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services pursuant to the request of a Government official not having actual authority to contract for the Government, the seller has no legal recourse against the Government for payment for the goods or services. The authority of Public Law 85–804 can be used to formalize such commitments when it facilitates the national defense.40

Advance Payments

tractors against liabilities from claims for death or injury or property damage arising out of nuclear radiation, use of high-energy propellants, or other risks not covered by the contractor's insurance program.45 Although certain statutes expressly or implicitly authorize indemnification agreements in specific circumstances,46 no general authority for such agreements exists.*?

Another important use of the residual powers has been to include clauses in contracts requiring contractors and subcontractors to abide by the terms of project labor stabilization agreements.48 Public Law 85–804 is resorted to in these situations because such clauses are restrictive of competition and cannot be inserted in Government contracts without express statutory authority.49

The residual powers also have been used to dispose of Government property where such disposal is not feasible by competitive bidding or in other circumstances not covered by the Federal Property and Administrative Services Act or other property disposal statutes.50 Such

Advance payments are loans from the Gov. ernment to a contractor for the purpose of enabling the contractor to complete the contract.^1 Although there was justification for including a provision for making advance payments within the authority of Public Law 85–804 at the time it was drafted,42 the act is almost never used for this purpose since adequate authority is now contained in two other statutes.43

Residual Powers

The term “residual powers" is defined in the regulations as including "all the authority under the Act except that which is covered by Part 2 hereof [relating to contractual adjustments] and the authority to make advance payments.” 44 The most frequent use of the residual powers has been to indemnify con

(1957) : Whelan & Dunigan, Government Contracte: Apparent Authority and Estoppel, 55 Geo. L.J. 830 (1967) ; Nash & Cibinic, supra note 21, at ch. 3.

40 The example given by the regulations of a circumstance in which an informal commitment may be formalized is “where any person, pursuant to written or oral instructions from an officer or official of a Military Department and relying in good faith upon the apparent authority 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 contractor or subcontractor without formal contractual coverage for such property or services." ASPR 17-204.4; accord, FPR 1-17.204-4. For a discussion of contract adjustment board decisions concerning formalization of informal commitments, see Lakes, su pra note 23, at 183–204 ; Jansen, supra note 23, at 993–999; O'Roark, supra note 23, at 87–95.

41 ASPR E-104: FPR 1-30.104.

12 At the time Pub. L. No. 85-804 was drafted, advance payments only could be made under negotiated contracts. On the same day that Pub. L. No. 85–804 was passed, however, Pub. L. No. 85-800 was also passed to permit advance payments under advertised contracts as well as under negotiated contracts. Act of Aug. 28, 1958, 88 4, 9, 72 Stat. 966-67.

43 See 10 U.S.C. & 2307 (1970); 41 U.S.C. $ 255 (1970).

4 ASPR 17-300; accord, FPR 1-17.300. The term is not used in the act or the Executive order.

45 See Letter from Barry J. Shillito, Asst. Sec. of Defense (Install. & Logist.), Dept. of Defense, to Hon. Carl Albert, Spkr. Hse. Rep., Apr. 7, 1972 (report to Congress pursuant to 50 U.S.C. $ 1434 (1970) ), 118 Cong. Rec. H2975–76 (daily ed. Apr. 11, 1972).

46 See, e.g., 10 U.S.C. $ 2354 (1970) ; 42 U.S.C. $ 2210 (1970). See also Jansen, supra note 23, at 1005-07 : Lakes, supra note 23, at 332-36.

*7 In Part H we discuss and make recommendations for the enactment of general legislation for financial protection of the public and contractors against loss or damage occasioned by a catastrophic accident. Exec. Order No. 10789 has been amended to exempt indemnity agreements from the provision of the order which states that exercise of authority under the act is limited to "the amounts appropriated and the contract authorization provided therefor. ..." Exec. Order No. 11610, 36 Fed. Reg. 13755 (1971), amending Exec. Order No. 10789, 3 CFR at 332 (1972), 50 U.S.C. $ 1431 (1970). For a discussion of the events which lead to the promulgation of Exec. Order No. 11610, see Memorandum for the Chairman, ASPR Committee, from ASPR Special Subcommittee, Case 71-115— Extraordinary Contractual Actions, Oct. 13, 1971, on file with ASPR Committee, Department of Defense.

