B-146401, JAN. 11, 1963

B-146401, JAN. 11, 1963

TO COVINGTON INDUSTRIES, INCORPORATED:

THIS REFERS TO YOUR LETTER OF NOVEMBER 8, 1962, AND PRIOR CORRESPONDENCE, CONCERNING YOUR CLAIM FOR $5,166, UNDER CONTRACT NO. DA 36-243-QM/CTM/8863 -C-61, WHICH WAS AWARDED TO YOU ON OCTOBER 21, 1960, BY THE MILITARY CLOTHING AND TEXTILE SUPPLY AGENCY, PHILADELPHIA QUARTERMASTER CENTER.

THE CONTRACT CALLED FOR THE MANUFACTURE AND DELIVERY OF 250,000 MAN'S COTTON SATEEN SHIRTS, OF VARIOUS SIZES, AT A UNIT PRICE OF $2.10. THE UNIT PRICE INCLUDED $1.20 AS THE VALUE OF MATERIAL (COTTON CLOTH) TO BE FURNISHED BY THE GOVERNMENT, AND ?90 AS THE CUT-MAKE-AND TRIM PRICE. THE CONTRACT CONTAINED THE FOLLOWING PROVISIONS:

"* * * GFP VARIATION IN QUANTITY: ANY QUANTITIES OF ITEMS MANUFACTURED AND DELIVERED UNDER THIS CONTRACT IN EXCESS OF THE QUANTITIES SPECIFIED HEREIN, INCLUDING THE VARIATION IN QUANTITY CLAUSE, IF ANY, ARE THE SOLE PROPERTY OF THE GOVERNMENT AND NO COMPENSATION OR MATERIAL CREDIT SHALL BE ALLOWED THE CONTRACTOR THEREFOR.

"B. VARIATION IN QUANTITY. NO VARIATION IN THE QUANTITIES CALLED FOR HEREIN WILL BE ACCEPTED, EXCEPT WHERE SUCH VARIATION IS CAUSED BY THE CONDITIONS REFERRED TO IN ARTICLE 4 OF THE GENERAL PROVISIONS, STANDARD FORM 32:

"2. IF THE ITEM BEING PROCURED IS SUBJECT TO CLASSIFICATION BY SIZES (I.E., A TARIFF OF SIZES IS FURNISHED), AND:

A. GOVERNMENT MATERIAL IS INCORPORATED INTO THE END ITEM, 1 PERCENT PLUS, 1 PERCENT MINUS IN THE AGGREGATE TOTAL QUANTITY OF ALL SIZES OF THE ITEM TO BE DELIVERED TO EACH DESTINATION WILL BE ACCEPTED; HOWEVER, NO INCREASE OR DECREASE IN THE TOTAL QUANTITY OF ANY INDIVIDUAL SIZE FOR ANY DESTINATION SHALL EXCEED 2 PERCENT. ANY INCREASE IN QUANTITY, WITHIN THE FOREGOING LIMITATIONS, WILL BE ACCEPTED AND PAID FOR AT THE LOWEST UNIT PRICES SPECIFIED IN THE CONTRACT FOR THE ITEMS AND DESTINATIONS INVOLVED. ANY DECREASE IN QUANTITY WILL BE CONSIDERED A DECREASE AGAINST THE ITEM HAVING THE HIGHEST UNIT PRICES SPECIFIED IN THE CONTRACT FOR THE ITEMS AND DESTINATIONS INVOLVED.'

DELIVERY WAS SCHEDULED FROM JANUARY 31 THROUGH SEPTEMBER 30,1961. HOWEVER, THE CONTRACT AUTHORIZED ACCELERATION OF DELIVERIES AT NO EXTRA COST TO THE GOVERNMENT, AND YOU COMPLETED DELIVERIES BY MAY 24, 1961.

IT APPEARS THAT YOU SHIPPED A TOTAL OF 254,960 UNITS BUT PAYMENT WAS MADE TO YOU ON THE BASIS OF 252,500 UNITS. YOU STATE BY LETTER DATED JUNE 9, 1961, TO THE CONTRACTING OFFICER, THAT YOU ERRONEOUSLY INTERPRETED THE "VARIATION IN QUANTITY" CLAUSE AS ALLOWING A PLUS 2 PERCENT VARIATION IN CONTRACT QUANTITY. YOU CLAIM PAYMENT FOR THE EXCESS 2,460 UNITS, AT THE RATE OF $2.10 PER UNIT. THE CONTRACTING OFFICER HAS RECOMMENDED THAT THE CLAIM BE DISALLOWED ON THE BASIS OF THE GFP VARIATION IN QUANTITY CLAUSE OF THE CONTRACT.

