justed to take into account lack of the statutory authority of the War Powers Acts and the Contract Settlement Act. The form of the article will provide for a negotiated settlement of the claim upon the basis of fair compensation plus a reasonable profit, and in the event of failure to agree, a formula for determination of the amount due, identical to that of the wartime article. The formula determination being based upon cost plus a profit, a statement of cost principles will be set forth in the regulation and incorporated in the uniform article by reference. As in the case of wartime settlements, formula settlement costs and profit will influence negotiation of a settlement and provide a general basis for the consideration of these elements in arriving at a negotiated settlement, but the Contracting Officer will not be bound by those costs in arriving at an overall settlement.

The determination of which contracts will contain the uniform article will be an administrative one for the head of the procuring activity. Failure to include such an article may subject the Government to common law damages for breach of contract,54 in the event of termination of a contract not containing the article, unless the contracting officer can secure a voluntary agreement.

Subcontract settlement, in the absence of statutory provisions permitting delegation of authority to contractors, will be subject to specific approval or ratification by the Contracting Officer, whether or not the prime contract settlement is negotiated. Prime contractors will be expected to include a uniform subcontract termination article in all subcontracts and purchase orders, so as to limit the allowance of common law damages. As in the case of wartime settlements, however, subcontract actions for common law damages will be defended by the Government with the cooperation of the contractor.

Settlement proposals, inventory schedules, and other supporting documents will follow in general the wartime forms, but will have to be

54 See Penn Foundry & Mfg. Co. v. United States, 75 F. Supp. 319 (1948), cert. granted November 1948.

55 See Chapter 11.

B6 See United States v. Mason & Hanger Co., supra, John H. Mathis Co. v. United States, supra. Also see Studebaker v. War Dept., supra, for Comptroller's position.

submitted within one year pursuant to proposed termination articles. Claims will generally be submitted on the inventory basis, or total cost basis. Termination inventory disposals will be limited to sales or retentions by the contractor, of contractor-owned termination inventory, with appropriate credits against the claim for salvage or market values, as the broad authority to dispose of government-owned termination inventory under the Contract Settlement Act, and the Surplus Property Act will not be available.55 Disposal of inventory to which title is taken by the Government will be subject to such statutory authority as the agencies may possess from time to time. Price policies on disposition will be set by regulation. A 90-day plant clearance period, as recommended by the Director of Contract Settlement, will also be established by regulation.

No provision will be included in the uniform article for advance or partial payments, as those provisions of the wartime article were based on statutory authority. Such statutory authority as individual agencies may have will be exercised within such agency's regulations. Cost-plus-a-fixed-fee contracts will also be handled somewhat differently. Upon termination, if the terminated contract is to be settled under the termination article, and the Comptroller General's finding as to the allowability of such costs is to be recognized, an audit status date must be agreed upon. The audit status date will fix the status of all public vouchers submitted prior to termination, so that the Contracting Officer will have available for settlement purposes information as to the costs approved by the Comptroller and those disallowed. Those costs disallowed by the Comptroller will be left to reclaim vouchers by the contractor, or to an action on the contract in the District Court or the Court of Claims as in the Mathis Case.56 Costs disallowed by the Contracting Officer of the same category, will also be left to an action on the contract.

The proposed termination program differs from the World War II program in a number of particulars. Contracting Officers will not be permitted to assist contractors in the preparation of their claims. Settlements by negotiation or determination will probably be subjected to careful scrutiny by the Comptroller General,

regardless of their legal finality, and audits thereof will not necessarily be confined to fraud or mistake.57 No authority will be provided for the settlement of quasi-contractual claims or for the direct settlement of subcontract claims. Finally, the new program will not offer the contractor the same appeal privileges. To the extent that the Contracting Officer and the contractor cannot agree on the termination settlement, the Contracting Officer will make written findings of the amount due. If the contractor disputes factual determinations so made, he may appeal under the standard disputes article to the Appeal Board set up in the agency to hear such disputes, within the time. limited in the article. Upon exhausting the administrative remedy, the contractor may bring an action on the contract in the Federal District Court or the Court of Claims under applicable provisions of the Judicial Code.

