TO THE RELOCATION AND ALTERATION CONTRACT. IT IS ALSO REPORTED THAT, IN OTHER INSTANCES, THE CLAIMED COST IS IN EXCESS OF THE COST OF NEW 90-POUND RAIL AND ACCESSORIES BUT THAT SANTA FE'S CLAIMED TOTAL COST FOR RAIL AND ACCESSORIES USED IN PERFORMING THE PARTICULAR WORK IS LESS THAN WHAT THE TOTAL COST FOR RAIL AND ACCESSORIES WOULD HAVE BEEN IF SANTA FE HAD ORDERED AND INSTALLED ALL NEW 90-POUND PER YARD RAIL.

THE POSITION OF THE RAILROAD COMPANY IS, IN EFFECT, STATED TO BE THAT USED 90-POUND RAIL WAS NOT AVAILABLE, THAT THE RAILROAD COMPANY DID NOT SEEK NEW 90-POUND RAIL AND IT UTILIZED MATERIALS THAT WERE ACTUALLY ON HAND DUE TO THE GOVERNMENT'S DESIRE TO COMPLETE THE RELOCATION AND ALTERATIONS AS SOON AS POSSIBLE, AND THAT, SINCE THERE WAS A NET SAVING TO THE GOVERNMENT IN THE MATTER AND SANTA FE HAS FULFILLED ITS OBLIGATIONS UNDER THE CONTRACT, FULL REIMBURSEMENT OF THE COSTS INCURRED IN PERFORMING THE PARTICULAR RAIL RELOCATION AND ALTERATION WORK SHOULD BE ALLOWED AND PAID.

YOU STATE THAT YOUR AGENCY IS WILLING TO ACCEPT SANTA FE'S CONTENTIONS THAT NO USED 90-POUND RAIL WAS AVAILABLE AND THAT LOOKING AT THE RELOCATION AND ALTERATIONS AS A "WHOLE" THE TOTAL COST WAS LESS THAN IF SANTA FE HAD UTILIZED NEW 90-POUND RAIL AND ACCESSORIES. YOU ALSO STATE THAT YOUR AGENCY ADMITS IT DID NOT EXERCISE ITS RIGHT TO INSPECT AND OBJECT AS SET FORTH IN ARTICLE V, SECTION E, OF THE RELOCATION CONTRACT. HOWEVER, IT IS THE STATED POSITION OF YOUR AGENCY THAT SANTA FE SHOULD BE REIMBURSED ON AN ITEM BY ITEM BASIS, WITH THE UPPER LIMIT OF REIMBURSEMENT ON ANY ONE ITEM BEING THE COST OF NEW 90-POUND RAIL AND ACCESSORIES. AFTER A DISCUSSION OF AN ASSUMED PRICE FOR NEW 90-POUND RAIL AND SANTA FE'S PRICES FOR 114 POUND AND 131-POUND TURNOUTS, WHICH HAD BEEN UTILIZED ON THE RELOCATED AND ALTERED RAILROAD TRACKS, IT IS REPORTED TO BE THE CONTENTION OF YOUR AGENCY THAT, BY UTILIZING NEW AND/OR USED RAILS AND ACCESSORIES WHICH WERE OVER 90 POUNDS PER YARD, NO MATTER WHAT THE COST, SANTA FE RECEIVED A BETTERMENT BECAUSE THE HEAVIER RAIL AND ACCESSORIES UTILIZED PROVIDED IT WITH A BETTER YARD AND TRACKAGE.

OUR OPINION HAS BEEN REQUESTED AS TO WHETHER THE GOVERNMENT HAS WAIVED ITS RIGHT TO OBJECT TO THE BILLING SUBMITTED BY SANTA FE FOR WORK PERFORMED UNDER THE RELOCATION AND ALTERATION CONTRACT, AND AS TO WHETHER, IN THE EVENT WE FIND THAT THERE WAS NO WAIVER, PAYMENT SHOULD BE MADE TO SANTA FE IN ACCORDANCE WITH THE FORMULA WHICH YOUR AGENCY CONSIDERS TO BE PROPER, INSTEAD OF TREATING THE RAIL AND RAIL ACCESSORY COSTS AS A WHOLE IN RELATION TO WHAT THE TOTAL COST OF THE MATERIALS WOULD HAVE BEEN IF SANTA FE HAD ORDERED AND INSTALLED ALL NEW 90-POUND RAIL AND ACCESSORIES.