THE ADMINISTRATIVE AGENCY REPORTS THAT THE GFP VARIATION IN QUANTITY CLAUSE WAS INCLUDED FOR THE PURPOSE OF PROTECTING AND CONTROLLING THE GOVERNMENT'S PROPERTY IN THE HANDS OF THE CONTRACTOR. THE AGENCY BELIEVES THAT THE CLAUSE ACCOMPLISHES THIS BY PLACING THE ENTIRE RISK ON THE CONTRACTOR FOR ANY OVERCUTTING AND PROCESSING OF THE MATERIAL BEYOND PERMISSIBLE VARIATIONS; AND THAT THIS IS APPROPRIATE, FOR THE CONTRACTOR ALONE IS IN A POSITION TO PREVENT MISUSE OF THE GOVERNMENT'S PROPERTY. THE "DEFENSE CLOTHING AND TEXTILE SUPPLY CENTER," PHILADELPHIA, PENNSYLVANIA, EXPLAINS THE PURPOSE FOR THE CLAUSE AS FOLLOWS:

"* * * WITHOUT CONTROLS THE GOVERNMENT WOULD NEVER BE IN A POSITION TO KNOW DEFINITELY, PRIOR TO THE AWARD OF THE END ITEM CONTRACT, WHETHER OR NOT SUFFICIENT GOVERNMENT PROPERTY WAS ON HAND AND AVAILABLE FOR ISSUE TO THE END ITEM MANUFACTURER. IN THE ABSENCE OF CONTROLS, THE GOVERNMENT WOULD HAVE TO OVER BUY THE BASIC CLOTH IN ORDER TO INSURE THAT THEIR END ITEM REQUIREMENTS WOULD BE MET. SINCE THE REQUIRED END ITEMS ARE PURCHASED OVER SOME TEN TO TWELVE MONTHS AFTER THE BASIC CLOTH HAS BEEN PROCURED, IT IS QUITE CLEAR THAT THERE MUST BE CONTROLS ESTABLISHED WHICH WILL PREVENT AN INDIVIDUAL CONTRACTOR OR CONTRACTORS FROM DISRUPTING THE REQUIRED FLOW OF END ITEMS TO THE MILITARY FORCES IN THE DESIRED QUANTITIES AND SIZES.

"THE PRESENT POLICY WHICH REQUIRES THE CONTRACTOR TO RETURN TO THE GOVERNMENT HIS EXCESS PRODUCTION DOES NOT IMPROVE THE GOVERNMENT'S ABILITY TO MEET THE REQUIRED NEEDS OF THE MILITARY FORCES. YOU CANNOT ISSUE A SMALL SIZED OVERCOAT TO A LARGE SOLDIER AND IF THE PRODUCTION OF THE SMALL GARMENT PREVENTED THE PROCUREMENT OF THE LARGE GARMENT, THEN OF NECESSITY THE LARGE SOLDIER MUST GET ALONG WITHOUT AN OVERCOAT. SIMILARLY IF THE CONTRACTOR OVERPRODUCED COATS, YOU CANNOT SUBSTITUTE THEM FOR TROUSERS OR SOME OTHER ARTICLES OF CLOTHING. THE GFP VARIATION IN QUANTITY CLAUSE IS NOT INTENDED TO SECURE MERCHANDISE FOR THE GOVERNMENT AT NO COST. ITS SOLE PURPOSE IS TO PREVENT SHORTAGES IN SUPPLY CAUSED BY THE CONTRACTOR. TECHNICIANS IN THE CLOTHING FIELD ARE UNITED IN THEIR OPINIONS THAT THE VARIATION PERMITTED BY THE GOVERNMENT IN ITS CONTRACTS PERMITS ALL CONTRACTORS TO MEET THE REQUIREMENTS OF THE CONTRACT AND AT THE SAME TIME NOT GENERATE OVERRUNS. THE MANUFACTURING PROCESSES ARE SUCH THAT ANY MANUFACTURER MAINTAINING REASONABLE CONTROL OVER HIS CUTTING OPERATIONS CAN AND DOES FALL WITHIN THE PERMISSIBLE VARIATION. OVERRUNS, ACCORDING TO THE EXPERTS, WOULD ONLY ARISE WHERE THE CONTRACTOR IS NEGLIGENT IN HIS CUTTING OPERATION OR INTENTIONALLY OR WILLFULLY OVERCUTS. A REASONABLE, PRUDENT MANUFACTURER IS ABLE TO CONTROL HIS CUTTING OPERATION TO SUCH AN EXTENT THAT HE FALLS WITHIN THE PLUS OR MINUS VARIATION PROVIDED IN THE CONTRACT. ILLUSTRATIVE OF THIS FACT IS THAT IN FISCAL YEAR 1961, THERE WERE ONLY FOUR INSTANCES OUT OF 310 CONTRACTS WHERE THE CONTRACTOR EXCEEDED THE PERMISSIBLE VARIATION.'

