Extraordinary contractual relief under Public Law 85-804

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Extraordinary contractual relief under Public Law 85-804
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by Andrew C. Mayer ; Committee on Armed Services, House of Representatives, 94th Congress, second session, May 10, 1976.

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.[COMMITTEE PRINT]


EXTRAORDINARY CONTRACTUAL

RELIEF UNDER PUBLIC

LAW 85-804




COMMITTEE ON ARMED SERVICES
HOUSE OF REPRESENTATIVES
NINETY-FOURTH CONGRESS
SECOND SESSION


MAY 10, 1976
DOQlO^eo
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U.S. GOVERNMENT PRINTING OFFICE
70-905 0 WASHINGTON : 1976










HOUSE COMMITTEE ON ARMED SERVICES
NINETY-FOURTH CONGRESS. SECOND SESSION


F. EDWARD HEBERT, Lo
CHARLES E. BENNETT, I
SAMUEL S. STRATTON, b
RICHARD H. ICHORD, Mi
LUCIEN N. NEDZI, Michig
WILLIAM J. RANDALL, A
CHARLES H. WILSON, Ca
ROBERT L. LEGGETT, Ca
FLOYD V. HICKS, Washin
RICHARD C. WHITE, Texi
BILL NICHOLS, Alabama
JACK BRINKLEY, Georgia
ROBERT H. (BOB) MOLL
West Virginia
DAN DANIEL, Virginia
G. V. (SONNY) MONTGOI
Mississippi
HAROLD RUNNELS, New
LES ASPIN, Wisconsin
RONALD V. DELLUMS, Ci
MENDEL J. DAVIS, South
PATRICIA SCHROEDER,
ABRAHAM KAZEN, JR., T
ANTONIO B. WON PAT, (
BOB CARR, Michigan
JIM LLOYD, CalUo.rnia
LARRY MbcDONALD, 'Geor
THOMAS J.'DpWNITY,,Ne'
.,,E,*, '/

FAAN9M1. SLATINSHEK, Th
fOpl.'J'. FORD, Professional
RALPH MARSHALL, Profess
: Member
6EOHlE NomRYs, Counsel
JAMiE'S F. SHUMATE, Jr., Co
WILLIA Hi. HOGAN, J1%.,* CO0
JOHN F. LALIA' Counsel
ANTHONY R. BATTISTA, Pro
Member
G. KIM WINCUP, Counsel
WILLIAM D. PRICE, Profess
Member


MELVIN PRICE, Illinois, Chairman
uisiana BOB WILSON, California
lorida WILLIAM L. DICKINSON, Alabama
Jew York G. WILLIAM WHITEHURST, Virginia
ssourt FLOYD D. SPENCE, South Carolina
an DAVID C. TREEN, Louisiana
Ilssourl GEORGE M. O'BRIEN, Illinois
lifornia ROBIN L. BEARD, Tennessee
lifornia DONALD J. MITCHELL, New York
gton MARJORIE S. HOLT, Maryland
as ROBERT W. DANIEL, JR., Virginia
ELWOOD H. (BUD) HILLIS, Indiana
L ANDREW J. HINSHAW, California
OHAN, RICHARD T. SCHULZE, Pennsylvania


IERY

Mexico

ilifornia
Carolina
Colorado
exas
uam


gia
York

* PROFESSIONAL STAFF
ef (C'odnsel RICHARD T. LUNGER, Professional Staff
Staff Member Member
ion0at Staff PAUL L. TSOMPANAS, Professional Staff
'"Member
; ADAM J. KLEIN, Counsel
uinsel- GARY HOLCOMB, Professional Staff Member
unsel Lou KRISER, Professional Staff Member
THOMAS S. HAHN, Professional Staff Member
fessional Staff JUSTUS P. WHITE, Jr., Professional Staff
Member
LEROY J. SPENCE, Counsel


ional Staff


MICHAEL A. WEST, Executive Secretary


(II)

















FOREWORD


The material contained in this Committee Print was prepared en-
tirely by the Library of Congress at the request of the Committee on
Armed Services. Therefore, the views expressed herein do not neces-
sarily reflect the views of the Committee on Armed Services.



















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The Library of Congress

Congressional Research Service

Washington, D.C. 20540


EXTRAORDINARY CONTRACTUAL RELIEF UNDER PUBLIC LAW 85-804











Prepared at the Request of the

House Armed Services Committee























Andrew C. Mayer
Specialist in National Defense
Foreign Affairs and National Defense Division


28 April 1976
































































































































9









Table of Contents


Preface ...........................................................I

Historical Background............................................. 3

Public Law 85-804 ................................................. 0

Essentiality Cases............................................... 15

Government Action Cases .......................................... 22

Correction of Mistakes........................................... 30

Formalization of Informal Commitments ............................ 36

Residual Powers ................................................... 43

Legislative Policy............................................... 53

Prospects for Continued Use......................... .............. .63



APPENDICES

The Statute: Public Law 85-804, as amended A

Tabulation of Amounts Expended under Public Law
85-804 B

Memorandum from the General Counsel of the
Department of Defense, dated November 19, ]970. C

Exchange of Correspondence between the Chairman,
House Committee on Armed Services, and the
Department of Defense, relating to the extension
of Public Law 85-804 and other statutes. D

Excerpt from the Report of the Commission on
Government Procurement E








































at











Coc





isl


COE






PREFACE

THE ADMINISTRATI N OF PUBLIC LAW 85-804


Since 1958, Public Law 85-804 (50 USC 1431 et seq.) has

authorized various agencies of the Federal Government to provide

certain types of extraordinary relief to contractors who are en-

countering difficulties in the performance of government contracts

or subcontracts relating to the national defense. Prior to 1958,

similar authority existed under Title II of the First War Powers

Act of 1941 (55 Stat. 839), so that cases involving extraordinary

relief to contracts have been decided by the military departments

at least since World War II.

Although the various types of relief awarded under these

statutes are regularly described as "extraordinary," and they will

be discussed at some length subsequently, it is important to state

at the outset just how extraordinary they are. One of the principal

forms of relief is known as an "amendment without consideration";

in other words, the contractor is given additional compensation to

complete a contract he is already bound to perform, thus violating

traditional rules of government contract law, general contract law,
1/
and numerous decisions of the Comptroller General. Public Law 804

is additionally extraordinary in that it authorizes the making of

contracts "without regard to other provisions of law relating to
2/
the making, performance, amendment, or modification of contracts....



I/ See infra, p. 14.

2/ 72 Stat. 972, 50 USC 1431. The entire statute is set forth
in Appendix A.






CRS-2



Despite the truly extraordinary nature of the authority vested

in the executive branch by this statute, there have been few changes

in it since its enactment, and few proposed amendments. It must

be conceded that the authority has been used sparingly, and, for
1/
the most part, with little budgetary impact. Nevertheless,

differing interpretations have arisen, and different approaches

have been taken to the administration of the statute. Further-

more, it has been seriously suggested that a law of this kind was
2/
strictly an emergency measure, the need for which has passed.



I/ On an average, between $5 and $6 million annually have been
spent by the Department of Defense under Public Law 804.
Earlier writers on the subject took the similar position
that while there may have been greater use of Title II
authority during World War II, "it has apparently been
used very sparingly since that time." James T. Ramey
and John T. Ramey and John A. Erlewine, Mistakes and
Bailouts of Suppliers Under Government Contracts and Sub-
contractors, 39 Corn. L. Q. 634, 684 (1954). Other
commentators have concluded that this is because the
statute is not widely known in the legal profession. See
Donald 0. Jansen, Public Law 85-804 and Extraordinary
Contractual Relief, 55 Geo. L. J. 959 (1967).

2/ This view was expressed to the author by two legal officers
within the Department of Defense who had had experience
in administering Public Law 804; since the Department has
publicly taken the position that the law should be made
permanent, the spokesmen for this unofficial view naturally
wished to remain anonymous. While they both agreed with
the author's conclusion that the statutory procedures had
been used with appropriate caution, they believed that the
availability of this type of relief tended to make it easier
to award contracts to marginal suppliers; indeed, they pointed
out that at least one half of the Army contractors receiving
relief under Public Law 804 had originally received contracts
pursuant to small-business set-asides.







CRS-3


HISTORICAL BACKGROUND

Prior to the enactment of Public Law 804, there was authority

for extraordinary contractual relief in Title II of the First War

Powers Act of 1941 (55 Stat. 839), under which the President could

authorize any department engaged in the war effort

to enter into contracts and into amendments or modifi-
cations of contracts heretofore or hereafter made and
to make advance, progress and other payments thereon,
without regard to the provisions of law relating to
the making, performance, amendment, or modification of
contacts whenever he deems such action would facilitate
prosecution of the war. 1/

Pursuant to this statute, President Roosevelt issued Executive

Order 9001, which delegated the foregoing statutory authority to

the Secretaries of War and Navy, and the United States Maritime

Commission, with authority to redelegate. The executive order

permitted contract modifications or amendments without consideration,

without competitive bidding, and without the furnishing of a bond,

and it also permitted the release or modification of any outstanding

contract obligations. There were a number of applications for Title

II relief still pending at the time hostilities ceased, and the

military departments generally took the position that they were

legally bound to reject such applications, since granting them could

not facilitate the prosecution of the war.


1/ 6 Fed. Reg. 6787.






CRS-4

Accordingly, the gap created by the expiration of the Title II

authority was filled by the enactment of the War Contractors Re-

lief Act, also known as the Lucas Act, which provided for the settle-

ment of equitable claims of contractors and subcontractors for losses

incurred between September 16, 1940 and August 14, 1945

without fault or negligence on their part in the per-
formance of such contracts or subcontracts. i/

It is of more than academic interest that section 6 of the Lucas

Act provided that a claimant

shall have the right within the six months to file a
petition with any Federal district court of competent
jurisdiction, asking a determination by the court of
the equities involved in such a claim; and upon the
filing of such a petition the court, sitting as a court
of equity, shall have jurisdiction to determine the
amount, if any, to which such claimant and petitioner
may be equitably entitled.... 2/

The Lucas Act, then, unlike Title II or the present law, provided

for judicial review of the action of the executive branch. While

it does not appear that any recent proposals have been made to subject

extraordinary contractual relief to judicial review, the Lucas Act

is of some historical significance. It may be noted that despite the

large number of Lucas Act claims which came before the courts, the

majority of judicial decisions upheld the actions of the executive
3/
departments.


I/ Act of August 7, 1946; 60 Stat. 902.

2/ 60 Stat. 902, 903.

3/ For an analysis of some of these decisions, see Cecil Thomas Lakes,
Extraordinary Contractual Authority in Government Defense
Procurement, George Washington University Dissertation, 1962, p. 40.






CRS-5


What is of perhaps greater relevance to present considerations

is the repeated emphasis by Congress on the emergency nature of

contractual adjustment authority. Thus Senator Vandenberg, in

the course of debate on Title II, stated that it would provide

a complete, blanket authority to the President... to
authorize any department to do anything it pleases
in respect to war contracts...and at any price. I/

On the House side, it was stated that

Title II...is a power that we would never give except
in time of war. 2/

The Lucas Act was temporary law; it provided that claims were

barred if not filed before February 7, 1947. The next statutory

development took place in 1951. In response to the outbreak of the

Korean War, Congress reenacted the provisions of Title II (64 Stat.

1257), but required a finding that any relief granted would facilitate

the "national defense" rather than the "prosecution of the var."

The amendment added an examination-of-records provision, and provided

for an expiration date not later than June 30, 1952. However, at

that time the Korean War was not yet concluded, so that Title II was

extended for an additional year. The large-scale acquisition of

defense supplies during the Korean War period resulted in a consider-

able number of applications for relief, so that ultimately four more



I/ Vandenberg, Arthur H. Remarks in the Senate. Congressional
Record, v. 87, Dec. 16, 1941: 9842.


2/ Gwynne, John Williams. Expediting the War Effort. Remarks in
the House. Congressional Record, v. 87, Dec. 16, 1941:
9862.






CRS-6


extensions were enacted before the statute finally expired on June

30, 1958. The Congress refused to extend the temporary provisions

of Title II beyond that date, and took the position that if

additional legislation were needed it should be of a permanent

nature, and that the Department of Defense should be prepared to

justify it on that basis.

One other historical aspect of this situation deserve mention,

since it furnishes an additional illustration of the extent to which

these statutes provide an authority that is truly extraordinary.

In 1940 the War Department entered into a cost-plus-a-fixed -fee

construction contract; subsequently it sought to reimburse the
C
contractor for certain equipment purchased at prices in excess of
a
those specified in the Treasury Department Appropriation Act of

1941. The Comptroller General objected, holding that Title II only

authorized procuring departments to disregard "laws which relate to

the making, performance, modification, or amendment of contracts "

and that the provisions in the appropriation act designating ceiling
1/
prices were not laws of this type. (The situation was further

complicated by the fact that at the time of the original procurement

the First War Powers Act had not yet become law, and the War Depart-

ment relied for its extraordinary contractual authority on a

predecessor statute, the National Defense Expediting Act (54 Stat.

712 (1940); however, the question was resubmitted after the


1/ 21 Comp Gen 835, 837 (1942).






CRS-7


enactment of Title II, and the Comptroller General adhered to his

earlier opinion that payment in excess of the appropriation act

limitations was illegal.) (For a fuller discussion of this and

other Comptroller General opinions relating to the wartime use of

Title II authority, see Lakes, p. 30.)

However, as indicated by the foregoing debates, the authority

contained in Title II was very much a result of wartime exigencies,

and during World War II it was given very substantial use. The War

Department proposed a directive authorizing the disregard of various

statutory restrictions on contracting, and providing for contract

clauses which would indemnify contractors for losses caused by

action. The proposed directive was submitted to and approved by

the Attorney General, who found that the statutory grant of authority

was

without any limitation whatever save that cost-plus contracts
are prohibited, statutory limitations on profits must
be observed, and action taken under the statute must be
published when deemed by the President not incompatible
with the public interest. I/

The Attorney General made extensive reference to the congressional

debates on the legislation. He pointed out that

no attempt was made to conceal the fact that peacetime
safeguards were being discarded...It was stated that
"nothing of the sort was even contemplated during the
first World War" and that "the language is so clear that
this does change the contract laws as well as merely
the procedure of making contracts."


1/ 40 OAG 225, 228 (1942)







CRS-8


The directive was accordingly adopted, and the executive

branch made full use of the latitude made available to it by

the Attorney General's opinions, notwithstanding the contrary views

of the Comptroller General. Title II authority was recognized

as extraordinary at the time of its enactment, then, both by those

who would restrict its use and by those who would extend it; it

is still considered extraordinary, but its repeated exercise over

the past thirty years has somewhat diminished the sense of urgency

surrounding its use.

In this connection, a number of noteworthy cases might be

cited. In Waller v. US, 114 Ct. Cls. 640, 78 F. Supp. 816 (1948),

the plaintiff had agreed to supply petroleum products to the

Treasury Department, but with the lifting of controls prices rose

to a point where he would have sustained a loss if required to perform

in accordance with the contract. Accordingly, the Treasury Depart-

ment increased the contract price, citing the authority of Title II,

and the Comptroller General

held that these increases had been made without authority
of law, and he directed that all amounts paid in excess
of the amounts originally contracted for be deducted from
amounts due under subsequent contracts. I/

The government argued before the Court of Claims that an amendment

to the contract could not facilitate the prosecution of the war,
*
since the war had long since terminated, but the Court disagreed:



i/ 78 F. Supp. 816, 817.






CRS-9


no treaties had been signed, and American troops were still occupying

enemy territory. Quoting an early Supreme Court opinion, the

Court of Claims stated that the war power

is not limited to victories in the field and the
dispersal of the insurgent forces. It carries with
it inherently the power to guard against the immediate
renewal of the conflict, and to remedy the evils which
have risen from its rise and progress. i/

For present purposes it is significant that the cases cited by

the Waller opinion related to actions that took place within one

or two years after the termination of hostilities. The Court

further pointed out that

On July 25, 1947, Congress passed Public Law 239, 80th
Congress, 1st Session, 61 Stat. 449, which terminated
a large number of wartime and emergency statutes. The
Judiciary Committee of the Senate reported that the Act
effected immediate repeal of certain statutes, future
repeal of others, and left unaffected still others.
Accompanying the report was a list of the wartime and
emergency statutes and a statement indicating the effect
upon them of Public Law 239.

The Court pointed out that with regard to the First War Powers Act,

the report said:

Unaffected...The authority relating to the making of
contracts contained in this provision continues to be
required pending action by the Congress on proper
legislation with respect to this subject.

The Court indicated that the legislation to which the report referred

is the Armed Services Procurement Act (62 Stat. 21, 10 USC 2301 et

seq.), which did not become law until 1948. While that statute does


I/ 78 F. Supp. 816, 818.


