B-134989, MARCH 25, 1958, 37 COMP. GEN. 634

B-134989, MARCH 25, 1958, 37 COMP. GEN. 634

CONTRACTS - DEFAULT - PROCUREMENT FROM ANOTHER SOURCE - EXCESS COST LIABILITY - GOVERNMENT'S FAILURE TO ISSUE LETTERS OF COMMITMENT EVIDENCE WHICH SHOWS THAT THE FAILURE OF THE GOVERNMENT TO TIMELY ISSUE LETTERS OF COMMITMENT UNDER A FEDERAL SUPPLY SERVICE CONTRACT CONTRIBUTED TO THE DEFAULT OF A SMALL BUSINESS CONTRACTOR WHO IS CHARGED WITH EXCESS COSTS INCURRED BY THE GOVERNMENT IN THE PROCUREMENT OF THE REQUIRED ITEMS FROM ANOTHER SOURCE AFFORDS THE CONTRACTOR A BASIS FOR A MERITORIOUS DEFENSE TO THE DAMAGE CLAIM; THEREFORE, FURTHER EFFORTS TO ENFORCE THE CLAIM ARE NOT JUSTIFIED AND AMOUNTS WITHHELD FOR APPLICATION TO THE CONTRACTOR'S DEBT MAY BE RELEASED.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, MARCH 25, 1958:

REFERENCE IS MADE TO YOUR LETTER OF JANUARY 22, 1958, TRANSMITTING FOR OUR CONSIDERATION A COPY OF THE REPORT OF THE BOARD OF REVIEW, GENERAL SERVICES ADMINISTRATION, DOCKET NO. 352, SETTING FORTH ITS FINDINGS AND RECOMMENDATIONS ON THE APPEAL OF EMECO CORPORATION, HANOVER, PENNSYLVANIA, FROM A DECISION OF THE CONTRACTING OFFICER, NATIONAL BUYING DIVISION, FEDERAL SUPPLY SERVICE. THE DECISION TERMINATED THE RIGHT OF THE CORPORATION AS OF AUGUST 24, 1956, TO PROCEED WITH ANY NEW OR ADDITIONAL ORDERS FOR STEEL AND ALUMINUM OFFICE CHAIRS UNDER CONTRACT NO. GS-00S- 2657, DATED APRIL 6, 1956, AND HELD THE CORPORATION LIABLE FOR ANY EXCESS COSTS INCURRED BY THE GOVERNMENT IN PROCURING THE REQUIRED ITEMS FROM OTHER SOURCES FOR THE REMAINDER OF THE CONTRACT PERIOD EXPIRING ON MARCH 31, 1957.

YOUR LETTER OF JANUARY 22, AND YOUR SUPPLEMENTAL REPORT DATED MARCH 7, IN THIS MATTER, EXPRESS YOUR CONCURRENCE IN THE RECOMMENDATIONS OF THE BOARD THAT THE CORPORATION'S APPEAL BE DENIED, ASKS OUR CONSIDERATION OF THE LEGAL ASPECTS OF THE APPEAL AND, IN THE EVENT OF OUR CONCURRENCE THEREIN, REQUESTS THAT WE GIVE FAVORABLE CONSIDERATION TO RELIEVING THE CORPORATION ON AN EQUITABLE BASIS FROM LIABILITY FOR EXCESS COSTS. YOUR REASONS FOR STRONGLY URGING THAT SUCH RELIEF BE GRANTED ARE, AMONG OTHERS, THAT THE CORPORATION IS A SMALL BUSINESS WITH LIMITED FINANCIAL RESOURCES; THAT THE CORPORATION WOULD PROBABLY BECOME BANKRUPT IF THE EXCESS COSTS WERE ASSESSED AGAINST IT; THAT IN SUCH EVENT IT IS DOUBTFUL WHETHER THE GOVERNMENT WOULD BE ABLE TO COLLECT THE RESULTING INDEBTEDNESS; THAT IF THE CORPORATION CONTINUES AS A SOURCE OF SUPPLY IT WILL OFFER COMPETITION WHICH WILL RESULT IN LOWER PRICES TO THE GOVERNMENT; THAT THE CORPORATION IS NOW PRODUCING CHAIRS SATISFACTORILY UNDER A CURRENT CONTRACT; AND THAT IT WOULD BE IN THE BEST INTERESTS OF THE GOVERNMENT TO CONTINUE THE CORPORATION AS A SOURCE OF SUPPLY.

