B-171484, APR 28, 1971

B-171484, APR 28, 1971

CONTRACTS - TERMINATION FOR CONVENIENCE - DAMAGES ADVISING THAT AMERICAN INTERNATIONAL FOREST PRODUCTS, INC., IS ENTITLED TO DAMAGES UNDER A REQUIREMENTS CONTRACT EXECUTED BY THE PORTLAND REGIONAL PROCUREMENT SUB-OFFICE, NAVAL SUPPLY CENTER, SEATTLE, WASHINGTON, UNDER WHICH THE GOVERNMENT WAS OBLIGATED TO PURCHASE ALL ITS REQUIREMENTS FOR INTERIOR PLYWOOD, GRADE CD, FOR A SIX-MONTH PERIOD. THE CENTER FOUND A CHEAPER SOURCE FROM WHICH TO OBTAIN ITS PLYWOOD REQUIREMENTS ONLY 11 DAYS FOLLOWING THE EXECUTION OF ITS CONTRACT WITH AMERICAN, BUT THE CONTRACTOR WAS NOT ADVISED THAT NO ORDERS WOULD BE PLACED UNDER THE CONTRACT. ALTHOUGH THE GOVERNMENT HAD JUSTIFIABLE REASON FOR INVOKING THE TERMINATION FOR CONVENIENCE CLAUSE (IF IT HAD SO DESIRED), ITS ACTIONS DO NOT DEMONSTRATE THAT HIGH DEGREE OF GOOD FAITH WHICH IS ESSENTIAL TO PRECLUDE THE CONTRACTOR FROM RECOVERING IN AN ACTION FOR DAMAGES. THEREFORE, CONTRACTOR MAY RECOVER DAMAGES MEASURED BY WHAT ITS RIGHTS WOULD HAVE BEEN HAD THE TERMINATION CLAUSE BEEN CORRECTLY INVOKED.

TO GENERAL HEDLUND:

WE REFER TO A LETTER DATED NOVEMBER 23, 1970, FROM THE ATTORNEYS FOR AMERICAN INTERNATIONAL FOREST PRODUCTS, INC., REQUESTING RECONSIDERATION OF A SETTLEMENT ACTION BY OUR CLAIMS DIVISION, DATED OCTOBER 14, 1970, DENYING AMERICAN'S CLAIM FOR DAMAGES ALLEGEDLY SUSTAINED BY THE GOVERNMENT'S FAILURE TO PURCHASE PLYWOOD UNDER CONTRACT NO. DSA 720-69-D- 0731.

UNDER THE TERMS OF THE SUBJECT CONTRACT, EXECUTED ON NOVEMBER 7, 1968, BY THE PORTLAND REGIONAL PROCUREMENT SUB-OFFICE, DEFENSE SUPPLY AGENCY, THE NAVAL SUPPLY CENTER, PUGET SOUND, SEATTLE, WASHINGTON, WAS REQUIRED TO PURCHASE FROM AMERICAN ALL ITS REQUIREMENTS FOR 1/2" STANDARD INTERIOR PLYWOOD WITH EXTERIOR GLUE (GRADE CD) FOR A SIX-MONTH PERIOD COMMENCING NOVEMBER 12, 1968, FOR $129.94 PER THOUSAND SQUARE FEET, WITH THE ESTIMATED QUANTITY SPECIFIED AS 896,000 SQUARE FEET.

DURING A PERIOD OF SEVERAL WEEKS AFTER THE EXECUTION OF THE CONTRACT, AMERICAN PURCHASED 901,376 SQUARE FEET OF THE SPECIFIED PLYWOOD AND PLACED IT IN STORAGE AT TACOMA, WASHINGTON, SINCE, UNDER THE TERMS OF THE CONTRACT, IT WAS OBLIGATED TO DELIVER AS MUCH AS 150,000 SQUARE FEET WITHIN ANY CALENDAR MONTH, AND DELIVERIES OF 8,000 TO 32,000 SQUARE FEET WERE REQUIRED WITHIN 24 HOURS FOLLOWING RECEIPT OF WRITTEN OR VERBAL ORDERS.

