B-160886, JUL. 23, 1968

B-160886, JUL. 23, 1968

TO MR. SECRETARY:

REFERENCE IS MADE TO LETTER CC:OP:GL JEFG:OP-488 OF MARCH 25, 1968, FROM THE ASSISTANT SECRETARY FOR ADMINISTRATION, REGARDING THE ASSESSMENT OF LIQUIDATED DAMAGES AGAINST PIONEER FACILITIES INC. FOR ITS LATE PERFORMANCE UNDER INTERNAL REVENUE SERVICE CONTRACT TIR 25127. THE BACKGROUND ON THIS MATTER IS SET FORTH IN OUR DECISION B 160886 OF SEPTEMBER 20, 1967, 47 COMP. GEN. ----, TO THE ASSISTANT COMMISSIONER (ADMINISTRATION), INTERNAL REVENUE SERVICE, AND THEREFORE IS NOT REPEATED HERE.

THE MARCH 25 LETTER TREATS THE MATTER OF LIQUIDATED DAMAGES IN THE ALTERNATIVE. FIRST, IT IS SUGGESTED THAT THE LIQUIDATED DAMAGES CLAUSE MAY BE A NULLITY AND THAT, THEREFORE, NO LIQUIDATED DAMAGES SHOULD BE ASSESSED. IN THE EVENT THAT CONTENTION IS REJECTED, IT IS RECOMMENDED THAT LIQUIDATED DAMAGES BE REMITTED ON AN EQUITABLE BASIS UNDER THE AUTHORITY OF THE ACT OF SEPTEMBER 5, 1950, 41 U.S.C. 256A. HOWEVER, IF IT IS DETERMINED THAT TOTAL REMISSION IS NOT JUSTIFIED, IT IS SUGGESTED THAT THE $150 PER DAY RATE OF LIQUIDATED DAMAGES BE PRORATED TO AN APPROPRIATE AMOUNT WHICH WOULD REPRESENT LIQUIDATED DAMAGES FOR THAT PORTION OF THE EQUIPMENT DELIVERED, INSTALLED AND READY FOR ACCEPTANCE TESTING BY JULY 12, 1966. IF THE PRORATION CANNOT BE ACCOMPLISHED ON A LEGAL BASIS, IT IS RECOMMENDED THAT IT BE DONE UNDER THE AUTHORITY OF THE ACT OF SEPTEMBER 5, 1950, SUPRA.

THE ORIGINAL CONTRACT PROVIDES FOR DELIVERY AND INSTALLATION OF THE AUTOMATED MAIL SORTING SYSTEM FOR ACCEPTANCE TESTING BY JANUARY 15, 1966. THE CONTRACT STATES THAT THE "CONTRACTOR WILL BE ASSESSED LIQUIDATED DAMAGES IN THE AMOUNT OF $150.00 PER CALENDAR DAY FOR DELAY IN COMPLETE INSTALLATION AND FINAL ACCEPTANCE OF THE SYSTEM.' THE CONTRACT STATES FURTHER THAT THE "SYSTEM MUST RUN AT FULL RATED CAPACITY FOR 14 CONSECUTIVE WORK DAYS WITH NOT MORE THAN 10 PERCENT LOST PRODUCTION DUE TO DOWN TIME DURING ANY EIGHT HOUR WORK DAY," AND THAT "IT IS NOT REQUIRED THAT ONE PERFORMANCE PERIOD EXPIRE IN ORDER FOR ANOTHER TO BEGIN.'

THE MARCH 25 LETTER STATES THAT THERE IS UNCERTAINTY AND ABSENCE OF DEFINITENESS AS TO WHEN LIQUIDATED DAMAGES ARE TO COMMENCE BECAUSE THERE IS NO CRITERION FOR ESTABLISHING "DELAY IN COMPLETE INSTALLATION AND FINAL ACCEPTANCE" AND BECAUSE UNDER THE TEST CRITERIA, THE CONTRACTOR COULD STILL BE PERFORMING ACCEPTANCE TESTING AND YET NOT BE LIABLE FOR LIQUIDATED DAMAGES. IN THIS RESPECT, YOU CITE CAMDEN IRON WORKS V UNITED STATES, 51 CT. CL. 9.

IN THE CITED CASE, THE COURT DECLINED TO ENFORCE A LIQUIDATED DAMAGES CLAUSE BECAUSE A DEFINITE DATE FROM WHICH THE LIQUIDATED DAMAGES WERE TO COMMENCE COULD NOT BE DETERMINED FROM THE CONTRACT. THE COURT HELD AT PAGE 18 OF ITS DECISION:

