B-135462, APR. 21, 1958

B-135462, APR. 21, 1958

TO THE SECRETARY OF THE NAVY:

REFERENCE IS MADE TO LETTER OF MARCH 7, 1958, FROM THE ASSISTANT SECRETARY OF THE NAVY (MATERIAL), REQUESTING A DECISION AS TO THE DISPOSITION OF PENDING CLAIMS INCIDENT TO LEASE NO. NOY 24869, ENTERED INTO BETWEEN YOUR DEPARTMENT AND MERRILL-STEVENS DRYDOCK AND REPAIR COMPANY, INC., JACKSONVILLE, FLORIDA.

IT APPEARS THAT ON APRIL 10, 1952, THE NAVY LEASED AN 18,000 TON LIFTING CAPACITY FLOATING DRYDOCK TO MERRILL-STEVENS FOR A PERIOD OF FIVE YEARS. THE PROVISION IN THE LEASE FOR RENTAL PAYMENT IS AS FOLLOWS:

"ARTICLE 4. RENT. THE LESSEE SHALL PAY TO THE GOVERNMENT AN ANNUAL RENTAL CONSISTING OF A SUM EQUAL TO 50 PERCENT OF ALL CHARGES MADE BY THE LESSEE FOR THE USE OF THE DOCK DURING THE YEAR EXCEPT THAT SUCH 50 PERCENT OF SAID CHARGES SHALL NOT EXCEED $80,000.00 IN ANY ONE YEAR LESS THE COST TO THE LESSEE OF FULFILLING THE SPECIAL MAINTENANCE REQUIREMENTS SET FORTH IN ARTICLE 6. THE LESSEE WILL CHARGE FOR THE USE OF SAID DRYDOCK THE STANDARD RATES PREVAILING IN THE VICINITY. THE ANNUAL RENTAL SHALL BE PAID BY THE LESSEE ON OR BEFORE THE 10TH DAY OF APRIL 1953 AND CONTINUING THEREAFTER ON EACH 10TH DAY OF APRIL ON THIS LEASE.'

IT IS REPORTED THAT THE MAXIMUM OF $80,000 BECAME OPERATIVE AFTER SEVEN MONTHS IN 1956-7; IN 1952-3, 1953-4, 1954-5 AFTER EIGHT MONTHS; AND IN 1955-6 AFTER TEN MONTHS. TOTAL EARNINGS ARE NOT AVAILABLE BECAUSE REPORTS WERE NOT FURNISHED AFTER THE MONTH IN WHICH THE MAXIMUM BECAME EFFECTIVE.

NEAR THE EXPIRATION DATE OF THE LEASE IT WAS DETERMINED BY THE NAVY TO SOLICIT PROPOSALS FOR ANOTHER FIVE-YEAR TERM LEASE AND, IN ORDER TO PROVIDE TIME FOR SUCH SOLICITATION, CHANGE "A" TO THE LEASE WAS ISSUED BY THE NAVY AND ACCEPTED BY THE LESSEE. THE CHANGE PROVIDED:

"AS A CHANGE TO THE SUBJECT LEASE, IT IS DIRECTED THAT THE TERM APPEARING IN ARTICLE 1 THEREOF, BE EXTENDED 122 CALENDAR DAYS TO AND INCLUDING 10 AUGUST 1957.

"EXCEPT AS HEREIN MODIFIED, THE TERMS AND PROVISIONS OF THE BASIC LEASE SHALL REMAIN IN FULL FORCE AND EFFECT.'

DURING THE 122-DAY EXTENSION OF THE LEASE IT IS REPORTED THAT THE LESSEE REALIZED DRYDOCKING FEES TOTALING $150,372. THE LESSEE HAS INTERPRETED THE LEASE AND CHANGE "A" AS PROVIDING FOR PRORATION OF THE MAXIMUM GROSS RENTAL OF $80,000 SO THAT THE MAXIMUM FOR THE 122-DAY EXTENSION WOULD BE ONE-THIRD OF $80,000, OR $26,667. HOWEVER, THE BUREAU OF YARDS AND DOCKS, WHICH ADMINISTERED THE LEASE, MAINTAINS THAT THE LEASE EXPRESSLY PROVIDED FOR PRORATION ONLY IN THE EVENT OF TERMINATION OR TOTAL DESTRUCTION, NEITHER OF WHICH OCCURRED, AND THAT THE GOVERNMENT, THEREFORE, IS ENTITLED TO 50 PERCENT OF THE GROSS RENTALS OF $150,372, OR $75,186, AND THAT THE $80,000 LIMITATION, NOT HAVING BEEN CHANGED BY THE TERMS OF THE EXTENSION, WOULD REMAIN AS THE ONLY EFFECTIVE LIMITATION EVEN FOR THE SHORTER TERM.

MERRILL-STEVENS NOW CONTENDS THAT, HAD IT BEEN AWARE OF THE BUREAU'S INTERPRETATION REGARDING PRORATION OF THE MAXIMUM RENTALS, IT COULD AND WOULD HAVE USED ANOTHER DRYDOCK AND HAVE ALTERED ITS USE OF THE LEASED DRYDOCK IN ORDER TO MINIMIZE THE RENTAL CHARGES. ON THIS BASIS, MERRILL- STEVENS HAS OFFERED TO PAY 50 PERCENT OF THE GROSS RENTALS RECEIVED, LESS THE AMOUNT WHICH IT SAYS IT COULD AND WOULD HAVE DIVERTED TO ANOTHER DRYDOCK. THE AMOUNT THUS ARRIVED AT IS $45,108.31. THE ASSISTANT SECRETARY STATES THAT THE NAVY HAS VERIFIED THIS CONTENTION SO FAR AS ITS RECORDS PERMIT AND CONFIRMS THAT THESE SAVINGS APPEAR POSSIBLE.

YOUR DEPARTMENT RECOMMENDS ACCEPTANCE OF THIS OFFER, STATING THAT--

"* * * THE LANGUAGE OF THE LEASE EXTENSION IS MOST AWKWARD AND INEPT SO FAR AS ITS APPLICATION TO THE MAXIMUM RENTAL LIMITATION IN AN EXTENSION FOR PART OF A YEAR IS CONCERNED. THE PARTIES OBVIOUSLY DID NOT CONSIDER OR PROVIDE FOR THE RENTAL SITUATION THAT ACTUALLY AROSE, SO THAT LEGAL CONSTRUCTION OR REFORMATION OF THE AGREEMENT IS NECESSARY. THE SETTLEMENT PROPOSED WILL GIVE THE GOVERNMENT THE SAME RETURN FROM THE DRYDOCK THAT IT WOULD HAVE RECEIVED HAD ITS PRESENT INTERPRETATION BEEN SPELLED OUT IN THE LEASE EXTENTION, FOR ONLY THE DRYDOCK RENTALS WHICH COULD HAVE BEEN DIVERTED BY THE LESSEE ARE BEING ELIMINATED. THIS DEPARTMENT REQUESTS YOUR APPROVAL OF A SETTLEMENT UPON THE BASIS DESCRIBED ABOVE.'

IN THE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE LESSEE'S OBLIGATION MAY PROPERLY BE MEASURED BY THE REVENUES WHICH IT WOULD HAVE RECEIVED HAD IT BEEN NO NOTICE OF THE NAVY'S INTERPRETATION OF CHANGE "A," AND SETTLEMENT ON THAT BASIS IS THEREFORE AUTHORIZED.