B-123906, JULY 13, 1955, 35 COMP. GEN. 16

B-123906: Jul 13, 1955

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" THERE IS NO AUTHORITY FOR THE DEDUCTION OF FREIGHT ALLOWANCES. 1955: REFERENCE IS MADE TO YOUR LETTER OF MAY 5. UNDER THE TERMS OF THE RENTAL AGREEMENT RENT IS BASED UPON A PERCENTAGE OF NET SALES. IS CONSIDERED THE FIRST LEASE YEAR. YOU HAVE DETERMINED THAT ADDITIONAL RENTAL IS DUE IN THE AMOUNT OF $3. THIS ADDITIONAL RENTAL FOUND DUE IS THE RESULT OF THE DISALLOWANCE OF "FREIGHT ALLOWANCES" IN ARRIVING AT "NET SALES" FOR COMPUTATION OF THE RENTAL. THE VIEW OF YOUR DEPARTMENT IS STATED TO BE THAT UNDER THE TERMS OF ARTICLE 2 (D) (1) OF THE LEASE THE ONLY PERMISSIBLE ALLOWANCES IN THE COMPUTATION OF . NET SALES" ARE FOR "TRADE DISCOUNTS" AND "RETURN ALLOWANCES.'. THE TERMS "NET SALES" AND "INCREASE IN VALUE" SHALL HAVE THE MEANING SET FORTH BELOW: (1) THE TERM "NET SALES" SHALL BE DEEMED TO MEAN GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES.

B-123906, JULY 13, 1955, 35 COMP. GEN. 16

LEASES - RENT - COMPUTATION - BASED ON PERCENTAGE OF SALES - FREIGHT ALLOWANCES UNDER A LEASE AGREEMENT WHICH DEFINES TERM "NET SALES" FOR COMPUTATION OF RENT "AS GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES," THERE IS NO AUTHORITY FOR THE DEDUCTION OF FREIGHT ALLOWANCES.

TO ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, JULY 13, 1955:

REFERENCE IS MADE TO YOUR LETTER OF MAY 5, 1955, REQUESTING DECISION AS TO WHETHER FREIGHT COSTS MAY PROPERLY BE DEDUCTED IN ARRIVING AT A NET SALES FIGURE UNDER THE TERMS OF A LEASE AGREEMENT NO. GS-00-B/S/ 1539 BETWEEN YOUR ADMINISTRATION AND KAISER ALUMINUM AND CHEMICAL CORPORATION.

UNDER THE TERMS OF THE RENTAL AGREEMENT RENT IS BASED UPON A PERCENTAGE OF NET SALES, SUBJECT TO PAYMENT BY THE LESSEE OF CERTAIN MINIMUM ANNUAL RENTALS. AS A RESULT OF AN AUDIT OF THE CONTRACTOR'S RECORDS COVERING THE PERIOD MAY 21, 1951, THROUGH MAY 31, 1952, WHICH PERIOD, IN ACCORDANCE WITH THE CONTRACT PROVISIONS, IS CONSIDERED THE FIRST LEASE YEAR, YOU HAVE DETERMINED THAT ADDITIONAL RENTAL IS DUE IN THE AMOUNT OF $3,739.64. THIS ADDITIONAL RENTAL FOUND DUE IS THE RESULT OF THE DISALLOWANCE OF "FREIGHT ALLOWANCES" IN ARRIVING AT "NET SALES" FOR COMPUTATION OF THE RENTAL. SIMILAR DISALLOWANCE FOR THE PERIOD JUNE 1, 1952, THROUGH MAY 31, 1953, RESULTED IN ADDITIONAL RENTAL CLAIMED OF $13,853.83. THE VIEW OF YOUR DEPARTMENT IS STATED TO BE THAT UNDER THE TERMS OF ARTICLE 2 (D) (1) OF THE LEASE THE ONLY PERMISSIBLE ALLOWANCES IN THE COMPUTATION OF ,NET SALES" ARE FOR "TRADE DISCOUNTS" AND "RETURN ALLOWANCES.'

