B-66927, APR. 8, 1964

B-66927, APR. 8, 1964

TO THE SECRETARY OF THE NAVY:

REFERENCE IS MADE TO LETTER OF SEPTEMBER 16, 1963, FROM THE ACTING SECRETARY, REQUESTING OUR DECISION AS TO THE PROPER LEGAL INTERPRETATION OF CERTAIN PROVISIONS OF THE UNIT PLAN CONTRACT, BETWEEN THE GOVERNMENT AND THE STANDARD OIL COMPANY OF CALIFORNIA, CONTRACT NO. NOD-4219 AS SUPPLEMENTED AND AMENDED BY CONTRACT NO. NOD 8477.

THE FACTS OF THE MATTER AS OUTLINED IN A LETTER DATED MAY 31, 1963, FROM THE DIRECTOR, NAVAL PETROLEUM AND OIL SHALE RESERVES, TO THE JUDGE ADVOCATE GENERAL OF THE NAVY, MAY BE SUMMARIZED BRIEFLY AS FOLLOWS. THE CONTRACTS INVOLVED WERE EXECUTED PURSUANT TO EXPRESS AUTHORIZATION OF 10 U.S.C. 7421 ET SEQ., PARTICULARLY 7426. THE QUESTIONS INVOLVED CONCERN, PRIMARILY, THE FOLLOWING CONTRACT PROVISIONS CONTAINED IN SECTION 6 (B) (1):

"/V) EQUILIBRIUM IN RECEIPT OF PRODUCTION.

"IF, AS TO THE SHALLOW OIL ZONE, AT ANY TIME AFTER THE PRIMARY PERIOD, AND, AS TO ANY OTHER ZONE, AT ANY TIME DURING THE LIFE OF THIS CONTRACT, THE QUANTITIES OF PRODUCTION RECEIVED BY, OR CHARGED TO, NAVY AND STANDARD, RESPECTIVELY, FROM ANY ZONE SINCE NOVEMBER 20, 1942 SHALL BE IN BALANCE WITH THEIR PERCENTAGE PARTICIPATIONS (THEN OBTAINING UNDER SECTION 2) IN THE TOTAL PRODUCTION FROM SUCH ZONE, AND IF AT SUCH TIME THE PAYMENTS OF THE COSTS OF EXPLORATION, PROSPECTING, DEVELOPMENT AND OPERATION REFERRED TO IN PARAGRAPH (A) OF THIS SECTION 6 THERETOFORE MADE BY NAVY AND STANDARD, RESPECTIVELY, WITH RESPECT TO SUCH ZONE SHALL NOT BE IN THE SAME PROPORTIONS AS THE RESPECTIVE QUANTITIES OF PRODUCTION RECEIVED BY, OR CHARGED TO, EACH FROM SUCH ZONES SINCE NOVEMBER 20, 1942, THEREAFTER, CURRENT PAYMENT OF ALL COSTS ACCRUING IN RESPECT OF SUCH ZONE, EXCEPT THOSE PROVIDED FOR IN SUBPARAGRAPH (VI) BELOW, SHALL BE MADE BY EITHER NAVY OR STANDARD, AS THE CASE MAY BE, IN SUCH MANNER AND FOR SUCH PERIOD OF TIME AS MAY BE NECESSARY TO BRING THE TOTAL PAYMENTS OF SUCH COSTS BY NAVY AND STANDARD, RESPECTIVELY, INTO BALANCE WITH THEIR PERCENTAGE PARTICIPATIONS (THEN OBTAINING UNDER SECTION 2) IN THE TOTAL PRODUCTION FROM SUCH E.'

"/IV) DEVELOPMENT FOR READINESS PURPOSES.

"IF, AT ANY TIME DURING THE LIFE OF THE CONTRACT, NAVY SHALL DRILL AND EQUIP, OR CAUSE TO BE DRILLED AND EQUIPPED, WELLS (OTHER THAN EXPLORATORY WELLS DRILLED PURSUANT TO PARAGRAPH (C) OF SECTION 4) FOR THE PURPOSE, NOT OF IMMEDIATE PRODUCTION, BUT OF HAVING PRODUCTIVE CAPACITY AVAILABLE AND READY TO PRODUCE IN THE FUTURE AS NAVY SHALL DETERMINE, THE COST THEREOF SHALL BE CURRENTLY PAID BY NAVY.'