70-905 ( 76 3






CRS-10


contain certain emergency authority (see, for example, 10 USC

2304(a), which authorizes the award of certain contracts with-

out formal advertising during a national emergency "declared by

Congress or the President"), such authority generally relates to

the award of contracts rather than to their amendment or to the

other types of relief action discussed herein. It appears, there-

fore, that in 1947 Congress retained the Title II authority at

least partly because of the pendency of the Armed Services Procure-

ment Act, which had little real relevance to the merits of Title

II as then administered; the next time Congress extensively considered

the situation was in 1958, prior to the enactment of Public Law

85-804.

PUBLIC LAW 85-804

Public Law 85-804, in language substantially identical to that

utilized in Title II, provides that the President may authorize any

department or agency exercising national defense functions to grant

such extraordinary contractual relief as is deemed to facilitate

the national defense. However, section 2 of the statute provides that

it shall not be construed to authorize:

(1) the use of the cost-plus-a-percentage-of-cost system

of contracting;

(2) any contract in violation of existing law relating

to limitation of profits;

(3) negotiation of contracts:






CRS-11


(4) the waiver of bonds required by law;

(5) an amendment to increase the contract price to an amount

higher than the rejected bid of the lowest responsible bidder when

the contract was negotiated because the bids received after formal

advertising were unreasonable or collusive; and

(6) the formalization of an informal commitment, unless it

is found that at the time the commitment was made it was impractica-

ble to use normal procurement procedures.

The executive order issued pursuant to the statute contained

several additional restrictions on the exercise of the authority.

Subsequently, the Department of Defense issued a regulation, Section

XVII of the Armed Services Procurement Regulation (ASPR), which

governs the departmental use of the statute. (Although other

Departments of the Federal Government also award extraordinary

contractual relief, their use has been minimal, and will not be

discussed in detail herein.) ASPR provides four types of extraordinary

relief: amendments without consideration (ASPR 17-204.2); correction

or mitigation of mistakes (ASPR 17-204.3); formalization of informal

commitments (ASPR 17-204.4); and other miscellaneous actions

(ASPR 17-304.1).

The exercise of Public Law 804 authority to amend contracts

without consideration is perhaps the most dramatic example of the

statute's use; the fact that such amendments require special

statutory authorization probably results more from the Comptroller






CRS-12


General's views on questions of consideration than it does from

the common law relating to the subject.

Although it has been held that "contracts with the Government

are governed by federal common law" (Navy Contract Law, sec. 2.15),

it would seem that this has generally not been true with respect

to questions of consideration. As one law review article has

stated it,

There are noticeable differences between what the common
law will recognize as sufficient consideration to support
the creation, modification, or release of contractual
rights, and the nature of consideration necessary to
satisfy the Federal rule against modifications without
a legal consideration. Under common law concepts, so
long as what is given in return for a promise is "bargained
for", it normally constitutes adequate consideration
for the promise. (Citing the Restatement of Contracts,
Sec. 75.)...However, decisions and rulings applying the
Federal rule against modifications without a legal
consideration require that the consideration moving to
the Government be commensurate with the value of the
vested rights given up in exchange.l/

Thus, for example, in one of the leading cases, a contracting

officer was not permitted to accept oysters of a lower quality

than the contract provided, even at a reduced price, because the
2/
reduction in price was not commensurate with the reduction in value.

Under this formulation of the Comptroller General's rule, then,

modification of a contract not only requires consideration; it requires
3/
sufficient consideration.



1/ James T. Ramey and John A. Erlewine, op. cit., at 667.

2/ 18 Comp. Gen. 114 (1939).

3/ Cf. 19 Comp. Gen. 358 (1939); 5 Comp. Gen. 605 (1926).






CRS-13


Another commentator has stated that

although it has been both asserted and denied that
government officers have power to modify a contract
and waive government rights thereunder in the interest
of fair dealing on grounds consisting solely of general
moral and equitable considerations in order to prevent
severe hardships to contractors, the Comptroller General
without question has disapproved any such agreement.
Furthermore, he has even held invalid amendments which
were based upon consideration for the Government which
was clearly adequate at law. i/

It may be of some significance in this context that Ramey and

Erlewine take the position that "bailouts" in the private sector

are common, if not actually routine, occurrences; they state that

such actions

go beyond the forgiveness of mistakes in bids and apply
to losses incurred in the performance of a contract.
Among the types of loss for which suppliers reportedly
have been made whoe are unanticipated increases in
labor rates an material prices, delays in specified
time of delivery, and waiver of guaranty and warranty
provisions. Indeed, for every type of increased cost
and price on Government contracts which the GAO has held
invalid as not supported by a legal consideration, at
least one instance or practice can probably be cited
where a private business concern has permitted the same
type of adjustment to be made.2/

In any event, the rule regularly followed by the Comptroller

General is a stringent one:



I/ Robert Kramer, Extraordinary Relief for War Contractors, 93
U. Pa. L. Rev. 357, 370 (1945).


2/ Op. cit., p. 672.






CRS-14


In the absence of a statute specifically so providing,
no officer of the Government has authority to give
away or surrender a right vested in or acquired by
the Governmnt under a contract. 1/

In general, the courts have agreed:

...agents and officers of the Government have no
authority to give away the money or the property
of the United States, either directly or under the
guise of a contract that obligates the Government
to pay a claim not otherwise enforcible against
it. 2/

With the perspective of over thirty years, during which the

use of extraordinary contractual relief, while perhaps still extra-

ordinary in a technical sense, has become regularized if not exactly

routine, it is difficult to recapture the attitude of earlier

commentators on this rapidly expanding procedure. A rather dramatic

view of this expansion is set forth in "War Procurement A New Pat-

tern in Contracts," by David Wain and Richard F. Watt, which sharply

contrasts the Attorney General's rather latitudinarian interpretation

of the statute with the more restrictive language of the House

Committee report:

By virtually holding that a finding that the war will
be facilitated is tantamount to or a substitute for
good consideration, and by stating that an action which
furthers the prosecution of the war contemplates a clear
benefit to the United States, the Attorney General
amplified the interpretation of the First War Powers
Act contained in Executive Order 9001. The Attorney
General apparently considered irrelevant the well-
settled rules that officers of the government are not
authorized to modify the terms of a contract if to do so
is prejudicial to the interests of the United States
and that, in the absence of a statute so providing,
they cannot give away or surrender a right vested in
or acquired by the government under contract. 3/


1/ 20 Comp. Gen. 703, 710 (1941).

2/ Bausch & Lomb Optical Co. v. US, 78 Ct. Cls. 584, 607 (1934).






CRS-15


The authors appear to find the Attorney General's ruling

incongruous with, if not actually violative of, the "narrow state-

ment" of proposed powers enumerated by the House Committee:

The President may authorize agencies, among other things:
(a) to enter into contracts without competitive bidding
in those cases where bidding is still required; (b)
to enter into contracts without performance bonds;
(c) to amend or modify contracts; (d) to make progress
payments on contracts.

Even at this late date, the discrepancy is more than a little

startling.

ESSENTIALITY CASES

In general, amendments without consideration are based on one

of two sets of circumstances. Under the first, the contractor

has incurred or is expected to occur a loss which will impair his

productive ability, which is essential to the national defense. Under

the criterion set forth in ASPR 17-204.2(a),

Where an actual or threatened loss under a defense contract,
however, caused, will impair the productive ability of a
contractor whose continued performance on any defense
contract or whose continued operation as a source of
supply is found to be essential to the national defense,
the contract may be adjusted but only to the extent
necessary to avoid such impairment to the contractor's
productive ability. I/

In effect, then, in order to find the essentiality required by the

foregoing provision, there must be an actual or threatened loss on

a defense contract which will impair his productive ability, the

contractor must be essential to the national defense either for


I/ ASPR 17-204.2 (a).






CRS-16

his continued performance on a particular defense contract or as

a future supplier; in addition, there must be a specific finding that

the proposed contractual adjustment will facilitate the national
1/
defense.

The question of whether a contractor has or is likely to sustain

a loss in a particular case is basically a matter of accounting.

Thus, in Parsons Corp., AFCAB 172, 1 ECR 201, 24 Feb. 1965, the

contractor, who was producing helicopter propeller blades for the

Air Force, was able to demonstrate quite clearly the loss in a

arising from his excess costs. In other cases, such as the one

involving the Lockheed Aircraft Corporation (2 ECR 137, June 4, 1971),

the accounting picture is extremely complex, and the actions taken

are far more involved than those explicitly described in ASPR. The

Lockheed case is interesting and significant from several points

of view. First, it points up the considerable variety of the actions

which may be taken under Public Law 85-804; second, it indicates

the very sizable amounts which may be involved in an 804 action;

and, third, it may suggest, particularly with several years of hind-

sight, that the temptation to relieve a contractor so intimately

connected with the most urgent of military programs is just too

strong to resist, and that the vast authority included in the statute

is too great to be vested in an executive department in peacetime.

It is also important that the contractor establish that losses

are being incurred on defense contracts, and not on his business


1/ ASPR 17-205.1.







CRS-17


as a whole. One case which illustrates this, and which also

indicates the type of findings made in an 804 case as well as the

extreme flexibility required in order to enable the statute to

operate effectively, is Memcor, Inc. There the Army Contract

Adjustment Board stated:

The contractor indicates in his cash projections for
the (Army radio) contracts that these are his loss
contracts. This has been concurred in by the Defense
Contract Audit Agency and Defense Contract Administrative
Services, Financial Services Branch...Failure to grant
relief would almost certainly result in the complete
collapse of this company. If this occurred, the Army
would not be able to get radios within the time frame
required. In addition, reprocurement from another
source would probably result in the loss of most, if not
all, of the amount outstanding on the (government) loan
and the program payments. I/

The Board carefully considered the status of each outstanding

contract before determining how much of an increase on each contract

price was essential to ensure performance. Determinations of essentiality

are necessarily matters of judgment, but it is significant that

throughout these cases of extraordinary contractual relief the finding

of essentiality is based on specific facts. Thus, for example, in

the case of Doughboy Industries, Inc., Televiso Electronics Division,

the Board stated:

Information received by the Board from Army activities
requiring the communications equipment being produced
by Televiso under the contract has led the Board to
the conclusion that the equipment is essential both to
meet safety standards required for Army airfields and
to train Army pilots. For this reason, it is of para- 2/
mount importance that this equipment be received on schedule.


1/ ACAB 1080, 2 ECR 17, 12 September 1966.

2/ ACAB No. 1089, 2 ECR 54, 23 February 1968.


70-9n 0 76 4






CRS-18


As indicated above, and as the statistics on the Defense

Department's record of application denials will further emphasize,

findings of essentiality have not been made frivolously. Although

in some of the earlier cases the courts heard appeals from Title

II determinations, they have never reversed the findings of the

executive branch. Thus, in the case of Bolinders Co., Inc., v.

US, 139 Ct. Cls. 677 cert. den. 355 US 953 (1957), the plaintiff

had already received a price increase from the Army pursuant to

a Title II action, but claimed to be entitled to additional relief,

which was denied. The Court held that

Except for the First War Powers Act, plaintiff would of
course have no basis whatever for asking an increase
in the contract price, and the First War Powers Act was
not passed for the benefit of contractors or for their
relief from an unprofitable contract, but solely for the
benefit of the nation as a whole, in order to facilitate
the prosecution of the war. Atlantic Corporation v. United
States, 125 Ct. Cls. 464, 480. The Act committed to the
sole discretion of the President the determination of
whether or not an increase in the contract price would
facilitate the prosecution of the war. His action,
or the action of the agencies to whom he had delegated
the power granted, was not subject to review by the courts.
Indeed, the Act conferred no rights on the contractor. _/

This view has been reaffirmed by every court that has considered

the issue: Cwlth. Engineering Co. v. US, 148 Ct. Cls. 330, cert.

den. 364 US 820 (1960); Evans Reamer & Mach. Co. v. US, 181 Ct. Cls.

539, cert. den. 309 US 982 (1967); etc.


l/ 139 Ct. CIS, 677, 681.







CRS-19


The Comptroller General likewise has taken the position that

The grant of relief to a contractor under the law
here involved is thus clearly a matter of grace, to
be allowed or denied at the discretion of the designated
officials,... I/

Generally speaking, where a military department has granted

extraordinary contractual relief to an essential contractor, it

has found that granting such relief would result in a lower over-

all cost than would a reprocurement, in addition to making a finding

of urgency. In the case of Freedman and Freedman (NCAB 8-62, 1 ECR

124, June 29, 1962), however, the Navy made no such finding of

urgency. Nevertheless, it did approve a contract amendment without

consideration, stating that

by granting the increase in price to the present
Contractor there would be a saving in contract
price...to the Government since the Contractor in
the event of default would not be able to pay the
excess reprocurement costs. In addition, in the
event of default, the Government would be unable
to recover progress payments made in the amount of
$22,204.22. 1/

This appears to been an exceptional case, since essentiality is

not mentioned; from the criteria spelled out in ASPR, it would

seem that a mere monetary saving to the government is not

sufficient to justify relief under Public Law 804.

In cases where relief is granted, the Contract Adjustment

Board commonly imposes conditions to protect the interests of

the government so far as possible. In the case of General

Communication Co. (NCAB, Aug. 11, 1961), the contract amendment

provided that future payments would be deposited into a controlled

1/ Comp. Gen. B-163274, 20 Dec. 1965.







CRS-20


account, and gave the government rights to withdraw from the

account '-.der certain circumstances; in Transval Electronics, (ACAB

No. 1-33), July 6, 1961), the contractor was required to furnish

a perfr-a~ance bonr' in a penal amount -.+hich was twice the amount of

the relief provided, and was also required to waive all prior

claims aair.s the United States; in Atlantic Diesel Manufacturing,

Inc. (ACAB .:. 215, Feb. 26, 1957), the contractor was also required

to agree to "a redetermination of the contract Dr ice downward only

based on actual costs without any allowance for profit." All of

these are typDical of the provisions inserted in contract amendments

executed under publicc Law 804.

One essentiality: case must be mentioned at this point, not because

it is typical, but because it is unique. On March 2, 1970, the

chairman of the board of the Lockheed Aircraft Corporation submitted

a letter to the Department of Defense citing his company's contractual

and financial problems on four major defense programs: Navy ship-

building, the SRAM missile motor, the Cheyenne helicopter, and the

C-5A. The letter alleged that because of the "unprecedented dollar

magrnitude" of claims and disputes arising under these programs, it

would be "financially impossible for Lockheed to complete performance

of these programs if we must await the outcome of litigation before

receiving further financing from the Department of Defense ."


1/ 2 ECR 137, dated June 4, 1971.










Subsecuently, Lockheed submitted detailed financial data, ic

was audited by the Defense Contract Audit Azencv and reviewed by

the General Accounti-. Office. On the basis of this audit and

review, the >e:ptv Secretary of Defense concluded, under the autnority

of Public Law 804, that certain extraordinary contractual actions

were necessary in order to -eri---:t the continuance of the C-5A

program and the Cheyenne helicopter wrhra vnich he dete-ine

to be essential. v-- Ver-. extensive assistance given Lcckheed -rsuant

to the Deu:ty Sezretarv's determination was __lv :x-:lained to the

Congress, but there was serious criticism= of the entire procedure.

As one Senator :-inted out,

Lockheed has been severely criticized for hay-> .
in" on government projects by biddi- unrealistically c'w
on the assu:-tion that once the contract was signed,
the costs would be renegotiate uward .

Ln:deed, this argument has frequently been used: a-ainst the cnnua n

Public Law '-: the mere existence of such a statute -ay encourage

contractors to underbid. 7.'wever, although the ar:z_--t -ay have

some merit as a justification for discontinuing 7blic Law 53- the

Lockheed exa-=le :robablv should not be considered in this context.

Te funds used for the relief of Lockheed were soeciall apprrted

for the ur-:ose, and it is almost certainly true that no effective


I/ (Hearins before the Comittee on =_-:i:., Hous: .. and .rban
Affairs, US Senate, :-"z C'-. on bills to Authorize
:-ergency Guaranteed Loans, at p. 65.)






CRS-22


relief could have been provided without such action. Similarly,

even without the existence of Public Law 804, it seems highly

likely that Congress would have enacted some type of special legis-

lation.

GOVERNMENT ACTION CASES

In the second type of case, relief is based on some action

taken by the government which interfered with performance of the

contract. In the language of the regulation,

Where a contractor suffers a loss (not merely a
diminution of anticipated profits) on a defense
contract as a result of Government action, the
character of the Government action will generally
determine whether any adjustment in the contract
will be made and its extent. Where the Government
action is directed primarily at the contractor and
is taken by the Government as the other contracting
party, the contract may be adjusted if fairness so
requires; thus, where such Government action, although
not creating any liability on its part, increases the
cost of performance, considerations of fairness may
make appropriate some adjustment in the contract. I/

The phrase "character of the Government action" refers to the

general principle that where the government acts in its sovereign

capacity, rather than as party to a contract, it cannot be held

liable even where, as a procedural matter, it has already consented

to be sued. (The consent of the United States to be sued on its

contracts is granted by the Tucker Act, 28 USC 1491.) In the leading

case of Horowitz v. US, 267 US 458 (1925), the Supreme Court held

that where a government embargo resulted in the plaintiff's selling


ASPR 17-204.2(b), 32 CFR 17-204.2(b).







