case of ordinary bankruptcy, a rejected contract creates a claim against the debtor's estate to the extent that the Navy is damaged by the rejection.275

No complete description of the process for the proof and allowance of claims under Chapters X and XI is possible here. In general, however, it may be stated that Chapter X proceedings affect the rights of both secured and unsecured creditors and that the judge is authorized in such matters to prescribe the manner in which and the time within which claims shall be filed and allowed.276 Chapter XI, on the other hand, permits an arrangement only of unsecured debts, and proof of claim may be filed at any time prior to the confirmation of the plan of arrangement.277 The practice under ordinary bankruptcy will also govern the reclamation of property in proceedings under Chapters X and XI.278

A final word should be added on what may be termed extrajudicial reorganization, that is, a reorganization conducted with the general consent of the creditors and stockholders of the debtor corporation, but without resort to the courts. While atypical, this procedure was sponsored by the Navy, in collaboration with the Air Force, in the case of an important airframe manufacturer whose sustained production during the period of reorganization was essential to the national defense. Although this procedure took the matter out of the provisions of the Bankruptcy Act, it required that extremely careful thought be given to those aspects of the plan of reorganization bearing upon the refinancing of the debtor, contract performance, and the repayment of outstanding debts to the Navy.27

275 For a general discussion of the effect of a rejection of an executory contract in Chapter X proceedings, see 6 COLLIER, BANKRUPTCY 3.24(1)(2) (14th ed. 1956); in Chapter XI proceedings, 8 COLLIER, BANKRUPTCY ¶ 7.15 (14th ed. 1956).

276 Bankruptcy Act, § 196, 52 Stat. 893 (1938), 11 U.S.C. § 596 (1958).

277 Bankruptcy Act, § 367(3), 52 Stat. 912 (1938), as amended, 11 U.S.C. § 767 (3) (1958). An exception is provided for claims arising out of the rejection of executory contracts, which may be proved within such time after the confirmation of the plan as the court may direct. Bankruptcy Act, § 369 (3), 52 Stat. 912 (1938), as amended, 11 U.S.C. 769 (3) (1958). See 8 COLLIER, BANKRUPTCY 7.09 (14th ed. 1956).

278 In re 1030 North Dearborn Bldg. Corp., 9 F. Supp. 972 (E.D. Ill. 1935); In re Burgemeister Brewing Co., 84 F. 2d 388 (7th Cir. 1936). While these cases arose under § 77B of the Bankruptcy Act (enacted by the Act of June 7, 1934, 48 Stat. 911), the predecessor of Chapters X and XI, their general principle is still applicable.

379 This extrajudicial reorganization is the subject of detailed analysis in Cary, Government Financing of Essential Contractors: The Reorganization of the Glenn L. Martin Company, 66 HARV. L. REV. 834 (1953).

CHAPTER 3

BASIC PROCUREMENT POLICIES

1. Introduction. The Army procurement program is affected by certain fundamental public policies derived from statutory law, Executive Orders and administrative orders and regulations. To be examined in this chapter are such policies as those relating to the manner in which contracts are awarded, the transfer of contracts, the limitations on contracts from which Government officials would benefit, the limitation on fees payable to agents of persons who enter into contracts with the United States, the preference of domestic over foreign supplies and the preference given small busi

ness.

I. Competitive Bidding

2. General. In most situations it is advantageous to the United States to make its contracts with the lowest responsible bidder in an open competition for such contracts. Thus since an early date1 statutes have required the letting of contracts by formal advertising. The purpose of this requirement was succinctly stated as being:

... to give all persons equal right to compete for Government contracts; to prevent unjust favoritism, or collusion, or fraud in the letting of contracts for the purchase of supplies; and thus to secure for the Government the benefits which arise from competition."

The statutory requirement for competitive bidding was enacted for the protection of the Government and not to confer rights upon contractors competing for Government contracts. In this connection the Supreme Court has stated:

Section 3709 of the revised statutes requires for the Government's benefit that its contracts be made after public advertising. It was not enacted for the protection of sellers and confers no enforceable rights on bidders.

1 Rev. Stat. § 3709 (1875), 41 U.S.C. § 5 (1958).

* Procurement by formal advertising is discussed in Chapter IV, infra.