BECAUSE NO ORDERS HAD BEEN ISSUED BY THE NAVAL SUPPLY CENTER SUBSEQUENT TO THE EXECUTION OF THE CONTRACT, BY LETTER OF MARCH 19, 1969, AMERICAN REQUESTED AN EXPLANATION FROM THE CONTRACTING OFFICER FOR THE ABSENCE OF ORDERS. IT FURTHER EXPRESSED ITS CONCERN THAT THE ORDERING ACTIVITY MIGHT BE RECEIVING ITS SUPPLY THROUGH GSA STORES, IN WHICH CASE AMERICAN RESERVED A POSSIBLE CLAIM FOR RESTITUTION BASED ON BREACH OF CONTRACT.

AN INQUIRY BY THE PORTLAND REGIONAL PROCUREMENT SUB-OFFICE DISCLOSED THAT THE CENTER HAD BEEN OBTAINING A BETTER GRADE OF PLYWOOD (CC) FROM GENERAL SERVICES ADMINISTRATION STORES AT A LOWER PRICE THAN THAT SHOWN ON THE SUBJECT CONTRACT. THE DIFFERENCE IN GRADE, HOWEVER, WAS NOT MATERIAL TO THE CENTER'S PACKING OPERATIONS, WHICH WAS THE PURPOSE FOR WHICH THE PLYWOOD WAS BEING USED. DURING THE CONTRACT PERIOD 376,820 SQUARE FEET OF 1/2" EXTERIOR GRADE CC PLYWOOD WAS ORDERED FROM GSA BY THE CENTER, WITH THE FIRST ORDER BEING ISSUED ON NOVEMBER 18, 1968, ONLY 11 DAYS SUBSEQUENT TO THE EXECUTION OF THE CONTRACT. THE RECORD SHOWS THAT GRADE CC PLYWOOD IS FUNCTIONALLY INTERCHANGEABLE WITH THE CD PLYWOOD FOR THE CENTER'S PACKING OPERATIONS, AND WAS SUBSTITUTED FOR THE CD PLYWOOD ONLY BECAUSE IT WAS AVAILABLE FROM GSA STOCK AT A LOWER PRICE.

THE "CHANGES" CLAUSE OF THE CONTRACT PROVIDES THAT THE CONTRACTING OFFICER MAY AT ANY TIME MAKE CHANGES WITHIN THE GENERAL SCOPE OF THE CONTRACT AS TO DRAWINGS, DESIGNS, OR "SPECIFICATIONS," PROVIDED SUCH A CHANGE IS MADE BY WRITTEN ORDER AND, IF IT AFFECTS THE COST OF PERFORMANCE, AN EQUITABLE ADJUSTMENT SHALL BE MADE IN THE CONTRACT PRICE AND THE CONTRACT MODIFIED IN WRITING ACCORDINGLY. THE CONTRACT ALSO CONTAINS A TERMINATION FOR CONVENIENCE OF THE GOVERNMENT CLAUSE WHICH PERMITS TERMINATION BY THE CONTRACTING OFFICER WHENEVER HE DEEMS IT IN THE BEST INTEREST OF THE GOVERNMENT, PROVIDED THAT A NOTICE OF TERMINATION IS DELIVERED TO THE CONTRACTOR AND AN ENSUING SETTLEMENT IS NEGOTIATED BETWEEN THE PARTIES.

AMERICAN CLAIMED DAMAGES FOR BREACH OF CONTRACT IN THE SUM OF $8,048.88, BASED PRINCIPALLY ON THE DIFFERENCE BETWEEN THE CONTRACT SALES PRICE AND THE AVERAGE PRICE FOR WHICH THE PLYWOOD WAS SOLD AS MULTIPLIED BY 376,820 SQUARE FEET, THE AMOUNT OF 1/2 INCH GRADE CC PLYWOOD ACQUIRED BY THE CENTER DURING THE PERIOD OF THE CONTRACT.

IN THE SETTLEMENT BY OUR CLAIMS DIVISION THE BASIS FOR DENIAL OF AMERICAN'S CLAIM IS THAT THE DETERMINATION OF THE CENTER TO UTILIZE A DIFFERENT TYPE OF PLYWOOD NEGATED ITS REQUIREMENTS FOR CD PLYWOOD AND, SINCE NO CD PLYWOOD WAS OBTAINED FROM ANY OTHER SOURCE DURING THE CONTRACT PERIOD, THERE WAS NO LEGAL BASIS UPON WHICH THE CLAIM COULD BE PAID UNDER THE THEORY OF A BREACH OF CONTRACT.

