B-146750, APR. 14, 1964

B-146750, APR. 14, 1964

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

FURTHER REFERENCE IS MADE TO YOUR LETTER OF FEBRUARY 27, 1963, REQUESTING OUR VIEWS CONCERNING THE ACTION TO BE TAKEN TO IMPLEMENT RECOMMENDATIONS CONTAINED IN GENERAL ACCOUNTING OFFICE REPORT TO THE CONGRESS DATED OCTOBER 10, 1962, ON THE AUDIT OF GENERAL SERVICES ADMINISTRATION ALUMINUM PRODUCTION EXPANSION AND GUARANTEED MARKET CONTRACT DMP-78 WITH HARVEY ALUMINUM (INCORPORATED), TORRANCE, CALIFORNIA, WHICH MATTER HAS BEEN THE SUBJECT OF EXTENDED DISCUSSION AND CORRESPONDENCE BETWEEN REPRESENTATIVES OF OUR STAFFS AS WELL AS WITH MEMBERS OF COUNSEL REPRESENTING THE CONTRACTOR.

THE BASIS FOR THE PROPOSED ADMINISTRATIVE ACTION IS SET FORTH IN AN OPINION OF YOUR GENERAL COUNSEL DATED FEBRUARY 26, 1963, SUBMITTED WITH YOUR LETTER FOR CONSIDERATION AS TO WHETHER ITS IMPLEMENTATION WOULD SATISFY THE RECOMMENDATIONS IN OUR REPORT. THE OPINION WAS RENDERED IN RESPONSE TO A MEMORANDUM DATED NOVEMBER 30, 1962, FROM THE COMMISSIONER, DEFENSE MATERIALS SERVICE, ATTACHED THERETO, STATING THAT:

"THE AUDIT DIVISION BELIEVES THAT THE GOVERNMENT MAY BE REQUIRED TO ACCEPT A SIGNIFICANTLY SMALLER QUANTITY OF ALUMINUM UNDER THE SUBJECT CONTRACT IF HARVEY'S SALES AND UTILIZATION WERE MATCHED BY GRADE AGAINST PRODUCTION THAN IT HAS ACCEPTED AS A RESULT OF HARVEY'S MATCHING ITS SALES AND UTILIZATION AGAINST PRODUCTION BY TOTAL QUANTITIES ONLY.'

THE OPINION, AS SUPPLEMENTED BY THE GENERAL COUNSEL'S LETTER DATED NOVEMBER 15, 1963, WAS MADE AVAILABLE TO COUNSEL FOR HARVEY AND THEIR VIEWS HAVE BEEN CONSIDERED, IN TURN, BY YOUR ADMINISTRATION.

IN BRIEF, THE OPINION SETS FORTH A DETAILED ANALYSIS AND CONSTRUCTION OF THE CONTRACT PROVISIONS RELATING TO THE DETERMINATION OF THE GOVERNMENT'S MARKET GUARANTEE OBLIGATIONS. THE OPINION EXPRESSES THE VIEW, IN EFFECT, THAT:

1. SUBSTITUTION OF NONCONTRACT PRODUCTION FOR CONTRACT PRODUCTION IN MAKING DELIVERIES UNDER TENDERS TO THE GOVERNMENT MAY NOT EXCEED THE QUANTITIES AND GRADES THE GOVERNMENT IS OBLIGATED TO ACCEPT UNDER THE MARKET GUARANTEE;

2. THE FIRST 54,000 SHORT TONS OF ALUMINUM PRODUCED FROM THE CONTRACT REDUCTION PLANT PER PRODUCTION YEAR MUST BE IDENTIFIED SO AS TO EXCLUDE ALUMINUM PRODUCED FROM "NONCONTRACT ACILITIES" IN DETERMINING THE TONNAGE OF "CONTRACT PRODUCTION" FOR CONSIDERATION UNDER THE GOVERNMENT'S MARKET GUARANTEE; AND

3. THE "CONTRACT PRODUCTION" AS DETERMINED UNDER 2 MUST BE CLASSIFIED TO SHOW THE QUANTITIES BY GRADES OF THE ALUMINUM ACTUALLY PRODUCED, WHICH QUANTITIES IN THE GRADES PRODUCED FIX THE MAXIMUM TONNAGE OF ALUMINUM THE GOVERNMENT IS OBLIGATED TO ACCEPT UNDER THE MARKET GUARANTEE.

IT IS STATED IN THE OPINION THAT THE QUESTIONS RAISED IN THE MEMORANDUM OF NOVEMBER 30, 1962, REQUIRE THE RESOLUTION OF A BASIC ISSUE THAT HAS ARISEN FROM TIME TO TIME DURING THE ADMINISTRATION OF THE CONTRACT; THAT IS, WHETHER HARVEY HAS BEEN PERMITTED TO DELIVER TO THE GOVERNMENT MORE ALUMINUM OF HIGHER GRADES THAN THE GOVERNMENT IS OBLIGATED BY THE CONTRACT TO ACCEPT. THE OPINION URGES THAT, REGARDLESS OF THE OBSCURITY OF THE MEANING OF SOME OF THE LANGUAGE OF THE CONTRACT AS IT HAS BEEN AMENDED FROM TIME TO TIME, THE INTERPRETATION HERETOFORE FOLLOWED IN DETERMINING HARVEY'S TENDER OR "PUT" RIGHTS AND OBLIGATIONS OF THE GOVERNMENT IS ERRONEOUS ON THE PRIMARY BASIS SUCH INTERPRETATION IS INCONSISTENT WITH THE UNDERLYING PURPOSES OF THE CONTRACT AND THE LAW UNDER WHICH IT WAS ENACTED; THAT THE EFFECT OF THE METHOD OF ADMINISTRATION WHICH HAS BEEN EMPLOYED "IS TO GUARANTEE A MARKET FOR, CONTRARY TO THE EXPRESS LANGUAGE OF THE CONTRACT, PRODUCTION OF ALUMINUM IN NONCONTRACT FACILITIES.'