CRS-23


his goods for substantially less than the price originally agreed,

there was no liability on the part of the government for this damage.

In the words of the Court,

the United States when sued as a contractor cannot be
held liable for an obstruction to the performance of the
particular contract resulting from its public and general
acts as a sovereign. i/

The Court went on to quote with approval a decision of the Court

of Claims that

The two characters which the government possesses as
a contractor and as a sovereign cannot thus be fused;
nor can the United States while sued in the one character
be made liable in damages for their acts done in the
other... In this court the United States appear simply as
contractors; and they are to be held liable only within
the same limits that any other defendant would be in any
other court.

These last words may appear somewhat disingenuous: there are

different rules applicable to the United States as contracting

party. Nevertheless, in terms of obtaining relief from a federal

court or a Contract Adjustment Board, the distinction between a

sovereign and a contractual government action has been fairly

consistently maintained, the essential reason presumably being that

it would be impractical to compensate all parties injured by a

particular sovereign action. (But cf. Waller v. US, 114 Ct. Cls.

640, 78 FS 816, (1948), supra). Alternatively, it has been argued that

"When the Government acts in its sovereign capacity it does so for
2/
the general welfare of the public."


l/ 267 US 461.

2/ Lakes, p. 106.






CRS-24


Contract Adjustment Boards have followed the general rule

enunciated by the courts, and do not appear to have granted relief

where the government action has been of sovereign nature, although

they have indicated that they might do so in proper circumstances.

See for example, Van Iderstine, ACAB No. 57, May 22, 1952, which

related, as so many extraordinary contractual relief cases have, to

a rollback in ceiling prices. In the words of the Board,

the action taken by the Office of Price Stabilization in
relation to such rollback constituted action by the Government
in its sovereign capacity, from the effect of which relief
will generally not be granted (under Title II of the First War
Powers Act). An exception to this rule must depend upon the
"nature of the action, the circumstances, and the effect on
the contractors" considered with reference to all other fact
of these case...The Board, under all the circumstances, is
of the view that the facts of this case do not indicate that
it is an exceptional case within the meaning of the rule.

The language of the Van Iderstine decision indicates one of the

semantic difficulties involved in administering extraordinary contractual

relief: there are no guidelines for determining what is an "exceptional"

case, just as there are no guidelines for determining "essentiality."

In the latter instance, it is submitted that the boards have generally

done extremely well in limiting determinations of essentiality to

those cases in which the supplies contracted for are urgently needed;

as to"exceptional" cases, where relief might be granted based on

sovereign governmental action, the problem appears not to have been

confronted. A recent law review article stated that "To date there

has not been a single case (under Public Law 804) where extraordinary

contractual relief has been granted to a contractor because of a loss
caused by a sovereign act." It is believed that this is still true.
caused by a sovereign act." -- It is believed that this is still true.


I/ Jansen, op. cit., p. 959.






CRS-25


The typical case in which relief is granted based on some

contractual action of the government involves some kind of delay

caused by the government; the government stops production while

it revises the specifications (NAFI Corporation, AFCAB, Feb. 15,

1961); the contract calls for a test, devised by the government,

which is subsequently determined to be impossible to meet (Lux

Clock Manufacturing Co., ACAB No. 235, June 25, 1958); etc. An-

other possible ground is that the government requires the contractor

to perform work outside the scope of the contract (Servo, Inc.,

ACAB No. 228, Dec. 16, ]957.)

Government action cases frequently give the appearance of

being soluble through ordinary means, rather than under Public Law

804, which is ostensibly an extraordinary procedure; but the reason

for using the latter procedure is often the extremely technical

doctrines which block relief under the contract itself. Thus, in

the case of the Bendix Corporation, ACAB 1050, Sept. 11, 1962, the

contractor had agreed to provide certain supplies and services

relative to the construction of six Relay Centers in an overseas

area. In the event, the Army was guilty of substantial delays in

making the sites available. As the Army Contract Adjustment Board

points out,

The contract did not specify when Site Nos. 2, 4, 6, 11, 14
and 17 would be made available by the Government but the
contract did require completion of the work called for under
Items 2 and 10 by 26 April 1961...As a result of negotiations
the contracting parties tentatively agreed to what was considered


70-905 0 76 -5






CRS-26


a fair and reasonable compensation to the contractor for
the delays caused by the Government.

However, when the proposed modification was submitted to the

Legal Office of the U.S. Army Signal Supply Agency, that office

failed to concur, concluding that

the contracting officer did not have authority to modify
the contract as proposed since there were no provisions for
price adjustments due to the Government's failure to provide
the relay sites in time.

Accordingly, the Board concluded that the contract itself contained

no provisions for increasing the price to the contractor, and that

relief under Public Law 804 was appropriate. In reaching this

result, the Board stated:

The changes clause (in government contracts) has been used to
compensate a contractor for changes issued by persons other
than the contracting officer..., to cover changes not in writ-
ing..., stop orders..., erroneous and defective specifications
..., erroneous rejection of supplies..., and orders to accelerate
performance of the contract...The changes clause has never been
used, however, to compensate a contractor for increased costs
caused by governmental delays.

Precedent dictated, therefore, that relief be sought from the Contract

Adjustment Board, rather than the Armed Services Board of Contract

Appeals, which would have jurisdiction to resolve other contract

matters:

Since there is no provision of the contract under which the
contracting officer may compensate the Bendix Corporation
for the delays, it appears that any right that the applicant
may have against the Government (other than requesting relief
under Public Law 85-804) is a claim for unliquidated damages
for breach of contract. This being so the applicant could
not obtain relief from the contracting officer nor from the
Armed Services Board of Contract Appeals. It is quite clear






i






CRS-27

that the Armed Services Board of Contract Appeals does
not have jurisdiction over a claim for unliquidated
damages for breach of contract.

Other examples of government action which have been the basis

for relief under Public Law 804 are: delay in government approval

of a pilot model (Copco Trailers, ACAB 1046, Aug. 3, 1962); strin-

gent enforcement of specification after prior acceptance of less

precise standards (Martin-Marietta Corp. on behalf of Washington

Scientific Industries, Inc. ACAB 1051, Nov. 24, 1962); delays and

interference in contract administration by government personnel

(Rootes, Ltd., ACAB 1034, Mar. 19, 1962); etc.

A contractor will not be denied relief under Public Law 804 merely
1/
because a legal remedy is available to him in the courts

although ASPR provides that

no contracts, amendments, or modifications shall be entered
into under the authority of the Act...unless other legal
authority in the Department concerned is deemed lacking or
inadequate. 2/

In other words, all other administrative remedies must be exhausted

before the contractor makes an application under Public Law 804. It

was so held by the Army Contract Adjustment Board in the case of Blaw-

Knox, ACAB No. 1019, Oct. 6, 1960, where the contract contained a

standard provision authorizing the government to make unilateral

changes in drawings and specifications subject to an equitable adjust-

ment in the contract price. Any dispute between the parties as to

the propriety or amount of an equitable adjustment is to be handled



1/ Lakes, p. 113,

2/ ASPR 17-205.l(b)(iii), 32 CFR 17.205-1(b) (2).






CRS-28

in accordance with the Disputes provision of the contract, and the

Board accordingly held that the 804 remedy was not appropriate.

Although, as indicated above, ASPR requires, as a precondition

for "government action" relief that the contractor

suffers a loss (not merely a diminution of anticipated profits)
on a defense contract

the Army board has taken the position that it is not necessary for the
1/
entire contract to be performed at a loss: a cost increase will suffice.

The theory behind the granting of relief in "government action"

cases, as indicated in the legislative history of Public Law 804,

is that the statutory purpose was to

assure uninterrupted performance on defense contracts through
fair and expeditious Government treatment of procurement
problems. 2/

A somewhat similar statement of the case was included in the Senate

report:

This authority has also been used to provide relief for
defense contractors where losses have resulted from
inequitable action of the Government toward a particu-
lar contractor. In this manner, contractors have been
encouraged to continue performance while pursuing an
administrative remedy rather than requiring them to
refuse to proceed with a contract and undertaking such
recourse as they might have at law. 3/



1/ (See Tae Sung Enterprise Co., ACAB No. 1027, Feb. 28, 1961. However,
there are cases contra. See G.W. Galloway Co., ACAB No. 212, April
11, 1957. For a general discussion, see Jansen, op. cit., pp. 981-2.
*
2/ H. Rept. 2232 85th Cong., 2nd Sess.,
p. 2.

3/ S. Rept. 2281, 85th Cong., 2nd Sess., p. 4








CRS-29


The scope of relief under Public Law 804 is of course very

much dependent on the unavailablility of other types of administra-

tive relief. Although successive changes in contract drafting and

contract administration have made an increasing number of disputes

susceptible of resolution under a standard disputes clause, there are

still cases which cannot be handled administratively outside the

Public Law 804 context. A case which illustrates the difficulties

inherent in providing fragmentary remedies for a contractor is

Kehm Corp. v. US, 119 Ct 454, 93 F. Supp. 620, (1950), where the

plaintiff sued for damages arising from the government's delay in

furnishing certain equipment required for the performance of a

contract. The Court found that the United States had "prevented

timely performance by plaintiff" and that "plaintiff is entitled

to recover the loss it actually sustained as a result," but that

nevertheless the claim could not be finally settled in accordance

with the various provisions of the contract, and accordingly that

further proceedings would be necessary.

Nearly a quarter of a century after the foregoing decision,

the Commission on Government Procurement, charged with examining

the entire field of government contracting, concluded that

We can find no valid reason for the distinction between
disputes "under the contract," that procuring agencies
may settle and pay, and disputes "in breach of contract"
that they may not. I/


i/ Report of the Commission on Government Procurement, Dec. 31,
1972, publ. U.S. Government Printing Office, vol. 4, p. 22.






CRS-30

Consequently it was recommended that the government

Empower contracting agencies to settle and pay, and
administrative forums to decide, all claims or dis-
putes arising under or growing out of or in connec-
tion with the administration or performance of
contracts entered into by the United States. 1/

The Commission indicates the significance of this recommendation

for Public Law 804 claimants by stating, in its analysis of that

statute, that

a contractor may have a remedy against the Government in
a court of law for breach of a defense contract because of
Government interference with the performance of the contract,
but it has no administrative remedy because neither the
contracting officer nor the board of contract appeals has
jurisdiction to settle such a claim. 2/

CORRECTION OF MISTAKES

The authority of Public Law 85-804 is regularly used for the

correction of mistakes in government contracts. In some cases, relief

may also be obtained through the courts or from the Comptroller General.

For the most part, the Comptroller General has adhered to a stricter

rule regarding the corrections of mistakes than the rule applied under

common law and elsewhere. The usual rule is that

An offer may be withdrawn by a communication prior
to acceptance (Williston, Contracts, 1974 Supp. Sec. 55),
nor is it material that the offer states that it shall not
be withdrawn; revocation is still possible. 3/




1/ Op. Cit., vol. 4, p.22.

2/ Op. Cit., vol. 4, p.52.

3/ Williston, 1957 ed., Sec. 55.







CRS-31


However, the Comptroller General's rule has been that after bids

have been opened, but before the time scheduled for acceptance,

bids cannot be modified or withdrawn without the government's per-
1/
mission. Accordingly, even where the bidder, after opening but

before the award, notifies the contracting officer of a mistake

in his bid he will not be permitted to withdraw; the contracting

officer may accept the bid as made.

Courts have sought to justify this difference at least partially

on the grounds that the government must protect itself against fraud.

Thus, as the Court of Claims explained in Scott v. US, 44 Ct. Cls. 524

(1909):

The agents of the Government stand upon a different
footing from private individuals in the matter of
advertising for the letting of contracts in behalf of
the United States. They have no discretion. They must
accept the lowest or the highest responsible bid, or
reject all bids and readvertise. Private individuals
are not required thus to act. Hence it is apparent that
government agents should be allowed a reasonable time
after the opening of bids before they are allowed to
be withdrawn, so they can be afforded opportunities
to ascertain whether collusion or fraud had been
perpetrated against the United States by the parties
engaged in the bidding. It is also apparent that if
the rule of allowing immediate withdrawals after the
results of the bidding are made known, frauds innumerable
could be perpetrated against the United States and thus
public justice would be greatly hampered.3/

1/ 31 Comp Gen 660 (1952); 31 Comp Gen 183 (1951); 17 Comp Gen 554
(1938); 17 Comp Gen 536 (536).

2/ 17 Comp Gen 915 (1938).


3/ Scott v. US, 44 Ct. Cls. 524 (1909).






CRS-32

An alternative rationale, which appears rather less satisfactory,

is that the bidder is accorded

the right of having its bid considered on its merits
and this right was conditioned on the premise that
the bid would remain open during the time specified. i/

Whether a mistake is of the type which the Comptroller General

would correct or not, relief may be sought under Public Law 804. The

804 procedure is generally more expeditious than the alternatives,

and it is Department of Defense policy that

amending contracts to correct mistakes with the
least possible delay normally will facilitate
the national defense by expediting the procure-
ment program and by giving contractors proper
assurance that such mistakes will be corrected
expeditiously and fairly. 2/

The general guidelines instancing the types of situations in

which Public Law 804 is used to correct mistakes are set forth in

ASPR 17-- 204.3:

A contract may be amended or modified to correct
or mitigate the effect of a mistake, including the
following examples:
(i) a mistake or ambiguity which consists of
the failure to express or to express clearly in a
written contract the agreement as both understand
it;
(ii) a mistake on the part of the contractor
which is so obvious that it was or should have
been apparent to the contracting officer; and
(iii) a mutual mistake as to a material fact. 3/



I/ Refining Associates, Inc. v. US 124 Ct Cls 115,
S109 F Supp 259 (1953).
*
2/ ASPR 17-204.3(iii).

3/ ASPR 17-- 204.3.






CRS-33


In situations where parties to a contract have had an identical

intent to include a particular contractual provision, but the "writing

executed by them is materially at variance with that intent," "either

party can get a decree that the writing shall be reformed so that it
1/
shall express the intention of the parties." This principle has been

followed by the Contract Adjustment Boards in the case Evans Reamer

& Machine Co., ACAB No. 1003, March 31, 1959, where the contract had

been incorrectly drafted so as to include a Patent Indemnity Clause;

the Board found that the parties had not intended to include such a

clause, and amended the contract so as to delete it. In the Westing-

house case, ACAB No. 1010, Feb. 14, 1961, the Board reformed the

contract so as to add a provision, in accordance with the intent of

the parties, authorizing the government to reimburse the contractor

for certain research costs.

The right to reformation of a contract, in which

The material mistake of one party was caused by the other...or
was known to him. 2/

has long been recognized by the courts, but the Comptroller General

has been somewhat slow to follow their lead. Thus, in Kemp v. US,

38 F Supp 568 (DC Md 1941), the district court disallowed the govern-

ment's assessment of excess costs and liquidated damages against a


1/ American Law Institute, Restatement of Contracts, Sec. 504,

2/ 3 Corbin, Contracts, Sec. 610 (1960).






CRS-34

bidder who claimed that a mistake in a subcontractor's quotation had

resulted in an erroneous bid. The court found that the contracting

officer had been aware of the price discrepancy, and held that to

adopt the government's theory "would be unconscionable." In reach-

ing this conclusion, the court reversed the Comptroller General,

who had ruled that the government was without authority to cancel

the contract.

The stricter rule made applicable to government contractors is

largely a question of burden of proof. As the Comptroller General

has stated it,

The general rule is that when there has been a mistake
in the submission of a bid the contractor must bear the
consequence thereof. In order to authorize relief on
account of a mistake it must appear that the mistake
was mutual or that the error was so apparent that it
must be presumed the accepting officer knew of the
mistake at the time of acceptance and sought to take
advantage thereof.I/

Accordingly, in order to obtain reformation of a government contract

in which a mistake is discovered after bid opening but prior to

acceptance, a contractor has the burden of proving that a mistake was

in fact made; if the claim of a mistaken bid is made after award, the

rule is stricter, and the contractor must establish that the mistake

was known or should have been known by the contracting officer.

Where the contractor, prior to award, alleges the existence of

a mistake, and the contracting officer denies the claim, acceptance
i
and performance of the contract in accordance with the bid submitted

will normally be regarded by the court as a waiver of the claim. 2/


1/ 17 Comp Gen 452, 454-455 (1937).

2/ Massman Construction Co v. US. 102 Ct Cls 699, 60 F Supp 635, cert den
325 US 866 (1945).






CRS-35


In some cases, however, the contractor succeeds in obtaining a

stipulation, prior to award, that execution of the contract will
1/
not prejudice his claim, in which event reformation is still possible.