"BUT IT WOULD SEEM HARDLY NECESSARY TO ELABORATE OR SEEK FURTHER FOR AUTHORITIES TO SUSTAIN THE RATHER SELF-EVIDENT PROPOSITION THAT IF WE ARE TO ENFORCE A LIQUIDATED DAMAGE CLAUSE WE MUST BE ABLE TO FIX THE DAY FROM WHICH IT IS TO OPERATE, AND IF WE CAN NOT FIX THAT DAY EITHER BY SPECIFIC STIPULATION OF THE PARTIES OR BY REASONABLE CONSTRUCTION OF STIPULATIONS WE ARE NOT JUSTIFIED IN ATTEMPTING TO FIX IT BY GUESSWORK. THE VERY NATURE OF A LIQUIDATED DAMAGE CLAUSE, AND ESPECIALLY ONE UNDER THE AGGREGATE OF DAMAGES IS TO BE DETERMINED WITH A PER DIEM RATE AS THE BASIS OF THE COMPUTATION, REQUIRES THE FIXING OF A DEFINITE DATE WHICH MUST BE DETERMINED FROM THE CONTRACT.'

THE LIQUIDATED DAMAGES CLAUSE IN THE CONTRACT PROVIDES FOR DAMAGES FOR DELAY IN COMPLETE INSTALLATION AND FINAL ACCEPTANCE OF THE SORTING SYSTEM. THE CONTRACT PROVIDES FOR INSTALLATION OF THE SYSTEM BY JANUARY 15, 1966, AND CONTEMPLATES COMPLETION OF TESTING WITHIN 14 WORKDAYS THEREAFTER. ALTHOUGH THE CONTRACT DOES NOT STIPULATE THE EXACT DATE UPON WHICH TESTING IS TO BE COMPLETED AND YET CONTEMPLATES THE POSSIBILITY OF ACCEPTANCE TESTING TAKING LONGER THAN 14 DAYS BECAUSE OF TEST FAILURES, SUCH FACTORS DO NOT, IN OUR OPINION, RENDER THE LIQUIDATED DAMAGE CLAUSE UNENFORCEABLE. IN OTHER WORDS, AS WE INTERPRET THE LIQUIDATED DAMAGE PROVISION, IF INSTALLATION OF THE SYSTEM IS COMPLETED LATER THAN JANUARY 15, 1966, OR IF FINAL ACCEPTANCE IS DELAYED BEYOND THE 14-WORKDAY TEST PERIOD, THE CONTRACTOR IS LIABLE FOR LIQUIDATED DAMAGES FOR EACH SUCH DAY OF DELAY THEREAFTER. IN VIEW THEREOF, WE BELIEVE A REASONABLE CONSTRUCTION OF THE CONTRACT REQUIRES THE CONCLUSION THAT THE CONTRACT FIXED ASCERTAINABLE TIMES OR DATES FROM WHICH LIQUIDATED DAMAGES WERE TO ACCRUE. ACCORDINGLY, WE REGARD THE LIQUIDATED DAMAGES CLAUSE AS SUFFICIENTLY DEFINITE AND, AS SUCH, ENFORCEABLE BY THE GOVERNMENT.

ALL MODULES OF THE SYSTEM, EXCEPT THE CONVEYOR UNIT, WERE READY FOR ACCEPTANCE TESTING ON MARCH 8, 1966. THE CONVEYOR UNIT WAS READY FOR ACCEPTANCE TESTING ON JULY 12, 1966. HOWEVER, THE CONVEYOR UNIT NEVER PASSED ACCEPTANCE TESTING AND IT WAS ULTIMATELY REJECTED AND NEVER REPLACED EITHER BY THE CONTRACTOR OR BY THE GOVERNMENT. THEREFORE, THE CONTRACTOR NEED NOT BE CHARGED WITH LIQUIDATED DAMAGES FOR THE CONVEYOR UNIT WHICH THE SERVICE HAS IN EFFECT DECIDED IT DOES NOT NEED. ON THAT BASIS, LIQUIDATED DAMAGES SHOULD NOT BE ASSESSED BEYOND MARCH 8, 1966. THE DAMAGES THUS WOULD TOTAL $7,800 FOR 52 DAYS OF DELAY WHICH ARE CHARGEABLE TO THE CONTRACTOR. THIS IS SIGNIFICANTLY LESS THAN THE $23,700 ESTIMATED WITHOUT PRORATION OR THE AMOUNT OF $11,859.80 ESTIMATED WITH PRORATION THROUGH JULY 12, 1966, AS TABULATED IN THE MARCH 25 LETTER.