8 United States v. Brookridge Farms, Inc., 111 F.2d 461, 463 (10th Cir. 1940). Perkins v. Lukens Steel Co., 310 U.S. 113, 126 (1940). See also United States ex rel. Goldberg v. Daniels, 231 U.S. 218 (1913), where the highest bidder in the advertised sale of the cruiser "Boston" sought mandamus against the Secretary of the Navy to compel delivery of the ship. The writ was refused. Cf. United States v. N.Y. & P.R. S.S. Co., 239 U.S. 88, 93 (1915); 39 Ops. Att'y Gen. 71 (1937); 26 Comp. Gen. 49 (1946).

6

5

Revised Statutes § 3709, as amended, was the basis for the procurement programs of the various Government departments and agencies for many years. However, its provisions were too restrictive to meet the unprecedented procurement needs of the armed services during World War II. As a result temporary legislation was enacted to allow exceptions to the competitive bidding requirements of Revised Statutes § 3709. Shortly after the close of World War II, Congress enacted the Armed Services Procurement Act of 1947" which is the current basis for procurement practices and procedures of the Department of Defense.

3. Procurement by the armed services. The provisions of 10 U.S.C. §§ 2301-2314 (1958) constitute the basic authority for all purchases of property and services by the military departments. It is provided in 10 U.S.C. § 2304 (a) that:

8

Purchases of and contracts for property or services . . . shall be made by formal advertising.

This section continues with a list of seventeen specific situations in which the general requirement for advertising and competitive bidding does not apply, and authorizes procurement by negotiation in these situations. Some of these situations are merely restatements of older exceptions to the requirement of competitive bidding authorized by Congress or recognized by judicial or administrative interpretation of Revised Statutes § 3709; the remaining exceptions were enacted to meet the needs of the military services in time of war or national emergency."

II. Transfer of Contracts

4. Transfer of contracts. By the curious relic of a statute which among other objectives sought to make amenable to trial by court martial contractors who furnished supplies to the Army and Navy,1o Government contractors are prohibited from transferring any contract with the Government or any interest therein." Violation of this prohibition "shall cause the annulment of the contract... transferred, so far as the United States are concerned." 12 While the

Rev. Stat. § 3709 (1875), as amended, 41 U.S.C. §5 (1958), allows procurement by negotiation only when: (1) the amount involved does not exceed $2,500 (increased from $500 by the Act of Aug. 28, 1958, § 7, 72 Stat. 967); (2) the public exigencies require immediate delivery of supplies or performance of services; (3) there is only one supplier available; (4) the services involved are personal in nature and are either under Government supervision and paid for on a time basis or of a technical or professional nature. First War Powers Act, 1941, tit. II, § 201, 55 Stat. 839.

7 Act of Feb. 19, 1948, ch. 25, 62 Stat. 21. This act was codified without substantial change by the Act of Aug. 10, 1956, ch. 137, 70A Stat. 677. It now appears as 10 U.S.C. 2301-14 (1958).

8 The term "property" does not include land (10 U.S.C. § 2303 (1958)).

• Procurement by negotiation is discussed in Chapter 5, infra.

10 Act of July 17, 1862, ch. 200, § 16, 12 Stat. 596.

11 Rev. Stat. § 3737 (1875), 41 U.S.C. § 15 (1958).

12 Ibid.

language of the statute is sweeping, its interpretation by the courts has been quite narrow. The purpose of the statute has been stated to be to protect the Government from harrassment caused by the multiplication, without its consent, of the persons or firms with whom it has to deal and to insure to the Government the benefit of performance by the persons or firms with whom it contracts;13 and further to prevent the evils attending speculative bidding.1 As a corollary to this, it has been stated that the statute does not purport to affect the validity of any assignment as between the parties thereto.15

The prevailing view is that the Government may elect upon notice of a transfer to repudiate the transfer and consider the contract as annulled, or to recognize the transfer and the rights of the assignee thereunder.16 However, the situations in which a "transfer" within the contemplation of the statute has taken place, or stated otherwise, in which the Government has such an election are not the subject of facile generalization. The problem of synthesizing case law is compounded by the fact that in many of what few cases do involve the "transfer" question, the rights of the Government are not in issue or are only collaterally so. Thus the Supreme Court held that the transfer of an executory contract to a corporation formed by a contractor at the insistence of his creditors, but controlled by him, was at most a subcontract "since under Revised Statutes 3737 one may not assign a contract with the United States." 17

