In order that Government peacetime procurement might become an instrument for keeping this vital weapon in a state of readiness, the War Production Board, through its Procurement Policy Board, recommended in November 1945 that the Government agencies propose procurement legislation to take effect when the emergency procurement legislation expired. The proposed legislation, while retaining for the most part the advertised sealed bid method of procurement, was to make provision for broad authority to negotiate the price and other contract terms when judgment and circumstances so dictated and was to dispense entirely with the advertisement method during any future national emergency. The report of the Procurement Policy Board pointed to a number of fields in which advertised sealed bid purchasing was either inadequate or costly; the report adverted, by way of illustration, to contracts required for security reasons to be kept secret, to contracts for research and development work where experience in the field and capacity to conduct the research precludes effective competition, to contracts for items involving high starting load costs, to contracts for items for which assurance of a source of supply is required, to contracts for items for which it is desirable to prevent the supply from becoming concentrated in a few sources or in dangerous areas, and to contracts for items where the limited sources of supply preclude effective price competition. The report adverted further to the lack of authority under preemergency legislation to negotiate when necessary to secure protection against the many practices which result in non-competitive or unreasonable prices under the advertising method.

In accordance with these recommendations a bill was prepared and introduced in the 80th Congress on January 27, 1947, as H.R. 1366, the

51 National Security Act of 1947, Public Law 253, 80th Congress; 61 Stat. 495.

52 Types of contracts employed by the Navy are discussed in Chapter 7.

53 Cross procurement is where one of the Services purchase all of the requirements of the three Services for a particular commodity; thus, the Department of the Army buys all subsistence supplies for Army, Navy and Air Force. Joint procurement is where an office representing all three Services is created to purchase a commodity used by each of the Services; as, for example, the Armed Services Petroleum Purchasing Agency.

Armed Services Procurement Bill. The bill had the effect of pulling all Army and Navy procurement authority together under one statute, sweeping out archaic laws in the process and paving the way for coordination and uniformity of practice between the Armed Services in the field of military procurement in consonance with the purposes of unification. It made no radical departures but rather preserved sound and tested wartime methods of procurement when appropriate or desirable for reasons of economy or national security.

With few significant changes of substance but with several perfecting modifications during the legislative process, H.R. 1366 was finally approved by the President on February 19, 1948, as Public Law 413 of the 80th Congress, but only after very full and careful review and analysis by the Armed Services Committees of both the House and Senate, each of which held extended hearings on the Bill. It became effective as to all procurement of the Armed Services ninety days after enactment, on May 19, 1948, and reliance upon the First War Powers Act as a procurement authority on that date ceased. The provisions of the Armed Services Procurement Act and the Navy's method of operation thereunder will be considered in detail in the two chapters of this course immediately following: "Procurement by Formal Advertising" and "Procurement by Negotiation"; suffice it to say here that the Act, in addition to authorizing negotiated purchases where circumstances require or justify a departure from the formal advertising sealed bid method, also authorizes the use of that type of contract best adapted to the circumstances at hand without blind reliance in every instance upon the fixed price form of contract. As noted above, the Act permits the making of advance payments where necessary; it permits the Comptroller General in his discretion to remit liquidated damages which may have accrued from a contractor's delay, and it affords statutory authorization for so-called "joint" or "cross" procurement between the Services.53 As finally passed, the Act applies to the procurement of the Military Services, the Coast Guard and the National Advisory Committee on Aeronautics. Other Government agencies continue to be governed by Revised Statutes

Section 3709 which, with only very limited exceptions, makes the advertisement method mandatory as to all purchases and sales of property or services.

