B-133890, DEC. 20, 1957

B-133890, DEC. 20, 1957

TO STEIN BROTHERS MANUFACTURING COMPANY:

REFERENCE IS MADE TO A LETTER OF SEPTEMBER 16, 1957, WITH ENCLOSURES, IN YOUR BEHALF, FROM LEE, TOOMEY AND KENT, REQUESTING A REVIEW OF SETTLEMENT DATED AUGUST 29, 1957, WHEREIN THERE WAS DISALLOWED YOUR CLAIM FOR $15,181.19 UNDER CONTRACTS NOS. DA 36-030-QM 5756 (O.I. 7738-E-55) AND DA 36-030-QM-5757 (O.I. 7739-E-55), HEREINAFTER REFERRED TO AS NOS. 5756 AND 5757, RESPECTIVELY.

CONTRACT NO. 5756 WAS ENTERED INTO BY YOU WITH THE DEPARTMENT OF THE ARMY ON JUNE 17, 1955, FOR THE FABRICATION AND DELIVERY OF 58,488 PNEUMATIC MATTRESSES AT THE UNIT PRICES DESIGNATED THEREIN, OR FOR A TOTAL CONTRACT PRICE OF $351,409.20 AND UNDER CONTRACT NO. 5757, ALSO DATED JUNE 17, 1955, YOU AGREED TO FABRICATE AND DELIVER TO THE ARMY 135,000 PNEUMATIC MATTRESSES AT THE SPECIFIED UNIT PRICE, OR FOR A TOTAL CONTRACT PRICE OF $808,650. BOTH CONTRACTS INCORPORATED AS A PART OF EACH CONTRACT THE GENERAL PROVISIONS AS CONTAINED IN STANDARD FORM 32, NOVEMBER 1949 EDITION AND PARAGRAPH TWO OF THESE PROVISIONS REQUIRES AN EQUITABLE ADJUSTMENT FOR ANY CHANGE WHICH INCREASES OR DECREASES THE COST OF PERFORMANCE.

