B-123420, MAY 18, 1955, 34 COMP. GEN. 611

B-123420, MAY 18, 1955, 34 COMP. GEN. 611

CONTRACTS - ESCALATOR CLAUSES - EXCLUSION OF FREIGHT COSTS IN COMPUTING PERCENTAGE INCREASES UNDER A DELIVERED PRICE CONTRACT FOR THE PURCHASE OF GENERATORS WHICH INCLUDED TWO ESCALATOR CLAUSES--- ONE TO COVER CHANGES IN FREIGHT RATES AFFECTING DELIVERY AND THE OTHER TO COVER INCREASES IN THE COMPANY'S PRICES UP TO 20 PERCENT OF THE PRICE--- ANY RISK INCIDENT TO SHIPPING COSTS WAS ELIMINATED BY THE FREIGHT ESCALATION CLAUSE AND, THEREFORE, THE FREIGHT COSTS SHOULD BE DEDUCTED IN COMPUTING ADJUSTMENTS UNDER THE PRICE ESCALATION CLAUSE.

COMPTROLLER GENERAL CAMPBELL TO THE SECRETARY OF THE ARMY, MAY 18, 1955:

YOUR LETTER OF MARCH 25, 1955, REQUESTS ADVICE AS TO THE INTERPRETATION TO BE GIVEN TWO PRICE ESCALATOR CLAUSES CONTAINED IN CONTRACT NO. W-03-050 -ENG-817, DATED MAY 26, 1948, WITH ALLIS-CHALMERS MANUFACTURING COMPANY.

UNDER THE CONTRACT, THE CONTRACTOR WAS REQUIRED TO MANUFACTURE AND DELIVER, F.O.B. RAILROAD CARS AT BULL SHOALS DAM, ARKANSAS, CERTAIN ELECTRIC GENERATORS AND APPURTENANCES FOR SPECIFIED UNIT PRICES. PARAGRAPH SC-15 OF THE BID SPECIFICATIONS, WHICH WERE INCORPORATED IN THE CONTRACT, PROVIDED:

ADJUSTMENT OF CONTRACT PRICE AS A RESULT OF FLUCTUATIONS OF FREIGHT RATES. IF, AFTER THE DATE AND HOUR OF OPENING BIDS AND CONTINUING THROUGHOUT THE COURSE OF THE CONTRACT, THERE IS ANY CHANGE IN THE OFFICIAL RAILROAD FREIGHT RATES EXISTING AND PUBLISHED AT THE TIME OF OPENING BIDS, AFFECTING DELIVERIES UNDER THIS CONTRACT, ANY INCREASE IN COST RESULTING FROM AN INCREASE IN FREIGHT RATES WILL BE BORNE BY THE GOVERNMENT AND ANY DECREASE IN THESE RATES WILL BE DEDUCTED FROM PAYMENTS TO THE CONTRACTOR.

THE FOLLOWING PROVISION--- WHICH HAD BEEN SET FORTH AS A QUALIFICATION IN THE BID ON WHICH THE CONTRACT WAS BASED--- WAS ALSO INCLUDED IN SCHEDULE A OF THE CONTRACT, WHICH SETS FORTH THE CONTRACT PRICES:

PRICES LISTED HEREIN SHALL BE ADJUSTED TO THE COMPANY'S PRICES IN EFFECT AT TIME OF SHIPMENT; HOWEVER, IN NO EVENT WILL THE ADJUSTMENT EXCEED 20 PERCENT OF THE PRICES LISTED.

IT APPEARS THAT DELIVERY OF THE GENERATORS AND APPURTENANCES WAS COMPLETED DURING JANUARY 1953, AND THAT BY INVOICES NOS. AWA-9705 AND AWA- 9706, DATED DECEMBER 31, 1953, THE CONTRACTOR BILLED THE GOVERNMENT ON ACCOUNT OF CERTAIN PRICE INCREASES APPLICABLE TO THE CONTRACT PRODUCTS AT THE TIME OF SHIPMENT FOR THE TOTAL AMOUNT OF $485.023.09, REPRESENTING 20 PERCENT OF THE CONTRACT PRICE AFTER THE DEDUCTION OF ALL FREIGHT CHARGES, ALLEGED TO BE DUE UNDER THE ESCALATOR CLAUSE CONTAINED IN SCHEDULE A, AND THE AMOUNT OF $6,959.54, REPRESENTING INCREASED FREIGHT CHARGES STATED TO BE DUE UNDER PARAGRAPH SC-15, SUPRA. HOWEVER, BY LETTER OF APRIL 23, 1954, THE CONTRACTOR SUBMITTED REVISED ESCALATION INVOICE NO. 9954, WHEREIN THE AMOUNT OF $493,887.96 WAS SUBSTITUTED FOR THE REFERRED-TO/SUM OF $485,023.09. THE REVISED AMOUNT IS SHOWN ON THE INVOICE TO REPRESENT 20 PERCENT OF THE CONTRACT PRICE OF THE EQUIPMENT--- AFTER GIVING EFFECT TO CERTAIN ADJUSTMENTS IN PRICE, DUE TO CONTRACT MODIFICATIONS, WHICH WERE NOT TAKEN INTO CONSIDERATION IN THE PREVIOUS BILLING--- WITHOUT THE DEDUCTION OF FREIGHT CHARGES. IN EXPLANATION OF THE REVISION, THE CONTRACTOR STATED:

DUE TO A MISUNDERSTANDING, WE PREVIOUSLY OVERLOOKED THE FACT THAT THE PROVISIONS OF THIS CONTRACT PROVIDE FOR A 20 PERCENT MAXIMUM INCREASE OF THE PRICES SPECIFIED IN THE BID. THE PRICES SPECIFIED, AND USED IN EVALUATING THE BID, WERE DELIVERED PRICES, AND ACCORDINGLY, WE ERRED IN ELIMINATING FREIGHT FROM THE COMPUTATION OF THE ESCALATION ON THE PRICES QUOTED. ALSO, IN LETTERS DATED JUNE 2 AND AUGUST 5, 1954, TO THE CONTRACTING OFFICER, THE CONTRACTOR CONTENDED THAT THE TWO ESCALATOR CLAUSES OF THE CONTRACT WERE MEANT TO OPERATE INDEPENDENTLY, AND THAT ANY INCREASE IN ITS ESTABLISHED PRICES IS APPLICABLE TO THE STIPULATED CONTRACT PRICES, WITHOUT THE DEDUCTION OF FREIGHT. THESE LETTERS WERE IN REPLY TO THE CONTRACTING OFFICER'S LETTER OF MAY 3, 1954, DECLINING PAYMENT OF THE ADDITIONAL AMOUNT SHOWN ON THE REVISED INVOICE ON THE BASIS THAT THE ORIGINAL METHOD OF COMPUTING THE AMOUNT DUE UNDER THE CLAUSE APPEARING IN SCHEDULE A WAS CORRECT.

ALTHOUGH THE CLAUSE IN SCHEDULE A DOES NOT PROVIDE THAT THE AMOUNT INCLUDED IN THE CONTRACT PRICES TO COVER THE COST OF SHIPMENT OF THE EQUIPMENT IS TO BE EXCLUDED IN ADJUSTING THE STIPULATED PRICES TO THE CONTRACTOR'S PRICES IN EFFECT AT THE TIME OF SHIPMENT, SUCH CLAUSE MUST BE INTERPRETED IN CONJUNCTION WITH THE CLAUSE CONTAINED IN PARAGRAPH SC 15, IT BEING WELL ESTABLISHED THAT AN AGREEMENT MUST BE CONSTRUED AS A WHOLE AND THE MEANING MUST BE GATHERED FROM THE ENTIRE CONTEXT, NOT FROM PARTICULAR WORDS, PHRASES, OR CLAUSES. 12 AM. JUR., CONTRACTS SEC. 241. THE MANIFEST PURPOSE OF INCLUDING THE FREIGHT ESCALATOR CLAUSE IN THE CONTRACT WAS TO KEEP ANY CHANGES IN FREIGHT RATES EFFECTIVE SUBSEQUENT TO THE DATE OF BID OPENING FROM AUGMENTING OR DIMINISHING THE NET AMOUNT WHICH THE CONTRACTOR WAS TO RECEIVE FOR PERFORMING THE CONTRACT. IT SEEMS EQUALLY CLEAR THE THE PRICE ESCALATOR CLAUSE WAS INCORPORATED IN THE CONTRACT BECAUSE THE CONTRACTOR WAS WILLING TO ASSUME ONLY THE RISK OF AN INCREASE AMOUNTING TO MORE THAN 20 PERCENT OF THE COST OF MANUFACTURING THE EQUIPMENT, AND THAT THERE WAS NO INTENTION TO PROVIDE FOR THE PAYMENT OF ANY AMOUNTS TO BE DERIVED BY TAKING A PERCENTAGE OF THE FREIGHT CHARGES, SINCE ANY ELEMENT OF RISK INCIDENT TO THE COST OF SHIPPING THE EQUIPMENT HAD ALREADY BEEN ELIMINATED FROM THE CONTRACT BY PARAGRAPH SC- 15. THIS LATTER PARAGRAPH PRESUPPOSES THAT TRANSPORTATION COSTS ARE A DETERMINABLE AND SEPARATE ITEM OF COST UNDER THE CONTRACT, AND, HENCE, THE CONTRACTOR'S CONTENTION THAT SUCH COSTS CONSTITUTED AN "INDEFINITE FREIGHT VALUE" WHICH THE PARTIES COULD NOT HAVE INTENDED TO EXCLUDE FROM THE ESCALATION BASE IS UNTENABLE. SEE UNITED STATES V. KANSAS FLOUR MILLS CORP; 314 U.S. 212, 215.

TO INTERPRET THE CONTRACT AS AUTHORIZING THE CONTRACTOR TO RECOUP ANY FREIGHT RATE INCREASES UNDER PARAGRAPH SC-15 AND, AT THE SAME TIME, USE THE AMOUNT WHICH HAD BEEN INCLUDED IN ITS BID PRICES TO COVER FREIGHT AS A BASIS FOR INCREASING ITS PRICES UNDER THE PRICE ESCALATOR CLAUSE WOULD BE TANTAMOUNT TO HOLDING THAT THE REPRESENTATIVES NEGOTIATING THE CONTRACT ON BEHALF OF THE GOVERNMENT INTENDED TO PROVIDE FOR THE PAYMENT OF A GRATUITY. SUCH A CONSTRUCTION OF THE CONTRACT WOULD BE UNREASONABLE AND IS NOT REQUIRED. THE FACTS AND CIRCUMSTANCES IN THE CASE AMPLY SUPPORT THE CONCLUSION THAT THE PARTIES INTENDED ALL FREIGHT CHARGES TO BE DEDUCTED FROM THE CONTRACT PRICES PRIOR TO MAKING ANY ADJUSTMENTS UNDER THE PRICE ESCALATOR CLAUSE.

ACCORDINGLY, ANY PAYMENTS MADE TO THE CONTRACTOR UNDER THE TWO ESCALATOR CLAUSES INVOLVED SHOULD BE COMPUTED IN ACCORDANCE WITH THE METHOD USED IN THE CONTRACTOR'S ORIGINAL INVOICES.