WE BELIEVE THAT THE DECISION IN THE CASE OF GEMSCO, INC. V UNITED STATES, 115 CT. CL. 209 (1950), PROVIDES PRECEDENT FOR A FINDING OF GOVERNMENT LIABILITY IN THE PRESENT CASE. IN GEMSCO, THE CONTRACTOR OBLIGATED ITSELF TO DELIVER AN ESTIMATED 25,000 COLLAR DEVICES WITHIN 90 DAYS. LIKE THE PRESENT CONTRACT, THAT CONTRACT STIPULATED THAT NO DELIVERIES WERE TO BE MADE UNLESS SPECIFICALLY ORDERED. SIMILARLY, THE GEMSCO CONTRACT CONTAINED AN ADMONISHMENT THAT THE ESTIMATED QUANTITY WAS STATED FOR INFORMATION ONLY, AND THAT THE GOVERNMENT WOULD ORDER THE QUANTITY THAT IN THE JUDGMENT OF THE ORDERING OFFICER MIGHT BE REQUIRED DURING THE CONTRACT PERIOD.

THAT CONTRACT, LIKE THE ONE AT HAND, ALSO EMBODIED A CHANGES CLAUSE ENABLING THE CONTRACTING OFFICER TO EFFECT CHANGES IN SPECIFICATIONS, DRAWINGS OR DESIGNS AS LONG AS WRITTEN NOTICE WAS TENDERED TO THE CONTRACTOR AND THE CONTRACT PRICE WAS ADJUSTED ACCORDINGLY. AS IN THE PRESENT CASE, THE GEMSCO CONTRACT CONTAINED A TERMINATION CLAUSE PERMITTING THE CONTRACTING OFFICER TO TERMINATE THE CONTRACT UPON HIS DETERMINATION THAT IT WOULD BE IN THE BEST INTERESTS OF THE GOVERNMENT, PROVIDED THE CONTRACTOR WAS DELIVERED A NOTICE OF TERMINATION.

AFTER THE PLAINTIFF HAD DELIVERED A QUANTITY OF THE DEVICES, THE GOVERNMENT APPROVED A CHANGE IN DESIGN OF THE COLLAR DEVICES ON APRIL 15, 1944, BUT THE PLAINTIFF WAS NOT NOTIFIED OF SUCH CHANGE UNTIL LATE JUNE OF 1944, AFTER THE EXPIRATION OF THE CONTRACT PERIOD. IN THE INTERIM, THE PLAINTIFF HAD CONTINUED TO MANUFACTURE THE DEVICES ACCORDING TO THE ORIGINAL SPECIFICATIONS BUT ALL DELIVERIES WERE REJECTED IN EARLY MAY ON THE GROUND THAT NO ORDER HAD BEEN PLACED FOR ITEMS DELIVERED. IT WAS NOT UNTIL JUNE, AFTER PLAINTIFF HAD ACCUMULATED A LARGE QUANTITY OF THESE DEVICES, READY FOR DELIVERY, THAT PLAINTIFF WAS APPRISED THAT THE REASON NONE HAD BEEN ORDERED AFTER MID APRIL WAS THAT THE CHANGE IN DESIGN RESULTED IN THE CESSATION OF ANY REQUIREMENTS OF THE GOVERNMENT FOR THE ORIGINAL DESIGN.

THE COURT, IN ITS OPINION, DETERMINED THAT THE CONTRACTING OFFICER WAS CHARGED WITH NOTICE OF THE CHANGES IN DESIGN MADE BY THE SECRETARY OF THE NAVY AND THE CONTRACTING OFFICER'S FAILURE TO PROMPTLY NOTIFY THE CONTRACTOR CONSTITUTED NOT ONLY A BREACH OF THE CONTRACT'S CHANGES CLAUSE BUT A VIOLATION OF THE STANDARD OF GOOD FAITH ORDINARILY REQUIRED OF THE GOVERNMENT ACTING THROUGH ITS AGENTS.