+ Such agreements have been used as a means of curing excessive costs and delay to certain Government programs caused by local shortages of construction labor and conflicts between union and nonunion workers which produced slowdowns, strikes, and abnormal wages. See Letter from T. 0. Paine, Admin., National Aeronautics and Space Administration (NASA), to Hon. John W. McCormack, Spkr. Hse. Rep., Mar. 25, 1970 [report to Congress pursuant to 50 U.S.C. & 1434 (1970)), 116 Cong. Rec. 9860 (1970); Letter from T. 0. Paine, Acting Admin., NASA, to Hon. John W. McCormack, Spkr. Hse. Rep., Mar. 24, 1969 (report to Congress pursuant to 50 U.S.C. $ 1434 (1970)], 115 Cong. Rec. 7813 (1969) ; Letter from John V. Vinciguerra (for General Manager), Atomic Energy Commission, to Hon. Carl Albert, Spkr. Hse. Rep., Mar, 8, 1972 (report to Congress pursuant to 50 U.S.C. $ 1434 (1970)], 118 Cong. Rec. H1952 (daily ed. Mar. 9, 1972). 19 42 Comp. Gen. 1 (1962).

Property of the United States cannot be disposed of except pursuant to an Act of Congress, United States v. Nicoll, 27 Fed. Cas. 149 (No. 15879) (C.C.D.N.Y. 1826) ; Royal Indemnity Co. v. United States, 313 U.S. 289 (1941); 34 Ops. Atty. Gen. 320 (1924).

Permanency of Authority

Recommendation 21. Make authority presently conferred by Public Law 85–804 permanent authority.

circumstances have included: (1) sale of facilities to contractors where it would be uneconomical or impracticable to relocate them; (2) sale of property to contractors performing Government contracts in isolated areas where supplies needed for contract performance cannot otherwise be obtained; (3) sale of unseryiceable ammunition components or scrap to metal processors in order to preclude interruptions in the production of ammunition; and (4) sale of special protective equipment to contractors and their employees.51 The act has been used, too, as authority to furnish nondisposable, nonseverable industrial facilities to contractors, because otherwise there is only limited statutory authority for the construction of such facilities. 52

Contractual Fairness vs. Special Management Powers

Only in the past three decades have we attempted to study the needs of procurement agencies in general and devise comprehensive Government-wide standards for authority and guidance in procuring goods and services. Spurring the recognition of these needs was the advent of World War II when it was discovered that the contracting agencies did not possess sufficient authority to purchas. war materials promptly and efficiently. Navy procurement, for example, at the beginning of the war "was governed by an astonishing mass of undigested and uncoordinated legislation-statutes that had accumulated on the books over a period of more than one hundred years. Many were completely archaic, many were conflicting, and not a few had been enacted to serve special and now forgotten interests." 55

To overcome such impediments to the requirements of large-scale wartime procurement, Congress passed title II of the First War Powers Act of 1941,56 the predecessor of Public Law 85–804. During debate on the bill some members of Congress feared that granting contracting agencies the power to make or amend contracts without regard to other provisions of law meant granting them unlimited power in procurement matters.57 For this reason Congress restricted exercise of the act's authority to those instances where its use would “facilitate the prosecution of the war.”

After the war Congress responded to the lack of comprehensive and coordinated pro

Although not so categorized by the regula tions, our analysis of the authority shows that there are two main types of powers. The first type of powers are those which seek to provide contractual fairness to defense contractors by correcting inequitable situations; that is, amendments without consideration based on Government action, correction of mistakes, and formalization of informal commitments. The second type of powers are those which enable management officials to hurdle certain obstacles to the attainment of critical procurement objectives. The latter include the residual powers, 53 power to make advance payments, and the power to amend contracts without consideration based on the essentiality of the contractor. The importance of distinguishing these powers is discussed at the end of this chapter.54

51 See Lakes, supra note 23, at 310-12; Jansen, su pra note 23, at 1003-04.

82 See Part A, Chapter 8 for discussion and recommendations with respect to providing additional authority to dispose of Government property in the hands of contractors.

* In addition to the uses described in the text, the residual powers have been used under Title II, First War Powers Act of 1941, the Reactivated Title II, and Pub. L. No. 85–804 as authority for: (1) payment for property requisitioned during combat; (2) lease of real property under emergency conditions ; (3) direct loan to contractor ; (4) novation : (5) settlement and compromise of contract claims ; (6) release of chattel mortgages ; (7) guarantee of loans ; (8) release of obligation under guaranteed loan; (9) recission of

termination for default and substitution of termination for convenience; (10) inclusion of arbitration clauses ; (11) waiver of restrictions on purchase of foreign-made, prison-made, and blindmade products; and (12) negotiation of a lump-sum settlement of a contract terminated for convenience of the Government. See Lakes, supra note 23, at 301-02 : Jansen, su pra note 23, at 1001-02.

54 See pp. 59–60, infra.

55 Dept. of the Navy, Navy Contract Law 6 (2d. ed. 1959). "In the aggregate they presented an obstacle to efficient and speedy purchasing that must have been the lament of many a supply officer." Ibid. See statutes listed in 87 Cong. Rec. 9864 (1941) (remarks of Rep. Walter).