SUMMARY

1. The general authority of a Contracting Officer, when authorized to enter into a contract in the first instance, to terminate that contract when the public interest requires it, and to enter into a supplemental agreement with the contractor as to the compensation to be 57 18 Comp. Gen. 826, supra; 20 Comp. Gen. 573, supra.

paid for the partial performance, has become an established part of Government contract law. Correspondingly, the Contracting Officer, in the exercise of his discretion, may provide in the contract for the termination thereof, for the negotiation of a settlement of the terminated contract, or in the alternative, if agreement is not possible, for a formula determination of the amount due.

2. A voluntary settlement, a settlement by agreement, or a formula determination of the amount due, pursuant to the termination clause, in the absence of fraud, mistake or bad faith, is binding upon the Government and upon the contractor.

3. Where a contract is terminated strictly within the termination provisions thereof, there is no breach of contract and the contractor can lay no claim to common law damages.

4. The magnitude of war-time operations, requires special legislation to authorize activities broader than those permitted within existing law. This may best be accomplished by a standby statute, defining not only the authority of contracting officers but the rights of contractors, which can be made operative in the event of a national emergency. Such a standby statute would prevent the necessity of working out a contract termination and settlement program during a major conflict.

WHAT IS RENEGOTIATION?

On first impression, the term "renegotiation" would appear to mean "negotiation again." One unfamiliar with the complex structure of renegotiation might assume that as the term "renegotiation" is applied to a given contract, it means that the parties to the contract, after having once negotiated the contract, sit down at some future date and negotiate it all over again. To the extent that such an implication is contained in the term "renegotiation," the term is definitely a misnomer, as we shall see in the pages that follow.

Perhaps the best way to define renegotiation in terms of the practice employed both presently and during World War II, when the term first came into general use, is to state what renegotiation is not.

RENEGOTIATION IS NOT TAXATION

At first glance, renegotiation appears to be most nearly akin to taxation, particularly as

* Prepared by Sumner Marcus, Counsel, Navy Renegotiation Division, Armed Services Renegotiation Board.

1 As will be more fully brought out below, there are three Renegotiation Acts presently on the Statute books. Since reference will be made throughout this chapter to these Acts, it should be explained at the outset how these Acts will be designated hereafter.

References to the "1942 Act" are to Section 403 of the Sixth Supplemental National Defense Appropriation Act, 1942, Public Law 528, 77th Congress, approved April 28, 1942 (56 Stat. 245), as amended by Section 801 of the Revenue Act of 1942. Public Law 753, 77th Congress, approved October 21, 1942 (56 Stat. 982); by the Military Appropriation Act, 1944, Public Law 108, 78th Congress, approved July 1, 1943 (57 Stat. 347); and by Public Law 149, 78th Congress, approved July 14, 1943 (57 Stat. 564).

References to the "1943 Act" are to the 1942 Act, as amended in full by Section 701(b) of the Revenue Act of 1943, Public Law 235, 78th Congress, enacted February 25, 1944 (58 Stat. 78, 55 U. S. Code App. 1191) and as further amended by Public Law 104, 79th Congress, approved June 30, 1945 (59 Stat. 294).

References to the "1948 Act" are to Section 3 of Public Law 547, 80th Congress, approved May 21, 1948 (62 Stat. 259, 50 U. S. Code App. 1193), as supplemented by Section 401 of Public Law 785, 80th Congress, approved June 25, 1948 (62 Stat. 1027, 50 U. S. Code App. 1193 note).

2 Section 403(a)(3) of the 1943 Act.

taxation was manifested in the excess profits tax. That there is a close affinity between renegotiation and taxation might be inferred from a reading of the definitions of the terms, "renegotiate" and "renegotiation," in the Renegotiation Act of 1943, which provided the basis for most of the renegotiation conducted in connection with World War II.1

The 1943 Act states that the term, "renegotiation," includes a determination by agreement or order under the Act of the amount of any excessive profits."