THE CONTRACT PROVIDED THAT ALL THE CLOTH TO BE USED IN THE MANUFACTURE WAS TO BE FURNISHED BY THE GOVERNMENT UNDER A BAILMENT. ALL THE MATERIAL, EXCEPT FOR PURCHASED REJECTS, SCRAP AND ENDS, WAS TO BE RETURNED TO THE GOVERNMENT, OR DISPOSED OF AS OTHERWISE DIRECTED BY THE CONTRACTING OFFICER. UNDER THE TERMS OF THE BAILMENT CONTRACT YOUR USE OF THE MATERIAL WAS RESTRICTED TO THE MANUFACTURE OF A MAXIMUM OF 252,500 ACCEPTABLE UNITS. YOU HAVE EXPLAINED THAT THE OVERRUN OF 2,460 UNITS WAS DUE TO INADVERTENCE. HOWEVER, UNDER THE LAW OF BAILMENTS,"A BAILEE FOR MUTUAL BENEFIT MAY USE THE PROPERTY ONLY AS AUTHORIZED BY THE CONTRACT, AND WHERE THERE IS AN UNAUTHORIZED USE HE IS LIABLE FOR LOSS OR DAMAGE IRRESPECTIVE OF NEGLIGENCE.' 8 C.J.S. BAILMENTS PAR. 27 (B).

UNDER THE BAILMENT ARRANGEMENT YOUR MATERIAL ACCOUNT WAS CHARGED ?54 FOR EACH YARD OF MATERIAL FURNISHED, AND YOU RECEIVED A CREDIT OF $1.20 IN YOUR ACCOUNT FOR EACH ACCEPTABLE END ITEM DELIVERED. THE GFP VARIATION IN QUANTITY CLAUSE PROVIDED THAT NO COMPENSATION OR MATERIAL CREDIT WOULD BE ALLOWED FOR EXCESS END ITEMS. THE RESULT WAS THAT WHILE YOU WERE CHARGED FOR THE MATERIAL CONSUMED IN THE MANUFACTURE OF EXCESS END ITEMS, YOU RECEIVED NO COMPENSATION OR MATERIAL CREDIT ON THESE ITEMS.

AS INDICATED ABOVE, A BAILEE MAY USE THE PROPERTY IN HIS CUSTODY ONLY AS AUTHORIZED. FURTHERMORE, A BAILEE IS UNDER AN ABSOLUTE DUTY TO REDELIVER THE PROPERTY BAILED, IN ITS ORIGINAL OR ALTERED FORM. SEE 8 C.J.S. BAILMENTS PAR. 37 (A). IN EFFECT, THE GFP VARIATION IN QUANTITY CLAUSE SERVED TO LIQUIDATE THE AMOUNT OF YOUR LIABILITY TO THE GOVERNMENT FOR THE UNAUTHORIZED USE OF THE GOVERNMENT'S MATERIAL.

A STIPULATION FOR LIQUIDATED DAMAGES IN A CONTRACT WILL BE ENFORCED EVEN THOUGH THE ACTUAL LOSS CAUSED BY THE BREACH IS INFINITESIMALLY SMALL AS COMPARED WITH THE STIPULATED LIQUIDATED DAMAGES. THE TEST AS TO WHETHER A STIPULATION FOR LIQUIDATED DAMAGES IS VALID OR WHETHER THE STIPULATION CONSTITUTES A PENALTY, AND IS UNENFORCEABLE, IS WHETHER IT MAY BE SAID THAT THE STIPULATION IN QUESTION HAD ANY REASONABLE RELATION TO THE ACTUAL DAMAGES WHICH THE PARTIES CONTEMPLATED AT THE TIME THE CONTRACT WAS MADE MIGHT BE SUSTAINED AS A RESULT OF THE BREACH. 21 COMP. GEN. 529, 534-535, AND THE COURT CASES CITED THEREIN.

THE AGENCY REPORTS THAT THE PURPOSE OF THE GFP VARIATION IN QUANTITY CLAUSE IS TO LIQUIDATE THE LOSS OCCASIONED BY THE GOVERNMENT WHEN A CONTRACTOR NEGLIGENTLY OR WILLFULLY OVERPRODUCES UNWANTED ITEMS IN THE PLACE OF THE NEEDED RAW MATERIAL. UNDER THE CIRCUMSTANCES WE MUST CONCLUDE THAT THE GFP VARIATION IN QUANTITY CLAUSE OF THE CONTRACT SHOULD BE ENFORCED.

ACCORDINGLY, YOUR CLAIM FOR $5,166 UNDER THE SUBJECT CONTRACT IS DISALLOWED.