IT APPEARS THAT ON OR ABOUT AUGUST 15, 1955, YOU COMMUNICATED WITH THE FOOD AND CONTAINER INSTITUTE FOR THE ARMED FORCES QM RESEARCH AND DEVELOPMENT COMMAND, CHICAGO, ILLINOIS, WHICH PREVIOUSLY HAD CONSIDERED AND MADE CERTAIN REVISIONS TO THE APPLICABLE PACKAGING SPECIFICATIONS, REQUESTING CERTAIN PACKAGING DEVIATIONS ON CONTRACTS NOS. 5756 AND 5757. UPON BEING ADVISED TO PRESENT YOUR REQUEST TO THE CONTRACTING OFFICER YOU RECOMMENDED, BY LETTER PROPOSAL DATED AUGUST 25, 1955, ADDRESSED TO THE CONTRACTING OFFICER, CHANGES IN PACKAGING THAT WOULD EFFECT SUBSTANTIAL SAVINGS TO THE DEPARTMENT OF THE ARMY UNDER THE TWO CONTRACTS. YOUR PROPOSAL OF AUGUST 25, 1955, OFFERED A REDUCTION FOR SUCH CHANGES IN PACKAGING BASED ON $0.78 A BOX--- 24 SINGLE UNITS PER BOX--- WHICH ACCORDING TO YOUR COMPUTATION, BASED ON THE TOTAL NUMBER OF BOXES REQUIRED, AMOUNTED TO A TOTAL REDUCTION IN THE TWO CONTRACT PRICES OF $6,286.02. THERE FOLLOWED STILL FURTHER NEGOTIATIONS, BY LETTERS EXCHANGED BETWEEN YOU AND THE DEPARTMENT OF THE ARMY, REGARDING ADDITIONAL VARIATIONS IN YOUR PROPOSED CHANGED METHODS OF PACKAGING. ULTIMATELY, MODIFICATION-CHANGE ORDERS NOS. 5 AND 7 WERE ISSUED TO CONTRACTS NOS. 5756 AND 5757, RESPECTIVELY, INCORPORATING THE CHANGES IN PACKAGING AND REDUCING THE TOTAL CONTRACT PRICES FOR THE TWO CONTRACTS, ON THE BASIS OF A SAVING OF $0.0325 A UNIT, IN THE AMOUNT OF $6,288.36--- CORRECT ADJUSTMENT OF $6,286.02 PROPOSAL. BOTH MODIFICATIONS RECITED THAT THEY WERE ENTERED INTO PURSUANT TO AUTHORITY CONTAINED IN ARTICLE TWO OF THE CONTRACTS. WHEN IT LATER BECAME APPARENT THAT THE BASIC UNIT SAVING OF $0.0325 DID NOT COVER THE SAVINGS WHICH ACCRUED TO YOU BY REASON OF THE CHANGE IN THE PACKAGING, THE DEPARTMENT OF THE ARMY ADVISED YOU BY TELEGRAM DATED NOVEMBER 30, 1955, THAT THE PRICE ADJUSTMENTS SET FORTH IN MODIFICATION-CHANGE ORDERS NOS. 5 AND 7 TO CONTRACTS NOS. 5756 AND 5757 WERE INACCURATE AND, THEREFORE, THE ADJUSTMENTS WERE SUSPENDED PENDING FURTHER NEGOTIATIONS TO ESTABLISH CORRECT EQUITABLE ADJUSTMENTS REFLECTING THE ACTUAL SAVINGS WHICH RESULTED FROM THE CHANGES. CORRESPONDENCE AND CONFERENCES REGARDING THE AMOUNTS OF THE ADJUSTMENT FOLLOWED AND, AMONG OTHER THINGS, A REQUEST WAS MADE UPON YOU BY THE DEPARTMENT OF THE ARMY TO SUBMIT CERTAIN DATA THAT WOULD REFLECT THE ACTUAL COST DIFFERENTIAL BETWEEN THE ORIGINAL AND REVISED PACKAGING REQUIREMENTS. IT APPEARS THAT UPON YOUR REFUSAL TO FURNISH SUCH DATA, THE DEPARTMENT OF THE ARMY CONTRACTING OFFICER REQUESTED THAT THE FOOD AND CONTAINER INSTITUTE, HERETOFORE REFERRED TO, FURNISH HIM WITH THE AMOUNT OF THE TOTAL SAVINGS ACCRUING TO YOU BY REASON OF THE PRICE ADJUSTMENT IN CONNECTION WITH THE PACKAGING REQUIREMENTS. IN THE ABSENCE OF THE INFORMATION WHICH YOU REFUSED TO FURNISH, THE INSTITUTE, BY LETTER DATED DECEMBER 27, 1955, ESTIMATED CERTAIN UNIT AMOUNTS THAT YOU HAD SAVED AS A RESULT OF THE REVISED PACKAGING SPECIFICATION REQUIREMENTS. ON THE BASIS OF SUCH UNIT AMOUNT SAVINGS, IT APPEARS THAT THE DEPARTMENT OF THE ARMY DETERMINED SAVINGS IN COST ON CONTRACTS NOS. 5756 AND 5757 RESULTING FROM CHANGES IN PACKAGING REQUIREMENTS, EXCLUSIVE OF GENERAL AND ADMINISTRATIVE EXPENSES AND PROFITS, TOTALED $18,647.16. IN VIEW OF THIS, AND SINCE ONLY $6,288.36 WAS DEDUCTED FROM THE CONTRACT PRICES OF THE TWO CONTRACTS FOR SUCH SAVINGS BY VIRTUE OF CHANGE ORDERS NOS. 5 AND 7, AMOUNTS TOTALING $15,181.19 HAVE BEEN WITHHELD BY THE DEPARTMENT OF THE ARMY ON VARIOUS VOUCHERS UNDER CONTRACTS NOS. 5756 AND 5757. THE WITHHOLDING OF SUCH AMOUNTS HAS RESULTED IN THE FILING YOUR CLAIM.