How does such a determination of excessive profits in renegotiation differ from a determination made under the Internal Revenue Code as to the amount of excess profits derived by a contractor?

In the first place, renegotiation does not apply to all the income of a contractor, but only to income received from certain specified contracts with the Government, and from subcontracts under such contracts.

Excess profits taxes are, of course, applicable, with minor exceptions, to all income received or accrued regardless of the source of such in

come.

Secondly, the excess profits tax treats each recipient of income on an equal basis, and is concerned solely in recapturing from such recipient amounts in excess of a stated fixed percentage of his income. It is entirely mechanical in its operation upon income.

The Renegotiation Acts, on the other hand, do not specify in detail what constitutes excessive profits, but merely set forth general guides to be employed by the authorized renegotiating agencies in arriving at a determination as to the amount, if any, of excessive profits which have been realized by a contractor. They contemplate the application of judgment and seek to reward with a fair and just profit

contractors who have most efficiently and cooperatively performed their contracts with the Government.

Finally, and most important, the excess profits tax is solely a revenue measure while the chief purpose of renegotiation is to act as a backstop for procurement officials who must negotiate contract prices under conditions which frequently make impossible any sort of precise determination in advance as to what constitutes fair and reasonable prices.

RENEGOTIATION IS NOT REDETERMINATION

Just as the definition of "renegotiation" in the 1943 Act leads one to infer that he is dealing with a taxation measure, the definition in the 1942 Act creates an inference that he is dealing with the redetermination of contract prices, as that term is used by those engaged in Government procurement. Thus, the 1942 Act provides that the "terms 'renegotiate' and 'renegotiation' include the refixing by the Secretary of the Department of the contract price." Redetermination, as used in procurement, also contemplates the refixing or redetermining of the contract price during the performance of, or at the completion of, a given contract.

However, as renegotiation was conducted under the 1942 Act, as well as under subsequent Renegotiation Acts, there are several marked differences between renegotiation and the process of redetermination, as the latter is commonly known. In the first place, the "refixing of the contract price" by way of renegotiation could be effected by the Secretaries of the respective Departments, whether or not the contractor had agreed to such "refixing." Redetermination, on the other hand, takes place only when the parties have agreed in advance that there will be a redetermination of the contract price, and then only in accordance with the procedure theretofore agreed upon by the

3 Section 403(a)(3) of the 1942 Act.

The relationship between renegotiation and redetermination is more fully treated at Paragraph 307 of the regulations promulgated under the 1943 Act by the War Contracts Price Adjustment Board. The correct citation of these Regulations is "Renegotiation Regulations." For convenience and to distinguish them from the Military Renegotiation Regulations promulgated under the 1948 Act by the Military Renegotiation Policy and Review Board the Renegotiation Regulations will be referred to as the 1943 Regulations.

parties. Furthermore, redetermination provisions in contracts frequently contemplate that the contract prices may be increased or decreased upon redetermination, while renegotiation is a one way street. Only downward adjustments of income are authorized in renegotiation.

Another important distinction between the two processes is that the standards employed in redetermination differ considerably from those employed in renegotiation. The object of redetermination is to arrive at a fair and reasonable contract price in a situation where the existence of many unpredictable factors preclude an agreement on such a price at the outset of the contract. The emphasis in renegotiation is not primarily on the fairness or reasonableness of an individual contract price, but is on the elimination of unconscionable, or, as the Renegotiation Acts phrase it, "excessive" profits.

The final, and perhaps most important, difference between the two processes is that redetermination is conducted on an individual contract basis, while renegotiation is generally conducted with respect to each fiscal year on an over-all contract basis. The consequence of the over-all approach is that no consideration is given to the fact that a contractor may have received unreasonable prices on single contracts if the contract prices of all his contracts are such that he has not earned excessive profits in connection with that portion of his business which is subject to renegotiation.

