B-122038, I-18760, JUL. 29, 1955

B-122038, I-18760, JUL. 29, 1955

TO HONORABLE EDMUND F. MANSURE, ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION:

REPRESENTATIVES OF THIS OFFICE HAVE INVESTIGATED THE MATTER OF CONTRACT NO. GS-OOP (D/-656 ENTERED INTO BY YOUR AGENCY ON MAY 8, 1951, WITH THE APPALACHIAN MINING AND SMELTING COMPANY FOR THE EXPANSION OF THE CONTRACTOR'S FACILITIES FOR THE PRODUCTION OF ZINC OXIDE AND THE SALE OF THE PRODUCTION FROM THE EXPANDED FACILITIES.

THE CONTRACT AS MODIFIED BY AMENDMENT NO. 1 REQUIRED THE CONTRACTOR (1) TO EXPAND ITS FACILITIES AND HAVE THEM IN OPERATION WITHIN SIX MONTHS FOLLOWING EXECUTION OF A $400,000 LOAN AGREEMENT WITH THE RECONSTRUCTION FINANCE CORPORATION AND (2) TO PRODUCE AT LEAST 10,000 SHORT TONS OF ZINC OXIDE WITHIN TWO YEARS THEREAFTER. FOR ALL ZINC WHICH MIGHT BE DELIVERED TO AND ACCEPTED BY THE GOVERNMENT THE CONTRACTOR WAS TO RECEIVE THE COST OF PRODUCTION UP TO 17 1/2 CENTS PER POUND. IN THE EVENT OF DEFAULT AND SHOULD SUCH DEFAULT CONTINUE FOR A PERIOD OF 10 DAYS AFTER WRITTEN NOTICE THEREOF FROM THE GOVERNMENT SPECIFYING THE NATURE OF SUCH DEFAULT OR DEFAULTS, THE GOVERNMENT COULD, AT ITS OPTION AND UPON WRITTEN NOTIFICATION TO THE CONTRACTOR, TERMINATE THE CONTRACT WITHOUT ANY LIABILITY ON ITS PART EXCEPT FOR MATERIAL DELIVERED TO AND ACCEPTED BY THE GOVERNMENT PRIOR TO THE DATE OF TERMINATION. ARTICLE 10 OF THE CONTRACT PROVIDED FOR EXTENSIONS OF THE CONTRACT TIME WHEN THE CAUSE OF DELAY WAS DUE TO CAUSES BEYOND THE REASONABLE CONTROL OF THE CONTRACTOR.

PRELIMINARY INVESTIGATION SHOWS THAT THE FIRST PAYMENT BY THE RECONSTRUCTION FINANCE CORPORATION ON ITS LOAN TO THE CONTRACTOR WAS MADE IN SEPTEMBER 1952 AND, SINCE THE CONTRACTOR DID NOT PUT ITS PLANT INTO OPERATION UNTIL DECEMBER 11, 1953, IT WAS AT LEAST EIGHT MONTHS LATE IN FULFILLING ITS FIRST OBLIGATION UNDER THE CONTRACT. THE GOVERNMENT DID NOT TERMINATE THE CONTRACT BECAUSE OF THE DEFAULT IN GETTING THE PLANT INTO OPERATION, ALTHOUGH IT APPEARS THAT SUCH ACTION WOULD HAVE BEEN IN THE BEST INTERESTS OF THE GOVERNMENT SINCE, DURING THE SUMMER OF 1953, THERE WAS NO URGENT NEED FOR STOCKPILING ZINC AND THE CIVILIAN ECONOMY APPEARED TO BE WELL SUPPLIED. THE CONTRACTOR'S MILL REMAINED IN OPERATION ON DECEMBER 11, 1953, FOR ONLY THREE AND ONE-HALF HOURS WHEN A FIRE OCCURRED, CAUSING A LOSS OF SOME $39,000 AND RESULTING IN THE DESTRUCTION OF A PORTION OF THE MILL. IT WAS REPORTED THAT PRODUCTION WAS RESUMED ON OR ABOUT FEBRUARY 10, 1954, BUT THERE HAS BEEN NO SHOWING AS TO WHAT AMOUNT OF ZINC, IF ANY, WAS PRODUCED BY THE CONTRACTOR UNDER THE CONTRACT.

