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VETERANS ADMINISTRATION: REFERENCE IS MADE TO MEMORANDUM DATED SEPTEMBER 24. REPRESENTING INCREASED COSTS ALLEGED TO HAVE BEEN INCURRED BY THE CONTRACTOR IN CONNECTION WITH ITS PERFORMANCE OF CONTRACTS NOS. ARE SET FORTH IN VALLEY FORGE'S LETTER OF JULY 16. WHICH CONTAINS A DETAILED BREAKDOWN OF THE INCREASED COSTS ALLEGED TO HAVE BEEN INCURRED. THE CLAIM WAS DISALLOWED BY OUR SETTLEMENT OF OCTOBER 26. WHICH WAS SUBMITTED HERE UNDER DATE OF FEBRUARY 25. BECAUSE OF THE INTERRELATIONSHIP WHICH IS STATED TO HAVE EXISTED BETWEEN THE COMPLETION OF PRODUCTION UNDER THE FORMER CONTRACT AND THE BEGINNING OF PRODUCTION UNDER THE LATTER. IS WITHDRAWN AS PART OF THE CLAIM HEREIN.'. HE STATES THAT HE IS NOT AWARE OF HAVING SAID ANYTHING AT THE CONFERENCE WHICH REASONABLY COULD BE CONSTRUED AS INDICATING THAT HE FELT VALLEY FORGE HAD A LEGITIMATE CLAIM FOR THE ITEM IN QUESTION UNDER EITHER CONTRACT.

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B-141538, MAY 20, 1960

TO HONORABLE SUMNER G. WHITTIER, ADMINISTRATOR, VETERANS ADMINISTRATION:

REFERENCE IS MADE TO MEMORANDUM DATED SEPTEMBER 24, 1959, PREPARED BY THE CONTROLLER, DEPARTMENT OF MEDICINE AND SURGERY, VETERANS ADMINISTRATION, ON VA FORM 4-943, TRANSMITTING TO OUR CLAIMS DIVISION FOR DIRECT SETTLEMENT THE CLAIM OF VALLEY FORGE FLAG CO., INC., FOR $28,873, REPRESENTING INCREASED COSTS ALLEGED TO HAVE BEEN INCURRED BY THE CONTRACTOR IN CONNECTION WITH ITS PERFORMANCE OF CONTRACTS NOS. V7018P- 2411 (PURCHASE ORDER 59-HI-20037) AND V7018P-2488 (PURCHASE ORDER 59-HI- 20150), DATED SEPTEMBER 11, 1958, AND FEBRUARY 27, 1959, AS A RESULT OF THE GOVERNMENT'S SUSPENSION OF WORK UNDER CONTRACT V7018P-2411. THE DETAILS RELATING TO THE CLAIM, AS ORIGINALLY FILED, ARE SET FORTH IN VALLEY FORGE'S LETTER OF JULY 16, 1959, TO THE VETERANS ADMINISTRATION SUPPLY DEPOT, HINES, ILLINOIS, WHICH CONTAINS A DETAILED BREAKDOWN OF THE INCREASED COSTS ALLEGED TO HAVE BEEN INCURRED.

THE CLAIM WAS DISALLOWED BY OUR SETTLEMENT OF OCTOBER 26, 1959, AND THE CONTRACTOR REQUESTED REVIEW OF THE MATTER ON THE BASIS SET FORTH IN A MEMORANDUM PREPARED BY SCHUR, HANDLER AND JAFFIN, ITS ATTORNEYS, WHICH WAS SUBMITTED HERE UNDER DATE OF FEBRUARY 25, 1960. BY LETTER OF MARCH 1, 1960, SCHUR, HANDLER AND JAFFIN MADE A CORRECTION WITH RESPECT TO THE INFORMATION PERTAINING TO THE DELIVERY SCHEDULE UNDER CONTRACT V7018P-2411 AS SET FORTH ON PAGE 3 OF THE MEMORANDUM.