ON THE OTHER HAND, IT IS THE POSITION OF COUNSEL FOR HARVEY, IN ESSENCE, THAT PURSUANT TO THE PROVISIONS OF THE "FOURTH AMENDMENT" OF THE CONTRACT THE "POOLING" CONCEPT ADOPTED FOR THE DETERMINATION OF TENDER RIGHTS UNDER AMENDATORY AGREEMENTS OF ALUMINUM PRODUCTION EXPANSION AND GUARANTEED MARKET CONTRACTS WITH THE "BIG THREE" PRODUCERS (ALCOA, REYNOLDS AND KAISER) WAS MADE APPLICABLE TO HARVEY--

"/1)WHICH FREELY PERMITTED SUBSTITUTION DELIVERIES WITHOUT REGARD TO WHAT FACILITY THE METAL WAS PRODUCED IN; AND

"/2) WHICH REQUIRED NO IDENTIFICATION AND NO ACCOUNTING ON THE BASIS OF WHAT GRADES OF METAL WERE PRODUCED IN WHAT FACILITY.'

IT IS POINTED OUT, FOR EXAMPLE, THAT UNDER THE CONTRACT WITH ALCOA CONTAINING PROVISIONS IDENTICAL IN ALL MATERIAL RESPECTS TO ARTICLE VI OF THE HARVEY CONTRACT, A METHOD OF COMPUTATION FOR FIXING TENDER RIGHTS SIMILAR TO THAT FOLLOWED UNDER THE HARVEY CONTRACT WAS EXPLICITLY SPELLED OUT WITH DUE REGARD FOR THE RIGHTS OF SUBSTITUTION AND FOR THE ALUMINUM SOLD AND UTILIZED, NAMELY:

"/1) TAKE THE TOTAL PRODUCTION FROM ALL FACILITIES FOR A PRODUCTION YEAR, WITHOUT ANY IDENTIFICATION OF THE GRADES PRODUCED IN ONE FACILITY OR ANOTHER;

"/2) SUBTRACT THEREFROM THE TOTAL SALES AND UTILIZATION, WITHOUT ANY IDENTIFICATION OF THE METAL WHICH HAD COME FROM ONE FACILITY OR ANOTHER; AND

"/3) THE BALANCE WAS TENDERABLE, UNLESS AND TO THE EXTENT THAT IT WAS IN EXCESS OF THE AMOUNT OF THE CONTRACT PRODUCTION.'

AFTER THE TENDER RIGHTS HAD BEEN SO COMPUTED FIXING THE QUANTITIES OR TONNAGE TO BE DELIVERED, IT IS CONTENDED, THE ONLY MATERIAL THING LEFT WAS THE QUALITY OF THE METAL WHICH WOULD BE ACCEPTABLE BY THE GOVERNMENT. THIS CONNECTION, IT IS POINTED OUT THAT IN THE ORIGINAL ALCOA CONTRACT, AS IN THE HARVEY CONTRACT, THE ONLY REQUIREMENT SPECIFIED AS TO QUALITY WAS A MINIMUM GRADE OF 99 PERCENT CALLED "PRIMARY ALUMINUM; " THAT WHEN THE AMENDATORY AGREEMENTS WERE MADE THIS WAS CHANGED TO REQUIRE THE DELIVERY OF THAT QUALITY OF ALUMINUM WHICH WOULD MEET THE MINIMUM AND AVERAGE STANDARDS OF THE HIGHER GRADES OF 99.3 AND 99.6 SPECIFIED IN STOCKPILE SPECIFICATION P-62-R1, AS ALSO PROVIDED UNDER PARAGRAPH 8 OF THE "FOURTH AMENDMENT" OF THE HARVEY CONTRACT. (THE ALCOA CONTRACT PROVIDED A MINIMUM OF 99.5 PERCENT.) IT IS ALSO CONTENDED THAT SINCE HARVEY WAS REQUIRED BY PARAGRAPH 8 TO DELIVER ALUMINUM WHICH WOULD MEET THE MINIMUM OF THE HIGHER GRADES SPECIFIED, AND THE ABILITY OF HARVEY TO DELIVER THOSE HIGHER GRADES WAS EXPRESSLY MEASURED BY THE CONTRACTOR'S ENTIRE PRODUCTION, I.E., BOTH THAT PRODUCED BY THE CONTRACT FACILITY AND A NONCONTRACT FACILITY, AND SINCE "HARVEY HAD AN OBLIGATION TO "POOL" ALL OF ITS PRODUCTION FOR THE PURPOSE OF MAKING DELIVERIES OF THE REQUIRED GRADES, SURELY HARVEY HAD A RIGHT TO "POOL" ALL OF THAT PRODUCTION IN ANY ACCOUNTING TO THE GOVERNMENT.'