Notwithstanding the foregoing differences, renegotiation and redetermination have been frequently confused not only in the lay mind, but even by those administering Government contracts. For example, a common misconception has been that renegotiation of income derived from a group of contracts precludes redetermination of the price of any one of those contracts, notwithstanding a provision in such contract for redetermination. Similarly, it has been erroneously considered on occasion that a contract once redetermined may not be considered thereafter in renegotiation. Such errors would not occur if the purposes of renegotiation and redetermination were thoroughly comprehended.

RENEGOTIATION IS NOT COMPULSORY REPRICING

OF INDIVIDUAL CONTRACTS

Renegotiation also bears a superficial resemblance to compulsory repricing of contracts. Both redetermination and renegotiation have from time to time been referred to as repricing processes. In general, such references are not necessarily incorrect. However, compulsory repricing of individual contracts is quite a different process from either renegotiation or redetermination. During World War II, under a statute entitled "Repricing of War Contracts," the power to price contracts unilaterally might be invoked by a Secretary of a Department both with respect to existing contractors and with respect to suppliers of the Government who refused to enter into contracts for required articles or services at fair and reasonable prices. Failure of the contractor or supplier to furnish the article or services at such fair and reasonable prices rendered his plant subject to seizure

accordance with Section 9 of the Selective Training and Service Act of 1940. Compulsory repricing resembles renegotiation only in that the power of the Government, under the repricing statute, may be exercised unilaterally. In substantially every other respect, repricing is more like redetermination. The power of the Government is exercised with respect to individual contracts, and directly upon the contract price, or upon the price of a contract not yet in existence, rather than upon the total profits of a war contractor.

OBJECTIVES OF RENEGOTIATION

To understand further what renegotiation is, now that we have ascertained what it is not, let us refer briefly to the general objectives of renegotiation as set forth in the 1943 Regulations:

1. To eliminate profits which may be considered excessive after careful review of the circumstances of a contractor's business.

2. To maintain or provide a substitute for competitive pressures on prices and costs.

Title VIII of the Revenue Act of 1943, Public Law 235, 77th Congress enacted February 25, 1944 (58 Stat. 92, 50 U. S. Code App. 1192).

6 Compulsory pricing is authorized in certain circumstances by the Selective Training and Service Act of 1948.

3. To induce reduction in prices and costs. 4. To reward efficiency and stimulate production.

5. To encourage prompt adjustment to a reasonable price basis when production experience indicates the original price basis was unreasonably high.

HISTORY OF RENEGOTIATION

In order to understand fully present day renegotiation it is necessary to relate it to the fairly long history of endeavors of the Government to take excessive profits out of the sale of war materials.

PRE-WORLD WAR II HISTORY

Profiteering occurred in every war of this Nation's history prior to World War II. During the Civil War, the profits made on war contracts became a national scandal. Both the Secretaries of War and of the Navy tried to cut down exorbitant profits by appointing special agents and commissions to handle procuring and pricing. Congress, however, took no steps other than to pass certain statutes relating to bribery and corruption in the placement of war contracts. In the Spanish-American War, Congress undertook to place ceilings on the price of armor steel for Naval vessels. This effort at control of profits threatened to shut off production of armor entirely, and was repealed after a few months.

When World War I began, there was no program for the control of munitions prices or profits. As the war progressed, three main types of profit limitations were attempted: (1) cost-plus-a-percentage-of-cost contracts; (2) price fixing; and (3) excess profits taxes.

Cost-plus-a-percentage-of-cost contracts were not a solution to the problem since it was found that excessive profits and high total costs to the Government might result under such contracts as well as under fixed price contracts. Price fixing was equally unsuccessful since the low cost producer could realize enormous profits by selling at prices pegged to the costs of a high cost producer. Excess profits taxes provided a substantial source of revenue