U.S. GENERAL ACCOUNTING OFFICE-Continued

SCHEDULE I.-Summary of cases reported to the Congress and the Department of Justice disclosing excessive prices negotiated or costs erroneously claimed and paid under Government contracts and status of Department of Justice action thereon, period July 1, 1958-Dec. 31, 1964-Con.

Magnavox Co., Fort Wayne, Iud.. B-133369 January 1962.
January 1964.

$335,000 The Department of Justice action in this
case resulted in an out-of-court settle-
ment of $1,150,000.
1,762,000 After thorough investigation of this matter
and careful review of all the available
facts the Department of Justice con-
cluded that the evidence was insufficient
to establish fraud by the contractor and
was insufficient to warrant a suit for
breach of contract. Accordingly the
Department of Justice closed its file
without objection to any negotiations
that the Air Force may wish to conduct
directed toward further recovery.
317,000 Conferences were held with representatives
of Rocket Jet and Scott and with GAO
auditors. Rocket Jet recently sub-
mitted revised accounting data. The
GAO report is being studied with par-
ticular reference to this new information.
Further conferences are scheduled in
April 1965.

An FBI investigation has only recently
been completed. The GAO report and
the information obtained by the FBI
are being analyzed to determine whether
there is a probable civil cause of action.
417, 000 The Department of Justice concluded that
civil action was not warranted and has
closed its file on this case,

New England Tank Industries of

43,000 Suit has been filed in the U.S. District Court for the Southern District of New York under the False Claims Act and alternatively for breach of contract. The case was tried in March 1965 before a court without a jury and a decision has not yet been rendered.

125,000

Suit was filed in the U.S. District Court
for the District of Minnesota in Sep-
tember 1963 under the False Claims Act.
There have been extensive pretrial dis-
covery proceedings. The case is on the
court's current trial calendar.

The Department of Justice accepted an
offer in compromise in the amount of
$327,300 submitted by Philco Corp. In
accepting this offer, it was specified that
acceptance did not prejudice or affect
negotiations between Philco and the
Department of the Navy as to any facet
of the contract other than the alleged
inclusion by Philco in the proposed costs
for that contract the estimated cost of
items which Philco had previously agreed
with the Navy would not be furnished.
The Department of Justice held discussions
with representatives of RCA and ac-
cepted an offer in compromise in the
amount of $258,000 as settlement of any
claims arising from the allegations con-
tained in the GAO report. The accept-
ance did not prejudice or affect negotia-
tions between RCA and the Air Force as
to any facet of the Air Force contract
other than the alleged withholding of
pertinent cost information during con-
tract negotiations which was the subject
of the GAO report.
215,000 The Navy has been requested to furnish a
report which has not yet been received.

The Department of Justice, after con-
sideration of information obtained in the
case, concluded that under the circum-
stances of the settlement by the Depart-
ment of the Air Force the likelihood of
success in a civil action against the con-
tractor for fraud was negligible. Accord-
ingly, the Department of Justice closed
its civil file in this matter.

183,000

See footnotes at end of table, p. 127.

U.S. GENERAL ACCOUNTING OFFICE-Continued

SCHEDULE I.-Summary of cases reported to the Congress and the Department of Justice disclosing excessive prices negotiated or costs erroneously claimed and paid under Government contracts and status of Department of Justice action thereon, period July 1, 1958-Dec. 31, 1964-Con.

Remainder

Status of Department of Justice action

reported

Reference

Date

By agency

By Depart-
ment of
Justice

B-133325 April 1963.

Air Force....

$2,600,000

B-133149 September 1964..

Navy..

787,000

787,000

$2,600,000

The Department of Justice requested
comments from GAO on a report from
the Air Force. Comments on the Air
Force report were forwarded to the
Department of Justice on Apr. 19, 1965.
The Department of Justice solicited the
comments of the Defense Department.
A conference was held with representa-
tives of the Department of Defense and
a request was made for copies of certain
additional documents.inte
The General Accounting Office has been
advised by the Department of Justice
that an offer in compromise was tendered
by Westinghouse Electric Corp. on Apr.
22, 1965, in the amount of $1,025,000.
190,000 Extensive reports have been received by
the Department of Justice from the
respective Departments and conferences
have been held with agency and com-
pany representatives. Some additional
investigation has been necessary and
undertaken. Conferences have been
held with counsel for the subject and
additional materials submitted. These
matters are currently being analyzed and
evaluated by the Department of Justice.