The Contract Adjustment Boards are substantially more liberal towards

contractors than the courts have been, and will not hold that perfor-

mance of a contract waives any claim made prior to the award; in

some cases claims are allowed which were initially made even after

award.

In the case of Joseph T. Ryerson & Son, Inc., AFCAB, April 4, 1960,

the contractor's bid was 58 percent lower than the bid of two other

bidders on one item, and 32 percent below the bid of another bidder.

The existence of such a discrepency should normally alert a contracting

officer to the possibility of a mistake, and accordingly the contracting

officer in the Ryerson case requested verification of the bid, but failed

to mention this particular discrepancy. The contractor verified the bid

as requested, and was subsequently awarded the contract, which he per-

formed in full. When he eventually brought a claim for correction of

the foregoing mistake, the Air Force Contract Adjustment Board held that

the contracting officer should have called this
price difference to the contractor's attention in
requesting verification of the bid

and consequently found that

it will facilitate the national defense...to
increase the (contract) price .... 2/



1/ Rappoli v US, 98 Ct Cls 499 (1943).

2/ (Cf. Book Construction Co., AFCAB, April 4, 1960; Jayval Co., AFCAB,
April 23, 1961)






CRS-36


It is almost inconceivable that such a result could have been obtained

except under Public Law 804. Of course, as in the Rappoli case, supra,

where the right to process a claim is specifically reserved at the time

the contract is executed, a Contract Adjustment Board will entertain
1/
such a claim even after performance of the contract.

FORMALIZATION OF INFORMAL COMMITMENTS

The rules applicable to government contracts are markedly different

from those governing private contracts in the area relating to the

authority of an agent. In the case of private contracts it is not

unusual for the courts to hold that a principal is bound by the acts of
2/
an agent, even where the agent exceeded his authority.

However, where the question is raised of the authority of a govern-

ment official, it has been customary for the courts to look not only for

its statutory basis but also for a specific delegation under the statute.

The Supreme Court has said that when the United States becomes party to

a contract it is subject to the commercial rules of law (US v. Purcell

Envelope Co., 249 US 313 (1919); The Floyd Acceptances, 74 US (7 Wall.)

666 (1869); Lynch v. US, 292, US 571 (1934), but the results have often

been otherwise. In the words of one commentator,



1/ Blaw-Knox Co., ACAB No. 1019, Oct. 6, 1960.

2/ American Law Institute, Restatement of Agency, sec. 27 (1958);
Mechem, Agency, sec. 90.






CRS-37

While good faith reliance on agency rulings will probably
keep a man out of jail, there is considerable doubt whether
he is similarly protected against fines, injunctions, liabi-
lity for damages, forfeiture, license revocation and the like. I/

Accordingly, persons dealing with a government agent, or with

one purporting to be a government agent, are traditionally held to

be under a duty to ascertain the existence and extent of the agent's

authority. In the leading case of the Floyd Acceptances, cited supra,

the Supreme Court held that the Secretary of War was not authorized

to execute certain types of debt instrument, and consequently that

these instruments were not obligations of the United States. Although

it cited with approval the foregoing principle that government contracts

are subject to the usual rules of commercial law, the Court's decision

was based on the rationale that

We have no officers in this government, from the President
down to the most subordinate agent, who does not hold office
under the law, with prescribed duties and limited authority. 2/

In another case of approximately the same date (Filor v. US, 76 US

(9 Wall) 45 (1870), the Supreme Court permitted the United States to

deny the validity of a lease entered into on its behalf by various

Army officers, even though the United States had enjoyed the benefits of

the lease. The Court held that the officers had had no authority to

make the lease:

In signing the agreement, and in taking possession of the
premises claimed by the petitioners, they acted on their
own responsibility. Their unauthorized acts cannot stop
the government from insisting upon their invalidity, however


l/ Frank C. Newman, "Should Official Advice Be Reliable? Pro-
proposals as to Estoppel and Related Doctrines in Administrative
Law," 53 Col. L. Rev. 374 (1953).

2/ Ibid., p. 676.






CRS-38

beneficial they may have proved to the United States. 1/

As in the Floyd Acceptance case, supra, courts generally cite in

support of this result the rule of limited authority, but Lakes

proposes a somewhat different reason:

The basis for the fundamental difference in the law of agency
as it related to the Government and private individuals thus
rests on the fact that the authority of the government agent
is found in the Constitution and statutes, or proper delega-
tions thereunder, while the authority of the private agent
is not usually a matter of public record. 2/

The extent of an agent's authority can be a relatively complex
3/
question. In the case of Feltex v. Dept. of the Army the contracting

officer had modified a contract so as to provide for additional

payment, but he had failed to submit this modification to higher

authority for approval, as required by regulations. However, the

appeal board sustained the modification, holding that the contracting

officer would have violated the duties of his office if he had failed

to obtain approval in advance, and the board gave the contractor the

benefit of a presumption that the contracting officer had done his

duty.

The result in the Feltex case is not unique, but is hardly

typical. More usually the courts hold, as in Federal Crop. Ins.

Corp. v. Merrill, 332 US 380, (1946) that



1/ Ibid., p. 49.

2/ Lakes, op. cit., p. 173.

3/ 3 App. Bd. O.C.S. 226 (No. 293, 1949), cited in 25 Geo. Wash.
L. Rev. 169-170.






CRS-39


Whatever the form in which the Government functions,
anyone entering into an arrangement with the Govern-
ment takes the risk of having accurately ascertained
that he who purports to act for the Government stays
within the bounds of his authority. The scope of this
authority may be explicitly defined by Congress or be
limited by delegated legislation, properly exercised
through the rule-making power. And this is so even
though, as here, the agent himself may have been unaware
of the limitation upon his authority.

In the Merrill case, a government agent had advised the claimant

that his crop was insurable, even though the regulation provided

otherwise; but private citizens are presumed to know the law and

the regulations, and the Supreme Court of the United States reversed

the state court so as to deny payment.

Although for the most part the courts and the Comptroller General

have followed a strict rule in denying the validity of contracts

which are not in all respects authorized by law, they have carved out

an exception where the defect is essentially procedural and the

person purporting to act for the government is in fact authorized to

execute a contract. As the Comptroller General has described this

exception,

Where goods are furnished or services are rendered on the
request or order of an officer who is unauthorized to con-
tract for the United States and to procure such goods or
services for the use of the United States, there is recognized
an implied contract to pay the reasonable value of such
goods and services actually furnished when the contract it-
self is void because not executed in the form required by
law...But if the officer or employee who makes the arrange-
ment has no authority to contract for or to procure such
goods and services for the Government, no contract, implied
or otherwise, can be created by the delivery of goods or the
rendition of services at his request, even though it appears
that the Government may have been benefited thereby. 1/


1/ 18 Comp. Gen. 568, 572. (See Clark v. US, 95 US 539 (1877).






CRS-40


Because of the large number of procedurally defective agree-

ments made by the government during wartime, the Dent Act (Act of

March 2, 1919, 40 Stat. 1272) authorized the correction of such

defects in some of these agreements:

The Secretary of War...is hereby authorized to adjust,
pay, or discharge any agreement, express or implied,
upon a fair and equitable basis...by any officer or
agent acting under his authority...when such agree-
ment has been performed in whole or in part; or expen-
ditures have been made or obligations incurred upon
the faith of the same .... .1/

Although this type of adjustment seems conceptually similar to the

amendment without consideration heretofore discussed, in fact it

appears that the formalization of informal commitments was not
2/
accomplished pursuant to Title II of the First War Powers Act, but

instead was effected, at the end of World War II, under the Contract

Settlement Act of 1944, 58 Stat 649.

At present, the formalization of informal commitments is authorized

pursuant to Public Law 85-804. ASPR provides that

Informal commitments may be formalized under certain
circumstances to permit payment to persons who have
taken action without a formal contract; for example,
where any person, pursuant to written or oral instruc-
tions from an officer or official of a Military Depart-
ment and relying in good faith upon the apparent author-
ity of the officer or official to issue such instructions,
has arranged to furnish or has furnished property or
services to a Military Department or to a defense contrac-
tor or subcontractor without formal coverage for such pro-
perty or service. Formalization of commitments under
such circumstances normally will facilitate the national
defense by assuring such persons that they will be treated
fairly and paid expeditiously.



1/ Act of March 2, 1919, 40 Stat. 1272.


2/ Lakes, p. 202, n. 26.






CRS-41

Illustrative of the use of this authority is the University of Alabama

case, ACAB No. 1024, March 26, 1961, where the Army Contract Adjust-

ment Board found that for several years the University had conducted

graduate courses for the Army, but that no formal contract was in effect

following October 1, 1959, the expiration date of the previous contract.

The University continued to conduct classes, without formal contract

coverage, for several months. The Board, in finding that an informal

commitment existed, stated as follows:

While the evidence in this case does not indicate that there
were express written or oral instructions to the University
of Alabama it does, nevertheless, indicate that such instruc-
tions were implied from the actions of Government personnel.
The University of Alabama had previously conducted such
courses...Government personnel knew that the University of
Alabama was conducting the courses during the period of
1 October 1959 through 20 December 1959 for which it expected
to be paid (but) made no effort to discontinue the services
(and) permitted its personnel to continue in the courses...
Under these circumstances the Board finds that there was an
implied commitment to the University of Alabama.....

Similarly, in the case of Asiatic Petroleum Co., NCAB, Sept. 22, 1960,

the Navy Contract Adjustment Board permitted the contractor to recover

under an informal commitment to furnish certain petroleum products,

where the basic contract had expired but the parties believed it

was still in effect.

In General Steam Navigation Co., ACAB No. 1007, Feb. 26, 1960,

however, the Army Contract Adjustment Board went substantially beyond

the point at which the Comptroller General would have formalized the

commitment, since the government agent had no contracting authority.

Contract Adjustment Boards generally do not presume that contractors

are aware of any limitations on the authority of government agents,


7",,- 0 76 6






CRS-42


and in fact it has been stated that

If an individual furnishes supplies or renders services to
the Government on the basis of a request from an officer
or official of a Military Department, reliance in good
faith on the part of the supplier is in some instances
assumed by the Contract Adjustment Boards without inquiry
into the question of whether the supplier knew or should
have known of the limitations on the authority of the
agent. I/

The authority contained in Public Law 85-804 is subject to very

few limitations. However, section 2 provides that

Nothing in this Act shall be construed to constitute
authorization hereunder for
(f) the formalization of an informal commitment,
unless it is found that at the time the commit-
ment was made it was impracticable to use normal
procurement procedures.

Accordingly, although the statute has been widely used for formalization

of informal commitments, Contract Adjustment Boards have regularly made

a finding that such commitments were entered into because normal procure-

ment procedures were impractical; the rationale behind the statutory

rule is well stated in the Santini case, ACAB No. 1026, March 10, 1961:

The Government frequently finds itself in a dilemma in cases
of informal commitments the Government clearly benefits
from the materials received or the services rendered under
the informal commitment, but there also is a need for main-
taining a policy of contracting only with authorized personnel
through authorized procurement procedures. The limitation in
the quoted (statutory) provision is an attempt to resolve the
Government's dilemma by preventing the possibility that the
extraordinary authority in this act could be used as a sub-
stitute for normal procurement procedures. The determination
of whether the use of normal procurement procedures was
impracticable at the time the commitment was made must depend
upon the facts and circumstances of the particular case.
However, one of the more important considerations in making
this determination necessarily must be whether there is any
evidence or indication that the informal commitment was used as


i/ Lakes, op. cit., p. 189.






CRS-43

a convenience to circumvent or evade unnecessarily the
statutory or administrative provisions involving military
procurement. In such cases, the benefit to the Government
which would result from the formalization of the informal
commitment must yield to the paramount interest of the
Government in protecting public funds as manifested in
the requirement that procurement generally be accomplished
through normal procedures. On the other hand, if the infor-
mal commitment resulted from mistake of fact or error
on the part of government personnel, the policy of contracting
only through authorized procedures would not be prejudiced
by formalizing a commitment to a person who has supplied
goods or services to the Government in good faith.

Finally, it may be noted that although ASPR authorizes relief to

a subcontractor, instances of such relief appear to have been extremely
1/
rare. However, it seems clear from an opinion of the Comptroller General

that relief to subcontractors is authorized, and the Army Contract

Adjustment Board provided such relief in the case of Bolinders Co.,

ACAB No. 26, Aug. 10, 1951, where its decision stated that the "increased

consideration (was) to be for the benefit" of the subcontractor.

RESIDUAL POWERS

Although in the history of Public Law 85-804 and the predecessor

statutes most attention has been given, by Congress and by legal commen-

tators, to amendments without consideration, there have been a significant

number of actions taken under the so-called "residual" powers. Residual

powers are defined in the Armed Services Procurement Regulation (see

ASPR 17-300, 32 CFR 17.300) only by exclusion they include such

powers as are not dealt with elsewhere in the regulation and it is

therefore probably more useful to give some examples of the types of

action for which they have been used. Among these are: the disposal

of government property; the indemnification of contractors against


l/ 35 Comp Gen. 328 (1955).






CRS-44


extraordinary risks; the execution of contracts without regard to

specific statutory requirements, such as the Buy-American Act; the execution

of contracts providing for a limited degree of arbitration, and so on.

For the most part, individual cases involving the use of these residual

powers will not be discussed in detail, since they do not occur frequently

enough; however, some attention will be given to the problems of

disposal and indemnification.

Article IV, Section 3 of the Constitution provides that Congress

shall have power to dispose of, and make all needful rules
and regulations respecting the territory, and other property
belonging to the United States.

1/
In the leading case, US v. Nicoll, an Army captain in command of

the New York City arsenal had sold some lead that had been stored in

the arsenal, and the United States sued for its return. Apparently

it was clear that the captain was acting without authority, but there

was some question as to whether the War Department could ratify his

actions. The court held that

There is no such express or implied power in (the War)
Department to sell the public property put under its
management and superintendence. 2/

The rule that officers of the executive branch can dispose of Govern-

ment property only pursuant to express or implied authority granted

by Congress is still followed. See Royalty Indemnity Co. v. US,

313 US 289 (1941).


1/ 27 Fed. Case. 149, CCDNY 1826.

2/ Ibid., at 150.






CRS-45


The Congress has enacted a number of statutes which provide for

the disposal of government property. At the present time, the princi-

pal disposal statute is the Federal Property and Administrative Services

Act of 1949, as amended (40 USC 471 et seq.) which requires that most

disposals be accomplished by advertised sale. There are however, certain

specialized statutes dealing with disposal of a certain type of property -

airport property, park property, educational property, and so on-which

authorize disposal without advertising to states, municipalities, and

to other preferred recipients.

In the course of the various hearings on Public Law 804 and the

predecessor statutes, mention was regularly made of the necessity of

accomplishing procurements expeditiously, where the defense effort was

involved. Nowhere, however, was there any suggestion that it might also

be important to achieve the same expeditiousness in the case of disposals,

and neither the statute nor the various executive orders refer to dis-

posals. Nevertheless, the Judge Advocate General of the War Department,

confronted with the question, ruled that the Title II authority "to

enter into contracts and into amendments or modifications of contracts"
1/
included contracts of disposal. The opinion indicated, however, that

ordinarily disposals should be accomplished under Title II only where

procurement was the "primary objective," and disposal was only "inci-
2/
dental ."-


I/ SPJGA 160, April 17, 1942.

2/ Ibid.




r
i
CRS-46


Accordingly, prior to 1970, disposals were regularly made by the

Department of the Army under the authority of Title II, or Public Law

804, but in general a finding was made with respect to each disposal

that would justify the failure to use the procedures of the Federal

Property Act. Thus, a common situation involved the disposal of faci-
|
lities used by a defense contractor for the performance of one or

more defense contracts. In one fairly typical case, it was deter-

mined that the Government would incur costs in dismantling, packing,

loading, and transporting the property, and in rehabilitating the

contractor's or premises, which would be uneconomical in terms of the

market value of the property, which was approximately ten percent of

the acquisition cost. In addition, the contractor agreed to maintain

the facilities in good operating condition and to make them available

for use in existing and future contracts as required, for a period of
1/
five years. There were many cases in which Government-owned equip-

ment or facilities, furnished to a contractor for use in performance

of a Government contract, was subsequently sold to the contractor on

a negotiated basis.

Significantly, although the Department of the Army, in reliance

on the opinion of its Judge Advocate General (cited supra), made regular

use of Title II and its successor statutes in the disposal of certain

types of real and personal property, the Department of the Navy cast


I/ See Lakes, op. cit., p. 311.






CRS-47

some doubt on the legality of this procedure. (See Navy Contract Law,

Sec. 10.52, which states that "it does seems stretching the wording

of the First War Powers Act to say that it includes disposal authority.")