THE COURT NOTED THAT THE GOVERNMENT HAD AMPLE AUTHORITY UNDER THE TERMINATION CLAUSE OF THE CONTRACT TO TERMINATE THE CONTRACT WITHOUT HARMING THE PLAINTIFF IN ANY WAY, AND EXPRESSED ITS OPINION THAT THE CONTRACT, EMBODYING THESE TWO CLAUSES, DID NOT CONTEMPLATE THAT THE GOVERNMENT COULD CHANGE THE DESIGN OF THE ARTICLES INVOLVED WITHOUT GIVING THE CONTRACTOR SOME FORM OF NOTICE, EITHER OF THE CHANGE IN DESIGN OR OF ITS DESIRE TO TERMINATE THE CONTRACT. FURTHERMORE, THE COURT STATED THE PRINCIPLE THAT IN CONTRACTS OF THAT TYPE, UNLESS ALL CONSIDERATIONS OF EQUITY AND JUSTICE ARE DISREGARDED, A HIGH DEGREE OF GOOD FAITH IS REQUIRED ON THE PART OF THE GOVERNMENT AND ITS AGENTS. FOR ADDITIONAL CASES IN WHICH THE COURTS HAVE APPLIED THE STANDARD OF GOOD FAITH IN SUCH MATTERS, SEE FIELD V UNITED STATES, 16 CT. CL. 434 (1880), AND SHADER CONTRACTORS, INC., ET AL. V UNITED STATES, 149 CT. CL. 535 (1960) IN WHICH THE COURT STATED AT PAGE 541: "ORDINARILY, WHERE THE QUANTITY ORDERED IS CONSIDERABLY MORE OR CONSIDERABLY LESS THAN THAT ANTICIPATED FROM A READING OF THE CONTRACT TERMS, THE COURT WILL PROTECT THE AGGRIEVED PARTY FROM UNFAIR USAGE BY APPLYING A TEST OF GOOD FAITH TO THE OTHER PARTY'S ACTIONS."

IN THE PRESENT CASE, WE DO NOT CONSIDER IT UNREASONABLE FOR AMERICAN TO HAVE ACQUIRED AND STORED CONSIDERABLE QUANTITIES OF THE PLYWOOD SPECIFIED, SINCE IT WAS OBLIGATED TO MAKE DELIVERIES IN SUBSTANTIAL AMOUNTS WITHIN 24 HOURS AFTER RECEIPT OF ORDERS AND IN QUANTITIES UP TO 150,000 SQUARE FEET IN ANY GIVEN MONTH. IT ALSO APPEARS THAT THERE WERE FLUCTUATIONS IN THE PRICE OF THE PLYWOOD AROUND THAT TIME.

WHILE THE CONTRACT STIPULATED THAT THE ESTIMATED QUANTITY OF 896,000 SQUARE FEET WAS AN ESTIMATE ONLY, AND THAT THE GOVERNMENT DID NOT AGREE TO MAKE ANY PURCHASES BY REASON OF THE STATED ESTIMATE, IT IS APPARENT THAT THE PURPOSE OF ITS INSERTION WAS TO EXTEND TO AMERICAN A ROUGH ESTIMATE OF THE CENTER'S PROJECTED REQUIREMENTS FOR CD PLYWOOD DURING THE CONTRACT PERIOD, AND THAT AMERICAN ACQUIRED THE SPECIFIED PLYWOOD IN RELIANCE UPON THAT ESTIMATE. WE ALSO BELIEVE THAT THE CENTER MUST BE REGARDED AS BEING ON NOTICE THAT AMERICAN WOULD ACQUIRE AND MAINTAIN A STOCK OF THE PLYWOOD IN ORDER TO MEET ITS CONTRACTUAL COMMITMENTS. YET, EVEN THOUGH THE CENTER FOUND A CHEAPER SOURCE FROM WHICH TO OBTAIN ITS PLYWOOD REQUIREMENTS AND ORDERED ITS FIRST SHIPMENT FROM GSA ONLY 11 DAYS FOLLOWING THE EXECUTION OF THE CONTRACT WITH AMERICAN, THE CONTRACTOR WAS NOT ADVISED THAT NO ORDERS WOULD BE PLACED UNDER THE CONTRACT UNTIL AFTER THE EXPIRATION OF THE CONTRACT PERIOD.