IT APPEARS FROM THE RECORD THAT DURING THE SUMMER OF 1953 THE CONTRACTOR PROTESTED THAT AMENDMENT NO. 1 TO THE CONTRACT DID NOT ALLOW, AS AN ITEM OF COST OF PRODUCTION, THE PRINCIPAL AND INTEREST PAYMENTS ON THE RFC LOAN OF $400,000. CONSIDERATION WAS GIVEN TO THE MATTER OF REFORMATION OF THE CONTRACT SO AS TO PERMIT RECOVERY BY THE CONTRACTOR OF THE CAPITAL COSTS OF THE FACILITIES. AS AN ALTERNATIVE TO REFORMING THE CONTRACT, AMENDMENT NO. 2 WAS NEGOTIATED WITH THE CONTRACTOR ON MAY 25, 1954, WHICH PROVIDED FOR ITS CANCELLATION. ALTHOUGH THE GOVERNMENT WAS TO RECEIVE TITLE TO THE CONTRACTOR'S FACILITIES, INCLUDING CERTAIN LEASEHOLD INTERESTS, IT AGREED (1) TO ASSUME THE OBLIGATIONS OF THE CONTRACTOR TO THE RFC; (2) TO PROVIDE FUNDS TO THE CONTRACTOR NOT TO EXCEED $127,730.48 TO PAY CERTAIN OF ITS OBLIGATIONS; AND (3) TO MAKE AVAILABLE TO THE CONTRACTOR FUNDS GOT TO EXCEED $149,984.88 FOR THE PURPOSE OF MAKING PAYMENT TO HOLDERS OF ITS PREFERRED AND COMMON STOCK. IN JUSTIFICATION FOR THE NEGOTIATION OF THIS SUPPLEMENT AGREEMENT IT WAS DETERMINED THAT THE PRODUCTION OF ZINC UNDER THE CONTRACT AS AMENDED WOULD BE UNECONOMICAL AND THAT, IF THE GOVERNMENT WERE TO PURCHASE ZINC FROM THE CONTRACTOR AT THE PRICE STATED IN THE CONTRACT, SUCH PURCHASES WOULD BE AT A PRICE CONSIDERABLY IN EXCESS OF THE THEN MARKET PRICE.

NOTWITHSTANDING THE DELAY IN PERFORMANCE ON THE PART OF THE CONTRACTOR, THERE IS NOTHING OF RECORD TO SHOW WHETHER ANY ACTION WAS TAKEN BY YOUR AGENCY TO DETERMINE WHETHER THE DELAY WAS EXCUSABLE WITHIN THE CONTEMPLATION OF THE DEFAULT CLAUSE OF THE CONTRACT. INFORMATION OBTAINED BY OUR REPRESENTATIVES INDICATES THAT THE DELAY IN PERFORMANCE WAS DUE TO LACK OF EXPERIENCE ON THE PART OF THE CONTRACTOR IN THE CONSTRUCTION INDUSTRY AND TO A LACK OF A PROPER REGARD FOR THE BEST INTERESTS OF THE GOVERNMENT. IF THE CONTRACTOR WAS IN UNEXCUSED DEFAULT, AS IT APPEARS TO HAVE BEEN, THE EXECUTION OF SUPPLEMENTAL AGREEMENT DEPRIVED THE GOVERNMENT OF ITS VESTED RIGHT UNDER ARTICLE 11 TO CANCEL THE CONTRACT WITHOUT LIABILITY AND PERMITTED THE CONTRACTOR TO TAKE ADVANTAGE OF ITS OWN DEFAULT. ON THE LATTER POINT THE LAW IS WELL SETTLED THAT A CONTRACTING PARTY CANNOT RESCIND OR TERMINATE HIS CONTRACT BECAUSE OF HIS OWN BREACH. SEE OUR DECISION DATED FEBRUARY 17, 1955, B-122309, I-18399, TO YOU, IN THE CASE OF THE MID-CONTINENT MINING CORPORATION. AND, OF COURSE, IF THE CONTRACT COULD AND SHOULD HAVE BEEN TERMINATED WITHOUT LIABILITY, IT CANNOT BE SAID THAT THE SUPPLEMENTAL AGREEMENT WAS NECESSARY TO REDUCE THE POTENTIAL LOSS OF THE GOVERNMENT UNDER THE CONTRACT WHICH COULD HAVE RESULTED FROM FURTHER PURCHASES OF ZINC AT EXCESSIVE PRICES.

MOREOVER, IT IS NOTED THAT SUPPLEMENTAL AGREEMENT AND AMENDMENT NO. 2 CITES CERTAIN STATUTORY AUTHORITY FOR ITS EXECUTION, INCLUDING, AMONG OTHERS, TITLE II OF THE FIRST WAR POWERS ACT OF 1941, AS AMENDED. FOR THE REASONS HEREINABOVE STATED, HOWEVER, IT IS NOT CLEAR THAT THE PARTICULAR FACTS AND CIRCUMSTANCES THAT THE SUPPLEMENTAL AGREEMENT WAS NECESSARY TO FACILITATE THE NATIONAL DEFENSE, AS REQUIRED BY THAT STATUTE. ON THE CONTRARY, THE EVIDENCE INDICATES THAT THE ONLY EFFECT OF THE SUPPLEMENTAL AGREEMENT WAS TO OPERATE AS A GRATUITY IN FAVOR OF THE CONTRACTOR THROUGH THE ASSUMPTION BY THE GOVERNMENT OF THE CONTRACTOR'S OUTSTANDING OBLIGATIONS WHICH APPARENTLY FAR EXCEEDED THE VALUE OF THE CONSIDERATION MOVING TO THE GOVERNMENT. IT THEREFORE APPEARS ON THE BASIS OF THE PRESENT RECORD THAT THE SUPPLEMENTAL AGREEMENT WAS ENTERED INTO IN DISREGARD OF THE GOVERNMENT'S RIGHTS UNDER THE ORIGINAL CONTRACT, AS AMENDED BY AMENDMENT NO. 1, AND THAT IT WAS WITHOUT LEGAL AUTHORITY AND NOT IN THE BEST INTERESTS OF THE GOVERNMENT.

WE WOULD APPRECIATE A STATEMENT OF THE VIEWS OF YOUR AGENCY WITH REGARD TO THIS MATTER.