IN A CONFERENCE HELD IN OUR OFFICE WITH REPRESENTATIVES OF THE CONTRACTOR, INCLUDING MR. JEROME HANDLER, OF SCHUR, HANDLER AND JAFFIN, ON FEBRUARY 29, 1960, REPRESENTATIVES OF OUR OFFICE EXPRESSED SOME DOUBT AS TO WHETHER THE ITEM OF $15,000 CLAIMED FOR "DERANGEMENT OF OUR PRODUCTION CAUSING ADDITIONAL OVERTIME ON CONTRACT 59-HI-20150 (CONTRACT V7018P-2488 (PURCHASE ORDER 59-HI-20150) (" REASONABLY COULD BE EVALUATED AS AN ELEMENT OF DAMAGES GROWING OUT OF THE GOVERNMENT'S SUSPENSION OF WORK UNDER CONTRACT V7018P-2411 UNTIL CONTRACT V7018P 2488 HAD BEEN COMPLETED, BECAUSE OF THE INTERRELATIONSHIP WHICH IS STATED TO HAVE EXISTED BETWEEN THE COMPLETION OF PRODUCTION UNDER THE FORMER CONTRACT AND THE BEGINNING OF PRODUCTION UNDER THE LATTER. IN A LETTER DATED MARCH 14, 1960, SCHUR, HANDLER AND JAFFIN, IN REFERRING TO THE CONFERENCE, ADVISED US AS FOLLOWS:

"YOU UNDOUBTEDLY RECALL THAT AT OUR CONFERENCE ON FEBRUARY 29TH MR. HAYCOCK STATED THAT IT APPEARED TO HIM THAT ONE OF THE ITEMS OF THE CLAIM OF VALLEY FORGE FLAG COMPANY INC., TO WIT, THE ONE ENTITLED "DERANGEMENT OF FUTURE PRODUCTION BECAUSE OF WORK STOPPAGE" SHOULD BE MADE UNDER CONTRACT NO. 59-HI-20150 WITH THE VETERANS ADMINISTRATION AND NOT UNDER THE CONTRACT INVOLVED HEREIN.

"OUR CLIENT HAS DECIDED TO ADOPT THE THOUGHT OF MR. HAYCOCK AND WE HEREWITH ADVISE YOU THAT THE AFORESAID ITEM "DERANGEMENT OF FUTURE PRODUCTION BECAUSE OF WORK STOPPAGE" FOR $15,000. IS WITHDRAWN AS PART OF THE CLAIM HEREIN.'

WE BELIEVE THAT THE ATTORNEYS INVOLVED LABORED UNDER A SLIGHT MISUNDERSTANDING WITH RESPECT TO THE STATEMENT ATTRIBUTED TO OUR MR. HAYCOCK ON THE OCCASION OF THE CONFERENCE. HE STATES THAT HE IS NOT AWARE OF HAVING SAID ANYTHING AT THE CONFERENCE WHICH REASONABLY COULD BE CONSTRUED AS INDICATING THAT HE FELT VALLEY FORGE HAD A LEGITIMATE CLAIM FOR THE ITEM IN QUESTION UNDER EITHER CONTRACT. ACCORDING TO HIS RECOLLECTION, HE DID EXPRESS THE VIEW THAT THE ITEM IN QUESTION COULD NOT PROPERLY BE EVALUATED AS AN ELEMENT OF DAMAGES PRIOR TO THE COMPLETION OF CONTRACT V7018P-2488, AS HEREINABOVE INDICATED.

