I can give you a hypothetical sitaution which occurs to me as a potential basis. Let's assume we were buying an item very urgently needed, in Korea, let's say. The contractor making it came in to us and says, "I am going broke and will have to discontinue production if I don't get an amendment." We know in order to get it from some other source it would be a matter of 6 months elapsing before we could get out invitations to bid, get the bids in, evaluate them, and award the contract and get the other fellow started. We might find that the urgent need for the item was so great that we would be facilitating the national defense by giving the present contractor an amendment without consideration. Mr. SAVAGE. To keep him in business to supply that item. Mr. MAYER. Even if it didn't mean going out of business. He might just refuse to continue on this particular item. to. Senator MOODY. He might refuse to continue and might never begin Mr. MAYER. Right. Mr. NOONE. Presumably Mr. Schwarz is necessary since he is producing now on a product which the Navy is accepting. Mr. SAVAGE. I think Mr. Mayer's example pointed up the fact in that case, the hypothetical case he mentioned, we needed that item in such time as would not permit going somewhere else to get it. If the facts were different and we could get the item from someone else in time to meet our requirement Mr. NOONE. Let me fill out some of the facts on the hardship consequences of this case. This man can finish the contract but unless he gets financial relief he will be bankrupt. Now is it your position that the Navy should let him go ahead and go to the precipice of bankruptcy as long as he can complete the contract and then forget about him? Mr. SAVAGE. That simply brings us back, I think, to the question of what is the test of facilitating the national defense. Mr. NOONE. We have had the general statement of congressional intent under the Defense Production Act, namely, small business should be fostered and encouraged to participate in national defense. I wonder if that couldn't. Mr. SAVAGE. We are implementing that desire of Congress. Senator MOODY. It seems to me, if instead of wrestling with the word "facilitate"-I mean I have confidence in the contracting officers of the Navy by and large. I don't think they are going to give the Treasury away, as implied a few moments ago. If you know anybody in the Navy that is going to do that, please get rid of them right away. Mr. MAYER. If there were, we would have already done so. Senator MOODY. I hope you would have. But it seems to me that instead of wrestling with exactly what does and does not facilitate the national defense, you ought to recognize under a broad rule that equity on the part of the Government and playing fair on the part of the Government is going to facilitate the national defense. I would like to have someone debate the other side of it. Mr. JONES. In connection with this question as to what we would do in case of bankruptcy, I would like to ask the question-what caused the bankruptcy? Senator MOODY. That is a good point. In other words, whether it was a matter of bad bidding or whether it was a matter of economic forces changing prices and so on in a way that could not have been anticipated by the bidder. Was that your point? Mr. JONES. I think that is exactly the point. Admiral SCHOEFFEL. Furthermore Senator MOODY. Just a minute. I didn't get his answer. Mr. JONES. I think that is exactly my point. Senator MOODY. Do you not believe then, Mr. Jones-I do not know whether you have the facts of this Massachusetts case, but it seems to me right on the button of your philosophy. Mr. JONES. I do not have the facts in that case, no sir. Senator MOODY. So is this Michigan Production case, which is a Navy case. Mr. JONES. I think before any particular opinion can be rendered as to the causes of bankruptcy some third party or some group who are capable of going in and determining what is the cause of the loss must go in and make that determination. Because, as I say again, we have consistently attempted to be as reasonable as possible since Korea. Mr. NOONE. Mr. Schwarz of the Michigan Production Engineering Co. has submitted data to the committee which reflects, first, that the contracts were let before Korea and, secondly, that the reason for his loss on the contract was the increase in costs on materials and labor following Korea. Mr. JONES. I would think that statement would be subject to a reasonable outside audit, would you not? Mr. NOONE. Surely. Mr. JONES. To determine the exact reason why the cost has increased, whether or not it is due to economic forces beyond his control or whether it is due to the fact he made an error in judgment at the time he submitted the bid. Senator MOODY. Have you not set up a board to do exactly that sort of thing? Mr. JONES. That is right. But I am just saying Senator MOODY. If the Board operates with a rigid interpretation, then he is not going to get fair treatment. And if the Board operates according to a rule of equity in accordance with the law, then he is going to get relief. It seems to