B-144012, JAN. 16, 1961

B-144012, JAN. 16, 1961

TO THE SECRETARY OF THE AIR FORCE:

BY LETTER DATED NOVEMBER 23, 1960, WITH ENCLOSURES, THE DEPUTY SPECIAL ASSISTANT FOR INSTALLATIONS REQUESTED THAT WE RECONSIDER OUR DECISION OF NOVEMBER 7, 1960, B-144012, WHICH HELD THAT CONTRACT NO. AF 23/606/-1902 AWARDED TO THE SWARTOUT COMPANY AND THE DEL E. WEBB CONSTRUCTION COMPANY AS JOINT VENTURERS SHOULD BE CANCELED FOR THE REASONS STATED THEREIN.

THE ADMINISTRATIVE JUSTIFICATION FOR SUCH REQUEST IS SET OUT IN THE LETTER OF NOVEMBER 23, 1960, AS FOLLOWS:

"AT THE PRESENT TIME, WE ARE INFORMED, THE JOINT VENTURE HAS EXECUTED SUBCONTRACTS IN AN AMOUNT TOTALING $5,771,800. THIS FIGURE REPRESENTS THE CUMULATIVE CONTRACT PRICE UNDER 15 SEPARATE CONTRACTS BETWEEN THE JOINT VENTURE AND 12 DIFFERENT SUBCONTRACTORS. IF THE GOVERNMENT AND THE JOINT VENTURE HAVE A CONTRACT, ITS CANCELLATION WOULD REQUIRE THE GOVERNMENT TO BEAR THE COST OF SETTLING THE SUBCONTRACTORS' CLAIMS FOR COSTS AND LOSS OF ANTICIPATORY PROFITS.

"IN ADDITION, IT MUST BE CONSIDERED THAT THE PROJECT SITE HAS BEEN LEASED TO THE MORTGAGOR-BUILDER CORPORATIONS; THAT THE MORTGAGOR BUILDER CORPORATIONS HAVE CONTRACTED WITH PRIVATE LENDING INSTITUTIONS TO BORROW A TOTAL OF $8,264,777, ON WHICH THE LENDERS EXCEPT TO RECEIVE INTEREST AT 4 1/2 PERCENT PLUS A DISCOUNT OF 6 3/4 PERCENT ($557,872.45, OF WHICH $123,971.66 HAS BEEN PAID); THAT THE LEASEHOLDS HAVE BEEN MORTGAGED TO SECURE THE LOANS; THAT FHA HAS INITIALLY ENDORSED THE MORTGAGE NOTES FOR INSURANCE; AND THAT THE AIR FORCE HAS GUARANTEED PAYMENT OF THE UNPAID PRINCIPAL OF THE NOTES, THE GUARANTY TO BECOME EFFECTIVE EITHER UPON FINAL ENDORSEMENT OF THE MORTGAGE NOTES BY FHA OR UPON TERMINATION OF THE HOUSING CONTRACT FOR THE CONVENIENCE OF THE DEPARTMENT PRIOR TO COMPLETION OF THE PROJECT. IF THE HOUSING CONTRACT WERE CANCELLED NOW, IT IS BELIEVED THAT THE GOVERNMENT WOULD AT LEAST BE RESPONSIBLE FOR THE PAYMENT OF ALL MORTGAGE PROCEEDS THUS FAR ADVANCED AND POSSIBLY FOR ANY LOSSES SUFFERED BY THE BANKS BY REASON OF THEIR MONEY HAVING BEEN TIED UP OR BY REASON OF INABILITY TO LEND THE MONEY NOW ON SUCH FAVORABLE TERMS.

"IF AN AMICABLE SETTLEMENT COULD NOT BE MADE WITH THE BANKS, IT MIGHT BE NECESSARY TO RESORT TO CONDEMNATION IN ORDER TO FREE THE PROJECT SITE OF THE MORTGAGE LIENS. IN SUCH AN EVENTUALITY, THE BANKS' CLAIMS WOULD TAKE THE SHAPE OF CLAIMS FOR JUST COMPENSATION FOR THE PROPERTY INTERESTS BEING ACQUIRED BY THE GOVERNMENT.