IN THE CONFERENCE, MR. HAYCOCK HAD ADVISED THE CONTRACTOR'S REPRESENTATIVES THAT WE MIGHT CONSIDER REQUESTING YOUR AGENCY TO REVIEW VALLEY FORGE'S CLAIM FROM AN AUDIT STANDPOINT. AFTER RECEIVING THE ABOVE LETTER, HOWEVER, WE ADVISED THE ATTORNEYS BY LETTER OF MARCH 28, 1960, THAT SINCE IT APPEARED FROM THEIR LETTER THAT VALLEY FORGE ANTICIPATED FILING A CLAIM UNDER CONTRACT V7018P-2488 (PURCHASE ORDER NO. 59-HI-20150) BASED UPON THE SAME GENERAL THEORY AS THAT UPON WHICH THE INSTANT CLAIM, AS AMENDED BY THEIR LETTER, IS ASSERTED, WE HAD CONCLUDED IT WOULD BE IMPRACTICAL TO REFER THE MATTER TO YOUR AGENCY UNTIL WE SHOULD RECEIVE THE ADDITIONAL CLAIM, FOLLOWING THE COMPLETION OF CONTRACT V7018P-2488. OUR LETTER STATED:

"* * * THIS IS BECAUSE OF THE INTERRELATIONSHIP WHICH IS STATED TO HAVE EXISTED BETWEEN THE COMPLETION OF PRODUCTION UNDER CONTRACT V7018P-2411 AND THE BEGINNING OF PRODUCTION UNDER CONTRACT V7018-2488, AND THE IMPRACTICABILITY OF ATTEMPTING TWO SEPARATE EXAMINATIONS OF VALLEY FORGE'S PRODUCTION COSTS UNDER THE TWO CONTRACTS, ASSUMING THAT THE VETERANS ADMINISTRATION IS TO MAKE AN EXAMINATION, AS SUGGESTED IN OUR CONFERENCE OF FEBRUARY 29, 1960.'

IN REPLYING TO THE ABOVE LETTER BY LETTER OF APRIL 20, 1960, SCHUR, HANDLER AND JAFFIN ADVISED US AS FOLLOWS:

"IN VIEW OF YOUR LETTER OF MARCH 28TH, WE HAVE REEXAMINED THE SITUATION WITH OUR CLIENT AND HAVE CONCLUDED THAT NO CLAIM FOR THIS ITEM ENTITLED "DERANGEMENT OF FUTURE PRODUCTION BECAUSE OF WORK STOPPAGE, WILL BE MADE UNDER AND UPON COMPLETION OF THE CONTRACT V7018P-2488. WE THEREFORE REQUEST THAT YOU NOW PROCEED WITH ARRANGEMENTS FOR THE VETERANS ADMINISTRATION TO AUDIT OUR CLIENT'S RECORDS WITH RESPECT TO THE ABOVE CLAIM.'

THE INSTANT CLAIM, AS AMENDED BY THE ABOVE LETTER, IS THEREFORE IN THE TOTAL AMOUNT OF $13,873, WHICH INCLUDES $887 TO COVER INTEREST AT 6 PERCENT PER ANNUM FOR EIGHT WEEKS ON THE AMOUNTS WHICH THE CONTRACTOR PRESUMABLY WOULD HAVE BEEN PAID FOR DELIVERIES UNDER THE CONTRACT BUT FOR THE STOPPAGE OF WORK.