ARTICLE 2 (D) (1) OF THE LEASE READS AS FOLLOWS:

(D) AS USED ABOVE, THE TERMS "NET SALES" AND "INCREASE IN VALUE" SHALL HAVE THE MEANING SET FORTH BELOW:

(1) THE TERM "NET SALES" SHALL BE DEEMED TO MEAN GROSS SALES LESS TRADE DISCOUNTS AND RETURN ALLOWANCES, AS CUSTOMARILY COMPUTED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE, DURING THE LEASE YEAR OF PRODUCTS PRODUCED OR PROCESSED BY THE LEASED PREMISES; PROVIDED THAT, IF MATERIALS NOT OWNED OR PRODUCED BY LESSEE ARE PROCESSED AT THE LEASED PREMISES ON A TOLL CHARGE BASIS, NET SALES FOR SUCH PRODUCTS SHALL BE DEEMED TO MEAN THE TOLL CHARGE CHARGED BY LESSEE FOR PROCESSING SUCH MATERIAL.

THE LESSEE CONTENDS THAT IT IS A RECOGNIZED CUSTOM OF THE INDUSTRY TO TREAT FREIGHT ALLOWANCES AS A DEDUCTION FROM GROSS SALES BEFORE ARRIVING AT NET SALES. THE LESSEE FURTHER CONTENDS WITH APPROPRIATE REFERENCE TO VARIOUS ACCOUNTING AUTHORITIES THAT SUCH PROCEDURE IS "IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE" AS THIS EXPRESSION IS USED IN ARTICLE 2 (D) (1) OF THE LEASE.

FOR THE PURPOSE OF CLARIFYING A DOUBT OR OF MAKING DEFINITE THAT WHICH IS UNCERTAIN, TRADE PRACTICES AND ACCOUNTING METHODS REFERRED TO BY THE LESSEE ARE ENTITLED TO RECEIVE CONSIDERATION IN THE INTERPRETATION OF A CONTRACT TERM. SUCH IS NOT THE SITUATION IN THIS CASE SINCE THE TERM "NET SALES" HAS BEEN SPECIFICALLY DEFINED IN ARTICLE 2 (D) (1) OF THE LEASE. IT HAS, THEREFORE, A DEFINITE AND UNEQUIVOCAL MEANING, AND IS FREE FROM SUCH ELEMENTS OF AMBIGUITY AND UNCERTAINTY AS WOULD JUSTIFY ANY RESORT TO ALLEGED TRADE PRACTICE OR ACCOUNTING CUSTOM. HAD THE PARTIES TO THE LEASE INTENDED THE TERM TO EXCLUDE A "FREIGHT ALLOWANCE" IT SHOULD HAVE BEEN EXCLUDED IN THE DEFINITION. IN THE ABSENCE OF SUCH EXCLUSION IT MUST BE HELD TO BE INCLUDED. CF. 18 COMP. GEN. 933.

IT IS WELL ESTABLISHED THAT A FORMAL CONTRACT DOCUMENT IS PRESUMED TO PROPERLY REFLECT THE INTENT OF THE PARTIES THERETO. THE COURT, IN THE CASE OF PENN BRIDGE CO. V. UNITED STATES, 59 C.1CLS 892, 896, SAID- -

CONTRACTUAL RIGHTS ONCE FIXED IN A PROPER CONTRACT EXECUTED BY AUTHORITY ARE INVIOLATE. THEY MAY BE FORFEITED BY ONE PARTY OR THE OTHER, CONSTRUCTION IS PERMISSIBLE IF THE TERMS ARE AMBIGUOUS, BUT IN THE ABSENCE OF AMBIGUITY OR FORFEITURE OF RIGHTS BY CONDUCT, SUCH A CONTRACT CAN NOT BUT BE ENFORCED AS WRITTEN. ( ITALICS SUPPLIED.)

FURTHER, IT IS WELL ESTABLISHED THAT WHEN A GENERAL EXPRESSION AS HERE USED,"CUSTOMARILY COMPUTED IN ACCORDANCE WITH GOOD ACCOUNTING PRACTICE," FOLLOWS PARTICULAR DESCRIPTIVE WORDS SUCH EXPRESSION IS TO BE CONSTRUED AS APPLICABLE TO CASES OR MATTERS OF LIKE KIND WITH THOSE DESCRIBED BY THE PARTICULAR WORDS. ACCORDINGLY, SUCH GENERAL EXPRESSION MAY NOT BE CONSTRUED AS PERMITTING THE INCLUSION OF FREIGHT ALLOWANCES IN ADDITION TO THE ENUMERATED ITEMS. SEE 20 COMP. GEN. 46, 52.

ACCORDINGLY, FREIGHT CHARGES MAY NOT PROPERLY BE DEDUCTED IN ARRIVING AT A NET SALES FIGURE UNDER THE TERMS OF THE AGREEMENT.

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