HARVEY'S COUNSEL URGES THAT THIS "POOLING" CONCEPT CONFORMS TO THE PRACTICAL CONSTRUCTION AND APPLICATION OF THE CONTRACT PROVISIONS BY THE PARTIES TO THE ALUMINUM PRODUCTION EXPANSION AND GUARANTEED MARKET AGREEMENTS DURING THE PERIOD OF PRODUCTION; THAT TO HAVE GIVEN THE MEMBERS OF THE "BIG THREE" COMPLETE FLEXIBILITY OF "POOLING" AND TO HAVE DENIED IT TO HARVEY "WOULD HAVE BEEN RANK DISCRIMINATION," AND THAT THE OPINION AFFORDS NO BASIS TO JUSTIFY A FINDING NOW THAT HARVEY HAD TENDER RIGHTS INFERIOR TO THOSE GIVEN ALCOA, REYNOLDS AND KAISER UNDER THEIR CONTRACTS. IN OTHER WORDS,"IF OBLIGATIONS ARE TO BE DETERMINED ON THE BASIS OF POOLING, THEN SO MUST RIGHTS.'

CONTRACT DMP-78 WAS ENTERED INTO SEPTEMBER 13, 1955, BETWEEN YOUR ADMINISTRATION AND HARVEY PURSUANT TO THE PROVISIONS OF THE DEFENSE PRODUCTION ACT OF 1950, 50 U.S.C. APP. 2061, ET SEQ., WHEREBY IT WAS AGREED THAT HARVEY WOULD CONSTRUCT A NEW ALUMINUM PRODUCTION PLANT CALLED THE ,REDUCTION PLANT" AND BY JUNE 30, 1963, WOULD PRODUCE FROM THIS PLANT 270,000 SHORT TONS OF ALUMINUM OF A MINIMUM GRADE OF 99 PERCENT (CALLED "PRIMARY ALUMINUM") AT THE RATE OF APPROXIMATELY 54,000 SHORT TONS PER YEAR (CALLED THE "CONTRACT PRODUCTION") TO BE MADE AVAILABLE FOR PURCHASE BY THE GOVERNMENT AT ITS OPTION, OR OFFERED AND SOLD TO COMMERCIAL USERS, AT THE CONTRACTOR'S LOWEST PUBLISHED PRICE FOR THE GRADE INVOLVED, AND THAT HARVEY COULD TENDER OR "PUT" TO THE GOVERNMENT THE PORTION OF THE "CONTRACT PRODUCTION" NOT PURCHASED BY THE GOVERNMENT UNDER ITS OPTION OR "CALL" RIGHTS OR NOT OTHERWISE SOLD OR UTILIZED COMMERCIALLY. IT WAS RECOGNIZED IN THE CONTRACT THAT HARVEY MIGHT ACQUIRE ADDITIONAL ALUMINUM REDUCTION FACILITIES IN WHICH EVENT IT WAS AGREED THAT HARVEY WOULD HAVE THE RIGHT TO DISPOSE OR UTILIZE PRODUCTION FROM SUCH NONCONTRACT FACILITIES FIRST BEFORE DISPOSING OR UTILIZING CONTRACT PRODUCTION FROM THE "REDUCTION PLANT" AND THAT IN MAKING DELIVERIES UNDER THE CONTRACT HARVEY COULD, AT ITS OPTION, SUBSTITUTE ALUMINUM PRODUCED FROM NONCONTRACT FACILITIES FOR ALUMINUM ACTUALLY PRODUCED AT THE "REDUCTION PLANT" PROVIDED THE NECESSARY INVOICE ADJUSTMENTS WERE MADE SO THE COST TO THE GOVERNMENT WOULD NOT BE INCREASED THEREBY. IT WAS ALSO EXPRESSLY STIPULATED THAT IT WAS THE INTENTION OF THIS CONTRACT THAT THE GOVERNMENT BY AGREEING TO PURCHASE ALUMINUM FROM THE "REDUCTION PLANT" AS THEREIN PROVIDED GUARANTEED THE DISPOSITION OF THE ENTIRE OUTPUT OF THE "REDUCTION PLANT" TO THE EXTENT OF THE 270,000-TON QUANTITY SPECIFIED, BUT THAT THE GOVERNMENT DID NOT, BY THIS CONTRACT, GUARANTEE OR AGREE TO PURCHASE PRODUCTION FROM OTHER FACILITIES. PROVISIONS RELATING TO POINTS AND TERMS OF DELIVERY, PROVIDING FOR INSPECTION AND TEST BY THE GOVERNMENT OF ALL ALUMINUM DELIVERED AND TENDERED FOR ACCEPTANCE, AND FOR MAINTENANCE OF AN INSPECTION SYSTEM ACCEPTABLE TO THE GOVERNMENT AND THE KEEPING OF COMPLETE RECORDS OF ALL INSPECTION WORK BY THE CONTRACTOR WERE SET OUT IN THE CONTRACT.

PERTINENT PROVISIONS OF ARTICLES III AND VI OF THE CONTRACT ARE AS FOLLOWS:

"ARTICLE III.

"DISPOSITION OF PRODUCTION FROM THE REDUCTION PLANT.

"COMMENCING WITH THE DATE OF COMPLETION OF THE REDUCTION PLANT, AND CONTINUING UNTIL THE TERMINATION OR COMPLETION OF THIS CONTRACT, AND SUBJECT TO PRIORITY DELIVERY AS MAY BE REQUIRED PURSUANT TO LAW, THE PRIMARY ALUMINUM SHALL BE DISPOSED OF AS FOLLOWS:

"/A) (1) THE GOVERNMENT MAY REQUIRE CONTRACTOR TO SELL TO IT, AT THE PRICE PROVIDED IN ARTICLE XI HEREOF, ALL OR ANY OF THE PRIMARY ALUMINUM FOR EACH CONSECUTIVE SIX-MONTH PERIOD DURING THE CONTINUANCE OF THIS CONTRACT, THE FIRST SUCH PERIOD COMMENCING WITH THE DATE OF COMPLETION.