THE LETTER OF LEE, TOOMEY AND KENT, DATED SEPTEMBER 16, 1957, SETS FORTH, AS THE BASIS OF THEIR REQUEST FOR REVIEW OF OUR SETTLEMENT DATED AUGUST 29, 1957, VARIOUS CONTENTIONS IN SUPPORT OF THEIR POSITION AND COURT CASES APPLICABLE THERETO. WHILE THE CONTENTIONS AND COURT CASES ARE SET FORTH IN CONSIDERABLE DETAIL, IT APPEARS THAT THE ATTORNEYS ARE ARGUING PRIMARILY THAT, IN GENERAL, THE UNITED STATES AS A CONTRACTOR MUST BE TREATED AS ANY OTHER CONTRACTOR UNDER ANALOGOUS CIRCUMSTANCES; THAT A GOVERNMENT CONTRACT IS TO BE INTERPRETED AS ARE CONTRACTS BETWEEN INDIVIDUALS; THAT MODIFICATIONS OF A CONTRACT UNDER THE FACTS AND CONDITIONS CITED IN THE COURT CASES REFERRED TO CREATE BINDING OBLIGATIONS ON THE PARTIES; THAT CHANGE ORDERS CONSTITUTE A MODIFICATION OF THE CONTRACT; THAT GOVERNMENT OFFICIALS MAY NOT ARBITRARILY CHANGE THE TERMS OF A WRITTEN INSTRUMENT OR REDUCE THE PRICE RETROACTIVELY WITHOUT THE CONSENT OF THE OTHER PARTY; AND THAT A REPUDIATION OF A CHANGE ORDER, WHICH BECOMES AN INTEGRAL PORTION OF THE CONTRACT, IS UNAUTHORIZED AND WITHOUT LEGAL EFFECT. ALSO, DURING A RECENT CONFERENCE BETWEEN TWO MEMBERS OF THE FIRM OF LEE, TOOMEY AND KENT AND REPRESENTATIVES OF OUR OFFICE, IT WAS UNDERSTOOD TO BE THE FURTHER POSITION OF THE ATTORNEYS THAT SINCE AMENDMENTS NOS. 5 AND 7 TO CONTRACTS NOS. 5756 AND 5757 WERE AGREEABLE TO, AND EXECUTED BY, THE CONTRACTING OFFICER OF THE DEPARTMENT OF THE ARMY, THEY BECAME LEGAL AND BINDING GOVERNMENT OBLIGATIONS REGARDLESS OF ANY OTHER CIRCUMSTANCES THAT MIGHT HAVE ATTENDED THE TRANSACTION.

WHILE THERE IS NO ATTEMPT HERE TO MINIMIZE THE OPINIONS IN THE COURT CASES CITED IN THE LETTER DATED SEPTEMBER 16, 1957, OF LEE, TOOMEY AND KENT, WE DO NOT BELIEVE THAT A THOROUGH EXAMINATION OF ALL OF THE FACTS ATTENDING THE SUBJECT CLAIM WOULD JUSTIFY DETAILED CONSIDERATION OR DISCUSSION OF SUCH PRINCIPLES OF CONTRACT LAW AS ARE STRESSED IN SUMS OF THESE COURT CASES. THIS CONCLUSION IS REACHED BECAUSE IT IS READILY ADMITTED HERE THAT, IN GENERAL, THE LONG ESTABLISHED PRINCIPLES OF CONTRACT LAW ARE EQUALLY APPLICABLE TO THE GOVERNMENT AS TO ANY OTHER CONTRACTOR. HOWEVER, THERE ARE EXCEPTIONS TO THIS RULE, OF COURSE, AS MAY BE SEEN BY REFERENCE TO UNITED STATES V. STANDARD RICE COMPANY, 323 U.S. 106, CITED IN THE ATTORNEYS' LETTER, WHEREIN IT WAS SPECIFICALLY STATED THAT "ALTHOUGH THERE WILL BE EXCEPTIONS, IN GENERAL THE UNITED STATES AS A CONTRACTOR MUST BE TREATED AS OTHER CONTRACTORS UNDER ANALOGOUS SITUATIONS.' OUR OFFICE FEELS THAT ONE OF THESE MORE WIDELY RECOGNIZED EXCEPTIONS IS PARTICULARLY PERTINENT IN THIS CASE.