This matter was finally resolved in a case involving the sale of

an Air Force facility at Burbank, California, to the Lockheed Aircraft

Corporation. The Administrator of General Services had determined,

pursuant to his authority under the Federal Property Act, that a

negotiated sale was in the best interests of the United States,

partly because the facilities of the Government and those of the con-

tractor located on the site were intermingled to a point where their

separation was not feasible, and accordingly that the negotiated sale

price to Lockheed was "far above" the appraised value of the property.

Specifically, the Administrator found that:

1. The overall interests of National Defense will best be served
by such a negotiated sale in that:
a. The Secretary of Defense has determined that the facility
is necessary for defense production for five years from the
date the property is sold.
b. Continued Government ownership is not in the best interests
of the United States in that buildings and equipment on the pro-
perty are obsolete and in need of expensive and extensive repairs
and alterations.
c. The property owned by the United States is so intermingled
with and dependent upon the property owned by the contract opera-
tor that it would be infeasible to attempt to separate the property.
d. The Department of Defense has advised that only Lockheed can
operate the scrambled facilities and has reported the property
for sale only to Lockheed.
e. Separation of the property (if possible) would destroy the
capability of the facility to function in the defense effort of the
United States.
f. The negotiated sale price of $30,037,500 is far above
the appraised value.... i/


1/ Congressional Record, v. 120, Jan. 29, 1974: S. 587. The legal
opinion of the Department of Defense is set forth in the Appendix.






CRS-48

The sale had aroused considerable concern on the part of Congress,

particularly because of anti-trust objections expressed by the Depart-

ment of Justice. In addition, there was incorporated into the record a

legal opinion of the Defense Department General Counsel stating that

We are of the opinion that there is no existing disposal
authority that is adequate to support a Defense program
which seeks to dispose of Government-owned industrial
equipment on a negotiated basis to contractors in posses-
sion of such property and at whose plants the property is
located. 1/

By implication, the authority contained in Public Law 804 was considered

inadequate by the General Counsel as a basis for at least some of the

disposals described above.

Consequently, and in pursuance of the foregoing opinion, the Depart-

ment of Defense currently does not engage in negotiated disposals under

the authority of Public Law 804. In addition to expressing this legal

view, the General Counsel stated that

It is our opinion that future dispositions of DOD
industrial equipment should be based on specific
authority to be obtained from the Congress. 2/

As the opinion pointed out, such authority had been sought by the Depart-

ment of Defense for a considerable period of time, and on several occas-

sions these requests had been transmitted to the Congress and even intro-

duced. A typical provision is contained in S. 3122, 90th Congress

which would have added a new section 2315 to Title 10, United States Code,

dealing with Government production equipment. The section provides in

part as follows:


1/ Cong. Rec. for January 29, 1974, at p. 589.

2/ Ibid., p. S.589.






CRS-49


Sec. 2315(c)(l). Under such regulations as may be
prescribed by the Administrator of General
Services, the secretary of a military depart-
ment or the head of a defense agency...may
sell to a contractor items of production equip-
ment and special tooling and special test equipment
which is owned by the United States and under the
control of that department or agency and which
are located at the facility of the contractor.
(2) Sales under this section shall be made at no
less than a fair and reasonable price, and in
the case of equipment used or planned for use
in the development or production of supplies
for, or the furnishing of services to, the
United States, upon such terms as to assure
for a reasonable period after the sale the
property or its replacement will be available,
on a priority basis, for the performance of
contracts of the United States or subcontracts
thereunder. I/

However, none of the bills was enacted. In view of the fact that

the Department of Defense has repeatedly sought this authority and,

indeed, has used it, in accordance with the Army's now overruled inter-

pretation of Title II it might seem feasible either to include such

authority explicitly in an extension of Public Law 804 or else to

provide some legislative history clarifying the application of the

statute to disposal contracts.

Although there were long-standing doubts within the Department of

Defense as to legality of utilizing Public Law 804 as authority for a

disposal program, there was never any question regarding use of the

statute for indemnification against so-called "extrahazardous" risks.

See, for example, statement of James P. Nash, Assistant Counsel, Office


I/ Cf. S. 2007 and HR 14696, 91st Cong.






CRS-50

of the Secretary of Defense, that"...in the area of the so-called

residual powers...we might need in a contract a provision for

indemnification... We are engaged in nuclear reactor programs,

missile development, and particularly today title II authority
i/
is important in these areas." The practice is virtually as old

as the statute itself, and indemnification agreements under Title

II were utilized in connection with the Manhattan Project.

The Department of Defense possesses statutory authority,

apart from Public Law 804, for the use of indemnification clauses,

but it is of limited application. Authorization for the Secretary

of a military department to approve the inclusion in research or

development contracts of a provision indemnifying the contractor

against claims of third persons, or loss of or damage to property,

or both, is contained in 10 USC 2354. However, the statute is not

only limited to contracts for research or development, but it is

also limited to claims or damages arising from "a risk that the

contract defines as unusually hazardous."

This latter statute dates from 1952, and it is clear from the

legislative history that its application was limited to contracts for

research or development for the reason that in those areas the risks

involved were not susceptible of easy evaluation. As the Senate

report on the bill stated,

In many cases, contractors are reluctant to undertake a
research or development contract involving extremely
hazardous new developments without securing adequate


I/ Hearings before Subcommittee No. 4 of the Committee on the
Judiciary, House of Representatives, 85th Cong., 2nd Sess.,
on HR 12894, at p. 44.






CRS-51


protection in the event of liability resulting from
claims made as result of damage from those experiments.
No provision can be made for such protection by includ-
ing a reserve in the contract price, and the cost of
insurance, if at all obtainable, would be prohibitive.
The solution is for the Government to agree to indemnify
such a contractor, subject to the safeguards provided
in this section. I/

Thus, contracts for research and development of nuclear submarines

contained indemnification provisions included pursuant to 10 USC
2/
2354 but it also proved necessary to use such a

clause during the production phase, and for this purpose Title II

and Public Law 804 were relied upon as authority.

The foregoing system that is, utilizing one statutory authority

during research and development, and another set of statutes during

the production phase appears to have worked satisfactorily. However,

it is significant that on the civilian side of the nuclear power industry

the procedures have been quite different. Thus, under the Price-Anderson

Act (Section 170 of the Atomic Energy Act of 1954, as amended, 42 USC

2210) there was originally established (i.e., in 1957) a fund of $560

million for the payment of claims in the event of a nuclear incident.



i/ The safeguards referred to presumably include the statutory
provisions that 1) notice must be given of the filing of
suit or claim; 2) the United States may, at its election,
control or assist in the defense of the suit or claim;
and 3) no payment will be made under the statute until
certified by an appropriate officer of the department to
be just and reasonable.

2/ Lakes, p. 336.

3/ 1958 hearings, pp. 8 and 24.






CRS-52


Of this, $500 million represented the amount of the government

indemnity, and $60 million represented the "then-existing...maximum
1/
available private liability insurance...." By contrast, the

indemnification agreements executed by the Department of Defense

are subject to no limitations on liability.

Secondly, the report on the recent amendments to Price-

Anderson pointed out that

The amount of private insurance had gradually risen, so
that it stands now at $125 million; the Government's
indemnity has commensurately decreased to $435 million. 2/

The committee recommended such a change for the reason that it

believed the nuclear power industry should be required

to gradually assume greater financial risk through a system
of private insurance. 3/

In other words, the committee expected private insurance to take

over the burden originally covered by the government indemnity. The

expectation is described in somewhat stronger terms by the minority:

...in extending the law (i.e., from 1965 to 1977), the
Congress expressed the hope that by the end of the second
ten-year period "data will have been accumulated which should
enable the industry and the Congress to assess much more
accurately the likelihood of a major nuclear incident and
the insurance requirements of the nuclear industry." In other
words, the Congress, both in 1957 and in 1965, had every x
expectation that the protections afforded under Price-Anderson
would be able to ended at the end of each ten-year extension. 4/



1/ S. Rept. 93-454, US Code Cong. and Adm. News, 1975, p. 3996.

2/ S. Rept. 94-454, US Code Cong. and Adm. News, 1975, p. 3996.

3/ Op. cit., p. 3995.

4/ Op. cit., p. 4016.






CRS-53


Accordingly, the minority view was that

the best interests of the public and ultimately of the nuclear
power industry would be better served by allowing the protection
of Price-Anderson to lapse as scheduled in 1977. i/

Price-Anderson, then, not only includes a statutory limitation on

the government's liability; it is based on the assumption that at

some point the risk will be entirely covered by private commercial

insurance. The Department of Defense indemnification program is

different in both these respects; while it may be that continuation

of the government indemnity is preferable to the Price-Anderson approach
2/
"since the Government often acts as a self-insurer" -presumably be-

cause it is cheaper to do so it would appear that there has never

been any thorough examination of the reasons underlying the disparities

between the two programs.

LEGISLATIVE POLICY

The cases arising under Public Law 804 and the predecessor statutes

have been fairly consistent in indicating an intent to facilitate the

national defense. This is, of course, the stated purpose of the act,

and much of the controversy it aroused fifteen or twenty years ago has

long since been laid to rest. But in light of the real possibility

that these "emergency" provisions may become permanent law, it seems

useful to review some of the history.

First, it may be helpful to discuss the inquiry conducted in the

82nd congress by the Senate Select Committee on Small Business. As



l/ Op. cit., p. 4016.

2/ Ralph C. Nash, Jr. and John Cibinic, Jr., Federal Procurement Law.
George Washington University, 1969. p. 802, n. 1.






CRS-54

stated by Senator Sparkman, the chairman, in a subsequent article,

The inquiry raised a serious question as to whether the
Department of Defense had correctly interpreted the will
of Congress in implementing the law, or whether it had
in fact thwarted the will of Congress through its administra-
tion of a law which had been promulgated, in part at least,
to protect small business during the mobilization period.l/

The Senator referred to the letter addressed by President Truman to

the Congress, requesting extension of this emergency authority, in

which the President mentioned the fact that some Government suppliers

were facing "possible bankruptcy because fixed prices in their

Government contracts are entirely inadequate to meet rising costs."2/

The hearings did in fact place some emphasis on the problem of

individual contractors, as contrasted with the needs of the national

defense effort; the Undersecretary of the Army testified that

... We have in the Army alone 45 instances of contractors,
almost exclusively small business, who made fixed price contracts
with us in May or April (of 1950) or earlier, and due to
the rise of costs, they cannot possibly carry out those
contracts without going bankrupt...I do not think they can
last 3 weeks. If we lose them as suppliers our position
will be definitely worsened.3/

While the Undersecretary did make reference to a "worsened" position,

this was much less stringent than the "essentiality" criterion which has

traditionally been used in the administration of extraordinary contrac-

tual relief; clearly his emphasis was more on the economic hardships of

the contractors.


I/ John Sparkman, The Administration of Title II, First War Powers
Act, 1941, in 14 U. Pitt. Law Rev. 303, 304 (1953).

2/ Ibid., p. 305.

3/ Hearings before the Senate Committee on Expenditures in the Executive
Departments on S.4266, 81st Cong., 2d Sess. 27, 28-9 (1950).






CRS-55

In any event, the Senate Select Committee, studying the situa-

tion in 1952, found that little relief had been granted to contrac-

tors suffering losses under fixed-price contracts, and concluded that

the principal difficulty lay in the regulations promulgated
by the Department of Defense .... .1/

In the words of the Committee,

It is obvious that the test laid down in the joint regu-
lation is far more stringent than the test set forth in
the law. It can be argued that any contractor who is
producing defense goods is facilitating the national de-
fense, but it cannot be argued that every defense contrac-
tor is essential. 2/

The Committee found that the statute had a twofold purpose:

namely, to protect military sources of by keeping
defense suppliers in business and to afford relief to
business v suffering heavy losses on fixed-price contracts. 3/

4/
In 1952, legislation was introduced which provided for a simple

extension of Title II for one additional year, or until June 30, 1953.

Prior to its passage, the Senate Select Committee had concluded, on

the basis of its hearings, that the legislative purposes it found in

Title II could be carried out without a change in the law, and accord-

ingly suggested to the Department of Defense that its regulations be

amended by deleting the reference to essentiality. The Department of

Defense rejected the suggestion, stating in part:


I/ Sparkman, op. cit., at p. 310.

2/ S. Rept. 1459, 82d Cong., 2d Sess. 23 (1952).

3/ Ibid., p. 21.

4/ S. 2321, 82d Cong., 2d Sess.






CRS-56

While the ultimate test in the regulation, as in the statute,
is the facilitation of the national defense, one of the
principal criteria is essentiality. Therefore, with
reference to your suggestion that the example dealing with
essentiality quoted in our regulation be deleted, it
would appear that in the normal case (in the absence of
special circumstances such as action by the Government
contributing to the increased price), a finding that the
continued operation of a contractor will facilitate the
national defense would depend on a showing of essentiality.
If the continuing productive capacity of the contractor
is not essential to national defense, relief, in most cases,
would have to be granted to him on the basis of the overall
benefit to the national defense resulting from the general
health of the economy, a proposition so broad that this
Department would find difficulty, without legislation
specifically authorizing general relief, in justifying the
expenditure of funds made available by the Congress for
the purpose of national defense. For this reason the
Department of Defense would find it impracticable and
unwarranted to amend its regulations along lines proposed
by the committee which in effect, would mean that relief
would be granted solely on the basis of "extreme hardship." I/

Accordingly, in order to justify an amendment without considera-

tion except in the "Government Action" cases, ASPR has provided that

a contractor's continued operation must be "essential to the national

defense"; mere "facilitation" is not enough. Furthermore, the contract

adjustment is authorized only to the extent necessary to avoid impair-
2/
ment to the contractor's productive capacity. The failure of the

Department of Defense to amend its regulations in accordance with the

view of the Senate Select Committee did not totally end the controversy.

Bills were introduced in the 83rd and 84th Congresses to amend Title II

along these lines (see for example S. 1175, 83rd Congress), but none of

them were enacted. S. 1175 would have amended the definition of "facili-

tating the national defense" to include "affording relief to contractors


I/ Sparkman, op. cit., at p. 315.

2/ ASPR 17-204.2(a), cited supra, p. 4.






CRS-57


incurring extreme financial hardship on fixed price contracts due to

factors beyond their anticipation or control." There were also several

private relief bills introduced (see S. 3364 and HR 8303, 82nd Congress,

2d Session), but they too failed of enactment.

The rules spelled out in ASPR, then, while stricter than the

law requires, have always governed the administration of Public Law 804.

In the course of the hearings on HR 12894, 85th Congress, which become

Public Law 804, the Department of Defense gave testimony that

in 1951 we had many urgent requests of contractors with
respect to obtaining relief because of rising prices. We
did not give relief in those cases unless the contractor
was more or less essential to the particular military de-
partment involved. Unless we needed his continued produc-
tion, we did not give an amendment without consideration
because of those economic conditions .... We have not used...
this authority to relieve economic dislocations or to
relieve particular contractors because of economic situa-
tions. I/

While the Select Committee made a concerted effort to liberalize Title II,

there appears to have been no serious attempt to make it stricter. Never-

theless, at least one law review article has objected to "the undesirability

of allowing the discretion under the Act to be widely and variously

delegated," and has also suggested that the Congress has never fully
2/
examined the way in which the statute is being administered.


i/ Hearings on HR 12894 before Subcommittee No. 4 of the House
Committee on the Judiciary, 85th Cong., 2d Sess. 44
(1958).

2/ C.S. McClelland, The Administration of Title II of the First
War Powers Act, 61 Dick. L. Rev. 215, 247 (1957).






CRS-58

Most recently, there has been a new approach to the problem

of granting relief based solely on hardship, and contractual relief

for small businesses is now authorized without reference to whether

such action would facilitate the national defense. Section 2 of

Public Law 94-190 (the Small Business Emergency Relief Act) provides

Lhat

It is the policy of Congress to provide relief to small
business concerns which have fixed-price Government
contracts in cases where such concerns have suffered or
can be expected to suffer serious financial loss because
of significant and unavoidable difficulties during per-
formance because of the energy crisis or rapid and un-
expected escalations of contract costs.

It may be noted that in order for relief to be granted under this

statute, a number of findings must be made, including a finding that

the conditions which have caused or are causing such cost
increase were, or are being, experienced generally by other
small business concerns in the market at the same time and
are not caused by negligence, underbidding, or other special
management factors peculiar to that small business concern. I/

By contrast, a finding of negligence on the part of the contractor

would not preclude relief under Public Law 804. A further restriction

under Public Law 190 is that the contractor be within

the size limitations of the "Small Business Administrator's
Definitions of Small Business for Government Procurement."2/

This latter qualification, like the preceding one, has no counterpart

under Public Law 804. It would seem that the two statutes will be

applied to distinct types of cases: Public Law 804 to "essentiality"

and "government action" cases, and Public Law 190 to cases where the


I/ Sec. 4(a)(2) of Public Law 94-190.

2/ Sec. 3(2) of Public Law 94-190.






CRS--59


justification for relief is based almost solely on hardship. It is

too soon to tell whether in fact there may be some degree of overlap.