Two others items of post-war legislation deserve special mention here because of their relationship to Navy property and procurement. Although nothing has been said in this chapter relative to the problems posed by the end of the war in connection with contract termination and disposal of excess Navy property, principally because these subjects are developed at length in later chapters,55 it is readily apparent that the problems presented by contraction were almost as many and complex as those which surrounded the Navy's expansion. So far as concerned contract termination, the most important single factor was speed in settlement to the end that industry could reconvert to peacetime production with the least possible delay and with the earliest possible liquidation of wartime inventories. Disposition of the vast investment made by the Government in the expansion and development of industrial facilities, however, presented a somewhat different and more difficult problem. On the one hand, an orderly disposition of Government-owned property and inventory acquired for war production purposes was dictated by the demands of reconversion and by the lack of adequate funds for the maintenance and administration by the Government of vast warborn surpluses. On the other hand, as long as any threat remained to the security of the nation, it would have been folly to dissipate wholly the tremendous industrial war potential built up at public expense during and in preparation for World War II. The means that suggested themselves for reconciling these two concepts were (1) sale, but with an interest reserved in the military departments of the Government to re

54 41 U. S. Code 5.

55 Chapter 5, "Termination of Contracts" and Chapter 11, "Disposal of Navy Property."

56 34 U. S. Code 522.

57 40 U. S. Code 303.

58 Such statutory authorization was necessary because of the provisions of Section 321 of the Economy Act of 1932 (40 U. S. Code 303b), which stated that "the leasing of buildings and properties of the United States shall be for a money consideration only, and there shall not be included in the lease any provision for the alteration, improvement or repair of such buildings or properties as part of the consideration for the rental to be paid.

capture the property when needed for national defense purposes or at least to require that such property be devoted to production for the military when the dictates of national security so required, and (2) retention of title by the Government, but making temporarily excess property available to the civilian economy on a lease basis, thereby permitting its use in aid of reconversion while at the same time making the property self-sustaining insofar as costs of maintenance to the Government were concerned. For both of these objectives legislation was necessary.

The Navy's peacetime leasing authority was wholly inadequate, stemming from a rider appended to its 1916 Appropriation Bill.56 This rider was designed to pick up and apply to the Navy an authorization which the War Department had had since 1892,57 to lease property for periods not exceeding five years and revocable at any time. Although the language of the Army and Navy authorizations was identical, by an irony of circumstance the Navy rider was inserted under a heading "Lease of Naval Lands," with the result that the Army's leasing authority was deemed to cover either real or personal property (31 Op. Atty. Gen. 457) while the Navy's authority was held to be confined to leases of real property and appurtenant personalty (32 Op. Atty. Gen. 78). Leasing authority which in fact extended little, if any, beyond the right to grant a revocable permit was clearly insufficient to persuade industry to take over and convert to civilian production shipyards and industrial installations with the substantial capital expenditures attendant thereon. Accordingly, on April 30, 1947, the War and Navy Departments introduced a bill (S. 1198) which was designed to extend the authority of the military departments to lease real or personal property under their control and which was not for the time being required for public use, for such periods as might be justified as being in the public interest or in the interests of national defense. The Bill further expressly authorized the Departments to permit the lessee's obligations to maintain, protect, repair and restore the property leased to constitute part or, if need be, all of the consideration for the lease of the property.58 To provide for the alternative means of retaining

an adequate reserve of available industrial capacity for war production while at the same time making such property available to the civilian economy, a provision was added to the bill specifically to authorize the Secretaries of War or Navy to direct the imposition of such terms, conditions, restrictions and reservations in the sale of surplus industrial property of strategic importance as would be adequate to insure its continued availability for war production purposes should need therefor arise.

This latter authorization gave legal sanction to the declaration as surplus to War Assets Administration of certain Navy industrial and shipyard installations for sale subject to the terms of the so-called "National Security Clause." If no purchaser could be found who was willing to purchase the property subject to the encumbrance and obligations of the National Security Clause, the Bill required the owning agency to modify or eliminate the restrictions or to withdraw the property from surplus.

As with the Armed Services Procurement Act, congressional committees conducted extensive, hearings on the Bill, considering such vexed questions as, for example, the extent to which, if at all, Government-owned property leased for commercial uses should be made the subject of state and local taxation and the doctrine of Federal immunity with respect thereto suspended. The Bill was finally enacted as Public Law 364 of the 80th Congress 60 on August 5, 1947.