IT IS REPORTED IN THE MAY 31 LETTER THAT SINCE NAVY AND STANDARD WERE IN BALANCE IN PRODUCTION IN THE STEVENS ZONE AND LOOKING TOWARD ULTIMATE BALANCING OF ALL COSTS IN THAT ZONE, LATE IN 1949 THE QUESTION AROSE IN THE OFFICE OF THE DIRECTOR, NAVAL PETROLEUM RESERVES, AS TO WHEN STANDARD SHOULD COMMENCE PAYMENT ON ITS UNDERBALANCE IN COSTS IN THE STEVENS ZONE, AND WHICH OF NAVY'S COSTS STANDARD SHOULD PAY CURRENTLY, PURSUANT TO THE ABOVE-QUOTED PROVISIONS OF SECTION 6 (B) (1) (V).

THE DIRECTOR, BY MEMORANDUM DATED APRIL 2, 1951, REQUESTED AN OPINION OF THE JUDGE ADVOCATE GENERAL OF THE NAVY AS TO WHETHER THE INTERPRETATION MADE BY THE DIRECTOR OF CERTAIN CONTRACTUAL PROVISIONS RELATING TO COSTS WAS CORRECT. HE POINTED OUT THAT WHILE THE STEVENS ZONE DEVELOPMENT PROGRAM WAS THEN THE ONLY QUESTION, THE OPINION WOULD BE CONSIDERED AS A PRECEDENT AND APPLICABLE TO OTHER ZONES AND PROJECTS AS TO WHEN STANDARD SHALL BE REQUIRED TO PARTICIPATE IN THE PAYMENT OF DEVELOPMENT COSTS.

IN HIS MEMORANDUM THE DIRECTOR POSED THE QUESTION AS TO WHEN THE DEVELOPMENT COSTS GOVERNED BY SECTION 6 (B) (1) (IV) CEASE TO BE COSTS CURRENTLY BORNE SOLELY BY NAVY AND BECOME AN OBLIGATION TO BE SHARED BY STANDARD, AND STATED HIS VIEWS, WHICH HE BELIEVED REPRESENTED THE INTENT OF THE PARTIES INSOFAR AS HE COULD DETERMINE BY INFORMAL CONVERSATIONS WITH CERTAIN REPRESENTATIVES OF NAVY AND STANDARD WHO PARTICIPATED IN DRAFTING THE CONTRACT. HE STATED THAT THERE WAS NO DOUBT THAT THE DEVELOPMENT COSTS WOULD ULTIMATELY HAVE TO BE SHARED BY STANDARD UPON TERMINATION OF THE CONTRACT, AND HE EXPRESSED THE VIEW THAT IT APPEARS DOUBTFUL THAT THERE IS, FROM THE LANGUAGE OF THE CONTRACT, ANY OBLIGATION ON THE PART OF STANDARD TO SHARE IN THE DEVELOPMENT COSTS BEFORE THE TIME OF ULTIMATE SETTLEMENT UNLESS STANDARD BEFORE THAT TIME RECEIVED SOME BENEFIT FROM THE DEVELOPMENT PROGRAM. HE SAID:

"* * * THIS IS PREMISED UPON THE FACT THAT NAVY HAS ABSOLUTE CONTROL OVER THE RATE OF PRODUCTION IN THE RESERVE AND, IN THE ABSENCE OF SPECIFIC PROVISION IN THE CONTRACT TO THE CONTRARY, IT WOULD APPEAR INEQUITABLE FOR STANDARD TO BE REQUIRED TO SHARE IN THE COSTS OF A DEVELOPMENT PROGRAM FROM WHICH IT IS CURRENTLY DERIVING NO BENEFIT. * * *"

IN THAT MEMORANDUM THE DIRECTOR TOOK THE FOLLOWING POSITION:

1. THAT NAVY SHOULD CURRENTLY PAY ALL DEVELOPMENT COSTS FOR THE STEVENS ZONE, AS CONTEMPLATED BY SECTION 6 (B) (1) (IV).

2. THAT WHEN THE STEVENS ZONE IS PUT ON PRODUCTION FOR USE PURSUANT TO AUTHORIZATION BY LEGISLATION OR JOINT RESOLUTION OF CONGRESS, AS PROVIDED IN THE ACT OF JUNE 17, 1944, THE PROVISIONS OF SECTION 6 (B) (1) (V) WILL GOVERN THE METHOD OF COST PARTICIPATION BY STANDARD; AND IF STANDARD IS OUT OF BALANCE IN COSTS AND IN BALANCE IN PRODUCTION IN THE STEVENS ZONE AT THAT TIME, WHICH IS PRESENTLY THE CASE AND WILL UNDOUBTEDLY BE THE CASE WHEN PRODUCTION IS COMMENCED, STANDARD SHALL PAY ALL COSTS IN THE STEVENS ZONE, INCLUDING ADDITIONAL DEVELOPMENT COSTS BUT EXCLUDING COSTS PROVIDED FOR IN SECTION 6 (B) (1) (VI), UNTIL BALANCE IN COSTS IS REACHED, OR UNTIL PRODUCTION IS SHUT IN SHOULD THAT OCCUR BEFORE BALANCE IS ACHIEVED.

THE JUDGE ADVOCATE GENERAL REPLIED TO THE DIRECTOR BY MEMORANDUM DATED APRIL 10, 1951. RECOGNIZING THAT THE INTERPRETATION CONCERNED DEVELOPMENT FOR READINESS COSTS, PROVIDED FOR BY SECTION 6 (B) (1) (IV), AS BEING AN EXCEPTION IN THE GENERAL COSTS SHARING PROVISION OF SECTION 6, THE JUDGE ADVOCATE GENERAL SAID THAT THE EXCEPTION PROVIDES THAT IF NAVY SHALL DRILL AND EQUIP WELLS FOR THE PURPOSE, NOT OF IMMEDIATE PRODUCTION, BUT OF HAVING PRODUCTIVE CAPACITY AVAILABLE AND READY TO PRODUCE IN THE FUTURE SHOULD THE NATIONAL SECURITY SO REQUIRE, THE COSTS OF DRILLING AND EQUIPPING SUCH WELLS, SOLELY FOR NATIONAL SECURITY PURPOSES, SHALL BE PAID CURRENTLY BY NAVY. IN HIS OPINION, THE JUDGE ADVOCATE GENERAL NOTED THAT THE BASIC PHILOSOPHY OF HIS STATUTE, WHICH AUTHORIZED THE UNIT OPERATION OF THE RESERVE, WAS TO INSURE CONSERVATION OF THE LARGEST POSSIBLE VOLUME OF OIL IN THE GROUND AVAILABLE FOR IMMEDIATE PRODUCTION AND USE SHOULD THE NATIONAL SECURITY SO REQUIRE. HE NOTED THAT PROVISION WAS MADE FOR RAPID DEVELOPMENT OF THE RESERVE AND THEN MAINTENANCE IN A STAND-BY BASIS UNTIL A NATIONAL EMERGENCY OCCURS. HE SAID THIS DEVELOPMENT PROGRAM FOR READINESS PURPOSES WAS FOR THE SOLE BENEFIT OF NAVY; THAT STANDARD WOULD RECEIVE NO FINANCIAL BENEFIT UNTIL A NATIONAL EMERGENCY OCCURS; THAT TO PREVENT ANY OUT-OF-POCKET EXPENSE BY STANDARD UNTIL IT RECEIVED A BENEFIT, SECTION 6 (B) (1) (IV) WAS INCLUDED; AND THAT NAVY WAS THEREIN REQUIRED TO PAY CURRENTLY ALL DEVELOPMENT FOR READINESS COSTS FOR THE STEVENS ZONE PROGRAM.