YOUR LETTER QUOTES SECTION C OF THE GENERAL PROVISIONS OF CONTRACT NO. IBM-67-95 (ARTICLE V), WHICH IS ENTITLED "BETTERMENTS," AND THE FIRST TWO PARAGRAPHS OF SECTION E, ARTICLE V, WHICH IS ENTITLED "INSPECTION AND ACCEPTANCE.'

SECTION C OF ARTICLE V DISCLOSES A GENERAL INTENTION ON THE PART OF THE PARTIES TO THE CONTRACT THAT THE RELOCATIONS AND/OR ALTERATIONS ACCOMPLISHED BY THE RAILROAD COMPANIES SHOULD PROVIDE THEM WITH FACILITIES EQUAL IN SERVICE AND UTILITY TO THOSE THEN IN EXISTENCE. IT IS PROVIDED THAT ANY IMPROVEMENT IN DESIGN, CONSTRUCTION OR CAPACITY OVER AND ABOVE WHAT WAS REQUIRED TO PROVIDE FACILITIES OF EQUAL SERVICE AND UTILITY WOULD CONSTITUTE A BETTERMENT AND THAT THE INCREASE IN COST THEREOF "SHALL BE PAID BY RAILROADS.' HOWEVER, SECTION C FURTHER PROVIDES THAT THE TERM ,BETTERMENT" WOULD NOT BE DEEMED TO INCLUDE MORE COSTLY CONSTRUCTION OR DESIGN NECESSITATED SOLELY AS THE RESULT OF RELOCATIONS AND ALTERATIONS, AND THAT CONSTRUCTION IN ACCORDANCE WITH PLANS AND SPECIFICATIONS APPROVED BY THE RAILROAD COMPANIES AND THE CONTRACTING OFFICER "SHALL NOT BE DEEMED TO INCLUDE ANY BETTERMENT AS CONTEMPLATED HEREIN, EXCEPT AS MAY BE EXPRESSLY PROVIDED, IN THE INSTRUMENT OF APPROVAL ISSUED BY CONTRACTING OFFICER AND RAILROADS.'

SECTION E, PARAGRAPH 1, OF ARTICLE V PROVIDES THAT:

"GOVERNMENT SHALL HAVE THE RIGHT TO INSPECT THE WORK TO BE PERFORMED BY RAILROADS HEREUNDER AT ANY TIME DURING ITS PROGRESS AND TO MAKE FINAL INSPECTION UPON COMPLETION THEREOF. FAILURE OF THE CONTRACTING OFFICER TO OBJECT TO METHODS AND MATERIALS USED BY RAILROADS OR THEIR CONTRACTORS, EXCEPT THOSE METHODS AND MATERIALS IN STANDARD USE BY RAILROADS, WITHIN TEN (10) DAYS AFTER INITIAL EMPLOYMENT OF SUCH METHODS AND MATERIALS SHALL CONSTITUTE A WAIVER THEREOF FOR THE DURATION OF THE PARTICULAR ITEM OF WORK INVOLVED, BUT SHALL NOT APPLY AS A WAIVER TO OTHER ITEMS NOT SO INVOLVED.'