In the meantime and in order that the Industrial Reserve program might not be unduly deferred, Mr. Steelman, in his capacity as Director of War Mobilization and Reconversion, authorized the War and Navy Departments to utilize

Under the National Security Clause in a sales contract the purchaser agrees to maintain the productive capacity of the installation intact for a specified period and to devote such capacity to production for national defense purposes whenever deemed necessary by the Secretary of the Department concerned. In the event of failure to negotiate a mutually satisfactory contract within a limited specified period, the Government can take possession of the plant itself, for periods up to five years in duration, upon payment of a reason. able rental, compensation for loss on work-in-process in the plant and the costs of reinstalling the owner's machinery and equipment when Government possession is relinquished.

61 Stat. 774, 34 U. S. Code 522a.

50 U. S. Code App. 1171(b), extended and made applicable to the Navy under Executive Order 9262, dated November 5, 19492. Director OWMR ltrs to SecNav, dated July 18, 1946, and November 9, 1946. The scarcity of available machine tools was one of the most serious industrial bottlenecks of World War II.

the more liberal leasing and sales authority of an emergency wartime statute, Public Law 703 of the 76th Congress 61 and to commence selecting and setting aside, pending passage of the legislation above referred to, a stockpile of essential machine tools and production equipment from the surplus pool.62

The Industrial Reserve program for stand-by facilities was given further statutory assistance through Public Law 883 of the 80th Congress, the "National Industrial Reserve Act of 1948," approved on July 2, 1948. Under the Leasing Act, Public Law 364, referred to above, industrial installations and shipyards which could not be sold subject to the obligations of the National Security Clause either had to have the restrictions lifted or the property had to be withdrawn from surplus by the declaring agency which, of course, would thereafter have to assume the costs and expenses of maintenance, custody and control of the property. Because of the scarcity of available funds for the purpose and because it is not an appropriate function of the Military Departments to act as repositories of and to manage large aggregations of surplus industrial installations, the National Industrial Reserve Act made the Federal Works Agency the agency responsible for administering property to be held in the standby industrial reserve and which has not otherwise been leased or sold under the National Security Clause or some equivalent restrictions. In this manner some of the industrial fruits of the last war are being held available for a future emergency as a "moth-ball industrial potential" comparable in the combat Navy to the "moth-ball fleets."

CONCLUSION

Attempt has been made in this initial chapter of the Navy's Contract Law Course to sketch very briefly the historical development of the procurement organization and practices of the Navy Department, with the hope that it will serve as a perspective and background against which the subsequent chapters, presenting in detail various aspects of current Navy procurement law, may be read.

Within the Navy Department we have seen that World War II wrought far-reaching changes in the procurement authority, organi

zation and practices which had theretofore existed. Gone was the formalized and mechanical system of buying all of the Navy's requirements from that small group of professional Government suppliers who understood the ramifications of bidding on publicly advertised invitations, and in its place had come the realization that buying for the Navy was big business in which the employment of sound business methods and the wide development of additional sources of supply would pay dividends far surpassing the frequently only theoretical economy of award to the lowest bidder. The Bureau of Supplies and Accounts ceased to be the Navy's exclusive purchasing agent and all material Bureaus assumed the responsibility of and became adept at contracting for the materiel which was within their particular province and which they best understood. With the growth of negotiated purchasing, the lawyer assumed a more important role in the commercial and business side of the Navy, aiding in negotiations, advising on the innumerable day-to-day legal problems that arose in connection with procurement on a multi-million dollar scale annually, and drafting the types of contracts, contract clauses and contractual instruments that were required to fit the infinite variety of circumstances met with by a Navy engaged in business on a scale larger than the largest private industry.

Policy control over and coordination of purchasing activities became centralized in the Secretary's Office, acting through the Office of Naval Material; the type of control employed, however, was designed to leave Negotiating and Contracting Officers in the Bureaus with the maximum independence of judgment and action within the framework of general policy

63 Public Law 253, 80th Congress; 61 Stat. 495, approved July 26, 1947.

directives. This is perhaps best illustrated by the fact that the Navy Procurement Directives issued by the Secretary's Office occupy one fairly small loose-leaf volume, while the War Department's Procurement Regulations, issued during the same period and covering the same field, filled sixteen volumes; the one evidences central direction in matters of detail, the other only general policy guidance.