me we ought to get this Board up here and talk to them perhaps. Admiral SCHOEFFEL. Another point in regard to bankruptcy, sir, would certainly be whether the bankruptcy is due primarily to the governmental contract or may also be greatly influenced by bad judgment in other business dealings. Senator MOODY. Yes, sir. I do not think it necessarily has to be bankruptcy. I think extreme hardship would not necessarily have to be bankruptcy. Admiral SCHOEFFEL. Or extreme hardship, because I certainly do not believe that the Government should bail out of bankruptcy or other form of extreme hardship every company that happens to get into that position and at the same time has a governmental contract. Senator MOODY. I agree with you. Admiral SCHOEFFEL. Because in many cases these companies will be getting themselves in that position due to bad judgment in their other business dealings. Senator MOODY. That is certainly true, and I certainly agree. Mr. MAYER. To get back to your point about the Board's interpretation of this statute and regulation, Congress could have written a law which said whenever a war contractor who is on the verge of bankruptcy asks for an amendment the Board will grant it, or something to that effect. Now they did not write that in the act. Senator MOODY. They said extreme hardship cases. Mr. MAYER. Not in the statute. They said simply we could amend the contract without consideration when amending it will facilitate the national defense. Senator MOODY. Now you know well that a broad clause of that nature is meant to be interpreted broadly. If Congress wanted it narrower, Congress would have narrowed it. Mr. MAYER. Right. Senator MOODY. And I think that a broad clause ought to be interpreted broadly. Therefore I think it is perfectly tenable interpretation that "facilitate the national defense" means, do not antagonize and scare business away from Government fixed-price contracts. Mr. MAYER. I think the real problem giving rise to all the complaints is simply the fact we are in partial mobilization instead of all-out war. Senator MOODY. Very true. Mr. MAYER. This statement is taken from the language in the Second World War Act, and we could very easily find that amendments without consideration in those times would facilitate the prosecution. of the war, because we needed every contractor's product. Now we have lots of competition for contracts and lots of sources. of supply. This is a statute written for a war-time situation and it is being applied in a partial mobilization. Senator MOODY. I think that is a very good point, but let me point out this to you—that if you realize there may come a time when you will need all of these contractors, then it will facilitate the national defense to keep them in business. You just said in a time of full mobilization you needed them all, and therefore you could easily interpret it that way. That is very true. But if you are going to interpret this very vague word, which is capable of many interpretations I will admit, in a broad manner, in an equitable manner, then it seems to me that you can make it possible to handle the situation fairly with regard to this small business. Mr. JONES. If all of the small businesses will facilitate national defense, then they would all qualify under your interpretation, it would seem to me. Do you believe we should consider every contractor who has a contract, prime or sub, building something for the Navy, that they are facilitating the national defense and therefore should be given full consideration under this? Senator MOODY. No. I was answering the point made here, that it was easier to interpret the word "facilitate" in an all-out mobilization than in a semimobilization. The point I would like to make on that is that with me the question of facilitating the national defense would be whether or not the Government handles its contractors in an equitable manner. If it doesn't, it is going to make it less likely that you will have eager and ready contractors available and then if it does and in an equitable manner that can be defended openly. I do not mean to say some company might not feel it had been dealt with inequitably, of course, but I do not think in a case such as you have mentioned of a pre-Korea contract anybody would say it was unfair. And the question is, does the work facilitate? Can it be so interpreted as to bring about the fairness? Mr. JONES. I would think, Senator Moody, that the contracts prior to Korea should definitely be segregated from those after Korea. Because, as I say, we do have definite consideration given to any contractor who legitimately demonstrates the need for it to protect them against this economic inflation which is based upon indices of labor, indices of material, and good judgment. Senator MOODY. I think certainly that is a good starting point for getting a job done here, namely, that if you will take the companies that have had their fixed-price contracts before Korea when they do come in on a hardship basis and give real consideration, and if they can show that it has been a hardship, if you would interpret