"/C) (1) ANY QUANTITY OF PRODUCTION FROM THE REDUCTION PLANT NOT DISPOSED OF IN ACCORDANCE WITH THIS ARTICLE III, AND NOT OTHERWISE SOLD OR UTILIZED BY CONTRACTOR, MAY BE TENDERED TO THE GOVERNMENT, IN THE FORM OF PIG ONLY, DURING EACH CONSECUTIVE TWELVE-MONTH PERIOD, THE FIRST SUCH PERIOD COMMENCING WITH THE DATE OF COMPLETION OF THE REDUCTION PLANT.

"/2) SUCH TENDER, OR TENDERS, SHALL BE MADE DURING THE FIRST TEN (10) DAYS OF ANY CALENDAR MONTH DURING ANY SUCH PERIOD AND DURING THE FIRST TEN (10) DAYS FOLLOWING THE EXPIRATION OF SUCH PERIOD AND ALL OF SUCH TENDERS SHALL BE CONSIDERED TO BE APPLICABLE TO SUCH PERIOD. THE GOVERNMENT SHALL PURCHASE THE AMOUNT SO TENDERED AT THE PRICE SPECIFIED IN ARTICLE XI.

"ARTICLE VI.

"RELATIONSHIP OF REDUCTION PLANT TO OTHER FACILITIES.

"/A) IT IS THE INTENTION OF THIS CONTRACT THAT THE GOVERNMENT BY AGREEING TO PURCHASE ALUMINUM FROM THE REDUCTION PLANT AS HEREIN PROVIDED, GUARANTEES THE DISPOSITION OF THE ENTIRE OUTPUT OF THE REDUCTION PLANT TO THE EXTENT OF THE TWO HUNDRED SEVENTY THOUSAND (270,000) TON QUANTITY SPECIFIED IN ARTICLE I, SUBJECT TO CONTRACTOR'S RIGHTS OF TERMINATION AS PROVIDED IN ARTICLE XI (B) AND ARTICLE XIII. IN THIS CONNECTION, IT IS RECOGNIZED THAT CONTRACTOR MAY IN THE FUTURE ACQUIRE FURTHER ALUMINUM REDUCTION FACILITIES OTHER THAN THOSE TO BE CONSTRUCTED UNDER THIS CONTRACT. IT IS UNDERSTOOD THAT, EXCEPT AS TO ORDERS FROM THE GOVERNMENT EXPRESSLY PLACED PURSUANT TO THIS CONTRACT FOR ALUMINUM TO BE PRODUCED AT THE REDUCTION PLANT TO BE CONSTRUCTED UNDER THIS CONTRACT, CONTRACTOR MAY FIRST DISPOSE OF THE PRODUCTION FROM SUCH OTHER FACILITIES OR UTILIZE FOR ITS OWN PURPOSES THE PRODUCTION OF SUCH OTHER FACILITIES, BEFORE DISPOSING OF OR UTILIZING ALUMINUM FROM THE REDUCTION PLANT, AND THAT, IN ACCORDANCE WITH ARTICLE III (C), THE GOVERNMENT WILL PURCHASE FROM CONTRACTOR ALL OF THE PRODUCTION OF THE REDUCTION PLANT NOT OTHERWISE DISPOSED OF OR UTILIZED BY CONTRACTOR. THE GOVERNMENT DOES NOT, BY THIS CONTRACT, GUARANTEE OR AGREE TO PURCHASE PRODUCTION FROM OTHER FACILITIES.

"/B) WITHOUT AFFECTING THE RIGHTS AND DUTIES OF THE PARTIES AS SET FORTH IN THE PRECEDING SUBPARAGRAPH, DELIVERIES TO THE GOVERNMENT AND TO NON- INTEGRATED USERS UNDER THIS CONTRACT MAY, AT CONTRACTOR'S OPTION, BE MADE BY SUBSTITUTING ALUMINUM PRODUCED FROM SUCH OTHER FACILITIES FOR ALUMINUM ACTUALLY PRODUCED AT THE REDUCTION PLANT. IN SUCH EVENT, ANY NECESSARY INVOICE ADJUSTMENTS SHALL BE MADE SO THAT THE COST TO THE GOVERNMENT SHALL NOT BE INCREASED THEREBY.' BY AN AMENDMENT DATED FEBRUARY 28, 1957, THE TIME FOR COMPLETION OF THE CONTRACT WAS CHANGED TO SIX YEARS AFTER THE COMPLETION OF THE PLANT BUT NO LATER THAN NOVEMBER 30, 1964.