SINCE THE REPORT OF THE BOARD CONTAINS A RECITATION OF THE PERTINENT CONTRACT TERMS AND CONDITIONS, AS WELL AS DETAILED STATEMENTS OF THE RELEVANT FACTS SURROUNDING THE CONTRACTOR'S DEFAULT AND THE CIRCUMSTANCES WHICH RESULTED IN ISSUANCE OF THE GOVERNMENT'S TERMINATION NOTICE, THEY WILL NOT BE RESTATED EXCEPT TO THE EXTENT NECESSARY TO OUR DISCUSSION OF CERTAIN PRINCIPAL LEGAL ISSUES.

WHILE WE ARE GENERALLY IN AGREEMENT WITH THE CONCLUSIONS OF THE BOARD WITH RESPECT TO TERMINATION OF THE CONTRACT, WE ARE ALSO OF THE OPINION THAT THE FAILURE OF YOUR ADMINISTRATION TO PERFORM CERTAIN CONTRACTUAL OBLIGATIONS MAY BE VIEWED AS OPERATING TO RELIEVE THE CONTRACTOR FROM ANY LIABILITY TO PAY THE EXCESS COSTS INCURRED AS A RESULT OF THE TERMINATION. WE REFER SPECIFICALLY TO THE PROVISION APPEARING AT PAGES 7 AND 8 OF THE INVITATION FOR BIDS AND READING AS FOLLOWS:

DEFINITE COMMITMENT AGAINST MONTHLY PRODUCTION. THE NATIONAL BUYING DIVISION, FEDERAL SUPPLY SERVICE, WILL ON A QUARTERLY BASIS ISSUE LETTERS OF COMMITMENT TO THE CONTRACTOR, SETTING FORTH DEFINITE QUANTITIES BY ITEMS AGAINST WHICH SPECIFIC ALLOCATIONS WILL BE MADE TO THE REGIONAL OFFICES UPON THEIR REQUEST DURING THE QUARTERLY PERIOD. AT THE TIME SUCH ALLOCATIONS ARE MADE A COPY WILL BE FURNISHED CONCURRENTLY TO THE SUPPLIER, TOGETHER WITH PURCHASE ORDER NUMBER AND DELIVERY DATE. CONFIRMING PURCHASE ORDER WILL BE ISSUED BY THE REGIONAL OFFICE OF THE GENERAL SERVICES ADMINISTRATION WITHIN FIVE (5) CALENDAR DAYS AFTER SUCH ALLOCATIONS ARE MADE. IN THE EVENT THE ENTIRE QUANTITY IS NOT ORDERED OUT AT THE END OF THE QUARTERLY PERIOD, THE FEDERAL SUPPLY SERVICE WILL WITHIN THE SUCCEEDING THIRTY (30) DAY PERIOD FURNISH PURCHASE ORDER AND DELIVERY INSTRUCTIONS FOR IMMEDIATE SHIPMENT OF THE UNSHIPPED BALANCE.

IN THIS CONNECTION WE NOTE THAT THE BOARD, AT PAGE 147 OF ITS RECOMMENDATIONS, HAS SET OUT THE FOLLOWING REASONS ADVANCED BY THE APPELLANT IN SUPPORT OF ITS CLAIM FOR RELIEF FROM LIABILITY FOR EXCESS COSTS:

(B) FAILURE OF THE GOVERNMENT TO ISSUE THE REQUIRED LETTER OF COMMITMENT.