B-146733

September 1963.

do.

1,353, 000

1,353, 000

Westinghouse Electric Corp.,
Lima, Ohio.

B-146845

March 1964.

Air Force.

190,000

2 Includes an additional $176,000 disclosed by Air Force audit.

1 Not determined.

LEGAL MEMORANDUM ON DUTY OF COST-TYPE CONTRACTOR TO EXERCISE "DUE CARE" IN MAKING REIMBURSABLE EXPENDITURES

(Prepared by the Office of the General Counsel, General Accounting Office) There is substantial legal support for the proposition that a contractor performing work on a cost-reimbursement basis must use the same skill and ability that it would use in performing work for a fixed price. In Title Guarantee & Trust Co. v. Pam, 155 N.Y.S. 333, 337 (1915); affirmed 192 App. Div. 268 (182 N.Y.S. 824), affirmed 232 N.Y. 441 (134 N.E. 525), the New York Supreme Court stated:

When a person contracts with a corporation with a reputation for the successful completion of large enterprises to do a work at cost and a percentage, he has the right to expect the same skill and ability to be applied to his work that it would give to a work where its profit was dependent upon its ability to do the work at a cost less than the contract price ***. If the contractor fails to do this, he should only be allowed the reasonable cost and his percentage."

In the case of Wendel v. Maybury et al., (La. Ct. of App., 1954), 75 So. 2d 379, 383, the court stated:

"Under a cost-plus contract, the contractor is obligated to use his utmost endeavors to see that the owner gets value received."

As was stated by the court in Shaw et al. v. Bula Cannon Shops, Inc. (Miss. Sup. Ct., 1949) 38 So. 2d 916, 918:

"The contractor does not have the right to expend any amount of money he may see fit upon the work, regardless of the propriety, necessity, or honesty of the expenditure, and then compel repayment by the other party, who has confided in his integrity, ability, and industry."

Other cases supporting this proposition are Hitt v. Smallwood (Va. Spec. Ct. of App., 1926), 133 S.E. 503; and Walsh Services, Inc. v. Feek (Wash. Sup. Ct. 1954), 274 P. 2d 117.

No case has been found in the Federal decisions dealing specifically with the question of responsibility of a cost-plus-a-fixed-fee contractor for negligent or improvident expenditures. However, we believe the principles enunciated in the cases mentioned above have equal applicability to Federal cost-reimbursementtype contracts. The United States has the same right as a private person to expect that its cost-reimbursement contractors will perform work on behalf of the Government with the same degree of care, industry, and economy that they would exercise if they were performing the work under a fixed-price contract. (Comments on the memorandum are included in the letter printed below.)

DEPARTMENT OF JUSTICE,
Washington, June 9, 1965.

Hon. CHET HOLIFIELD,
Chairman, Subcommittee on Military Operations, Committee on Government
Operations, House of Representatives, Washington, D.C.

DEAR MR. CHAIRMAN: You have requested, for inclusion in the committee's printed record, the Department's comments on the schedule submitted to you by GAO which summarizes the GAO referrals to the Department of Justice. Our comments are as follows:

1. Our files in the GAO referral cases do not indicate any complaints from contractors relating to any alleged delays in the Department of Justice. 2. Insofar as our files disclose, there have been no withholdings except in the Westinghouse Electric Co. referral, B-146733, of September 1963, when Navy did not pay the sum of $272,447 for a short period of time because of the claim asserted by Navy and GAO in the amount of $1,353,440 as being due the Government from Westinghouse under the same contract.

3. The records of this Department indicate that the following reports were referred to the Department by GAO on the dates stated:

Aeroflex Corp., B-146758, May 7, 1964.

Boeing Co., B-146717, June 3, 1964.

Fairchild Camera & Instrument Corp., B-146854 (GAO report sent to Justice by Air Force on December 10, 1964).

Hazeltine Corp., B-132974, September 19, 1963.

Kearfott Co., B-133303, March 31, 1961.

Lear, Inc., B-133022, March 10, 1961.

Northwestern Aeronautical Co., B-133247, January 22, 1962.