UNDER INVITATION NO. M2-40-9, ISSUED JUNE 30, 1958, THE VETERANS ADMINISTRATION SUPPLY DEPOT, HINES, ILLINOIS, INVITED BIDS ON A UNIT PRICE BASIS FOR FURNISHING VARIOUS QUANTITIES OF FLAGS MANUFACTURED ACCORDING TO SPECIFICATIONS TO CERTAIN V.A. SUPPLY DEPOTS, THE DELIVERY THEREOF TO BE MADE IN MONTHLY INSTALLMENTS DURING THE PERIOD JANUARY 1-20, 1959, THROUGH JUNE 1-20, 1959. IT APPEARS FROM THE REFERRED-TO MEMORANDUM PREPARED BY SCHUR, HANDLER AND JAFFIN THAT YOUR AGENCY BY LETTER OF AUGUST 25, 1958 (A COPY OF WHICH WAS NOT FORWARDED HERE AS A PART OF THE FILE IN THE CASE) NOTIFIED THE CONTRACTOR THAT IT HAD SUBMITTED THE LOW BID UNDER THE INVITATION, BUT ADVISED THAT, IN VIEW OF THE PROSPECTIVE ADMISSION OF ALASKA AS THE 49TH STATE, WHICH WOULD ENTAIL A CHANGE IN THE DESIGN OF THE FLAGS, ITS BID WOULD BE ACCEPTED ONLY WITH THE UNDERSTANDING THAT THE CONTRACTOR DID NOT COMMENCE PRODUCTED ON ANY INDIVIDUAL SHIPMENT UNTIL IT HAD RECEIVED THE AGENCY'S APPROVAL. THE AGENCY FURTHER ADVISED THAT IT WOULD HAVE TO BE UNDERSTOOD THAT WHEN THE DESIGN OF THE FLAG SHOULD BE DECIDED UPON, THE PARTIES WOULD IMMEDIATELY NEGOTIATE THE PRICE DIFFERENTIAL, AND, IF AGREEABLE TO BOTH PARTIES, PRODUCTION UNDER THE CONTRACT WOULD THEN PROCEED, EXCEPT THAT THE FLAGS WOULD BE OF THE NEW DESIGN WITH 49 STARS, AND ALSO THAT THE DELIVERY SCHEDULE WOULD BE SUBJECT TO CHANGES. THE RECORD INDICATES THAT THE CONTRACTOR SIGNIFIED ITS ACCEPTANCE OF THESE CONDITIONS, AND BY LETTER DATED SEPTEMBER 2, 1958, THE CHIEF, MARKETING DIVISION FOR TEXTILES SUPPLY SERVICE (DM AND S), VETERANS ADMINISTRATION SUPPLY DEPOT, MINES, ILLINOIS, NOTIFIED VALLEY FORGE THAT ITS BID WAS THEREBY ACCEPTED SUBJECT TO THE FOLLOWING CONDITIONS, THE CONTRACTOR'S ACCEPTANCE OF WHICH WAS APPROVED IN THE SPACE PROVIDED FOR ON THE LATTER:

"1. PRODUCTION ON ANY INDIVIDUAL SHIPMENT ON THIS ORDER IS NOT TO BE COMMENCED UNTIL APPROVAL IS GIVEN BY THIS OFFICE.

2. PERMISSION TO STOCKPILE OR ACCELERATE DELIVERY OF 48 STAR FLAGS WILL NOT BE GRANTED.

3. WHEN THE DESIGN OF THE FLAG IS DECIDED UPON, WE WILL IMMEDIATELY NEGOTIATE THE PRICE DIFFERENTIAL, AND, IF AGREEABLE TO BOTH PARTIES, YOU WILL PROCEED WITH THE QUANTITIES UNDER THE CONTRACT EXCEPT THAT THE FLAGS WILL BE OF THE NEW DESIGN WITH 49 STARS. IF MUTUAL AGREEMENT CANNOT BE REACHED, THE CONTRACT MAY BE TERMINATED WITHOUT FURTHER OBLIGATION ON THE PART OF EITHER PARTY.