SINCE LEGAL CONTRACTS WERE IN EXISTENCE, WHICH PREVIOUSLY HAD FIXED ALL OF THE RIGHTS AND OBLIGATIONS OF THE PARTIES, THERE APPEARS ONLY FOR CONSIDERATION HERE, IN DETERMINING THE VALIDITY OF THE CLAIM, FIRST, THE QUESTION AS TO WHETHER ADEQUATE CONSIDERATION PASSED TO THE GOVERNMENT UPON EXECUTION OF THE AMENDMENTS NOS. 5 AND 7 TO CONTRACTS NOS. 5756 AND 5757 AND, SECOND, WAS THE GOVERNMENT CONTRACTING OFFICER AUTHORIZED TO EXECUTE THE AMENDMENTS UNDER THE CIRCUMSTANCES REPORTED.

REGARDING THE FIRST QUESTION, PARAGRAPH 2 OF THE GENERAL PROVISIONS OF CONTRACTS NOS. 5756 AND 5757 COVERING "CHANGES," PROVIDES, IN PERTINENT PART, THAT:

"* * * IF ANY SUCH CHANGE CAUSES AN INCREASE OR DECREASE IN THE COST OF, * * * AN EQUITABLE ADJUSTMENT SHALL BE MADE IN THE CONTRACT PRICE * * * AND THE CONTRACT SHALL BE MODIFIED IN WRITING ACCORDINGLY * * *.'

IT APPEARS THEN THAT IT BECOMES NECESSARY TO DETERMINE WHETHER AN EQUITABLE ADJUSTMENT OR ADEQUATE CONSIDERATION DID, IN FACT, ATTEND THE CHANGES IN THE PACKAGING REQUIREMENTS AS REFLECTED IN AMENDMENTS NOS. 5 AND 7 TO THE TWO CONTRACTS. IN THIS CONNECTION, IT IS NOTED THAT, IN THE FIRST INSTANCE, THE PROPOSAL FOR THE CHANGES IN THE PACKAGING REQUIREMENTS WAS INITIATED BY YOU. YOUR PROPOSAL CARRIED WITH IT THE OFFER OF SUBSTANTIAL SAVINGS TO THE GOVERNMENT. WHILE IT APPEARS TO BE TRUE THAT YOUR PROPOSAL, AS FINALLY ADOPTED WITH SOME CHANGES, DID NOT SPECIFICALLY STATE THAT THE PROPOSED REDUCTION OF $6,288.36, TO BE EFFECTED IN THE AMENDMENTS UNDER THE TWO CONTRACTS, REPRESENTED THE TOTAL SAVINGS ACCRUING TO YOU BY REASON OF THE CHANGED PACKAGING REQUIREMENTS, THERE CAN BE LITTLE, IF ANY, DOUBT BUT THAT SUCH A DEFINITE AND ODD AMOUNT WAS AT LEAST IMPLIEDLY PRESENTED TO BE AN APPROXIMATION OF THE TOTAL REDUCTION IN COST, ETC., WHICH WOULD RESULT BY REASON OF THESE CHANGES AND, THEREFORE, DID, IN FACT, FURTHER REPRESENT SUCH AN EQUITABLE ADJUSTMENT AS REASONABLY MIGHT BE EXPECTED UNDER THE CIRCUMSTANCES. A THOROUGH EXAMINATION OF THE RECORD IN THIS CASE, HOWEVER, FAILS TO ESTABLISH THE EXACT AMOUNT OF THE