* Act of Dec. 18, 1941, ch.593, $ 201, 55 Stat. 839. For an extended discussion of the historical antecedents of Pub. L. No. 85-804 see Lakes, supra note 23, at 25–55; Jansen, supra note 23, at 960-65; Navy Contract Lau', su pra note 55, at ch. 1.

87 See 87 Cong. Rec. 9837-47, 9855-68, 9893-95 (1941).

TABLE 6. NUMBER OF CONTRACTUAL ACTIONS TAKEN PURSUANT
TO PUBLIC LAW 85–804 BY DEPARTMENT OF DEFENSE

(Calendar 1968–1971)

Den.

Other
Appru.

Den.

[ocr errors]

79

99

94

103

53

87

22

96

18

29

11

[ocr errors]

21

21

Amendments

Formalization
without
Correction

of informal
Contingent

Dis position
consideration

of mistakes
commitments

liabilities b

of property
Department

.1 pprv.
Den.
Apprv.

.Ipprv.
Den.

Appru.
Air Force

18
Army

22
DCA

1
DSA

209

79
Navy

15
87
12

312
Total

26
86
478 252
123

428

10
a Includes 1 amendment without consideration in favor of Lockheed Aircraft Corp. in 1971.
b This column represents approved actions. One action disapproved by Army in 1971.
e Air Force: contract modification or termination.

Army: 95 actions for insertion of employee compensation clauses (ASPR 18–703.2); 1 action under "Secretarial authority and residual powers."
Navy: "Secretarial authority and residual powers."

DSA: 7 approved actions for removal of price escalation ceiling ; subject of other actions not reported.
Source: Based on reports submitted to Congress by Department of Defense pursuant to 50 U.S.C. $ 1434 (1970).

6

133

President Truman in 1951 is still in effect, 64 Public Law 85–804 authority presently may be used by authorized agencies. It is clear, though, after three decades of use, that the vitality of the authority transcends any “national emergency.” Its purpose is to enable contracting agencies to “supplement other contract authority by providing a statutory basis for dealing with individual procurement problems which inevitably arise and which must be resolved to assure the uninterrupted performance of contracts and to correct inequities.” 65 The need for such authority will remain as long as agencies are engaged in accomplishing national goals through large-scale procurement programs.*

curement authority by enacting two primary procurement statutes. 58 Reflecting a change in attitude about Government procurement, certain title II powers which were once thought to be extraordinary in nature, such as the negotiation authority, were permanently incorporated into the new statutes.59 Despite its now narrower scope, contracting agencies found that title II still was necessary in defense contracting. At President Truman's urging, the title was "reactivated” in 1951, at the outset of the Korean War.60 The continued commitment of the United States to expanding the procurement process to facilitate the accomplishment of national defense goals following the Korean War caused Congress to extend the reactivated title II five more times. 61

After extensive hearings by Congress in 1958, in which agencies testified on the necessity for the authority and the Comptroller General reported that no abuse of the powers had been discovered,62 Congress passed Public Law 85–804. The purpose of the hearings was not only to discover whether there was a need for the powers but also whether that need was permanent in nature. For a reason which is not clear from the legislative history, a provision was inserted in the bill limiting use of the authority to periods of national emergency declared by Congress or by the President.63

Because the national emergency declared by

General Applicability of Authority

Recommendation 22. Authorize use of Public Law 85–804 by all contracting agencies under regulations prescribed by the President.

Among the 11 agencies authorized to use Public Law 85–804, the Department of Defense has resorted to it most often. During calendar year 1970 DOD approved actions under the act totaling $4.2 million. In calendar 1971 that figure rose to $629 million because of the severe financial problems of Lockheed Aircraft Corporation. The most frequent use of the authority has been for correction of mistakes, formalization of informal commitments, and inclusion of contingent liability clauses in contracts. Tables 6 and 7 show the number of contractual actions that have occurred in the Department of Defense under the authority of Public Law 85–804 for the period 1968– 1971, and the dollar amount of contractual adjustment actions taken within the same time period.