THEN, THE 1951 OPINION CONCLUDED THAT WHEN THE STEVENS ZONE IS PRODUCED PURSUANT TO AUTHORIZATION BY LEGISLATION OR A JOINT RESOLUTION OF CONGRESS, STANDARD SHALL, IF IT IS OUT OF BALANCE IN COSTS AND IN BALANCE IN PRODUCTION, PAY COSTS AS PROVIDED FOR IN SECTION 6 (B) (1) (V).

IN VIEW OF THE FACTS RELATED ABOVE THE DIRECTOR IN HIS MAY 31, 1963, LETTER REQUESTED THE JUDGE ADVOCATE GENERAL TO REVIEW THE 1951 OPINION AND CONSIDER THE FOLLOWING QUESTIONS:

1. AT WHAT POINT IN TIME OR EVENTS SHOULD SECTION 6 (B) (1) (V) OF THE UNIT PLAN CONTRACT GOVERN OR HAVE GOVERNED WITH RESPECT TO THE MATTER OF BRINGING COSTS INTO BALANCE?

2. ARE DEVELOPMENT FOR READINESS COSTS A PART OF THOSE COSTS WHICH, BY VIRTUE OF SECTION 6 (B) (1) (V), ARE TO BE BROUGHT INTO BALANCE? IF SO, WHAT COSTS ARE TO BE USED AS THE VEHICLE OF REPAYMENT?

3. IF YOU FIND THAT STANDARD SHOULD AT ANY TIME HAVE BEEN PAYING CURRENT ORDINARY AND DEVELOPMENT COSTS (6 (B) (1) ( IN ORDER TO COMMENCE BALANCING ITS DEVELOPMENT FOR READINESS COSTS (6 (B) (1) (IV) ( IN THE STEVENS ZONE, SHOULD STANDARD NOW BE REQUIRED TO PAY THE TOTAL AMOUNT IT SHOULD HAVE PAID IN ORDINARY AND DEVELOPMENT COSTS FROM APRIL 1949 TO DECEMBER 1957 IN ORDER THAT THE ACCOUNTS MAY BE ADJUSTED IN CONFORMANCE WITH CONTRACT REQUIREMENTS?

IN THE ACTING SECRETARY'S LETTER OF SEPTEMBER 16, IT IS STATED THAT THE JUDGE ADVOCATE GENERAL BY LETTER OF JULY 1, 1963, WITHDREW THE MEMORANDUM OPINION OF 1951, AND RECOMMENDED THAT THE MATTER BE REFERRED TO OUR OFFICE FOR DECISION. THE ACTING SECRETARY STATES THAT AS THE MATTER NOW STANDS IT IS THE POSITION OF THE NAVY THAT, WITH REGARD TO QUESTION 1 ABOVE, SECTION 6 (B) (1) (V) OF THE UNIT PLAN CONTRACT GOVERNS AND SHOULD HAVE GOVERNED IN THE STEVENS ZONE (OR ANY OTHER ZONE) WHEN PRODUCTION WAS IN BALANCE, AND THIS WITHOUT REGARD TO ANY SPECIAL LEGISLATION OR JOINT RESOLUTION OF CONGRESS.

AS TO QUESTION 2, THE DEPARTMENT OF THE NAVY'S INTERPRETATION OF THE UNIT PLAN CONTRACT IS THAT DEVELOPMENT FOR READINESS COSTS ARE PART OF THOSE COSTS WHICH, BY VIRTUE OF SECTION 6 (B) (1) (V), ARE TO BE BROUGHT INTO BALANCE. READINESS MAINTENANCE COSTS AND DEVELOPMENT FOR READINESS COSTS (SECTIONS 6 (B) (1) (VI) AND 6 (B) (1) (IV) (, EACH BEING SPECIAL CASES, ARE NOT CONSIDERED AMONG THOSE COSTS WHICH ARE TO BE USED AS THE VEHICLE OF REPAYMENT OF OUT-OF-BALANCE COSTS, LEAVING AS THE MAIN VEHICLE OF REPAYMENT THOSE COSTS WHICH ARE REFERRED TO AS "6 (B) (1)" OR "ORDINARY AND DEVELOPMENT" COSTS.