CONSTRUCTION OF THE ALUMINUM REDUCTION FACILITIES WAS COMPLETED AND "CONTRACT PRODUCTION" WAS COMMENCED ON OCTOBER 31, 1958, WITH A CAPACITY OF 60,000 SHORT TONS PER YEAR, OR APPROXIMATELY 6,000 SHORT TONS PER YEAR IN EXCESS OF THE 54,000-TON CAPACITY OF THE "REDUCTION PLANT" SPECIFIED BY THE CONTRACT. AS OF AUGUST 1, 1959, THE PARTIES ENTERED INTO THE "FOURTH AMENDMENT TO CONTRACT DMP-78" WHICH WAS COMPOSED OF NUMBERED PARAGRAPHS GENERALLY WITHOUT ANY REFERENCE TO SPECIFIC ARTICLES OF THE CONTRACT. THIS AMENDMENT WAS EXECUTED IN ACCORDANCE WITH AN INFORMAL AGREEMENT SUGGESTED BY YOUR ADMINISTRATION AND ACCEPTED BY HARVEY ON SEPTEMBER 13, 1955 (THE CONTRACT DATE), IN WHICH IT WAS PROPOSED THAT IN LINE "WITH OUR MUTUAL OBJECTIVE TO PROVIDE IN YOUR CONTRACT, AS FAR AS PRACTICABLE, THE SAME TERMS AND CONDITIONS AS APPLY IN OTHER CONTRACTS," IF AND WHEN AGREEMENT WAS REACHED ON CERTAIN AMENDMENTS THEN BEING NEGOTIATED TO THE EXPANSION AND GUARANTEED MARKET CONTRACTS EXISTING WITH ALUMINUM COMPANY OF AMERICA (ALCOA), THE KAISER ALUMINUM AND CHEMICAL CORPORATION AND THE REYNOLDS METALS COMPANY, AN ENDEAVOR WOULD BE MADE TO INCORPORATE SUCH AMENDMENTS IN THIS CONTRACT TO THE EXTENT APPROPRIATE. IN DECEMBER 1960, SOME 16 MONTHS AFTER THE DATE OF THE "FOURTH AMENDMENT," THE CAPACITY OF HARVEY'S ALUMINUM REDUCTION FACILITIES WAS FURTHER INCREASED BY AN ADDITIONAL 15,000 SHORT TONS TO APPROXIMATELY 75,000 SHORT TONS PER YEAR. THIS RESULTED IN A COMBINED EXCESS PRODUCTION OF APPROXIMATELY 21,000 SHORT TONS PER YEAR OVER CONTRACT PRODUCTION.

IT WAS STATED IN THE LETTER OF SEPTEMBER 13, 1955, THAT SOME OF THE AMENDMENTS UNDER CONSIDERATION WERE "LARGELY FORMAL AND DESIGNED TO PROMOTE MORE UNIFORM AND EFFICIENT ADMINISTRATION OF THE CONTRACTS.' THE OTHER CONTEMPLATED AMENDMENTS WERE DESCRIBED AS BEING ,SUBSTANTIVE AS WELL AS FORMAL" RELATING TO THE FOLLOWING:

"/A) THE RELATIONSHIP OF PURCHASED PRIMARY ALUMINUM, SECONDARY ALUMINUM AND SCRAP ALUMINUM TO THE QUANTITY OF ALUMINUM WHICH MAY BE TENDERED TO THE GOVERNMENT UNDER SUCH CONTRACTS;

"/B) THE FURNISHING TO NON-INTEGRATED USERS OF ALUMINUM PRODUCED AT FACILITIES OTHER THAN THOSE COVERED BY SUCH CONTRACTS; AND

"/C) MORE FLEXIBILITY IN SO-CALLED "FREE SUBSTITUTION" (THE POOLING, FOR THE PURPOSE OF FILLING ORDERS, OF ALL CONTRACTOR'S PRODUCTION BOTH FROM CONTRACT AND FROM OTHER FACILITIES).'

PARAGRAPHS 3, 7, 8 AND 15 OF THE "FOURTH AMENDMENT" PROVIDE, IN PART, AS FOLLOWS:

"3.CONTRACTOR SHALL BE ENTITLED TO TENDER IN RESPECT OF ANY PRODUCTION YEAR FROM APRIL 1, THROUGH MARCH 31 UP TO 54,000 TONS OF ALUMINUM PRODUCED AT THE REDUCTION PLANT (OR A PRO RATA AMOUNT IN RESPECT OF THE FIRST AND LAST OF SUCH PRODUCTION YEARS) UNTIL THE RIGHT OF CONTRACTOR TO MAKE SUCH TENDERS TERMINATES IN ACCORDANCE WITH CONTRACT DMP-78 AS HEREIN MODIFIED. IF THE AMOUNT OF ALUMINUM PRODUCED AT THE REDUCTION PLANT IN ANY PRODUCTION YEAR IN FACT EXCEEDS 54,000 TONS (OR A PRO RATA AMOUNT IN RESPECT OF THE FIRST AND LAST OF SUCH PRODUCTION YEARS), THE AMOUNT OF SUCH EXCESS SHALL BE DISREGARDED FOR THE PURPOSE OF COMPUTING PRODUCTION AND TENDER RIGHTS UNDER CONTRACT DMP-78, AND SALES AND UTILIZATIONS OF ANY PRODUCTION DURING SUCH PRODUCTION YEAR SHALL FOR THE PURPOSE OF COMPUTING TENDER RIGHTS BE FIRST APPLIED TO SUCH EXCESS BEFORE BEING APPLIED AGAINST SUCH 54,000 TONDS (OR PRO RATA AMOUNT), NOTWITHSTANDING ANY OTHER PROVISIONS IN THIS AGREEMENT OR CONTRACT DMP-78.

"7. IN COMPUTING PRODUCTION FROM THE REDUCTION PLANT AFTER THE DATE OF COMPLETION OF CONSTRUCTION THEREOF, PRODUCTION IS TO BE MEASURED BY POT- ROOM WEIGHTS INCLUDING METALLIC ADDITIONS AND IS TO INCLUDE ALL PRODUCTION REGARDLESS OF GRADE, EXCEPT REPROCESSED MATERIALS WHICH SHALL HAVE THERETOFORE BEEN MEASURED IN COMPUTING PRODUCTION. CONTRACTOR SHALL FURNISH THE GOVERNMENT A MONTHLY COMPUTATION OF ITS TENDER RIGHTS UNDER CONTRACT DMP-78, AS AMENDED HEREBY. IN COMPUTING SALES AND UTILIZATION OF ALUMINUM PRODUCED AT THE REDUCTION PLANT, A CHANGE IN THE FORM OF ALUMINUM FROM THAT IN WHICH ORIGINALLY CAST (OTHER THAN A CHANGE THROUGH REPROCESSING, OR RECASTING INTO PIG, INGOT OR BILLET, AT THE REDUCTION PLANT) SHALL BE DEEMED TO CONSTITUTE UTILIZATION THEREOF.