4. THE DELIVERY SCHEDULE WILL BE SUBJECT TO CHANGES, BUT THE TOTAL QUANTITY WILL REMAIN FIRM.'

BY LETTER OF NOVEMBER 14, 1958, THE CONTRACTING OFFICER ADVISED THE CONTRACTOR THAT THE QUANTITY OF FLAGS SCHEDULED FOR DELIVERY UNDER THE CONTRACT DURING JANUARY 1-20, 1959, WOULD NOT BE REQUIRED AT THAT TIME, AND THAT THE AGENCY WOULD ADVISE THE CONTRACTOR WHEN TO PROCEED WITH PRODUCTION, AT WHICH TIME THE CONTRACTOR WOULD BE FURNISHED WITH A REVISED DELIVERY SCHEDULE. THE CONTRACTOR REPLIED BY LETTER OF NOVEMBER 18, 1958, STATING THAT IT WOULD ADHERE TO THE AGENCY'S REQUEST "AS PER OUR AGREEMENT," BUT SINCE IT WOULD REQUIRE 45 TO 60 DAYS FOR THE CONTRACTOR TO GO INTO PRODUCTION UNDER THE CONTRACT, ADVICE WITH RESPECT TO THE FEBRUARY DELIVERIES WAS REQUESTED. BY LETTER OF DECEMBER 2, 1958, THE CONTRACTING OFFICER NOTIFIED THE CONTRACTOR THAT THE FLAGS SCHEDULED FOR DELIVERY DURING FEBRUARY 1-20, 1959, WOULD NOT BE REQUIRED AT THAT TIME, AND CONCLUDED WITH THE SAME ADVICE AS IN HIS PREVIOUS LETTER.

IT APPEARS THAT FOLLOWING THE ENACTMENT OF THE LAW ADMITTING ALASKA AS THE 49TH STATE, AND THE APPROVAL OF THE DESIGN OF A 49-STAR FLAG BY THE PRESIDENT ON JANUARY 3, 1959, THE CONTRACTING OFFICER BY LETTER OF JANUARY 28, 1959, AUTHORIZED THE CONTRACTOR, IN EFFECT, TO PROCEED WITH PRODUCTION OF A 49-STAR FLAG UNDER THE CONTRACT. THE LETTER REFERRED TO "OUR MUTUAL AGREEMENT AS EVIDENCED BY YOUR TELEGRAM DATED JANUARY 15, 1959, AND VERBAL OFFER OF FINAL DELIVERY TIME OF MAY 1-20, 1959, OR EARLIER," AND TRANSMITTED A COPY OF WHAT IS REFERRED TO AS AMENDMENT NO. 1 TO THE CONTRACT, WHICH HAD BEEN ISSUED BY THE CONTRACTING OFFICER AS OF JANUARY 30, 1959, AND WHICH PROVIDED FOR THE CHANGE IN SPECIFICATIONS INVOLVED, FOR THE DELIVERY OF ALL OF THE FLAGS TO BE COMPLETED BY MAY 1-20, 1959, AND FOR AN INCREASE IN UNIT CONTRACT PRICES TO COMPENSATE THE CONTRACTOR FOR THE CHANGE IN SPECIFICATIONS. THE CONTRACTOR APPEARS TO HAVE STARTED PRODUCTION UNDER THE CONTRACT IN ACCORDANCE WITH THE FOREGOING INSTRUCTIONS. HOWEVER, WITH THE IMMINENCE OF THE ADMISSION OF HAWAII AS A STATE, A REDESIGN OF THE FLAG TO ONE OF 50 STARS SUBSEQUENTLY CAME UP FOR CONSIDERATION, AND THE CONTRACTING OFFICER ADVISED THE CONTRACTOR BY TELEPHONE AND CONFIRMING LETTER OF MARCH 12, 1959, TO STOP ALL PRODUCTION UNDER THE CONTRACT UNTIL FURTHER NOTICE.