SAVINGS OR REDUCED COSTS WHICH WERE INVOLVED, PRIMARILY BECAUSE OF YOUR STEADFAST REFUSAL TO SUBMIT DATA TO REFLECT THE ACTUAL COST DIFFERENTIAL BETWEEN THE ORIGINAL AND REVISED PACKAGING REQUIREMENTS, BUT IT MUST BE ACCEPTED UNDER THE CIRCUMSTANCES REPORTED THAT THE TOTAL AMOUNT OF $6,288.36, BY WHICH THE CONTRACT PRICES WERE REDUCED, WAS FAR LESS THAN THE ACTUAL SAVINGS OR REDUCED COSTS. IN FACT, YOU READILY ADMIT IN YOUR LETTER OF JULY 14, 1956, THAT YOU OPENED THIS NEGOTIATED AMENDMENT EXPECTING TO MAKE A PROFIT AND THAT YOU OFFERED TO RETURN ONLY A PART OF THE SAVINGS TO THE GOVERNMENT. THE DEPARTMENT OF THE ARMY THROUGH THE FOOD AND CONTAINER INSTITUTE FOR THE ARMED FORCES QM RESEARCH AND DEVELOPMENT COMMAND, ESTIMATED THE TOTAL REDUCED COSTS TO BE $18,647.16 AND IN THE ABSENCE OF EVIDENCE TO CONCLUSIVELY ESTABLISH THAT THIS AMOUNT IS OUT OF ALL PROPORTION TO THE COSTS WHICH IT REPRESENTS SUCH AMOUNT WILL BE CONSIDERED A REASONABLE APPROXIMATION OF THE ACTUAL SAVINGS INVOLVED IN THE CASE. IN VIEW OF THE FOREGOING, AND SINCE THERE EXISTED SUCH SUBSTANTIAL MONETARY DIFFERENCES BETWEEN THE SAVINGS OR REDUCED COSTS ALLOWED THE DEPARTMENT OF THE ARMY UNDER THE TWO CONTRACTS AND THE ACTUAL SAVINGS WHICH ACCRUED TO YOU; ALSO, SINCE THE RECORD FAILS TO SHOW THAT ANY OTHER BENEFITS PASSED TO THE GOVERNMENT BY REASON OF THE TRANSACTION, IT MUST BE CONCLUDED THAT AMENDMENTS NOS. 5 AND 7 TO CONTRACTS NOS. 5756 AND 5757 WERE NOT SUPPORTED BY SUCH ADEQUATE CONSIDERATION AS TO CREATE BINDING LEGAL OBLIGATIONS. TO HOLD THAT SUCH AMENDMENTS WERE PROPER WHERE, AS HERE, IT IS SHOWN THAT THE GOVERNMENT COMPLETELY FAILED TO RECEIVE ANY ADJUSTMENT COMMENSURATE WITH THE LOWERED COSTS OF PERFORMANCE WOULD BE IN COMPLETE DISREGARD OF THE EQUITABLE ADJUSTMENT REQUIREMENT OF PARAGRAPH 2 OF THE GENERAL PROVISIONS OF THE CONTRACTS COVERING "CHANGES," WHICH REQUIREMENT IS TO ASSURE THAT THE COST POSITION OF BOTH THE GOVERNMENT AND THE CONTRACTOR, WHICH HAS BEEN ARRIVED AT THROUGH COMPETITIVE BIDDING OR NEGOTIATION, WILL BE MAINTAINED DURING THE LIFE OF THE CONTRACTS.