"8. ALUMINUM DELIVERED TO THE GOVERNMENT PURSUANT TO TENDERS BY CONTRACTOR SHALL MEET THE MINIMUM AND AVERAGE GRADES SPECIFIED IN, AND OTHERWISE CONFORM TO, STOCKPILE SPECIFICATION P-62-R1 DATED JULY 30, 1954, EXCEPT THAT IF THE AVERAGE GRADE OF THE ALUMINUM PRODUCED BY CONTRACTOR DURING THE PERIOD COVERED BY THE TENDER IS LESS THAN THAT PRESCRIBED BY SAID STOCKPILE SPECIFICATION P-62-R1 THE AVERAGE GRADE OF PURITY OF ALUMINUM DELIVERED TO THE GOVERNMENT IN RESPECT OF SUCH PERIOD SHALL BE OF A GRADE AT LEAST EQUAL TO THE AVERAGE PURITY OF THE ALUMINUM PRODUCED DURING SUCH PERIOD, BUT IN NO EVENT SHALL ANY OF THE ALUMINUM DELIVERED TO THE GOVERNMENT BE BELOW THE MINIMUM GRADE PROVIDED FOR IN CONTRACT DMP- 78.

"15. AS AMENDED AND SUPPLEMENTED HEREBY, ALL THE PROVISIONS OF CONTRACT DMP-78 AS PREVIOUSLY AMENDED SHALL REMAIN IN FULL FORCE AND EFFECT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS RECOGNIZED THAT THIS AGREEMENT HAS NOT DEPRIVED CONTRACTOR OF ITS RIGHT UNDER ARTICLE VI OF CONTRACT DMP-78 (WITH RESPECT TO THE ACQUISITION OF FURTHER ALUMINUM FACILITIES AND THE DISPOSITION AND SUBSTITUTION OF THE PRODUCTION THEREOF)

A FORM FOR USE IN THE COMPUTATION OF TENDER RIGHTS WAS ADMINISTRATIVELY PRESCRIBED MARCH 16, 1959, WHICH WAS THEREAFTER REVISED FROM TIME TO TIME. INSOFAR AS MATERIAL HERE, THESE FORMS CONTAINED NO REQUIREMENTS FOR MATCHING QUANTITIES BY GRADES AND PLACE OF PRODUCTION. COMPUTATIONS OF THE QUANTITIES THE GOVERNMENT WAS OBLIGATED TO ACCEPT PURSUANT TO THE TENDERS THEREUNDER WERE REQUIRED TO BE MADE ON THE BASIS OF THE TOTAL MAXIMUM GUARANTEE OF 270,000 TONS SPECIFIED IN THE CONTRACT. AND WHILE IT IS UNDERSTOOD THAT IN ESTABLISHING THE PROCEDURE FOR THE VARIOUS PRODUCTION CONTRACTS THE "POOLING" CONCEPT WAS TAILORED TO MEET INDIVIDUAL REQUIREMENTS AND COMPLETE FLEXIBILITY WAS NOT EXTENDED UNIFORMLY TO ALL MEMBERS OF THE "BIG THREE" AS MAY BE INDICATED BY HARVEY'S COUNSEL, NEVERTHELESS, IT SEEMS REASONABLY CLEAR THAT THE PROCEDURE PRESCRIBED AND FOLLOWED UNDER THE HARVEY CONTRACT PERMITTED THE POOLING OF PRODUCTION IN DETERMINING TENDER RIGHTS AS WELL AS THE SUBSTITUTION OF PRODUCTION IN MAKING DELIVERIES. NOTHING HAS BEEN FOUND IN THE INFORMATION AND EVIDENCE SUBMITTED, HOWEVER, WHICH WOULD IN OUR OPINION DISCLOSE AN INTENTION TO EXTEND THE POOLING CONCEPT SO AS TO PERMIT THE SUBSTITUTION BY HARVEY OF PREMIUM GRADES FOR THE "MINIMUM AND AVERAGE GRADES" STIPULATED IN MAKING TENDERS AND DELIVERIES UNDER THE CONTRACT.

BASED UPON A LIMITED EXAMINATION OF THE CONTRACT RECORDS IT WAS DISCLOSED IN OUR REPORT OF OCTOBER 10, 1962, THAT HARVEY HAD PRODUCED IN BOTH CONTRACT AND NONCONTRACT FACILITIES NUMEROUS GRADES OF PRIMARY ALUMINUM FOR WHICH PRICES FROM ONE-HALF TO TWO CENTS MORE A POUND WERE CHARGED DEPENDING UPON THE PARTICULAR GRADES, BUT AN ATTEMPT HAD NOT BEEN MADE TO ALLOCATE THE VARIOUS GRADES PRODUCED EACH MONTH TO THE CONTRACT AND NONCONTRACT FACILITIES. IT WAS ALSO DISCLOSED THAT THE GOVERNMENT HAD RECEIVED QUANTITIES OF HIGHER PRICED PREMIUM-GRADE ALUMINUM TENDERED BY HARVEY IN EXCESS OF THE PRODUCTION OF SUCH PREMIUM GRADES FROM THE CONTRACT FACILITIES FOR THE PERIOD INVOLVED. ADJUSTMENTS IN THE PRICES CHARGED AS APPARENTLY CONTEMPLATED BY THE CONTRACT HAD NOT BEEN MADE, HOWEVER, SO THAT THE COST TO THE GOVERNMENT WOULD NOT BE INCREASED BY THE SUBSTITUTION OF PREMIUM-GRADE NONCONTRACT ALUMINUM FOR NON-PREMIUM-GRADE CONTRACT ALUMINUM. HARVEY INFORMED US THIS COULD NOT OCCUR FOR THE REASON ITS TORRENCE FABRICATING PLANT ALONE USED MORE PREMIUM-GRADE ALUMINUM THAN THE TOTAL AMOUNT OF THE NONCONTRACT PRODUCTION, BOTH PREMIUM AND NONPREMIUM.