WE NOTE THAT PARAGRAPH NO. 2, SECTION E, ARTICLE V OF THE CONTRACT, RELATES PRIMARILY TO WORK TO BE PERFORMED BY THE GOVERNMENT OR ITS CONTRACTORS, AND NOT TO WORK TO BE PERFORMED BY THE RAILROAD COMPANIES OR THEIR CONTRACTORS. IN VIEW OF THE PROVISIONS OF PARAGRAPH NO. 1 OF SECTION E, ARTICLE V OF THE CONTRACT, AND THE FACT THAT THE GOVERNMENT NEITHER INSPECTED NOR OBJECTED TO THE RELOCATION AND/OR ALTERATION WORK BEING PERFORMED BY SANTA FE AT ANY TIME DURING THE PROGRESS OF THE WORK, THE GOVERNMENT WAS NOT IN A POSITION, WHEN THE WORK WAS COMPLETED, TO INSIST UPON THE PERFORMANCE OF ANY REMEDIAL WORK AT SANTA FE'S EXPENSE. HOWEVER, THE INSPECTION AND ACCEPTANCE PROVISIONS OF THE CONTRACT DO NOT APPEAR IN ANY MANNER TO AFFECT THE RIGHT OF THE GOVERNMENT TO CONSIDER SANTA FE'S CLAIMED COSTS IN RELATION TO THE QUESTION WHETHER SANTA FE SHOULD PAY A PART OF THE COST OF RELOCATING AND ALTERING ITS YARD AND TRACKAGE ON THE BASIS THAT THE COMPLETED WORK INCLUDED "BETTERMENTS" WITHIN THE MEANING OF SECTION C, ARTICLE V OF THE CONTRACT.

WE ARE NOT ADVISED AS TO THE REASON FOR SPECIFYING NEW OR USED 90 POUND PER YARD RAIL AND ACCESSORIES. IF RAILS OF THAT WEIGHT WERE INSTALLED IN THE TRACKS TO BE RELOCATED, THEY APPARENTLY WERE NOT SATISFACTORY FOR UTILIZATION IN ACCORDANCE WITH THE SALVAGE PROVISIONS OF THE CONTRACT (SECTION B OF ARTICLE V), SINCE THE GOVERNMENT AND SANTA FE AGREE THAT NO USED 90-POUND RAIL WAS AVAILABLE. THE NONAVAILABILITY OF USED 90-POUND RAIL MAY HAVE BEEN DUE, AT LEAST IN PART, TO THE FACT THAT MOST OF THE RAILROADS IN THE UNITED STATES AND CANADA, SINCE ABOUT THE YEAR 1960, HAVE BEEN UTILIZING RAIL SECTIONS WEIGHING FROM 100 TO 140 POUNDS PER YARD. SEE ENCLYCLOPEDIA BRITANNICS, VOLUME 18, PAGE 1, 114.

THE TERM "BETTERMENT" IS INDEFINITE AND ITS SCOPE MAY BE NARROWED BY THE CONTEXT IN WHICH IT IS USED UNDER PARTICULAR CIRCUMSTANCES. IT HAS BEEN DEFINED AS AN IMPROVEMENT WHICH ENHANCES THE VALUE OF AN ESTATE MORE THAN MERE REPAIRS. SEE 10 C.J.S. 349. IN GRAND RAPIDS AND I. RY. CO. V DOYLE, 245 F. 792, WHICH CONCERNED A TAX PROBLEM, IT WAS HELD WITH RESPECT TO THE REPAIR OF THE PLAINTIFF'S TRACKS THAT THERE HAD BEEN A BETTERMENT TO THE EXTENT THAT THE PLAINTIFF INCURRED ADDITIONAL RAIL COSTS BY REASON OF HAVING REPLACED OLD RAILS WITH NEW RAILS ALL OF WHICH WEIGHED MORE THAN THE OLD RAILS, INSTEAD OF UTILIZING NEW RAIL SECTIONS OF THE SAME WEIGHT AS THOSE WHICH WERE REPLACED.