AS TO QUESTION 3, THE DEPARTMENT OF THE NAVY'S INTERPRETATION OF THE UNIT PLAN CONTRACT IS THAT THE STANDARD OIL COMPANY SHOULD NOW PAY COSTS WHICH IT SHOULD HAVE PAID FROM APRIL 1949 TO DECEMBER 1957. THIS SUM IT IS STATED APPROXIMATES $760,000. THE ACTING SECRETARY FURTHER STATES THAT THE DEPARTMENT OF THE NAVY'S INTERPRETATION OF THE UNIT PLAN CONTRACT WITH RESPECT TO THE SHALLOW ZONE IS THE SAME AS WITH RESPECT TO THE STEVENS ZONE. HE ALSO STATES THAT, IN VIEW OF THE WITHDRAWAL OF THE 1951 MEMORANDUM OPINION OF THE JUDGE ADVOCATE GENERAL, DECISION IS REQUESTED ON THE FOLLOWING QUESTIONS:

1. IS THE DEPARTMENT OF THE NAVY'S INTERPRETATION WITH RESPECT TO QUESTION 1 LISTED AT PAGE 17 OF THE DIRECTOR'S LETTER OF MAY 31, 1963, CORRECT?

2. IS THE DEPARTMENT OF THE NAVY'S INTERPRETATION WITH RESPECT TO QUESTION 2 LISTED AT PAGE 17 OF SAID LETTER CORRECT?

3. IS THE DEPARTMENT OF THE NAVY'S INTERPRETATION WITH RESPECT TO QUESTION 3 LISTED AT PAGE 17 OF SAID LETTER CORRECT IN THAT STANDARD SHOULD NOW PAY COSTS WHICH IT SHOULD HAVE PAID FROM APRIL 1949 TO DECEMBER 1957? IF SO, WOULD IT BE PROPER TO ASK FOR AND/OR ACCEPT AMICABLE PAYMENT, WITHOUT INTEREST, ALONG WITH A NUNC PRO TUNC ADJUSTMENT OF ACCOUNTS?

4. WITH RESPECT TO PARAGRAPH 40 OF THE DIRECTOR'S LETTER, IS THE DEPARTMENT OF THE NAVY'S INTERPRETATION CORRECT THAT THE RESULTS OF THE OPERATION OF SECTION 6 (B) (1) (V) OF THE UNIT PLAN CONTRACT IN THE SHALLOW ZONE (OR ALL ZONES) WOULD BE THE SAME AS IN THE STEVENS ZONE?

WE BELIEVE, AS URGED BY STANDARD, THAT THE CONTRACT IS AMBIGUOUS BECAUSE THERE IS A CONFLICT BETWEEN SUBPARAGRAPHS (IV) AND (V) OF SECTION 6 (B) (1). SUBPARAGRAPH (IV) PROVIDES THAT NAVY SHALL PAY CURRENTLY 100 PERCENT OF THE COST OF DEVELOPMENT OF WELLS FOR READINESS PURPOSES. ON THE OTHER HAND, SUBPARAGRAPH (V) OF THE SAME SECTION PROVIDES THAT AT THE SAME TIME, IF THE PARTIES ARE IN BALANCE IN RECEIPT OF PRODUCTION AND ONE PARTY IS BEHIND IN PAYMENT OF COSTS ,THEREAFTER CURRENT PAYMENT OF ALL COSTS ACCRUING IN RESPECT OF SUCH ZONE, EXCEPT THOSE COSTS PROVIDED FOR IN SUBPARAGRAPH (VI) BELOW, SHALL BE MADE BY EITHER NAVY OR STANDARD, AS THE CASE MAY BE," UNTIL BALANCE IN PAYMENT OF COSTS IS REACHED. THUS, IT WOULD SEEM THAT "ALL COSTS" EXCEPT SUBPARAGRAPH (IV) COSTS NECESSARILY MUST INCLUDE SUBPARAGRAPH (IV) COSTS. CONSEQUENTLY, IF SUBPARAGRAPH (V) WERE TO BE CONSIDERED APPLICABLE TO THE STEVENS ZONE BETWEEN 1949 AND 1957, THERE OBVIOUSLY IS A CONFLICT AS TO WHO SHOULD PAY READINESS DEVELOPMENT COSTS. SUBPARAGRAPH (IV) PROVIDES THAT NAVY SHOULD PAY 100 PERCENT OF THOSE COSTS WHEREAS SUBPARAGRAPH (V) INDICATES STANDARD SHOULD PAY 100 PERCENT UNTIL IT GOT INTO BALANCE IN PAYMENT OF ALL COSTS.