WE RECOGNIZED THAT WHILE THE GOVERNMENT, UP TO THAT TIME, MAY NOT HAVE TAKEN PREMIUM-GRADE ALUMINUM IN QUANTITIES DISPROPORTIONATE TO THE CONTRACT PRODUCTION IN TOTAL, THERE WAS NEVERTHELESS A POSSIBILITY THAT SUCH A SITUATION MIGHT OCCUR IN THE FUTURE. IT WAS THEREFORE RECOMMENDED THAT APPROPRIATE PROCEDURES BE ESTABLISHED (1) TO LIMIT THE ACCEPTANCE OF PREMIUM ALUMINUM TO THE QUANTITIES OF THESE GRADES PRODUCED IN THE CONTRACT FACILITIES WHICH HARVEY WAS OTHERWISE UNABLE TO SELL OR USE, AND (2) TO OBTAIN APPROPRIATE PRICE ADJUSTMENTS FOR ANY EXCESS QUANTITIES ACCEPTED. YOUR ADMINISTRATION INFORMED US THAT YOU WERE AWARE OF THE POSSIBILITY THAT A DISPROPORTIONATE AMOUNT OF PREMIUM-GRADE ALUMINUM MIGHT BE ACCEPTED UNDER SHIPMENTS TENDERED BY HARVEY AND ADVISED US THAT THE CONTROLS IN USE BY HARVEY AND WITHIN THE ADMINISTRATION TO PREVENT ANY PRICE DISADVANTAGE TO THE GOVERNMENT WERE BEING REVIEWED.

PRIOR TO OUR REPORT OF OCTOBER 10, 1962, WE HAD SUBMITTED TO YOUR ADMINISTRATION OUR REPORT DATED OCTOBER 25, 1960 (B-133335), ON AN AUDIT MADE OF THE OPERATIONS UNDER ALUMINUM PRODUCTION EXPANSION AND GUARANTEED MARKET CONTRACTS WITH ALCOA NOS. GS-OOP/D/-12007 AND -12096 DATED JUNE 7 AND OCTOBER 19, 1951, RESPECTIVELY, CONTAINING PROVISIONS SIMILAR TO THE HARVEY CONTRACT. THIS REPORT INCLUDED A RECOMMENDATION IDENTICAL TO THAT MADE IN OUR REPORT ON THE AUDIT OF THE CONTRACT WITH HARVEY. WE WERE ADVISED BY THE COMPTROLLER OF YOUR ADMINISTRATION THAT ALCOA REQUIRED FLEXIBILITY IN SELECTING AMONG THE VARIOUS GRADES OF ALUMINUM IN ORDER TO MEET HIGHER PURITY REQUIREMENTS IMPOSED BY AN AMENDMENT TO THE CONTRACTS DATED SEPTEMBER 13, 1957, AND THAT GENERAL SERVICES ADMINISTRATION HAD NOT PURCHASED A DISPROPORTIONATE SHARE OF THE PREMIUM-GRADE ALUMINUM PRODUCED IN CONTRACT FACILITIES. IT WOULD SEEM IN EFFECT THAT IT IS THE ADMINISTRATIVE CONSTRUCTION AND APPLICATION OF THE CONTRACTS REFLECTED BY THIS ADVICE WHICH THE GENERAL COUNSEL URGES IS ERRONEOUS.

THUS, THE SPECIFIC QUESTION ACTUALLY PRESENTED IS WHETHER THE CONTRACT PROVISIONS MAY NOW BE CONSTRUED AS EVIDENCING AN INTENTION TO LIMIT OR CURTAIL THE GOVERNMENT'S GUARANTEE OBLIGATIONS UNDER THE CONTRACT WITH HARVEY TO THE QUANTITIES OF THE ACCEPTABLE GRADES OF THE FIRST 54,000 SHORT TONS OF ALUMINUM ACTUALLY PRODUCED FROM THE CONTRACT PRODUCTION FACILITY DURING EACH PRODUCTION YEAR.