SUBSEQUENTLY, IT WAS DETERMINED THAT A CHANGE IN THE DESIGN OF THE FLAG FROM 49 STARS TO 50 STARS AS OF JULY 4, 1959, WOULD NOT BE AUTHORIZED BY LAW, AND BY TELETYPE AND CONFIRMING LETTER OF APRIL 30, 1959, THE CONTRACTING OFFICER REQUESTED THE CONTRACTOR TO PROCEED WITH PRODUCTION OF THE 49-STAR FLAG. IT APPEARS FROM VALLEY FORGE'S LETTER OF JULY 16, 1959, THAT IN REPLYING TO THE FOREGOING REQUEST BY LETTER OF MAY 8, 1959, THE CONTRACTOR STATED THAT IT HAD INCURRED CERTAIN LOSSES DUE TO THE "SHUT- DOWN" WITH RESPECT TO WHICH THE CONTRACTING OFFICER WOULD BE FURTHER ADVISED. ALSO, BY LETTER OF MAY 2, 1959, SCHUR, HANDLER AND JAFFIN, AS VALLEY FORGE'S ATTORNEYS, ADVISED THAT DURING THE PERIOD OF SUSPENSION OF PRODUCTION UNDER THE CONTRACT, THE CONTRACTOR'S OVERHEAD AND OTHER EXPENSES HAD CONTINUED, AND THEY REQUESTED UNDER DATE OF MAY 13, 1959, THE CONTRACTING OFFICER ISSUED "AMENDMENT ADVICE AS TO THE PROCEDURE TO FOLLOW IN SUBMITTING A CLAIM. UNDER DA3 E OF MAY 13, 1959, THE CONTRACTING OFFICER ISSUED "AMENDMENT NO. 2" TO THE CONTRACT, WHICH EXTENDED THE PERIOD DURING WHICH ALL DELIVERIES WERE REQUIRED TO BE MADE THEREUNDER TO AUGUST 1 20, 1959.

IN VIEW OF THE CONDITIONS UNDER WHICH THE BID WAS ACCEPTED, THE GOVERNMENT HAD THE RIGHT TO DELAY THE BEGINNING OF PRODUCTION UNDER THE CONTRACT UNTIL SUCH TIME AS IT WAS DETERMINED ADMINISTRATIVELY TO BE PRACTICAL TO GO AHEAD WITH THE MANUFACTURE OF THE FLAGS. HOWEVER, ONCE THE GOVERNMENT AUTHORIZED THE CONTRACTOR TO PROCEED WITH PRODUCTION--- AS IT DID BY THE LETTER OF JANUARY 28, 1959--- IT REASONABLY MAY NOT BE SAID TO HAVE HAD THE RIGHT TO SUSPEND WORK UNDER THE CONTRACT THEREAFTER WITHOUT INCURRING LIABILITY FOR ANY INCREASED COSTS TO THE CONTRACTOR RESULTING FROM THE SUSPENSION. SEE BRAND INVESTMENT CO. V. UNITED STATES, 102 C.CLS. 40, 58 F.SUPP. 749.

ACCORDINGLY, THE FILE IN THE MATTER AS FORWARDED TO OUR CLAIMS DIVISION BY THE CONTROLLER, DEPARTMENT OF MEDICINE AND SURGERY, IS TRANSMITTED HEREWITH, TOGETHER WITH THE MEMORANDUM PREPARED BY SCHUR, HANDLER AND JAFFIN, AND THEIR LETTER OF MARCH 1, 1960, WITH THE REQUEST THAT YOUR AGENCY MAKE SUCH AUDIT OF THE INCREASED COSTS CLAIMED BY VALLEY FORGE AS YOU DEEM PRACTICAL AND FURNISH--- WITH RETURN OF THE ENCLOSURES--- A REPORT THEREON, WITH SUCH FURTHER RECOMMENDATION AS YOU SEE FIT TO MAKE IN THE MATTER. IN AUDITING THE CONTRACTOR'S COSTS, NO CONSIDERATION SHOULD BE GIVEN THE ITEM OF INTEREST CLAIMED ($887), WHICH COULD NOT BE CONSIDERED ALLOWABLE TO ANY EVENT. UNITED STATES V. THAYER-WEST POINT HOTEL CO., 329 U.S. 585, 588; B-142108, MAY 2, 1960. IN OTHER WORDS, FOR PURPOSES OF VA'S AUDIT, THE CLAIM SHOULD BE CONSIDERED AS IN THE NET AMOUNT OF $12,986.

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