It should be noted that the authority contained in Public Law 190 is

temporary it terminates September 30, 1976 but there appears to

be at least a possibility that longer-range legislation may ultimately

be enacted in accordance with the policy set forth above.

It should be pointed out that the Department of Defense Appro-

priation Act for FY 1974 (Sec. 807)(a) of PL 93-155) added an amend-

ment to Public Law 804 under which the extraordinary authority con-

tained therein "may not be utilized to obligate the United States in

any amount in excess of $25,000,000" until the Armed Services Committees

have been notified in writing of the proposed action, and unless 60

days have elapsed since such notification without either house adopting

a disapproving resolution. Furthermore, it is understood that many

proposed actions under Public Law 804, although not legally within the

foregoing statutory requirement, were reported in advance to various

congressional committees.

As indicated, suggestions have been made that statutory authority

of this kind should be operative only during a national emergency.

Indeed, the statute provides that it shall be effective

only during a national emergency declared by Congress or
the President and for six months after the termination
thereof or until such earlier time as Congress, by con-
current resolution, may designate. I/


1/ Section 5 of PL 85-804, 50 USC 1435.






CRS-60

Nevertheless, Public Law 804 authority continues to be exercised

pursuant to the Executive Order signed by President Eisenhower in

1958, and was amended as recently as 1971. (EO 10789, Nov. 14, 1958,

23 Fed. Reg. 8897, as amended by EO 11051, Sept. 28, 1962, 27 Fed.

Reg. 9683; EO 11382, Nov. 28, 1967, 32 Fed. Reg. 16427; EO 11610,

July 22, 1971, 36 Fed. Reg. 13755.)

The Chairman of the House Armed Services Committee addressed

a letter to the Secretary of Defense on August 29, 1975, in which he

inquired, among other things, whether Public Law 804 was still needed,

or whether it should be repealed. In particular, the Chairman expressed

the Committee's concern about the apparent pressures within the contrac-

ting community and within the Department of Defense to dispose of diffi-

cult problems, including potential claims, by the use of Public Law 85-

804 in lieu of disposition under the terms of the contract or through

litigation.

In reply, the Department of Defense stated that

With respect to pressures to dispose of difficult
problems, including potential claims, through use
of the statute rather than in accordance with
contract terms or litigation as stated in your
letter, we believe that the essentiality as a
source of supply test coupled with the impairment
of productive capability test which have been
employed in determining whether relief is granted
have successfully met those pressures.

The Department of Defense made brief reference to the various types of

relief granted under Public'Law 804, but nowhere indicated that the

statute should be utilized only during a national emergency; it stated

that the law had proved "extremely useful to this Department" and "should

remain available for future needs."






CRS-61


Indeed, although the letter of the law makes it unquestionably

clear that the congressional intent was to enact legislation effective

only during an emergency plus six months, there is language in the debates

on the bill which indicates that the type of problem the statute was

designed to cure might arise at any time. Thus, in the course of the

1958 debates on the bill making the authority permanent, Mr. Robison

stated that

there will always be a field where legislation such as this
will be needed to take care of unusual situations that will
arise in providing for the weapons of national defense.

Not only in this prefatory remark, but in his subsequent discussion, it

seems clear that the congressman is not limiting himself to periods of

national emergency. Mr. Robison continues:

I will give you one example, that of a contract to build a
ship. Suppose you get half through the construction of
the ship and something goes wrong, perhaps through bad
management, perhaps through something unavoidable, never-
theless, the shipyard finds that it cannot continue under
the terms of the contract and complete the ship. The
question then arises whether or not the Defense Department
should rescind the contract, sue the contractor for damages,
and take the ship over to some other yard for completion.
But, of course, it cannot work that way. As a practical
matter, national defense would require the ship to be com-
pleted in that yard, even though it might require the
renegotiation of the contract. Writing new laws relating
to Government contracts will not take care of a situation
such as this. The Defense Department must have the spe-
cial powers provided by this legislation, where, under
the supervision of Congress, they would have leeway to
&o ahead and get the ship completed, even if, unhappily,
in some instances it would require more money. I/


I/ See p. 15470 of the Congressional Record for July 29, 1958.






CRS-62


Divergent views as to whether the legislation should be based

on the proclamation of a national emergency were outlined by Mr.

Drabkin, counsel for the House Judiciary subcommittee, and Mr. Nash,

counsel for the Department of Defense, in the course of the 1958

hearings on extending the Title II authority.

Mr. Drabkin...The legislation you are proposing here
is predicted upon a national emergency...(We have heard)
that the increased procurement, the large volume of
procurement we have now, is likely to continue into...
the indefinite future. I do not think any of us can
foresee a time when that procurement will be diminished.
Yet this whole legislation is predicated upon national
emergency either as proclaimed by the President or by
Congress. When something becomes a matter of course it
ceases to be an emergency. Many people have expressed
the view that the national emergency we are in now is
a rather artificial device. It is now 7 years and
1 war after, it was first declared. Is it necessary
that this legislation be predicated upon a national
emergency or is this something which has now become
a matter of course as a result of our new status in
the world?
Mr. Nash...(I)t was the original intention of the
Department of Defense to ask the Congress for this
authority on a permanent basis regardless of the exis-
tence of a national emergency. It was at the recom-
mendation or direction of the Bureau of the Budget
that this legislation was reworded to limit it to the
current national emergency and any future national
emergency. i/

The controversy over whether the authority should be for an

emergency nature or not has been rendered almost academic, by the

report of the Commissionm on Government Procurement which concludes

that


I/ Hearings before Subcommittee No. 4 of the Committee on the
Judiciary, House of Representatives, 85th Cong., on
HR 12894, at p. 42.






CRS-63

the procurement process, in civilian as well as in
defense agencies, in war as well as in peace, requires
adjustments of the kind authorized by Public Law 85-804.
The law should be made permanent and not conditional
upon the existence of a declared national emergency. l/

Nevertheless, the views of the Commission, so far as can be

determined, were based largely on the reports regularly submitted to

Congress relating to actions under Public Law 804; to a considerable

degree, the field has never been exhaustively explored.

PROSPECTS FOR CONTINUED USE

As indicated above, the provisions of Public Law 804 remain

effective until a termination of the emergency declared during the

Korean War. The pending bill, HR 3884, 94th Congress, would terminate

that emergency effective two years from the date of enactment. How-

ever, section 502(a)(6) of the bill states that its other provisions

do not apply to Public Law 804, although the Senate and House committees

having jurisdiction over the law would be directed to investigate its

administration and to make recommendations as to any possible revisions.

Consequently, several questions emerge which the cognizant committees

may wish to consider as the basis for their recommendations: 1) Should

Public Law 804 be reenacted in such manner that its provisions shall

not be dependent on the finding of a national emergency? 2) If Public

Law 804 is to be reenacted, should it be used for all the purposes

for which it is presently used? 3) Is it feasible or desirable to limit

the government's liability under indemnification provisions, as is done



l/Summary of the Report of the Commission on Government Procurement,
publ. Government Printing Office, December 1972, at p. 100.
A more extensive excerpt from the summary is included as
Appendix B.






CRS-64


pursuant to the Price-Anderson Act? 4) Is it necessary or desirable

for government agencies to have an emergency disposal authority comparable

to the emergency procurement authority which has been exercised under

Public Law 804? 5) Do the problems of which Public Law 804 has provided

a solution arise with sufficient frequency and sufficient urgency in

the case of the non-defense agencies to justify vesting them with this

extraordinary authority?






S U ;.-IA R Yi'


The objective of this study is to examine the purpose and effect

of a statute, originally enacted in 1958, whereby defense contractors

encountering difficulties in the performance of their contracts have

been awarded various types of "extraordinary" relief.

The statute currently in effect, which is generally known as Public

Law 85-804, is examined in considerable detail; however, it was preceded

by a wartime statute known as Title II of the First War Powers Act, and

the administration of this statute is also investigated. The background

of these laws, including their legislative history, is extensively

explored in the first part of the study.

Following a chronological listing of the events surrounding the

development of these statutes, Public Law 85-804 is analysed, together

with the executive order issued under it, and Section XVII of the Armed

Services Procurement Regulation (ASPR). Section XVII of ASPR describes

in some detail the types of extraordinary relief which may be provided:

amendments without consideration; correction or mitigation of mistakes;

formalization of informal commitments; and other miscellaneous actions.

The study discusses at length the common law of contracts, and

the rule enunciated by the Comptroller General that, in general, "no

officer of the Government has authority to give away or surrender a

right vested in or acquired by the Government under a contract." The

study points out that, although the rule just cited would generally

prohibit an "amendment without consideration," the Department of Defense

has developed procedures under Public Law 804 to effect such an amend-

ment, and to award a contractor additional compensation, where there is






ii


an actual or threatened loss under a defense contract
(which) will impair the productive ability of a contractor
whose continued performance on any defense contract...
is found to be essential to the national defense....

These "essentiality" cases are the first type of case to be analysed in

in the study. Next, the study analyses the "government action"

cases, where the contractor

suffers a loss (not merely a diminution of anticipated profits)
on a defense contract as a result of Government action....

The study points out that in order for the Department of Defense to

award relief on this ground, it is generally necessary that the action

of which the contractor complains be taken by the government in its

capacity as party to the contract, rather than in its capacity as

sovereign.

The study also refers to the distinction between claims which

can be settled under the terms of a contract, and claims which can be

settled only through the awarding of extraordinary relief under Public

Law 85-804. The Armed Services Procurement Regulation specifically pro-

vides that this statutory authority will not be used except where "other

legal authority in the Department is deemed to be lacking or inadequate."

This distinction assumes considerable importance in connection with a

proposed action of the Department of Defense which was announced on

April 8, 1976, subsequent to the preparation of this study. It is under-

stood that the Deputy Secretary of Defense, in announcing to Congress his

decision to pay $1.7 billion in shipbuilders' claims under Public Law 85-804,

gave as his reason for using this extraordinary remedy the argument that

the large backlog of outstanding claims created an undesirable atmosphere

in which to conduct business. Although the author has seen none of the






iii


documents pertaining to these claims, his information is that they

do not involve financial hardship, as has regularly been required as

a precondition to amendments without consideration under Public Law 85-804;

instead, it is understood that they are claims made pursuant to the terms

of the contract claims for extra work, for example which were being

dealt with in accordance with usual contractual procedures. Accordingly,

the proposed actions, which the law requires to be reported to Congress

in advance because of the large amounts of money involved, will represent

a major departure from the usual situation in which relief is granted

under Public Law 85-804.

The next part of the study deals with the use of Public Law 85-804

to correct mistakes in government contracts. There is some discussion of

the fairly liberal common-law rule authorizing the withdrawal of bids

prior to acceptance; of the stricter rule of the Comptroller General

which for the most part prohibits the withdrawal or modification of bids

after opening and permits correction of mistakes only in a limited number

of cases; and of the extremely liberal Defense Department policy under

Public Law 85-804 which states that the correction of mistakes

normally will facilitate the national defense by expediting
the procurement programs and by giving contractors proper
assurance that such mistakes will be corrected expeditiously
and fairly.

The use of the statute for the "formalization of informal commitments"

is also considered. This type of action is designed to relieve a contrac-

tor who believed in good faith that a government agent had authority to

make a contractual commitment which would bind the government. Again,

common law principles of agency are discussed, as well as the highly









restrictive rules which have evolved regarding the authority of govern-

ment officials, and the mitigating effect of Public Law 804 procedures.

Although the study is principally concerned with the use of Public

Law 85-804 in connection with procurement contracts, some mention is

made of instances in which the statute has been relied upon to expedite

certain actions to dispose of government property. While the statute is

no longer used for this purpose, the fact that Congress may soon be

confronted with the question of extending or revising it makes it appropriate

to consider whether some additional disposal authority is needed.

The use of Public Law 85-804 in disposal actions was made under the

so-called "residual" powers granted by the statute. The other significant

use of residual powers is for the purpose of indemnifying contractors

against risks which are deemed to be extremely hazardous, such as those

arising from a nuclear incident, for example. While it seems virtually

certain that some type of indemnification program will continue to be

necessary, the study points out the major differences between the scope

of the contractual provisions used by the Department of Defense under

Public Law 85-804 and those used by the civilian agencies under the Price-

Anderson Act.

Following this examination of the residual powers is a portion

of the study concerned with "legislative policy" of the statute. Although,

in a broad sense, the legislative policy is fairly clearly spelled out in

the hearings and reports which the study quotes, there have been enough

criticisms of the way in which the statute has been administered some

them made by members of Congress that it seems appropriate to devote

some attention to these conflicting views of what the statute was intended

to accomplish.








APPENDIX A





Act of August 28, 1958, as amended, (Public Law 85-804); 72 Stat.
972, as amended by 87 Stat. 605 (1973); 50 U.S.C. 1431-1435, as amended:


"Be it enacted by the Senate and House of Representatives of the United States of America in Con-
gress assembled, That the President may authorize any department or agency of the Government
which exercises functions in connection with the national defense, acting in accordance with
regulations prescribed by the President for the protection of the Government, to enter into con-
tracts or into amendments or modifications of contracts heretofore or hereafter made and to
make advance payments thereon, without regard to other provisions of law relating to the mak-
ing, performance, amendment, or modification of contracts, whenever he deems that such action
would facilitate the national defense. The authority conferred by this section shall not be utilized
to obligate the United States in an amount in excess of $50,000 without approval by an official at
or above the level of an Assistant Secretary or his Deputy, or an assistant head or his deputy, of
such department or agency, or by a Contract Adjustment Board established therein. The authori-
ty conferred by this Section may not be utilized to obligate the United States in any amount in ex-
cess of $25,000,000 unless the Committees on Armed Services of the Senate and the House of
Representatives have been notified in writing of such proposed obligation and 60 days of continu-
ous session of Congress have expired following the date on which such notice was transmitted to
such Committees and neither House of Congress has adopted, within such 60 day period, a
resolution disapproving such obligation. For purposes of this Section, the continuity of a session
of Congress is broken only by an adjournment of the Congress sine die, and the days on which
either House is not in session because of an adjournment of more than 3 days to a day certain are
excluded in the computation of such 60 day period.
SEC. 2. Nothing in this Act shall be construed to constitute authorization hereunder for-
(a) the use of the cost-plus-a-percentage-of-cost system of contracting;
(b) any contract in violation of existing law relating to limitation of profits;
(c) the negotiation of purchases of or contracts for property or services required by law
to be procured by formal advertising and competitive bidding;
(d) the waiver of any bid, payment, performance, or other bond required by law;
(e) the amendment of a contract negotiated under section 2304(a)( 15), title 10, United
States Code, or under section 302(c)( 13) of the Federal Property and Administrative
Services Act of 1949, as amended (63 Stat. 377, 394), to increase the contract price
to an amount higher than the lowest rejected bid of any responsible bidder; or
(f) the formalization of an informal commitment, unless it is found that at the time the
commitment was made it was impracticable to use normal procurement procedures.
SEC. 3 (a) All actions under the authority of this Act shall be made a matter of public record
under regulations prescribed by the President and when deemed by him not to be detrimental to
the national security.
(b) All contracts entered into, amended, or modified pursuant to authority contained in this
Act shall include a clause to the effect that the Comptroller General of the United States or any
of his duly authorized representatives shall, until the expiration of three years after final payment,
have access to and the right to examine any directly pertinent books, documents, papers, and
records of the contractor or any of his subcontractors engaged in the performance of and involv-'
ing transactions related to such contracts or subcontracts.
SEC. 4 (a) Every department and agency acting under authority of this Act shall, by March
15 of each year, report to Congress all such actions taken by that department or agency during
the preceding calendar year. With respect to actions which involve actual or potential cost to the
United States in excess of $50,000, the report shall-
(1) name the contractor;
(2) state the actual cost or estimated potential cost involved;
(3) describe the property or services involved, and
(4) state further the circumstances justifying the action taken.
With respect to (I)), (2), (3), and (4), aiboe. and under regulation, prescribed by the Pre-
sident, there may he omitted ,iny information the disclosure of which woiould he detrimental to the
national ',ccurity.
(b) The Clerk of the House and the Secretary of the Senate shall cause to be published in the
Congressional Record all reports submitted pursuant to this section.
SEC. 5. This Act shall be effective only during a national emergency declared by Congress or
the President and for six months after the termination thereof or until such earlier time as Con-
gress, by concurrent resolution, may designate."