that as facilitating the national defense I think we would have made a considerable jump forward from the more rigid and literal interpretations which implies that this particular man is going to be needed right away for the contract or else defense is not facilitated. I think we have gotten to the point of interpretation which is going to be decisive here, and I hope you will, if it is your authority, Mr. Jones, at least take care of these companies that have been trapped because of the Korean situation. Now, some of the other companies, including at least Kadison Corp., came in on a somewhat different basis. They came in on a basis that they felt that they had been misled into increasing their costs. That is a question of facts, and there, of course, again is the question of equity. But it is not specifically along the broad lines we are talking about now and which Mr. Jones has enunciated here. Mr. MAYER. I might point out in that case that there is another board of the Navy, the Navy Panel of Armed Services Board of Contract Appeals, which is a permanent board dealing with all disputes arising out of questions of facts in contracts. It is a remedy which contractors always have available to them. And in the facts as you stated them that is the claim that the Kadison Corp. was to make. Senator MOODY. I am not stating the facts, I am merely stating what the testimony was. Mr. MAYER. I understand that, but their argument is one that belongs before that Board, if that is the argument they want to make. And as a matter of fact we wrote them some months ago and asked them to please let us know whether they wanted to go before that Board and they never replied to the letter. I think that is correct. Mr. SAVAGE. From the information I have, that is substantially correct. Senator MOODY. We will recess until 1:30. (Whereupon, at 12 noon the committee recessed until 1:30 p. m.) AFTERNOON SESSION Senator MOODY. I must apologize to you, gentlemen, for having to adjourn the meeting first for 20 minutes and then for an hour and a half, but the vagaries of the Senate schedule are something that no one can predict, and one of my many faults is that I cannot be two places at the same time. We were speaking this morning of the congressional intent of this bill, to what extent the services would be carrying out the intention of Congress if they took a broad view of this word "facilitate." Counsel for the committee, Mr. Noone, has here the remarks made on January 2, 1951, by Mr. McCormack, from Massachusetts, the majority leader of the House of Representatives, who of course. is a very important Member of Congress. Mr. McCormack said on that date: The purpose of this bill is to try to bring practical justice to a number of business concerns throughout the country. We may disagree on this or that piece of legislation, but I think all of us are in agreement that we do not want to bring about any kind of unintentional injustice. That is the point I was speaking of this morning, and I am sure that also goes to the Navy. This is a matter of vital concern to a number of what might be termed the smaller or independent business activities, corporations or partnerships throughout the country who in good faith made contracts. I am able to look ahead and see the tremendous impact of prices on these concerns. They will be forced into bankruptcy unless something is done. They are entitled to this relief. Mr. Celler, of New York, added: I am also informed by the Department of the Army that most of these contractors are small businesses. I am sure we all want to lend a helping hand to small business. We want to keep them in a position where we can continue a competitive economy and where they can continue to aid our defense effort. Now that of course goes equally for large businesses. We do not want to be unfair to anybody. Mr. McCormick said: May I suggest that it is not a question of lending a hand. It is a question of practical justice under the circumstances. That is what attracts me. I know the gentlemen used the phrase "Lend a helping hand" in that sense. Then the debate continued. That is precisely the purpose of these hearings. We are trying to call to your attention a situation where we feel that practical justice has been denied, not because of any sinister intent of anyone in the services to deny it to them, but simply because of an interpretation of the existing regulations. I might ask Mr. Jones, picking up the point he made regarding the pre-Korea situation, whether he feels that there is anything now preventing him or preventing whatever officer in the Navy Department would handle this from making an adjustment on a case where there was a clear injustice done, particularly if the contract was signed before Korea. TESTIMONY OF REAR ADM. M. F. SCHOEFFEL, ACCOMPANIED BY EDWARD SAVAGE, JR., CAPT. G. H. WALES, MILTON E. JONES, REAR ADM. S. R. EDSON, RICHMOND L. WATSON, MERITT H. STEGER, AND CHARLES H. MAYER-Resumed Mr. JONES. Let me point out that I personally have not the authority to make such a decision. Senator MOODY. Who does have that authority, Mr. Jones? |