An arrangement between a contractor (a partnership) and a corporation, ninety per cent of which was owned by the partners whereby the contract was "taken over by the corporation" and completed under the direction of the partners, was held not to be a transfer of the contract or of any interest therein. The court was of the opinion that the work done by the corporation was no different than that done by any other employee of the partnership.18

In recent years the specter of the statute has loomed almost exclusively in situations involving agreements entered into by Government contractors for financial reasons. The key to the effect which

13 Hobbs v. McLean, 117 U.S. 567 (1886).

14 Federal Mfg. & Printing Co. v. United States, 94 Fed. 6 (5th Cir. 1899). 15 Burck v. Taylor, 152 U.S. 634 (1893).

16 ASPR 16-505 (1 Jul 1960) concerns novation agreements and authorizes the recognition of a third party's successory interest in a Government contract where such interest is acquired incident to the transfer of all assets of the contractor or such assets as are concerned with the performance of the contract and where such recognition would be consistent with the Government's interest. Also, recognition is directed where only

a change of the contractor's name is involved.

17 Illinois Surety Co. v. John Davis Co., 244 U.S. 376 (1917), in which case an action by materialmen of the corporation was being defended by the surety on the grounds that a transfer of the contract had been effected, the contract thus annulled, and the surety's liability thereunder discharged.

18 Hollerbach v. United States, 47 Ct. Cl. 236 (1912), rev'd on other grounds, 233 U.S. 165 (1914).

any such agreement may have on the Government contract involved lies in the degree of control retained by the contractor over the performance of its obligations under the contract. Thus where the purchaser of Government surplus property had agreed to demilitarize it to the satisfaction of the Government and upon finding himself financially unable to perform had sold the property to another company which assumed the obligation of demilitarizing, there was held to have been no violation of the proscription in view of the fact that the original contractor had carefully retained by the terms of the sales contract the right to supervise the demilitarizing and, further, to conduct with the Government any negotiations which might be necessary in connection therewith.19 On the other hand, where in return for financial assistance to perform a Government contract the contractor signed a "Management Agreement" by terms of which the lender was employed as manager of the contractor's operations under the contract and was appointed attorney for the contractor in its "name, place and stead" with respect to the operation of the business, there was held to have been a transfer within the proscription of the statute.20

Illustrative case: An extremely lucid approach to the problem of applying the statutes to the facts in a given case is that taken by the court in Thompson v. Commissioner.21 The court was pragmatic in considering the facts in the light of the purpose of the statute and held that the transfer of a Government contract as an incident to the dissolution of a corporation and the formation of a partnership was not within the proscription of the statute. The court noted that the principal stockholder of the corporation obtained the same proportionate share in the partnership that he held in the corporation; that the corporate management for which the Government had bargained became the management of the partnership; that there was no increase in the number of persons with whom the Government had to deal; that the Government was better off financially since the personal liability of the partners had been substituted for the liability of the corporation; and, finally, that there was no element of speculation involved in the original bidding.

III. Contingent Fees

5. General. The policy of proscribing the "no contract-no fee" arrangement between a would-be Government contractor and a contract procurer is one of long-standing.22 However, the statutory re

19 Chemical Recovery Co. v. United States, 122 Ct. Cl. 166 (1952). See Hobbs v. McLean, 117 U.S. 567 (1886); Field v. United States, 16 Ct. Cl. 434 (1876).

20 McPhail v. United States, 181 F. Supp. 251 (Ct. Cl. 1960).

21 205 F.2d 73 (3d Cir. 1953).

22 See Providence Tool Co. v. Norris, 69 U.S. (2 Wall.) 45 (1864); Exec. Order No. 9001, 6 Fed. Reg. 6787 (1941); See generally Barron and Munves, The Government Versus the Five-Percenters, 25 Geo. Wash. L. Rev. 127 (1957).