SANTA FE DID NOT UTILIZE NEW 90-POUND PER YARD RAIL AND ACCESSORIES WHICH WOULD HAVE BEEN REQUIRED IN ORDER TO COMPLY WITH THE APPROVED PLANS AND SPECIFICATIONS OF CONTRACT NO. IBM-67-95, SINCE NO USED 90 POUND PER YARD RAIL WAS AVAILABLE. SOME OF THE UTILIZED HEAVIER RAIL AND MATCHING ACCESSORIES MIGHT HAVE BEEN NEW BUT IT APPEARS THAT THE BULK OF THE UTILIZED RAIL AND ACCESSORIES HAD BEEN CARRIED ON SANTA FE'S STOCK RECORDS AS USED MATERIALS. ALSO, IT APPEARS THAT THE STOCK RECORD PRICES FOR USED RAIL AND ACCESSORIES WERE GENERALLY BELOW THE COST OF NEW 90-POUND RAIL AND ACCESSORIES. SANTA FE'S TOTAL RAIL COST PROVED TO BE LESS THAN WHAT THE TOTAL RAIL COST WOULD HAVE BEEN IF ALL NEW 90-POUND RAIL AND ACCESSORIES HAD BEEN UTILIZED. AS AN EXAMPLE OF THE SAVINGS EFFECTED BY SANTA FE, YOUR LETTER REFERES TO ONE INSTANCE IN WHICH SANTA FE UTILIZED A USED 114-POUND TURNOUT PRICED AT $15 AS COMPARED WITH AN ASSUMED COST OF $20 FOR A NEW 90-POUND TURNOUT. HOWEVER, AS AN EXAMPLE OF INSTANCES IN WHICH SANTA FE INCURRED AN EXCESS COST, THE LATTER REFERS TO THE UTILIZATION OF A 131-POUND TURNOUT AT A COST OF $30, AND IT APPEARS THAT THIS WAS A NEW TURNOUT SINCE A PRICE OF $30 FOR A NEW TURNOUT OF THAT WEIGHT WOULD CORRESPOND SUBSTANTIALLY WITH A PRICE OF $20 FOR A NEW 90- POUND TURNOUT COMPUTED ON A PRICE PER POUND BASIS.

UTILIZATION OF THE HEAVIER RAIL AND MATCHING ACCESSORIES PRESUMABLY RESULTED IN AN IMPROVEMENT IN THE CAPACITY OF THE RELOCATED AND ALTERED TRACKS BUT IT IS QUESTIONABLE WHETHER THE ACTUAL VALUE OF THE RELOCATED AND ALTERED TRACKS SHOULD BE REGARDED AS BEING MORE THAN WHAT IT WOULD HAVE BEEN IF ALL NEW 90-POUND PER YARD RAIL AND ACCESSORIES HAD BEEN UTILIZED. IN ANY EVENT, IN THE CONTEXT OF SECTION C OF ARTICLE V OF THE CONTRACT, AN ADJUSTMENT WITH RESPECT TO COSTS OTHERWISE REIMBURSABLE TO SANTA FE WOULD NOT BE REQUIRED UNLESS AN IMPROVEMENT IN THE RELOCATED AND ALTERED TRACKS RESULTED IN A COST INCREASE. IN THAT CONNECTION, IT DOES NOT APPEAR REASONABLE TO MAKE AN INCREASE IN COST DETERMINATION STRICTLY ON AN ITEM BY ITEM BASIS, WITH THE UPPER LIMIT OF REIMBURSEMENT TO SANTA FE BEING THE COST OF NEW 90-POUND PER YARD RAIL AND ACCESSORIES, SINCE IT APPEARS THAT THE UTILIZATION OF MORE COSTLY MATERIALS IN SOME INSTANCES WOULD NOT NECESSARILY HAVE RESULTED IN AN IMPROVEMENT TO THE RELOCATED AND ALTERED TRACKS CONSTRUCTED WITH THE UTILIZATION OF A COMBINATION OF NEW AND USED RAIL AND MATCHING ACCESSORIES. IN OUR OPINION, THE PHRASE "ANY IMPROVEMENT IN DESIGN, CONSTRUCTION OR CAPACITY," AS USED IN SECTION C OF ARTICLE V OF THE CONTRACT, COULD REASONABLY BE REGARDED AS HAVING BEEN INTENDED TO RELATE TO AN IMPROVEMENT IN THE REQUIRED TRACK RELOCATION AND ALTERATION WORK CONSIDERED AS A WHOLE. IF NO NET INCREASE IN COST WAS INVOLVED ON THE BASIS OF CONSIDERING THE WORK AS A WHOLE, IT WOULD APPEAR THAT FULL REIMBURSEMENT TO SANTA FE PROPERLY COULD BE MADE FOR ITS ACTUAL RAIL COSTS.