APPENDIX B








SUMLIAiY (OF NASA, A`C & DOT
P.L. 35--. AC!lIONS SINCE 1959

[In Thousands of Dollars]





"'o 0 "o 0 00o I C4 " i I o U)
wQ cni ;; o o C C tir C 3 C-i ol i '0 ^o > -i ^ -. p. 3' r- oo|o '0 r~
o 0 -i0 -00] - i- -o0 --
E U r- -D < i' r~- r-- --^ -') h-} <*
<~ U> U> CU> C/) C)w -



1'- kk0 0 -1
0;-4 r Oc ? .-< 0 0 | CNO.r-4l


C 0J 00
CC >I 00 1 4 go o i; '- s <



C)
o0 -.7 O
f). OO K4 [r




:- c0
c< tn! w>r Lr n LnL




0 3 I 0| CD C -
E cf o- o> <. c O M -
< oi <> ^' \u> ti


o




.0
O-4 0|
41" r-
0U .1- p i |
0 u I i |n
<- <





E>




Z- -41
40 CQ (; U
mo > O






ca Qj
r0 0- 01%r
C> (C '-4"
ai 2ooI


0 CI) 01 (n
CM KM4


't C) 1-
-It
o o
op -:1
CUC)> L/ /


T (D 0 -
00 0
0 -
U> K'>


C"M yiD

-T c"> Ir-
(Nf ~
0 -
U>







0 (D> (
-. -


r- 0N 0 C0- 0c,


o O' o Co0
rn K r) n mi %)
17 Cr 0n k^ yi


<
0 < M.,


O n 2 <


r<- U


cr u ~ C2 t,- uo p




0) < w, Q C <
QZ< z2< =Z<


1 t r(


0<0 o:0
C^ |

V(1,







p.- J7=
ro4-



(.i 1













Department
Involved


1966


Total
Actions


DOD
NASA
AEC


DOD
NASA
AEC


DOD
NASA
AEC
DOT


DOD
NASA
AEC
DOT


DOD
NASA
AEC
DOT


DOD
NASA
AEC
DOT


Act ions Ai!,rov.'Ld


Amount Amount


Amount
No. Requested


424
5
0
429"

463
6
0
W9-
435
3
4
0


425
7
0
0
428

372
1
1
0
TPT4
357
1
5
1
364


336
4
0
To
347
4
0
351

342
2
2
0
346
334
3
0
0
337

277
1
1
0


245
0
5
1
25T-


Ac i ons


Amount
Approved


$8,156
89
0


$5,879
1,580
0


$5,165
156
173
0
$5,494"
$9,261
454
0
0


$4,961
203
11
0
$5, 175

$6,370*
0
57
35
T6-, U


* Excludes Lockheed's request of $1 billion, wherein
Air Force CABs granted relief for $623,000,000.


the Army and


Calendar
Year
Involved


$6,688
86
0
$6,774

$4,098
297
0


$2,870
156
173
0
$3,199

$2,420
454
0
0


$4,158
71
7
0
$4,236
$6,004*
0
29
35
$6,069*


1967


1968


1969


1970


1971


Denl fJ
D~ n 1 t-
Amount
Denied


88
1
0


116
2
0

93
1
2
1
-97
91
4
0
1
9-6

95
0
0
0
96
112
1
0
0
MT


$2,288
Unknown
0
^TT-,-ng-
$12,476
288
0
$12,746
$12,053
306
344
4,450
$17,153
$10,241
654
0
2
$1078977
$12,057
0
0
0
$12,057
$25,291
25
0
0








APPENDIX C


CONGRESSIONAL RECORD -SENATE


January 29, 1974


GEVNRI'. COUsst, Or
THE DEPAR'?EN"' OF T)E'WSZ,
Washnirton, D C, November 19.1970.
MZMOnANuOM POR THB ASaisTANT SZCET ART
or DEFENSz (I&L)
Subject: Legal authoritry for the sale of gov-
ernment-owned industrial property.
By memorandum of October 26, 1970. the
Deputy Assistant Secretary of Defense (Ma-
terel) raised certain questions with regard
to the existence of legal authority for the
sale by the government of "non-excess" gov-
ernment-owned Industrial property, presum-
ably by negotiated sale to a Contractor in
possession of such property and at whose
plant the property Is located. In referring to
"non-excess" property, we assume that the
Deputy Assistant Secretary was referring to
property which the government no longer
needed to retain provided the terms of the
disposal required Its continued availability
at a contractor's plant for defense production
purposes.
Prior to addressing specifically the ques-
tions raised In the Deputy Assistant Secre-
tary's memorandum, it may be useful to pro-
vide some background Information. The dis-
position of government property is restricted
by the Constitution of the United States, Ar-
ticle IV. Section 3 Clause 2, which provides
that "the Cor.rreP. shall have Power to dis-
pose of and make all needful Rules and P-e-
ulatlons respecting the Territory or other
Property belonging to the United States"
This provision has been Interpreted by the
US. Supreme Court to mean that no property
of the United States may be sold or otherwise
disposed of without authority from Congress.
Ashwander v. T.V.A., 297 U.S. 288 (1935).
Shortly before the entry of the US. into
World War II. Congress granted the War De-
partment substantial authority to expand the
industrial base by the Act of July 2. 1940
(P.L. 703, 76th Congress) which provided
broad temporary authority to acquire, lease,
and dispose of industrial property. This au-
thority was soon extended to the Department
of the Navy." With the expiration of PL.
703. Congress enacted P-L. 130. 83rd Con-
gress (1953), which authorized the expansion
and lease of industrial facilities. P.L. 130.
which finally expired on July 1. 1957. did not
authorize the sale of such facilities.
When the extension of P-L. 130 was being
considered in 1955. draft legislation was pre-
pared by the Department of Defense which
would have provided permanent authority
similar to P.L. 130 to permit the continua-
tion of the development of mobilization pro-
duction base. One provision in this proposed
legislation would have authorized the Depart-
ment of Defense to dispose of nonserverable
facilities to the contractor in possession.
There was, however, opposition within the
Executive Braneh to providing this authority,
and in 1957 a bill was introduced in Con-
gress without the disposal provision. The
effort to obtain such disposal authority con-
tinued, and in 1959. legislation including
such authority was submitted to Congress
and Introduced (H.R. 6270, 86th Congress).
The bill was not acted on and this legislative
proposal died.


At about the same time, in 1956, another
Department of Defense legislative proposal
was initiated which would have authorized
the sale of non-excess Industrial property
needed for current and mobilization require-
ments to private holders. While this effort
continued In varying forms for several years.
it was never transmitted to the Congress and
was removed from the DOD Legislative Pro-
gram in 1960. In 1988 a draft bill, which
would have authorized the disposal of pro-
duction equipment, was initiated by DOD.
approved within the Executive Branch and
submitted that year to the Congress for con-
sideration. However, this proposed legislation
was not introduced in the Congriss
Contemporaneously with this Department
of Defense legislative proposal. Senator Prox-
mire introduced S. 3122.90th Congress, which
among other things, would have provided dis-
posal authority to that desired by the De-
partment of Defense. Simlllar legislation was
re-introduced in the 91st Congress. S 2007,
H.R, 12414. a companion bill. and HR. 14696.
The Department of Defense has formally sup-
ported these bills.
During the 1960's in conjunction with the
General Services Administration, and in
1968 with the General Accounting Office, con-
sideration was given to using various pro-
visions of the Federal Property and Adminis-
trative Services Act of 1949 (hereinafter re-
ferred to as the Federal Property Act) as
authority for the negotiated sale of Defense
industrial property to the contractor in
posseslsion. It was In this statute that the
Congress provided the current statutory
framework for the general disposal of gov-
ernment property. Consideration was given
to (1) Sectlon 203(e)(A), which authorizes
negotiated disposal In the pubic interest
during a period of emergency: (2) Section
203(e)(3)(B) which authorizes negotiated
disposals If the public health, sale or na-
tional security will ,'.-r-bv be promoted;
(3) Section 203(e) (5), which authorizes the
negotiated sale at fixed prices of categories
of personal property when the Administra-
tor of GSA determines that such action will
best serve the Interests of the government.
with. however, competition consistent with
the value and nature of the property and:
(4) Section 203(f) which authorizes the
negotiated disposal of contractor inventory.
Each of these alternatives was found want-
ing either because of the limited nature of
the statutory authority or because of the
General Services Administration's reluctance
to use the authority for the purpose.
During the 1960's there was also some ex-
panded use of the authority to dispose of
real property by negotiation (Section 203(e)
(3) (G)). This authority was originally used
as a basis for the disposal of real property
In the traditional sense, I.e.. land and struc-
tures, and then was expanded to include
heavy Items of nonseverable equipment, such
as heavy expensive presses which required
specially designed facilities to house tem-n
We are ot the opinion that there Is no
existing disposal authority that is adequate
to support a Defense program which seeks


to dispose or government-owned industrial
equipment on a negotiated bass to contrac-
tors in possession of such property and at
whose plants the property is located. The
efforts of the Dep,'trren' of Defense to
obtain broad disposal authority since 1955.
and Department of Defense reports to this
Congress on pending legislation clearly rec-
ognized this lack of authority.
We note that by memorandum of 3 No-
vember 1970. the Deputy Secretary of De-
fense approved with certain modiflcations
for imp.ernmeiatnua by you of Blue Ribbon
Panel Recommendation No. 11-28 of a pro-
gram for DOD to divest itself of ownership
of all plant equipment where such owner-
ship cannot clearly be shown to be to the
economic advantage of the government. Ac-
cordingly. it is our recommendation that
the Department of Defense, with the ap-
proval of the Office of Management and
Budget submit to the next Cor.gre's pro-
posed legislation to that effect and that Con-
gress be urged to gLve it immediate con-
sideration. Consideration might also be
given to the conclusion in such legislation
of a provision which would permit the pro-
ceeds of sale to be returned to the appro-
priations of the owning DOD component.
Such a provision would provide added in-
centive to DOD components In furthering
such a disposal program and in obtaining
maximum return to the government..
My office will assist in every way possible
in this effort.
Answer to the specific questions raised in
the Deputy Assistant Secretary's memoran-
dum are provided in the attachment hereto.
J. Flim BuzHAsOT.
Attachment.
Question 1. ASPR 13-101.10 defines non-
severable Government production and re-
search property as such property which "can-
not be removed after erection or installation
without substantial loss of value or dam-
age thereto, or to the prem.se- where in-
stalled." Please define "substantial" as it ap-
plies here. What constitutes a "substantial
loss?"
Answer: The ASPR definition of "non-
severable" contained in section 13-101.10 is
used in connection with the provisions 'of
section 13-307. Section 13-307 provides that
nonseverable faculties shall not be Installed
on privately-owned land unless the con-
tract contains provisions iafe-eiuarcing the
government's investment. The purpose of this
provision Is to avoid the situation where at
the end of the usefulness of the facilities to
defense production, the government might
otherwise abandon them because the cost of
removal would be excessive In relation to
their value The term "substantial" and
"substantial loss" it is believed are used In
this context.
Question 2. Does the existence of nonsev-
erable Government-owned equipment on
contractor-owned property vest the, Govern-
ment with a real property Interest in the
contractor's premises' Does the designation
of "nonseverable" permit .uch equipment to
be treated as real property for dlspoeal pur-


S588








January 29, 1974


CONGRESSIONAL RECORD -SENATE


poses under the Federal Property and Ad-
rfinistratlve Services Act of 1949 and must
it be reported as real property under 10 U.S.C.
2662?
Answer: The existence of nonseverable
government-owned equipment on contractor-
owned property does not vest the government
witif a real property interest in the contrac-
tor's premises. In the past in certain specific
cases, nonseverable facilities owned by the
government and located in contractor's plant
have been disposed of as real property under
section 203(e)(31 (G) of the Federal Prop-
erty Act (40 U.S.C. 484(e) (3) (0). One of the
first of such sales we believe was If 1964 In-
volving a government-owned heavy drop
forge located In the plant of the Ladish Com-
pany. We find no basis for making a distinc-
tion between the use of the term "real prop-
erty" as used in the Federal Property Act and
In section 2662 of title 10 US C. which re-
quires reports of proposed real property dis-
positions to the Armed Services Committees.
Therefore, property to be disposed of as
"real property" under that Act must be con-
sidered as real property for the purpose of
reporting in accordance with sections 2662
of title 10, United States Code.
Section 203(e) (1) of the Federal Property
Act provides generally that all disposals of
property shall be made after publicly adver-
tising for bids. Section 203(e)(3) permits a
deviation from this requirement In certain
specified situations subject to the obtain-
ing of such competition as Is feasible under
the circumstances. One of the specified situa-
tions Is contained In section 203(e) (3) (0)
which reads as follows:
"With respect to real property only, the
character or condition of the property or
unusual circumstances make it Impractical
to advertise publicly for competitive bids and
the fair market value of the property and
other satisfactory terms of disposal can be
obtained by negotiation;"
There is no definition of "real property" in
the Federal Property Act However. "real
property" is defined. In pertinent part, in
section 101-47.103.12(b) of the Federal Prop-
erty Management Regulations (41 CFR 101-
47.103.12(b)) as:
"(b) Improvements of any kind, structures,
and fixtures under the control of any Fed-
eral agency when designated by such agency
for disposition without the underlying land
(including such as may be located on the
public domain, or lands withdrawn or re-
served from the public domain, or lands re-
served or dedicated for national forest or na-
tional park purposes, or on lands that are
not owned by the United States) excluding
however, prefabricated movable structures,
such as Butler-type storage warehouses and
quonset huts, and housetralers (with or
without undercarriages)".
The terms -"imnprovements", "structures"
and "fixtures" are not defined in the regula-
tions. The term "fixture" can have a fairly
wide meaning and varies from state to state.
-Whether a particular item is a "fixture"


may depend on sucn actors as how it is
annexed to the realty, its relationship to the
use or purpose to which the realty is appro-
priated. the intention of the parties, and local
custom and practice. "Severabtilty" could be
one of several factors In determining whether
property Is a "fixture".
It Is our opinion that the DoD should dis-
continue any reliance on the autlhorlty pro-
vided in section 203(e)(3)(G) in proposing
dispositions of certain Industrial equipment.
unaccompanied by a disposal of land, to con-
tractors in possession. The absence of precise
definitions in the Federal Property Manage-
mrnent Regulations Is itself evidence of the
difficulty in determining in any particular
case whether an Item of equipment installed
on real property Atself possesses the charac-
terlstics of "real property" and hence Is eligi-
ble for disposition under existing authority
separate from the land. The absence of an
ability to apply meaningful guidelines to Its
use in a particular case is indicative of its
weakness. What is obviously lacking In this
area is specific statutory authority from the
Congress for dispositions of this nature. The
Department of Defense should seek such au-
thority along with the authority to sell other
Industrial equipment clearly in the nature
of personal property.
Question 3. Under a negotiated sale of
nonseverable and non-excess Government-
owned property, would It be legal to include
severable non-excess Government property
which Is used in conjunction with the non-
severable property? If so, would it be proper
to classify Items such as general purpose
machine tools as related severable property?
Answer: In recent years the sale separate
from the land of certain nonseverable facil-
ities under section 203 e) (3) (0) of the Fed-
eral Property Act has included some ancillary
equipment necessary to the operation of the
facilities. However, as stated in answer to
the preceding question, our opinion is that
DoD should discontinue reliance on that au-
thority for such sales for the reasons stated
therein.
Question 4. Part I. Paragraph 1 of Executive
Order No. 10789, 14 November 1958 as
amended by E.O. 11051, 27 September 1982
authorizes the Department of Defense "to
enter into contracts . without regard to
the provisions of law relating to the making.
performance, amendment, or modification of
contracts, whenever, in the Judgment of the
Secretary of Defense, the Secretary of the
Army, the Secretary of the Navy, or the Sec-
retary of the Air Force . the national de-
fense will be facilitated thereby." Paragraph
3. states in part: "the contracts hereby au-
thorized . -. shall Include agreements of all
kinds . for all types and kinds of property.
or services necessary . including-. . fa-
cilities, utilities, machinery, machine tools,
and any other equipment without any re-
strictions of any kind as. to type, character,
location or form." Is It legal to use the fore-
going authority as basis for selling non-excess
Government equipment by negotiation? If


no;, please explain to include the meaning
of the language "to enter Into contracts .'-
without regard to the provisions of law re-
lating to the making, performance, amend-
ment, or modilc3tlon of contracts."
Answer: Executive Order No. 10789,. as
amended, Is an Implementation of the au-
thority conferred on the President by the Act
of August 28, 1968 (P.L. 85-804, 50 US.C.
1431-1435). As noted in section XV of the
Armed Services Procurement Regulation, this
is extraordinary statutory authority to be
exercised only in unusual circumstances and
only after it Is formally determined that such
action would facilitate the national defense.
Subject to such a determinatlcn and certain
restrictions set forth tn the statute, It per-
mits authorized departments and agencies
performing functions in connection with the
national defense, to enter into contracts and
into amendments or modifications of con-
tracts without regard to other provisions of
law relating to the making, performance.
amendment or modification of contracts. PL.
85-804 does not specifically authorize the dis-
posal of property. It was a continuation with
certain additional restrictions for use during
a national emergency of the authority of Title
II of the FIrst War Powers Act of 1941 which
?-as enacted a few weeks after entry of the
U.S. into World War II. The primary pur-
pose of Title II of the First War Powers Act
was to authorize the negotuation of procure-
ment contracts without regard to laws relat-
ing to the making of such contracts. e.g., the
requirements of formal advertising. In this
connection one of the restrictions added to
this authority by P.L. 85-8404 was a pro-
hMbition against Its use for, puchases of or
contracts for property or services required
by law to be procured by formal advertising
and competitive bidding.
It is our opinion that future dispositions of
DOD industrial equipment should be based
on specific authority to be obtained from the
Congress.
Question 5. Ia U.S.C. 2667 (b) (2) permits
the Secretary of a Mlitary Department-to
give the lessee of Government property the
first right to buy the property If the lease is
revoked to allow the United States to sell
the property "under any other provision ot
law." Since inclusion of the foregoing au-
thority Implies that laws exist elsewhere
please cite and explain the specific provisions
of the other laws referred to here. '
-Answer: Section 2667 Is a codification of
the Act of August 5. 1947 (PJL. 364 Mth Con-
gres),.-which was enacted for the purpose
of broadening and making uniform the au-
thority of the War and Navy Departments to
lease government property. An examination of
the legislative history Indicates that section
2667(b) (2) was not predicated on. any par-
ticular disposal statute, but that a disposal
at a particular time would be based on "what-
ever legal procedures are then provided for
the sale of surplus Government property." (S.
Report 626. 80th Congress).- .