In the Navy's relations with its two sister services we have seen that the concept of unification, born of the National Security Act of 1947,63 was given strong impetus in the fields of procurement and property by the Armed Services Procurement Act, the Leasing Act, and the National Industrial Reserve Act, which had the effect of rendering uniform the statutory authority and basic procedures of each of the Services in these fields. Already since the war, long strides have been taken to coordinate and unify the procurement practices and procedures of the three Services, so that industry dealing with the Army will operate under the same rules as when it sells to the Navy or Air Force, and vice versa.

In conclusion, one word of warning may be necessary. Enough has been said in this chapter, and it will be demonstrated time and again in the chapters which follow, to show that the field of Navy Contract Law, and the Navy's procurement organization and practices are far from static; they are subject to constant change, development and improvement. As such, these chapters comprising the Contract Law Course are to be regarded not as a textbook on Navy Procurement but rather as an exposition of some of the procurement practices and many of the procurement problems met with from day to day by the lawyers called upon to advise and assist the Department in its relationships with industry.

INTRODUCTION

On 19 May 1948, the effective date of the Armed Services Procurement Act of 1947 (41 U. S. Code 151), the Armed Services returned to the long-established method of procurement by means of formal advertising and competitive bids. Prior to World War II, this method of Government purchasing had been required of all Government Departments since 1861 by Revised Statutes 3709 (41 U. S. Code 5). From 1942 until the effective date of the new Act, the Armed Services negotiated practically all contracts under the authority of the First War Powers Act and Executive Order 9001. Under the new Act, procurement by formal advertising is again the general rule, and contracts now may be negotiated only when negotiation is authorized by one of the specific exceptions set forth in the Act. It is to be noted that the new Act is more liberal with reference to instances where contracts may be negotiated than the former statute. The particular exceptions where negotiation is authorized under the new Act are discussed in detail in Chapter 3 of this course.

By virtue of marked differences in statutory language, as well as the legislative history of the Armed Forces Procurement Act, the somewhat rigid rules under the predecessor statute will probably not apply with like effect to advertised purchases under the new Act. For example, in purchasing under R. S. 3709, award had to be made to the "lowest responsible bidder;" whereas Section 3 (b) of the new Act provides that award shall be made "to that responsible bidder whose bid, conforming to the invitation for bids, will be most advanta

* Prepared by Meritt H. Steger, Counsel, Bureau of Supplies and Accounts.

geous to the Government, price and other factors considered." Furthermore, it was stated as follows in the Senate Report with respect to Section 3(b) of the Act:

"The question whether a particular bidder is a 'responsible bidder' requires sound business judgment, and involves an evaluation of the bidder's experience, facilities, technical organization, reputation, financial resources, and other factors. The service concerned with the procurement of goods of the type dealt in by the bidder is naturally best qualified to make this evaluation, and broad discretion is accordingly reserved to the service in this respect. In virtually all cases this will result in an award to the lowest responsible bidder. However, it will also provide for situations where the public interest dictates an award to someone other than the lowest responsible bidder."

In the "Justification of the Bill" the same Report also stated, with respect to the former legislation providing for formal advertising, sealed bids, and award to the lowest responsible bidder:

...

"However, the committee also recognizes that during the time this legislation has been in effect a substantial number of strict administrative interpretations have been made, out of which has grown the present traditional approach that Government contracts must be awarded primarily on a lowestprice basis, irrespective of the best public interest or of lower ultimate cost. While existing law does not require this result it is nevertheless a fact. . . . This attitude has had the only result which could be expected the award of contracts in a purely mechanical way to the lowest bidder with no exercise of judgment or discretion on the part of the purchasing officer. The committee is firmly of the opinion that this is not in all cases the best way to conduct a business.... Under present circumstances buying for the armed services is definitely a large-scale business and should be conducted accordingly. The committee is convinced that there are a number of situations in which the exercise of judgment by the purchasing officer should not merely be permitted but should be encouraged."

Time has not yet permitted, of course, the growth of any body of decisions or opinions under the Armed Services Procurement Act, other than from the Services themselves; and accordingly, general guides must be obtained