A NUMBER OF REASONS ARE CITED IN THE MARCH 25 LETTER FOR REMITTING ALL THE LIQUIDATED DAMAGES UNDER THE ACT OF SEPTEMBER 5, 1950. IT IS CONTENDED THAT THE INTERNAL REVENUE SERVICE FAILED (1) TO REQUIRE THE ENVELOPE MANUFACTURER TO CHANGE THE INKING PROCESS FOR THE CODES ON THE ENVELOPES PROCESSED THROUGH THE SORTING SYSTEM; (2) TO PROVIDE ELECTRICITY FOR THE SYSTEM AT THE APPROPRIATE TIME; AND (3) TO PROPERLY TREAT THE FLOOR UPON WHICH THE SYSTEM SITS WITH A PREPARATION TO AVOID HARMFUL EFFECTS TO THE EQUIPMENT. ADDITIONALLY, IT IS POINTED OUT THAT THE SERVICE AFFIXED A GUM ON THE ENVELOPES WHICH CAUSED THEM TO JAM THE CUTTER IN THE SORTING SYSTEM WITH THE RESULT THAT THE CONTRACTOR WAS REQUIRED TO REDESIGN MOST OF THE CUTTER MODULE AFTER IT WAS DELIVERED AND INSTALLED. FURTHER, IT IS STATED THAT THE CONTRACTOR WAS CONFUSED AND MISLED BY A LETTER DATED DECEMBER 22, 1965, IN WHICH IT WAS ADVISED BY THE SERVICE THAT A NOTICE OF TERMINATION FOR DEFAULT MIGHT BE ISSUED SINCE DELIVERY COULD NOT BE ACCOMPLISHED BY JANUARY 15, 1966, WHEREAS, THE CONTRACTING OFFICER'S SUPERVISOR ADVISED THE COMPANY PRESIDENT THAT THE LETTER WAS MERELY A FORMALITY. ADDITIONALLY, IT IS INDICATED THAT PRIOR TO THE JANUARY 15, 1966, CONTRACT DELIVERY DATE THE DIRECTOR OF THE SYSTEMS DIVISION WAS INCLINED TO ALLOW THE CONTRACTOR UNTIL JANUARY 31, 1966, TO DELIVER THE CONVEYOR UNIT IN VIEW OF ITS DIFFICULTY IN OBTAINING DELIVERY OF THE UNIT FROM THE SUBCONTRACTOR.

THE REASONS WHY THE ITEMS NUMBERED (1), (2) AND (3) ARE NOT CONSIDERED TO BE PERSUASIVE ARE STATED IN OUR DECISION OF SEPTEMBER 20, 1967, TO THE ASSISTANT COMMISSIONER (ADMINISTRATION), INTERNAL REVENUE SERVICE, AND THEREFORE NEED NOT BE REPEATED HERE. THE ADDITIONAL PROBLEM RELATING TO THE GUM ON THE ENVELOPES DID NOT OCCUR UNTIL AFTER DELIVERY OF THE CUTTER; HENCE, SUCH DIFFICULTY DID NOT PREVENT THE DELIVERY OF THE EQUIPMENT ON TIME. MOREOVER, THERE IS NO INDICATION THAT THE ADDITIONAL TIME REQUIRED TO ADJUST THE CUTTER IS EQUAL TO THE NUMBER OF DAYS OF DELAY IN DELIVERY OF THE EQUIPMENT. ALTHOUGH THE CONTRACTOR MAY HAVE BEEN ADVISED THAT THE THREAT OF TERMINATION FOR DEFAULT WAS A FORMALITY, APPARENTLY NOTHING WAS SAID TO THE CONTRACTOR CONCERNING THE ASSESSMENT OF LIQUIDATED DAMAGES. WE THEREFORE BELIEVE THAT NO SUBSTANTIAL BASIS EXISTED FOR THE CONTRACTOR TO ASSUME THAT LIQUIDATED DAMAGES WOULD NOT BE ASSESSED UNDER THE CONTRACT FOR LATE DELIVERY. IT IS NOT NECESSARY TO CONSIDER THE SYSTEMS DIVISION DIRECTOR'S INCLINATION TO ALLOW ADDITIONAL TIME TO DELIVER THE CONVEYOR, SINCE IT HAS BEEN DETERMINED ALREADY THAT LIQUIDATED DAMAGES SHOULD NOT BE ASSESSED FOR THE LATE DELIVERY OF THE CONVEYOR. IN VIEW OF THE FOREGOING CIRCUMSTANCES WHICH SEEM TO NEGATE ANY EQUITIES IN FAVOR OF THE CONTRACTOR, THE REQUEST FOR REMISSION OF ALL LIQUIDATED DAMAGES UNDER THE ACT OF SEPTEMBER 5, 1950, MUST BE DENIED.

SINCE IT HAS BEEN DETERMINED THAT LIQUIDATED DAMAGES SHOULD NOT BE ASSESSED FOR THE LATE DELIVERY OF THE CONVEYOR, THE LAST MODULE DELIVERED, NO ANSWER IS REQUIRED AS TO THE QUESTION WHETHER LIQUIDATED DAMAGES SHOULD BE REDUCED BY A PROPORTIONATE AMOUNT AFTER ALL MODULES WITH THE EXCEPTION OF THE LAST MODULE WERE DELIVERED.

ACCORDINGLY, OUR CLAIMS DIVISION IS BEING INSTRUCTED TODAY TO ISSUE A SETTLEMENT IN FAVOR OF THE CONTRACTOR IN THE AMOUNT OF $3,450, REPRESENTING THE DIFFERENCE BETWEEN $7,80) AND THE $11,250 BALANCE REMAINING DUE UNDER THE CONTRACT.