"FINALLY, WE ASSUME THAT EVEN IF THE CONTRACT WITH THE JOINT VENTURE WAS NOT LEGALLY PROPER, ITS CANCELLATION WOULD GIVE RISE TO A CLAIM BY THE JOINT VENTURE FOR THE VALUE OF ALL WORK PERFORMED THUS FAR OF WHICH THE GOVERNMENT HAS RECEIVED THE BENEFIT AND FOR WHICH NO PAYMENT HAS BEEN MADE. FURTHERMORE, THE POTENTIAL HARDSHIP THAT A REFUSAL TO LET THE JOINT VENTURE PERFORM WOULD UNDOUBTEDLY WORK ON THOSE WHO HOLD THE MILLIONS OF DOLLARS WORTH OF SUBCONTRACTS, PRESENTS A SOBERING PROSPECT INDEED.

"IN SUMMARY, THE CANCELLATION OF THE CONTRACT WITH THE JOINT VENTURE COULD RESULT IN AN EXTRAORDINARY PROLIFERATION OF LAW SUITS AMONG THE SUBCONTRACTORS, THE JOINT VENTURE, THE BANKS, THE MORTGAGOR BUILDERS, AND THE GOVERNMENT ACTING THROUGH BOTH THE FHA AND THE MILITARY. EVEN IF THE CONTRACT WITH THE JOINT VENTURE WAS NOT LEGALLY PROPER, THE COLLAPSE OF THE NUMEROUS RELATIONSHIPS FOUNDED UPON THE ASSUMPTION THAT A VALID CONTRACT DOES EXIST WOULD UNDOUBTEDLY COST THE GOVERNMENT A LARGE SUM OF MONEY, WOULD RESULT IN A POSTPONEMENT OF INDEFINITE DURATION IN THE CONSTRUCTION OF A VITALLY NEEDED MILITARY HOUSING PROJECT, AND MIGHT WELL CAUSE THE SEVEREST DISLOCATION AMONG THE SUBCONTRACTORS. THE RISK THAT THE COURTS WOULD HOLD THE CONTRACT WITH THE JOINT VENTURE A VALID OBLIGATION OF THE GOVERNMENT MERELY INCREASES THE POTENTIAL MAGNITUDE OF THE DOLLAR LOSS THAT CANCELLATION WOULD CAUSE THE GOVERNMENT.

IN VIEW OF THE FOREGOING FACTS AND CIRCUMSTANCES, YOU ARE ADVISED THAT WE WOULD HAVE NO OBJECTION TO THE CONTINUATION OF THE CURRENT CONTRACT WITH THE JOINT VENTURE AS IN THE BEST INTERESTS OF THE GOVERNMENT.

WITH RESPECT TO THE QUESTION WHETHER A BINDING CONTRACT WAS ENTERED INTO WITH SWARTOUT UPON ISSUANCE OF THE LETTER OF ACCEPTABILITY, IT IS OUR VIEW THAT THE LETTER OF ACCEPTABILITY CONSUMMATED AN AGREEMENT BETWEEN THE GOVERNMENT AND THE ELIGIBLE BIDDER WHEREBY THE ELIGIBLE BIDDER OBLIGATED HIMSELF TO COMPLETE THE VARIOUS CORPORATE, LEGAL AND FINANCIAL ARRANGEMENTS PRELIMINARY TO EXECUTION OF THE FORMAL HOUSING CONSTRUCTION CONTRACT. IN TURN THE GOVERNMENT HAD THE OBLIGATION TO ENTER INTO THE FORMAL CONTRACT UPON THE SATISFACTORY COMPLETION OF SUCH PRELIMINARY ARRANGEMENTS. FAILURE TO CARRY OUT THE TERMS OF THE AGREEMENT RESULTING FROM THE ISSUANCE OF THE LETTER OF ACCEPTABILITY WOULD, OF COURSE, REQUIRE THE DEFAULTING PARTY TO RESPOND IN DAMAGES FOR BREACH OF THE AGREEMENT AS PROVIDED THEREIN. SEE B-134772, SEPTEMBER 14, 1959. HOWEVER, THIS CONCLUSION SHOULD NOT BE REGARDED AS AUTHORIZING HEREAFTER ANY DEPARTURE FROM THE PRINCIPLE ENUNCIATED IN OUR NOVEMBER 7, 1960, DECISION, THAT AN ENTITY, NOT A PARTICIPANT IN THE ADVERTISED COMPETITION, MAY NOT BE SUBSTITUTED FOR OR JOINED WITH AN OTHERWISE ELIGIBLE BIDDER IN EXECUTING A FORMAL CONSTRUCTION CONTRACT UNDER THE INVITATION.

THE PERTINENT DOCUMENTS ACCOMPANYING THE DEPUTY SPECIAL ASSISTANT'S LETTER ARE RETURNED AS REQUESTED.