S589









APPENDIX D


August 29. 1975




Honorable James R. Schleosinger
Secretary of Defense
Room 3E880, Pentagon
Washington, D.C.

Dear Mr. Secretary:

The Rouse Ared Services Committee has been increasingly concerned
about the problems associated with financing defense contractors, Including
the provision of financial relief under the authority of Public Law 85-804.
Further, under the rules adopted by the House of Representatives for the
94th Congress, this Committee is charged with the task of studying and re-
viewing the application, administration, execution and effectiveness of l4.ws
within its jurisdiction to determine whether those laws are being implemented
according to the intent of Congress and whether those laws should be continued,
curtailed or eliminated.

The several statutes dealing with financing defense contractors are, to
some extent, an illogical mixture of overlapping authorities which have been
enacted over many years as the result of wartime expediency. Because the
original rationale for some of these provisions has passed, it occurs that
they may not now serve the public interest.

The Cor-mittee is aware that the financial problems and risks of defense
contracting have increased with the rising costs of weapons systems and un-
certain economic conditions. As long as our defense industries remain in
private hands, we realize that defense work depends upon eome assurance of
a profit or, at least, some form of protection from financial disaster. The
Committee is also aware of the philosophy, which has developed since World
War II, that if the government is to obtain military supplies from private
business, then the government must provide incentives and share some of the
financial risk.

A special area of the Committee's concern involves Public Law 85-804,
first enacted in 1941 as authority for extraordinary relief for war contractors
during World War II. As amended in 1958, this law is extremely broad in
scope and completely open-ended as to dollar amounts. The Congress has no
input into the terms and conditions under which relief will be granted to
contractors, and actions taken under authority of these provisions appear to






evade the authorization and appropriations process as well as the full
funding policy of the Department of Defense and the Appropriations CoaIlttees.
In addition, financial relief under Public Law 85-804 can be based upon the
single, but very broad, criterion that such relief will "facilitate the
national defense".

Our Cora ittee is understandably concerned about the statutory authority
of officials of the Executive Branch to obligate the government to the extent
of hundreds of millions of dollars without any reference to the Congress
except an annual report. We are also concerned about the apparent pressures
within the contracting community and within the Department of Defense to
dispose of difficult problems, including potential claims, by the use of
Public Law 85-804 in lieu of disposition under the terms of the contract or
through litigation. Also present, is the question of the applicability of
Public Law 85-804 to subcontractors, especially those who supply shipbuilding
contractors.

Aside from our Comittee's independent interest in Public Law 85-804,
we will be tasked with a study of its provisions under the terms of E.I 3884
should that bill become law. The Office of Ranagement and Budget has also
transmitted the Federal Procurement Act of 1975 to the Congress, in draft
form, which would modify Public Law 85-804.

To assist the Cornittee in its studies and probable future hearings on
the foregoing subjects, the Committee requests that the Department of Defense
review all provisions of law which provide authority for financing defense
contractors and for providing financial relief for defense contractors. These
review sho.Ui include, but need not be limited to, those laws listed below:

Public Lay 85-804 (50 U.S.C. 1431 et.seg.) as amended.

Sections 2091 and 2092, Title 50 appendix, U.S. Code, as amended.

Sections 2307 and 7520, Title 10, U.S. Code.

Sections 109, 110, and 255 of Title 41, U.S. Code.

Following the above requested review, the Comalttee requests that you
provide, by February 1, 1976, your recommendations and comprehensive justi-
fications as to:

(a) which provisions of law are no longer needed and should be
repealed.

(b) which provisions of law are unnecessarily overlapping and
should be consolidated. including draft legislative language.

(c) which provisions of law are excessive to the needs of the
Department of Defense.







(d) which provisions of law should be retained in their present
form.

(e) which provisions of law are inadequate to the needs of the
Department of Defense, including suggested amendments.

(f) any suggested new or additional legislation vhich would
better serve the interests of national defense.

(g) such other additional recommendations which you may desire
to make.

Sincerely,





Helvin Price
Chairman


MP:akv



































Ii











-. GENERAL COUNSEL OF THE DEPARTMENT OF DEFENSE
ri.;' / o] .o
'y; //WASHINGTON, 0 C 20301


.1 DOEC 1975


Honorable Melvin Price
Chairman, Committee on Armed Services
U. S. House of Representatives
Washington, D. C. 20515

Dear Mr. Chairman:

This is in further reply to your letter of August 29, 1975 and your
request-for a review of provisions of law which constitute authority
for the Department of Defense to provide financing and financial relief
to its contractors.

As you requested, we have reviewed the various statutory provisions
and offer the following conclusions for the consideration of your Committee.

The authority provided by Public Law 85-804 (50 U.S. C. 143] et seq. ) as
delegated by Executive Order 10789, as amended, has proved extremely
useful to this Department in connection with its procurement programs
and in our opinion should remain available for future needs. It is used
to effect amendments to contracts without consideration, to correct mutual
mistakes made at the time of contract execution, and to formalize informal
commitments involving situations where at the time the commitment was
made it was impracticable to use normal procurement procedures. It can
only be used when it has been determined that other legal authority is lack-
ing or inadequate and that the action to be taken under it will facilitate the
national defense. The statute's availability is also particularly significant
with regard to our ability to indemnify contractors against liability or
losses which might arise out of unusually hazardous or nuclear risks in-
volved in producing articles or furnishing services for the Nation's defense.
Other Federal departments and agencies delegated authority under Public
Law 85-804 by the President by Part II of Executive Order 10789, as
amended, are the Departments of Treasury, Interior, Agriculture, Com-
merce and Transportatioi, the General Services Administration, the
National Aeronautics and Space Administration, the Tennessee Valley
Authority and the Government Printing Office.

As the term financial relief is used in you-r letter with respect to Public
Law 85-804, I believe you have reference to amendments to contracts






without consideration as described in section 17-204.2 of the Armed
Services Procurement Regulation. (Similar coverage applicable'to
civilian agencies authorized by the President to use the statute's
authority is found in Part 1-17 of the Federal Procurement Regulations. )
The statute is used from time to time to provide a legal basis for amend-
ing a Defense contract when a contractor's productive ability will be im-
paired by an actual or threatened loss and his continued performance on
a Defense contract or his continued, operation as a source of supply is
essential to the national defense. In such a case the contract may be
adjusted but only to the extent necessary to avoid the impairment to the
contractor's productive ability. No contract adjustment action can be
taken in an amount in excess of appropriations and authorizations there-
for. Moreover, such action would not be in violation of the full funding
policy referenced in your letter. If the adjustment action results in an
obligation of the Government in excess of $25 million it is subject to the
provisions of the recent amendment to Public Law 85-804 made by section
807(a) of Public Law 93-155. These provisions require advance notifica-
tion to the Armed Services Committees and a 60-day continuous session
of Congress waiting period during which either I-louse may adopt a resolu-
tion of disapproval.

With respect to pressures to dispose of difficult problems, including po-
tential claims, through use of the statute rather than in accordance with-
contract terms or litigation as stated in your letter, we believe that the
essentiality as a source of supply test coupled with the irnpairnment of
productive capability test which have been employed in determining whether
relief is granted have successfully met those pressures. Also, while we
believe the statute could be used to provide financial relief to a subcon-
tractor under circumstances similar to those for which a prime contractor
would receive relief, the need in the interests of national defense to pro-
vide such relief has not occurred very frequently.

Your letter next referred to sections 2091 and 2092 of title 50 App., U.S.
Code, which are drawn respectively from sections 301 and 302 of the
Defense Production Act of 1950, as amended. Section 301 provides that
the President may authorize the Military Departmnents, the Department
of Commerce and other agencies of the Executive Branch engaged in pro-
curemrnent for the national defense to guarantee loans made by financing
institutions for the purpose of financing contractors and subcontractors
engaged in such procurement. By Executive Order 10480, as amended
(set forth as a note following 50 U.S. C. App. 2153), other agencies
authorized by the President include the Departments of Interior and



-e






Agriculture, the General Services Administration and the National
Aeronautics and Space Administration.

Section 301 as amended in 1970 by Public Law 91-379 limits the max-
imum guarantee which can be made by any agency without approval of
Congress to $20 million. It further prohibits the issuance of a guarantee
for the primary purpose of preventing a financial insolv:ncy cr bank-
ruptcy unless the President (1) certifies that there would be a direct
and substantial adverse effect upon defense production and (2) provides
the certification with accompanying justification to the Banking Committees
of the Congress at least ten days in advance. While this guarantee author-
ity has not been used extensively by the DoD in recent years, it is con-
sidered'of value as stand-by authority for any future mobilization effort.

Section 302 of the Defense Production Act (50 U.S.C. App. 2C92) authorizes
the President to make provision for loans to private business enterprises
for the expansion of capacity, the development of technological processes
or the production ci essential materials, including the exploration, develop-
ment, and mining of strategic and critical materials and miinerals. Au-
thority under this ,statutory provision was delegated to the Secretary of the
Treasury and the Director of the Office of Emergency Planning (now the
Federal Preparedness Agency within the General Services Administration)
by section 310 of Executive Order 10480, as amended. As amended by
section 807(b) of Public Law 93-155, section 302 now provides that no loan
over $25 million can be made without prior notification to the Congress
and a 60-day continuous session of Congress waiting period during which
either House may adopt a resolution of disapproval.

We understand that no loan action by Treasury or the Federal Preparedness
Agency (or its predecessor OEP) has been taken under the authority of sec.-
tion 302 for many years, and we have been unable to find any record in
tl.c Department of Defense which would indicate the extent Defense con-
Aractors were ever involved in such loans since enactment of the provision
i- 1V5O. This authority appears to have been used primarily for programs
t i..'hr agencies, such as the General Services Administration, and the
'".,artment of Defense would defer to the views of those agencies as to a
'i -'.z,,.uini need of this authority for those programs. With regard to its
,- 1t-rramns, the Department of Defense has undertaken a study which
t o.,',uld for completion next year of defense contractor capital needs
t rtw! i,-O.har commercial sources are available to fulfill them. To the ex-
I 10A4 fI tu.t!yi discloses a shortage of commercial sources, section 302






might be useful as an alternative source. Therefore, we would hope
that its availability would continue at least until the completion of that
evaluation.

In this connection, we note that S. 1537 as recently passed by the Congress,
extending the Defense Production Act to September 30, 1977, also contains
a provision (section Z) which provides that all authority uder Title III of
the Act (which includes sections 301 and 302) "'shall be effective for any
fiscal year only to such extent or in such amounts as are provided in ad-
vance in appropriation acts."

Section 2307 next listed in your letter is considered to be basic authority
within the Department of Defense to make advance payments. It also pro-
vides express statutory authority for progress and partial payments.
Hence, its provisions should be retained. Advance payments are advances
of funds to a contractor prior to and in anticipation of performance of a
contract-which has been awarded to him. Such advances cannot exceed
the contract price. Progress and partial payments on the .other hand are
measured by his periodic progress in performance of the contract or the
deliveries he makes under the contract. Section 807 of Public Law 93-155
in subsection (c) amended section 2307 by providing that payments there-
under, other than partial, progress, or other payments specifically pro-
vided for in a contract at. the time the contract was initially executed, may
not exceed $25 million unless advance notification has been provided the
Armed Services Committees, 60 days of continuous session of Congress
have expired, and neither House has adopted a resolution disapproving
such payments. While Public Law 85-804 has been used as authority to
make advance payments, generally it was before section 2307 was amended
in 1958 by Public Law 85-800 to authorize advance payments for all pro-
curements, whether negotiated or awarded as a result of formal advertis-
ing. As amended'by section 807(a) of Public Law 93-155, the use of
Public Law 85-804 as advance payment authority would be subject to the
same requirements as are applicable to section 2307 of title 10.

Section 7521 of title 10 authorizes the Secretary of the Navy to make par-
tial payments during progress of work under Navy contracts. To that ex-
tent the authority is duplicative of that contained in section 2307 applicable
to all three Military Departments. However, the Department cf the Navy
considers its retention to have value because the provision not only specif-
ically provides for a lien on the contracted work, but also states that such
a lien is paramount to the liens of any other person. The continued exis-
tence of this statutory provision does not appear unnecessarily duplicative
of section 2307.






Sections 109 and 110 of title 41, U.S. Code, are provisions which were
contained in the Contract Settlement Act of 1944. This Act was special
legislation enacted by the Congress to cope with the problem of wholesale
cut-backs of World War II contracts. Section 109 authorized advance and
partial payments to "war contractors" in connection with conti act ter-
mination claims and section 110 authorized a contracting agency to make
loans and to provide guarantees on loans by others to such contractors in
connection with the same contract termination claims. While the Act did
not contain a specific termination date it has always been considered be-
caus'e of its terms to have been addressed to World War II contracts only
and not applicable to contracts executed since that time. Therefore, sec-
tions 109 and 110 are considered obsolete and it would seem could be re-
moved from the United States Code for that reason without the necessity
of further Congressional action.

The last statutory provision listed in your letter was section 255 of title
41, U.S. Code. The source of this provision is Title III of the Federal
Property and Administrative Services Act of 1949, as amended, more
particularly section 305 of that Act. Title III of that Act was patterned
upon the Armed Services Procurement Act and is applicable to most of
the civilian agencies of the Government. Section 305 contains authority
similar to that provided to the Department of Defense by section 2307 of
title 10 for advance, progress and partial payments. However, the pro-
vision is not available to the DoD since Title III of the Federal Property
and Administrative Services Act in section 302 states that its provisions
are inapplicable to the DoD, the Coast Guard and the National Aeronautics
and Space Administration. We would defer to the views of the General
Services Administration with respect to the need for this authority.

On August 5, 1975 there was sent to Congress by the Office of Federal
Procurement Policy an behalf of the Administration a proposed Federal
Procurement Policy Act of 1975. The legislation in providing a single
basic procurement statute for all federal agencies would repeal chapter
137 of title 10, United States Code, including section 2307 anSJ Title III
of the Federal Property and Administrative Services Act, including
section 305. Section 17 of the proposed legislation is addressed, to ad-
vance, partial and progress payments. This legislation we understand
has been referred to the House Government Operations Committee but
has not yet been introduced. In the Senate it has been inlrod,- .c A as
S. 2309.

I hope the above analyses and conclusions are responsive to your needs.
The Department has no recommendations for additional, new or amending
legislation at this time./

Sincerely,


L. Niederlehner
Acting General Counsel





































































































































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APP'NDIX E


(Excerpt From the Report of the Commission on Government
Procuremient-Sumnmary Volume, Page 100)
EQUITABLE AND SPECIAL MANAGEMENT POWERS UNDER PUBLIC LAW
85-804
(CHAPTER 4)
Public Law 85-804 provides authority for prompt administrative
resolution of problems occurring in defense contracts that would not
be otherwise solvable under the normal statutory, regulatory. and
common-law principles governing the procurement process.
Thirty years of experience with the act and its antecedent legislation
have shown that the authority to enter into or modify contracts "with-
out regard to other provisions of law" has been used prudently to
compensate for gaps in the procurement statutes. The act has been
used mainly to include indemnification clauses in contracts, correct
mistakes, and formalize informal commitments.
The Report concludes that the procurement process, in civilian as
well as in defense agencies, in war as well as in peace, requires adjust-
ments of the kind authorized by Public Law 85-804. The law should
be made permanent and not conditional upon the existence of a de-
clared national emergency. All agencies should be authorized to use
the powers in the act subject to (a) the statutory controls now con-
tained in the act and (b) the controls and criteria specified in regula-
tions established by the President. The existing reporting requirements
in the act should be changed to provide for notification of Congress
prior to any exercise of certain authorities that would obligate the
Government in an amount exceeding $1 million.





































































































































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UNIVERSITY OF FLORIDA

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