THE SECOND, AND PERHAPS EVEN MORE SIGNIFICANT, QUESTION HAS TO DO WITH THE AUTHORITY OF THE GOVERNMENT CONTRACTING OFFICER TO EXECUTE THE AMENDMENTS UNDER THE CIRCUMSTANCES REPORTED AND IT IS HERE THAT THERE IS INVOLVED ONE OF THE WELL RECOGNIZED EXCEPTIONS TO THE PRINCIPLES OF CONTRACT LAW WHERE THE GOVERNMENT IS A PARTY. IN THIS CONNECTION, ONE OF THE PRIME CONTENTIONS OF YOUR ATTORNEYS, LEE, TOOMEY AND KENT, IN ATTEMPTING TO ESTABLISH THE LEGALITY OF AMENDMENTS NOS. 5 AND 7 TO CONTRACTS NOS. 5756 AND 5757, IS THAT REGARDLESS OF THE CONSIDERATION WHICH PASSED TO THE GOVERNMENT THE AMENDMENTS WERE DULY ISSUED AFTER PRIOR AGREEMENT HAD BEEN REACHED WITH THE GOVERNMENT CONTRACTING OFFICER AND, THEREFORE, BECAME BINDING LEGAL OBLIGATIONS. THE RECORD BEFORE US FAILS TO SHOW CLEARLY WHETHER THE GOVERNMENT CONTRACTING OFFICER WAS AWARE, AT THE TIME OF NEGOTIATING FOR THE CHANGED PACKAGING REQUIREMENTS OR WHEN THE AMENDMENTS WERE AUTHORIZED, THAT THE PROPOSED REDUCTION OF $6,288.36 REPRESENTED ONLY THE AMOUNT TO BE ALLOWED BY YOU AS THE GOVERNMENT'S PROPORTIONATE SHARE OF THE REDUCED COSTS, OR WHETHER IT REPRESENTED ALL OF THE REDUCED COSTS INVOLVED. HOWEVER, LET US ASSUME, SOLELY FOR THE PURPOSE OF A FURTHER DISCUSSION OF THIS PARTICULAR PART OF THE CASE, THAT THE GOVERNMENT CONTRACTING OFFICER DID, IN FACT, KNOW AT THE TIME HE EXECUTED AMENDMENTS NOS. 5 AND 7 THAT THE AMOUNT OF $6,288.36 WAS FAR LESS THAN THE TOTAL SAVINGS OR REDUCED COSTS INVOLVED. IF THAT WERE THE CASE, LITTLE JUSTIFICATION NEED BE SET FORTH HERE TO ESTABLISH THE FACT THAT SUCH AN AMENDMENT TO A CONTRACT BY A GOVERNMENT CONTRACTING OFFICER, WHICH PREVIOUSLY WAS SUPPORTED BY ADEQUATE CONSIDERATION AND SPECIFICALLY SET FORTH THE RIGHTS AND LIABILITIES OF THE PARTIES OR GIVES AWAY A VESTED RIGHT BY REASON OF THE INADEQUATE CONSIDERATION WHICH ATTENDED THE TRANSACTION AND THE EXECUTION THEREOF CONSTITUTES A WRONGFUL OR UNAUTHORIZED ACT OF A GOVERNMENT AGENT. IT IS, OF COURSE, AXIOMATIC THAT NO OFFICER OR AGENT OF THE UNITED STATES IS AUTHORIZED TO GIVE AWAY THE MONEY, PROPERTY, OR ANY RIGHT OF THE GOVERNMENT. PACIFIC HARDWARE AND STEEL COMPANY V. UNITED STATES, 49 C.CLS. 327; HAUSCH AND LOMB OPTICAL COMPANY V. UNITED STATES, 78 C.CLS. 584, 607; AND UNITED STATES V. AMERICAN SALES CORPORATION, 27 F.2D 389. MOREOVER, THE LAW IS TOO WELL SETTLED TO CITE AT LENGTH HERE CASES SUPPORTING THE PRINCIPLE THAT THE GOVERNMENT IS NOT LIABLE FOR THE WRONGFUL OR UNAUTHORIZED SETS OF ITS AGENTS. SUCH CONCLUSION IS PREDICATED UPON THE BASIS THAT WHERE AN AGENT OF THE GOVERNMENT ACTS IN EXCESS OF THE AUTHORITY VESTED IN HIM, HIS ACT, FROM A LEGAL STANDPOINT, IS NO LONGER AN ACT OF THE GOVERNMENT. THE UNDERWRITER, 6 F.2D 937. LIKEWISE, THE UNAUTHORIZED ACTS OF ITS AGENTS CANNOT OBLIGATE THE GOVERNMENT. FILER V. UNITED STATES, 9 WALL. 45; WHITESIDE, ET AL. V. UNITED STATES, 93 U.S. 247, 257. AND, UNDER THOSE CIRCUMSTANCES, THE COURTS HAVE HELD CONSISTENTLY THAT ONE ENTERING INTO A CONTRACT WITH AN OFFICER OR EMPLOYEE OF THE GOVERNMENT IS CHARGED WITH NOTICE OF THE LIMITATIONS PLACED UPON THE AUTHORITY OF THE OFFICER OR EMPLOYEE TO OBLIGATE THE UNITED STATES. SEE HUME V. UNITED STATES, 132 U.S. 406, JACOB REED'S SONS V. UNITED STATES, 273 ID. 200; DAVIS V. UNITED STATES, 59 C.CLS. 197.

THE FOREGOING ARE SOME OF THE EXAMPLES OF THE EXCEPTION--- PREVIOUSLY REFERRED TO--- TO THE PRINCIPLE THAT, IN GENERAL, THE UNITED STATES AS A CONTRACTOR MUST BE TREATED AS ANY OTHER CONTRACTOR. IT DOES NOT APPEAR THAT ANY OF THE CASES CITED IN THE LETTER DATED SEPTEMBER 16, 1957, INVOLVE THE WRONGFUL OR UNAUTHORIZED ACTS OF A GOVERNMENT AGENT.