B-141070, NOV. 6, 1959

B-141070, NOV. 6, 1959

TO THE SECRETARY OF AGRICULTURE:

FURTHER REFERENCE IS MADE TO A LETTER OF OCTOBER 22, 1959, SIGNED BY THE ACTING SECRETARY, REQUESTING OUR DECISION WITH RESPECT TO FIVE QUESTIONS IN CONNECTION WITH THE APPLICATION OF SANJO, INC., OF BAKERSFIELD, CALIFORNIA, FOR APPROVAL OF THE SMISER WAREHOUSE FOR THE STORAGE OF COMMODITY CREDIT CORPORATION COTTON. IN OUR DECISION, B 141070, OF OCTOBER 26, 1959, WE CONCLUDED THAT THE CERTIFICATE OF COMPETENCY AWARDED THE APPLICANT BY THE SMALL BUSINESS ADMINISTRATION SHOULD BE REGARDED AS AN ACCEPTABLE SUBSTITUTE FOR THE NET WORTH STANDARDS APPLICANTS WERE REQUIRED TO MEET. WHILE OUR DECISION DID NOT SPECIFICALLY SO STATE, THE EFFECT OF OUR CONCLUSION WAS THAT THE COMMODITY CREDIT CORPORATION SHOULD NOT REFUSE TO ENTER INTO A COTTON STORAGE AGREEMENT WITH SANJO, INC., BECAUSE OF THE LATTER'S FAILURE TO MEET A $10,000 MINIMUM NET WORK REQUIREMENT. SINCE THAT TIME, HOWEVER, WE HAVE BEEN ADVISED INFORMALLY THAT THE ADMINISTRATIVE REGULATIONS REGARDING THE ELIGIBILITY OF APPLICANTS TO PARTICIPATE IN THE PROGRAM THROUGH STORAGE AGREEMENTS HAVE BEEN MODIFIED TO PERMIT ACCEPTANCE OF A CERTIFICATE OF COMPETANCY IN LIEU OF THE MINIMUM NET WORK REQUIREMENT AND NOW REQUIRE THE SUBMISSION OF A BOND BASED ON THE STORAGE CAPACITY OF THE PROPOSED WAREHOUSE, WITH THE PROVISION THAT NET WORTH MAY BE SUBSTITUTED FOR UP TO 50 PERCENT OF THE BOND REQUIREMENT. OBJECTION HAS BEEN MADE ON BEHALF OF SANJO, INC., TO THE BOND REQUIREMENTS AS MODIFIED, AND IT NOW APPEARS NECESSARY TO AMPLIFY OUR ANSWERS TO QUESTIONS ONE AND THREE CONTAINED IN YOUR LETTER OF OCTOBER 22, 1959.

QUESTION ONE REQUESTED OUR DECISION AS TO WHETHER THE ISSUANCE OF THE CERTIFICATE OF COMPETENCY REQUIRES YOU TO ENTER INTO A STORAGE AGREEMENT FOR COTTON WITH SANJO, INC., WITHOUT REGARD TO ITS NET WORTH. THE SHORT ANSWER TO THIS QUESTION IS THAT SUCH A CERTIFICATE DOES NOT REQUIRE YOU TO ENTER INTO THE PROPOSED CONTRACT IN CONNECTION WITH WHICH IT WAS ISSUED. AS STATED ABOVE, HOWEVER, IT IS OUR VIEW THAT ISSUANCE OF THE CERTIFICATE DOES PRECLUDE YOU FROM REFUSING TO ENTER INTO SUCH AN AGREEMENT WITH SANJO, INC., BECAUSE OF THE LATTER'S FAILURE TO MEET THE FORMER $10,000 MINIMUM NET WORTH REQUIREMENT. OF COURSE, THE QUESTION OF WHETHER THE PARTICULAR SERVICES TO BE CONTRACTED FOR ARE REQUIRED BY THE GOVERNMENT IS A MATTER FOR ADMINISTRATIVE DETERMINATION.