Use of Public Law 85–804 authority is conditioned on an authorization from the President and compliance with regulations pre

64 Presidential Proclamation No. 2914, 3 CFR, 1949–1953 Comp., at 99.

5$ See Armed Services Procurement Act of 1947, Act of Feb. 19, 1948, ch. 65, 62 Stat. 21 (codified at 10 U.S.C. $$ 2301-2314 (1970)); Federal Property and Administrative Services Act of 1949, Act of June 30, 1949, ch. 288, tit. III, 63 Stat, 377, 393 (codified at 41 U.S.C. $$ 251-260 (1970)). $9 See 10 U.S.C. $ 2304 (1970); 41 U.S.C. $ 252(c) (1970). 0 Act of Jan. 12, 1951, ch. 1230, 64 Stat. 1257. 61 When the Reactivated Title II expired, according to its provisions, on June 30, 1952, the Korean War was still being waged. Congress, therefore, extended the act one more year. Act of June 30, 1952, ch. 524, 66 Stat. 295. Four other extensions were subsequently granted. See Act of June 30, 1953, ch. 173, 67 Stat. 132; Act of June 29, 1954, ch. 415, 68 Stat. 322 ; Act of June 1, 1955, ch. 120, 69 Stat. 82; Act of Sept. 7, 1957, Pub. L. No. 85–306, 71 Stat. 628.

62 See Authority for Certain Actions Relating to Defense Contracts, Hearings on H.R. 12894 Before Subcomm. No. 1 of the House Committee on the Judiciary. 85th Cong., 2d. Sess., at 2-61 (1958).

63 The Department of Defense originally intended to ask Congress for the authority on a permanent basis, but at the request of the Bureau of the Budget, the legislation was reworded to condition exercise of the authority upon the existence of a declared national emergency. The change is not explained in the legislative history: however, the hearings do contain a discussion of the nature of the authority and individual conclusions that the need is permanent so long as the agencies are engaged in large-scale procurement programs. See Authority for Certain Actions Relating to Defense Contracts, Hearings on H.R. 12894. supra note 62, at 17, 41-43.

65 Statement of Robert Dechert, General Counsel, Department of Defense, Authority for Certain Actions Relating to Defense Contracts, Hearings on H.R. 12894. supra note 62, at 4.

*For a dissenting view regarding this recommendation, see p. 59, infra.

TABLE 7. DOLLAR AMOUNT OF CONTRACTUAL ADJUSTMENT ACTIONS TAKEN PURSUANT TO

PUBLIC LAW 85–804 BY DEPARTMENT OF DEFENSE

(Calendar 1968–1971)

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a Dollar amounts in thousands. b Figure does not include one 1971 amendment without consideration totalling 500 million dollars in favor of Lockheed Aircraft Corp. (C-5A

aircraft). c Figure does not include one 1971 amendment without consideration totalling 123 million dollars in favor of Lockheed Aircraft Corp. (AH-56A

helicopters). Source: Based on reports submitted to Congress hy Department of Defense pursuant to 50 U.S.C. $ 1434 (1970).

scribed by him. The regulations governing such use are contained in Executive Order 10789 and the two basic procurement regulations. The latter expressly provide that the authority "shall not be utilized so as to encourage carelessness and laxity on the part of persons engaged in the defense effort nor be relied upon where other adequate legal authority exists.” 66 They provide that "[t]he mere fact that losses occur under a Government contract is not, by itself, a sufficient basis for the exercise of the authority conferred by the Act.” 67 These regulations also implement the statutory mandate for making a public record of all actions taken and describe the findings and kinds of information which must be recorded for each action.

The regulations contain built-in findings that contractual fairness actions, such as adjustments for mistakes or losses due to Government action and formalization of informal commitments, benefit the national defense.68 Thus, it is not necessary in these situationsif fairness dictates the action—to make individual determinations with respect to facilitating the national defense.69 However, specific determinations are required for the exercise of the special management powers. In essentiality cases, for example, a direct relationship to the national defense must be shown by a

determination that continuance of the contractor's performance or source of supply is essential to the successful accomplishment of an agency's national defense program.

The original limitation of the predecessor of Public Law 85–804 to "facilitate the prosecution of the war” was intended as a time limit on the authority. Today, the limitation to national defense contracts restricts its use to procurement actions related to that specific objective. As the Nation turns to Government procurement programs to achieve other national goals the same need for procurement tools to achieve fairness and accomplish these goals exists. A procurement program that relates to health, solving urban living conditions, or improving the environment, for example, is just as important as national defense. Yet, today, the anomaly is that where defense objectives are involved, the President can authorize the use of Public Law 85–804; for other objectives he may not.

The restrictions on a broader application of Public Law 85–804 stem from the language in 50 U.S.C. § 1431 that provides “the President may authorize any department or agency ... which exercises functions in connection with the national defense...." Our recommendation could be implemented by eliminating the phrase "in connection with the national defense” in section 1431. This would make it clear that although any agency could be granted authority to utilize Public Law 85–804, the President would still control its use and

66 FPR 1-17.102 (b); accord, ASPR 17-102 (b). 67 FPR 1-17.204-1: ASPR 17-204.1.

68 See ASPR 17-204.2(b), 17-204.3, 17-204.4 ; FPR 1-17.204-2(b), 1-17.204-3, 1-17.204-4.

69 See O'Roark, su pra note 23, at 49–50.

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