IN VIEW OF THE CONFLICT BETWEEN THOSE SUBPARAGRAPHS, IT APPEARS THAT AFTER DISCUSSIONS AND EXCHANGES OF CORRESPONDENCE BETWEEN THE REPRESENTATIVES OF THE GOVERNMENT AND STANDARD, THE DIRECTOR ISSUED HIS APRIL 2, 1951, MEMORANDUM REQUESTING THE ADVICE OF THE JUDGE ADVOCATE GENERAL AS TO WHETHER THE INTERPRETATION MADE BY HIM, AND AGREED TO BY STANDARD, OF THOSE CONTRACTUAL PROVISIONS WAS CORRECT. AS STATED ABOVE, THE JUDGE ADVOCATE GENERAL AGREED WITH THOSE VIEWS AND FOR THE PAST 13 YEARS BOTH PARTIES TO THE CONTRACT HAVE ADHERED TO THEM. IT IS CUSTOMARY, WHERE CONGRESS HAS NOT ADOPTED A DIFFERENT STANDARD, TO APPLY TO THE CONSTRUCTION OF GOVERNMENT CONTRACTS THE PRINCIPLES OF GENERAL CONTRACT LAW. UNITED STATES V. STANDARD RICE CO., 323 U.S. 106, 111, AND CASES CITED. ALSO, IN DETERMINING THE MEANING OF AN AMBIGUOUS PROVISION IN A CONTRACT, THE INTERPRETATION PLACED UPON IT BY THE PARTIES PRIOR TO THE TIME IT BECAME A MATTER OF CONTROVERSY IS ENTITLED TO GREAT, IF NOT CONTROLLING, INFLUENCE IN ASCERTAINING THE INTENT AND UNDERSTANDING OF THE PARTIES. OLD COLONY TRUST COMPANY V. CITY OF OMAHA, 230 U.S. 100. SEE, ALSO, CASES CITED IN STANDARD'S LETTER OF DECEMBER 6, 1963, COMMENTING ON THE VIEWS EXPRESSED BY THE ACTING SECRETARY IN HIS LETTER OF SEPTEMBER 16, 1963. WHITE V. UNITED STATES, 241 U.S. 149; DISTRICT OF COLUMBIA V. GALLAHER, 124 U.S. 505; UNITED STATES V. LUTHER, 225 F.2D 499; HOUSTON READY-CUT HOUSE CO. V. UNITED STATES, 96 F.SUPP. 629.

IN VIEW OF THE FACTS AND THE LAW APPLICABLE THERETO, AS SET FORTH ABOVE, WE THINK THAT THE RESOLUTION OF THE PROBLEM BY THE PARTIES IN 1951 BY LIMITING THE APPLICABILITY OF SUBPARAGRAPH (V) TO THE TIME WHEN THERE WOULD BE SUBSTANTIAL PRODUCTION SHOULD CONTINUE TO BE FOLLOWED.

ACCORDINGLY, THE FIRST THREE QUESTIONS PROPOUNDED BY THE ACTING SECRETARY IN THE LETTER OF SEPTEMBER 16, 1963, ARE ANSWERED IN THE NEGATIVE AND QUESTION 4 IS ANSWERED IN THE AFFIRMATIVE.

IN REACHING OUR CONCLUSIONS CAREFUL CONSIDERATION HAS BEEN GIVEN TO THE SUPPLEMENTARY MATERIAL FURNISHED BY YOUR DEPARTMENT BY LETTERS DATED JANUARY 10 AND FEBRUARY 7, 1964, AND BY LETTERS FROM THE ATTORNEYS FOR THE STANDARD OIL COMPANY OF CALIFORNIA DATED DECEMBER 6, 1963, AND FEBRUARY 5, 1964.