UNDER THE ABOVE CIRCUMSTANCES IT IS OUR VIEW THAT THE GOVERNMENT'S ACTIONS CONCERNING THE CONTRACTOR DO NOT DEMONSTRATE THAT HIGH DEGREE OF GOOD FAITH WHICH IS ESSENTIAL TO PRECLUDE THE CONTRACTOR FROM RECOVERING IN AN ACTION FOR DAMAGES. EVEN IF THE SECURING OF THE CC GRADE PLYWOOD, INSTEAD OF THE CD GRADE PLYWOOD REQUIRED UNDER THE CONTRACT, COULD BE REGARDED AS A CHANGE IN THE SPECIFICATIONS OF THE PLYWOOD NEEDED FOR THE CENTER'S PACKING OPERATIONS (AND WE DO NOT FIND THAT THE RECORD SUPPORTS SUCH A VIEW) IT IS DOUBTFUL, UNDER THE RATIONALE OF THE GEMSCO CASE, THAT THE GOVERNMENT COULD ESCAPE LIABILITY IN THIS MATTER.

IN CASES OF CONTRACT TERMINATIONS, RESCISSIONS OR REPUDIATIONS, WHERE THE SUBJECT CONTRACT INCORPORATED A TERMINATION FOR CONVENIENCE OF THE GOVERNMENT CLAUSE TO WHICH THE CONTRACTING OFFICER FAILED TO RESORT, IT HAS BEEN HELD THAT THE TERMINATION CLAUSE CONTROLS THE EXTENT OF THE CONTRACTOR'S RECOVERY IF THERE EXISTED A JUSTIFIABLE REASON FOR WHICH THE CONTRACTING OFFICER COULD HAVE INVOKED THE CLAUSE. SEE NESBITT V UNITED STATES, 345 F. 2D 583 (1965) AND CASES CITED THEREIN. IN B 152486, DECEMBER 6, 1963, WE INDICATED THAT IT WAS APPROPRIATE TO TERMINATE A CONTRACT FOR THE CONVENIENCE OF THE GOVERNMENT IN ORDER TO OBTAIN AN ACCEPTABLE PRODUCT AT A LOWER PRICE.

ACCORDINGLY, IT IS THE OPINION OF OUR OFFICE THAT AN ADEQUATE CAUSE EXISTED FOR WHICH THE GOVERNMENT COULD HAVE INVOKED THE TERMINATION FOR CONVENIENCE CLAUSE AND THEREFORE AMERICAN'S RECOVERY MUST BE LIMITED TO THE AMOUNTS AUTHORIZED BY THE PROCEDURES THEREIN PROVIDED, AND BY THE PROVISIONS OF SECTION VIII OF THE ARMED SERVICES PROCUREMENT REGULATION.

AT 41 COMP. GEN. 379, 381 (1961) WE DECLARED THAT:

"UNDER ASPR 8-301 AND THE CONTRACT TERMS THE CONTRACTING OFFICER HAS BROAD AUTHORITY WITH RESPECT TO A TERMINATION FOR CONVENIENCE TO DECIDE ON A PROPER AMOUNT TO COMPENSATE THE CONTRACTOR FAIRLY FOR WORK DONE OR PREPARATIONS MADE *** WHETHER AND TO WHAT EXTENT THEY (CERTAIN COSTS) ARE PROPERLY FOR INCLUSION IN THE SETTLEMENT OF THIS CASE ARE MATTERS FOR DETERMINATION IN THE FIRST INSTANCE BY THE CONTRACTING OFFICER."

IN ACCORDANCE WITH THE FOREGOING, IT IS RECOMMENDED THAT THIS MATTER BE RETURNED TO THE CONTRACTING OFFICER FOR A DETERMINATION OF THE AMOUNT DUE AMERICAN UNDER THE PROCEDURES SET OUT IN THE TERMINATION FOR CONVENIENCE OF THE GOVERNMENT CLAUSE OF THE CONTRACT.

A COPY OF THE CONTRACTING OFFICER'S REPORT ON AMERICAN'S CLAIM IS ENCLOSED, TOGETHER WITH A COPY OF A SUPPLEMENTAL REPORT FROM THE DEFENSE CONSTRUCTION SUPPLY CENTER DATED FEBRUARY 4, 1971.