(D) EXCESS ORDERS GIVEN TO THE APPELLANT.

IN CONSIDERING THE VALIDITY OF APPELLANT'S ARGUMENT ON THE FAILURE OF THE GOVERNMENT TO ISSUE THE REQUIRED LETTER OF COMMITMENT, THE BOARD REFERRED TO ITS PRIOR DISCUSSION OF THIS MATTER IN CONNECTION WITH TERMINATION OF THE CONTRACTOR'S RIGHT TO PROCEED APPEARING AT PAGES 126 130 AND CONCLUDING THAT THE GOVERNMENT WAS NOT UNDER ANY LEGAL OBLIGATION TO ISSUE THE QUARTERLY LETTER OF COMMITMENT SO LONG AS THE CONTRACTOR FAILED TO PRODUCE ACCEPTABLE PREPRODUCTION SAMPLES AND THAT ACCEPTANCE OF PURCHASE ORDERS BY THE CONTRACTOR IN THE ABSENCE OF SUCH LETTER CONSTITUTED A WAIVER OF THE REQUIREMENT FOR ITS ISSUANCE.

WE ARE UNABLE TO LOCATE ANY PROVISION IN THE CONTRACT WHICH RELATES THE REQUIREMENT FOR PREPRODUCTION SAMPLES TO THE OBLIGATION OF THE GOVERNMENT TO FURNISH LETTERS OF COMMITMENT. NEITHER ARE WE ABLE TO CONCEIVE ANY VALID REASON FOR AN IMPLIED DUTY UPON THE CONTRACTOR TO FURNISH ACCEPTABLE SAMPLES AS A CONDITION PRECEDENT TO THE OBLIGATIONS OF THE GOVERNMENT TO ISSUE A LETTER OF COMMITMENT. OBVIOUSLY, THE ACCEPTANCE OF THE CONTRACTOR'S BID BOUND HIM TO PERFORM IN ACCORDANCE WITH THE CONTRACT SPECIFICATIONS AND REQUIREMENTS. HOWEVER, UNTIL SUCH TIME AS A LETTER OF COMMITMENT WAS ISSUED THE GOVERNMENT WAS NOT BOUND TO PURCHASE, OR THE CONTRACTOR BOUND TO FURNISH, ANY ASCERTAINABLE NUMBER OF CHAIRS DURING THE QUARTERLY PERIOD IN QUESTION. WHILE THE PROVISION ENTITLED " DEFINITE COMMITMENT AGAINST MONTHLY PRODUCTION" IN THE INVITATION FOR BIDS DOES NOT ESTABLISH ANY DETERMINABLE DATES ON WHICH LETTERS OF COMMITMENT WERE TO BE ISSUED, IT IS THE OBVIOUS PURPOSE OF THIS PROVISION THAT THE MINIMUM OBLIGATIONS OF THE GOVERNMENT BE ESTABLISHED AT THE EARLIEST POSSIBLE DATE TO ASSIST THE CONTRACTOR IN PREPRODUCTION PLANNING.

IT IS THEREFORE OUR OPINION THAT FAILURE TO ISSUE LETTERS OF COMMITMENT MUST NECESSARILY HAVE HAD AN INJURIOUS EFFECT UPON THE EFFICIENT AND TIMELY PLANNING AND PERFORMANCE OF THE CONTRACT. SUCH CONCLUSION IS SUBSTANTIATED BY YOUR SUPPLEMENTAL REPORT DATED MARCH 7, 1958, WHICH STATES THAT, IN THE ABSENCE OF LETTERS OF COMMITMENT, NO ATTEMPT WAS MADE TO COORDINATE THE GOVERNMENT'S REQUIREMENTS WITH THE CONTRACTOR'S PRODUCTIVE CAPACITY; THAT NO ATTEMPT WAS MADE BY THE NATIONAL BUYING DIVISION TO SCHEDULE PRODUCTION AFTER ISSUANCE OF THE PURCHASE ORDERS; THAT THE RESULT OF THIS PROCEDURE WAS THAT BOTH THE GOVERNMENT AND THE CONTRACTOR LOST CONTROL OF THE SITUATION; AND THAT THE GOVERNMENT'S FAILURE TO PROPERLY ADMINISTER AND CONTROL THE CONTRACT CONTRIBUTED MATERIALLY TO THE DIFFICULTIES WHICH RESULTED IN THE CONTRACTOR'S FAILURE TO PERFORM.