THE CARDINAL RULE OF INTERPRETATION WHERE THE LANGUAGE OF A CONTRACT IS AMBIGUOUS OR OBSCURE IS TO ASCERTAIN THE INTENTION OF THE PARTIES FROM THE INSTRUMENT ITSELF, IF POSSIBLE, READ IN THE LIGHT OF ALL THE SURROUNDING FACTS AND CIRCUMSTANCES INCLUDING THE ACTS OF THE PARTIES INDICATING THE INTERPRETATION PLACED UPON IT BY THEMSELVES. THIS IS TO SAY THAT A CONTEMPORANEOUS EXPOSITION OF THE CONTRACT BEFORE IT BECOMES THE SUBJECT OF CONTROVERSY (AS EVIDENCED IN THIS INSTANCE BY THE LETTER OF SEPTEMBER 13, 1955, THE "FOURTH AMENDMENT" TO THE CONTRACT AND THE PROCEDURE PRESCRIBED FOR TENDERS UNDER THE CONTRACT) IS ENTITLED TO GREAT, IF NOT CONTROLLING, INFLUENCE IN ASCERTAINING THE UNDERSTANDING OF THE PARTIES, AND SUCH PRACTICAL CONSTRUCTION GENERALLY SHOULD PREVAIL. CF. EASTMOUNT CONST. CO. V. TRANSPORT MFG. AND EQUIP. CO., 301 F.2D 34 (1962), AND THE AUTHORITIES CITED AND QUOTED WITH APPROVAL AT PAGES 39 TO 42.

THE FACTS AND CIRCUMSTANCES HERE INVOLVED DISCLOSE THAT THE PROCEDURE SUGGESTED BY THE OPINION WOULD LIMIT THE APPLICATION OF THE "POOLING" CONCEPT CONTEMPORANEOUSLY ADOPTED DURING THE ADMINISTRATION OF THE CONTRACT SO THAT IT WOULD APPLY ONLY TO DELIVERIES UNDER "CALLS" OR ORDERS ISSUED BY THE GOVERNMENT, BUT WOULD NOT APPLY TO DELIVERIES UNDER TENDERS MADE BY HARVEY. IN OTHER WORDS, THE INTERPRETATION IS IN MATERIAL CONFLICT WITH THE PRACTICAL CONSTRUCTION THERETOFORE PLACED UPON THE CONTRACT BY THE PARTIES. FURTHERMORE, THE MATCHING OF GRADES AS SUGGESTED WOULD INTRODUCE A NEW AND SOMEWHAT INTRANSIGENT REQUIREMENT INTO THE CONTRACT.

SIGNIFICANTLY, WE FEEL, THE VIEW TO THE EFFECT THAT THE GOVERNMENT UNDERTOOK TO GUARANTEE ONLY THE FIRST 54,000 TONS OF PRODUCTION HINGES LARGELY UPON THE WORD "FIRST" WHICH DOES NOT APPEAR IN THIS CONTEXT IN THE CONTRACT. IF CONSIDERED AND INTENDED BY THE PARTIES WHO DRAFTED THE CONTRACT AND ITS AMENDMENTS A SPECIFIC LIMITATION OF SUCH IMPORTANCE WOULD HARDLY HAVE BEEN OMITTED.

IN FACT, THE CONTRACT DEALS SPECIFICALLY WITH ANY AND ALL OF HARVEY'S PRODUCTION INCLUDING THE EXCESS OVER "CONTRACT PRODUCTION" FROM BOTH CONTRACT AND NONCONTRACT FACILITIES. THIS SEEMS QUITE CONSISTENT WITH THE LEGISLATIVE PURPOSE SET OUT IN 50 U.S.C. APP. 2062 TO DEVELOP AND EXPAND PRODUCTIVE CAPACITY AND SUPPLY BEYOND THE LEVELS REQUIRED TO MEET CIVILIAN DEMAND.

ADMITTEDLY, THE RESTRICTIVE INTERPRETATION OF THE OPINION IS INDICATIVE OF WHAT MIGHT HAVE BEEN CLEARLY PROVIDED, AND APPARENTLY WOULD WORK TO THE ADVANTAGE OF THE GOVERNMENT UNDER THE PARTICULAR FACTS AND CIRCUMSTANCES ARISING DURING THE COURSE OF THE CONTRACT PERFORMANCE. HOWEVER, SUCH INTERPRETATION MANIFESTLY DOES NOT REPRESENT THE CONTEMPORANEOUS UNDERSTANDING HERETOFORE FOLLOWED, AND IN OUR OPINION THE GOVERNMENT MAY NOT IN GOOD CONSCIENCE INSIST UPON IT NOW TO THE DETRIMENT OF THE CONTRACTOR. CF. CLEMENS CONSTRUCTION COMPANY V. UNITED STATES, 153 CT.CL. 170 (1961), AT PAGE 178, WHERE THE COURT APPLIED THE FAMILIAR RULE THAT AN AMBIGUOUS CONTRACT SHOULD BE INTERPRETED AGAINST THE PARTY DRAFTING IT, AND HELD THAT IT WOULD BE INAPPROPRIATE TO ADOPT AN ADMINISTRATIVE INTERPRETATION WHICH WOULD EXPAND THE LANGUAGE USED IN ORDER TO MAKE IT MEANINGFUL AND CONTROLLING SINCE THE CONTRACT PROVISION WAS DRAFTED BY GOVERNMENT PERSONNEL AND SUCH INTERPRETATION WOULD BE DISADVANTAGEOUS TO THE CONTRACTOR; ALSO, THE DECISION BY THE SAME COURT IN WPC ENTERPRISES, INCORPORATED V. UNITED STATES, 323 F.2D 874 (1963). WE ACCORDINGLY ARE OF THE VIEW THAT THE CHANGE IN PROCEDURE SUGGESTED IN THE OPINION IS NOT NECESSARY IN ORDER TO TAKE THE ACTION RECOMMENDED IN OUR REPORT, WHICH WE FEEL IS REQUIRED, NOR DO WE BELIEVE THAT SUCH CHANGE MAY REASONABLY BE REGARDED AS JUSTIFIED UNDER THE FACTS AND CIRCUMSTANCES OF THIS CASE.