YOUR THIRD QUESTION, AS TO THE PROPRIETY OF THE CUSTOMARY BOND COVERAGE, WE ANSWERED BY STATING THAT THE ISSUANCE OF THE CERTIFICATE OF COMPETENCY DID NOT PRECLUDE YOU FROM REQUIRING THE FURNISHING OF BONDS ON THE BASIS OF THE SAME STANDARDS APPLIED TO ALL OTHER PROSPECTIVE CONTRACTORS. THE ISSUANCE BY THE SMALL BUSINESS ADMINISTRATION OF A CERTIFICATE OF COMPETENCY FOR A SPECIFIC CONTRACT CONSTITUTES A CERTIFICATION CONCLUSIVE UPON THE PROCURING AGENCY THAT THE PROSPECTIVE SMALL BUSINESS CONTRACTOR HAS THE OVER-ALL ABILITY AND THE NECESSARY CREDIT TO PERFORM IN ACCORDANCE WITH THE TERMS OF THE PROPOSED CONTRACT. THE ISSUANCE OF THE CERTIFICATE, HOWEVER, DOES NOT REQUIRE OR JUSTIFY THE AWARD OF A CONTRACT WHICH IMPOSES CONTRACTUAL OBLIGATIONS EITHER MORE OR LESS FAVORABLE TO THE SMALL BUSINESS FIRM THAN TO ANY OTHER PROSPECTIVE CONTRACTOR. IN OTHER WORDS, THE CONTRACT TERMS SHOULD NOT BE AFFECTED BY THE CERTIFICATE. IN ADDITION TO BEING A REQUIREMENT IMPOSED BY STATUTE FOR CERTAIN CONTRACTS (SEE THE MILLER ACT, 40 U.S.C. 270A), A PERFORMANCE BOND IS A COMMON CONTRACTUAL REQUIREMENT, AND WE SEE NO REASON WHY SUCH A REQUIREMENT SHOULD BE AFFECTED BY THE ISSUANCE OF A CERTIFICATE OF COMPETENCY.

IN MOST SITUATIONS WHERE A CERTIFICATE OF COMPETENCY HAS BEEN ISSUED THE CONTRACT INVOLVED IS FOR THE FURNISHING OF SUPPLIES OR SERVICES IN WHICH THE UNITED STATES HAS NO POSSESSORY INTEREST UNTIL PERFORMANCE HAS BEEN COMPLETED BY DELIVERY. UNLIKE THIS SITUATION, HOWEVER, THE WAREHOUSEMAN IS ENTRUSTED WITH PHYSICAL POSSESSION OF PROPERTY IN WHICH THE GOVERNMENT HAS A FINANCIAL INTEREST AND ASSUMES A SPECIAL RELATIONSHIP AS BAILEE FOR THAT PROPERTY. INHERENT IN THIS RELATIONSHIP IS THE BAILEE'S OBLIGATION TO ASSUME RESPONSIBILITY FOR ANY LOSS OR DAMAGE SUFFERED AS A RESULT OF A BREACH OF THE BAILEE'S DUTY SAFELY TO STORE AND RETURN THE COTTON. WAREHOUSEMAN'S PERFORMANCE UNDER A STORAGE AGREEMENT INVOLVES HIS ABILITY TO MEET THIS OBLIGATION AS WELL AS THE ACTUAL MAINTENANCE AND OPERATION OF THE WAREHOUSE. IT IS, THEREFORE, ENTIRELY PROPER IN OUR OPINION TO REQUIRE BOND IN AN APPROPRIATE AMOUNT TO ESTABLISH THE WAREHOUSEMAN'S ABILITY TO COMPLY WITH THIS ASPECT OF HIS CONTRACTUAL OBLIGATIONS.

THE PURPOSE OF SUCH A BOND IS THE PROTECTION OF THE INTERESTS OF THE UNITED STATES, AND THE PROPOSED SUBSTITUTION OF NET WORTH FOR UP TO HALF THE AMOUNT OF THE BOND WHICH OTHERWISE WOULD BE REQUIRED DOES NOT APPEAR TO BE EITHER ARBITRARY OR DISCRIMINATORY. FURTHERMORE, SINCE BOTH THE BOND AND THE NET WORTH WHICH A PROSPECTIVE CONTRACTOR MAY SUBSTITUTE THEREFORE ARE ASSURANCES OF HIS PERFORMANCE UNDER HIS CONTRACT, IT IS OUR VIEW THAT THE ISSUANCE OF A CERTIFICATE OF COMPETENCY HAS NO EFFECT ON THE CONTRACTOR'S OBLIGATION TO FURNISH SUCH ASSURANCES.