PARAGRAPH 11 (B) OF THE GENERAL PROVISIONS OF THE CONTRACT PROVIDES, IN PERTINENT PART, AS FOLLOWS:

(B) THE CONTRACTOR SHALL NOT BE LIABLE FOR ANY EXCESS COSTS IF ANY FAILURE TO PERFORM THE CONTRACT ARISES OUT OF CAUSES BEYOND THE CONTROL AND WITHOUT THE FAULT OR NEGLIGENCE OF THE CONTRACTOR. SUCH CAUSES INCLUDE, BUT ARE NOT RESTRICTED TO, * * * ACTS OF THE GOVERNMENT, * * *.

WE ARE OF THE OPINION THAT TIMELY ISSUANCE OF LETTERS OF COMMITMENT AND PROPER CONTROL OF PURCHASE ORDERS BASED UPON SUCH LETTERS WAS A MATERIAL PART OF THE GOVERNMENT'S OBLIGATION WHICH WAS REQUIRED TO BE PERFORMED EVEN IN THE ABSENCE OF REQUESTS FROM THE CONTRACTOR. SEE 55 C.J. SALES, 303, 305; 77 C.J.S. SALES, 130, 138. WHILE IT IS TRUE THAT SUCH REQUIREMENT WAS PRIMARILY FOR THE BENEFIT OF THE CONTRACTOR AND, AS SUCH, COULD BE WAIVED BY THE CONTRACTOR, IT IS OUR BELIEF THAT THE REPEATED REQUESTS OF THE CONTRACTOR FOR QUARTERLY COMMITMENTS, THE CONTINUING FAILURE OR REFUSAL OF THE GOVERNMENT TO PERFORM THESE OBLIGATIONS, AND THE ADDITIONAL DIFFICULTIES ARISING FROM SUCH FAILURE WHICH ADMITTEDLY CONTRIBUTED TO THE CONTRACTOR'S DELINQUENCY MAY BE SAID TO CONSTITUTE A MERITORIOUS DEFENSE TO ANY CLAIM OR COUNTER-CLAIM BY THE GOVERNMENT BASED UPON DAMAGES REPRESENTED BY EXCESS COSTS INCURRED AS A RESULT OF THE CONTRACTOR'S DEFAULT. SEE STEARNS CO. V. UNITED STATES, 291 U.S. 54, 61; UNITED STATES V. PECK, 102 U.S. 64; TENNESSEE SOAP CO. V. UNITED STATES, 130 C.1CLS. 154, 159; CHALENDER V. UNITED STATES, 127 C.1CLS. 557, 563.

ON THE BASIS OF THE PRESENT RECORD WE MUST CONCLUDE THAT WE WOULD NOT BE JUSTIFIED IN ATTEMPTING TO ENFORCE A CLAIM AGAINST THE CONTRACTOR FOR EXCESS COSTS IN THIS INSTANCE.

ACCORDINGLY, ANY AMOUNTS DUE THE CONTRACTOR WHICH HAVE BEEN WITHHELD TO BE APPLIED AGAINST AN INDEBTEDNESS REPRESENTED BY SUCH EXCESS COSTS MAY BE RELEASED FOR PAYMENT, IF OTHERWISE PROPER.