Mr. COLLENS. By establishing the fact your terminated business is definitely a derivative of prime contracts up the line.

Mr. SHERIDAN. You cannot now legally give that liability to the Government after the contract has already expired. I can see where the Government could assume that liability while the contract is in being, however.

Mr. COLLENS. We have a legal liability with our customers under our orders at the present time, but that is upset by renegotiation and the Government comes in directly. Now, just because on terminations we are on the other side of the fence, trying to get some money instead of the Government trying to get it away from us, why can't the Government upset that in the same way?

Mr. SHERIDAN. Can you give specifically the manner in which that can be done? I as a lawyer thinking in a legal way cannot see how it can be done under the present set-up.

Mr. COLLENS. The Government is the only customer. It certainly has a liability on the prime contracts.

Mr. SHERIDAN. That is right.

Mr. COLLENS. It has a liability on the prime contracts to the prime contractor, and also included in that liability is all the liability and commitments made by the prime contractor that extend all the way down the line.

Mr. SHERIDAN. Doesn't the extent of the liability of the Government between the prime contractor and the subcontractor end with the prime contractor?

Mr. COLLENS. But the Government has assumed the liabilities and commitments of the prime contractor.

Mr. SHERIDAN. I can see where it can assume them while the contract is in being, but once it is canceled the Government cannot legally take that liability.

Mr. COLLENS. In most of the termination provisions there are included not only the claims of the prime contractor himself but of all of his commitments and liabilities, that is, after every termination. Mr. SHERIDAN. With respect to renegotiation, that is. Mr. COLLENS. This is a matter of life and death.

Mr. SHERIDAN. Could you have your counsel for your group, Mr. Collens, submit a recommendation? I am interested in that.

Mr. COLLENS. If you deny the Government has any liability and is not assuming the liabilities and commitments of the prime contractor then there is a problem. But I cannot conceive of the Government, and that is the usual condition in termination clauses, that the Government assumes not only the cost of the prime contractor to date but his liability and commitments.

Mr. SHERIDAN. I can see that but once the contract is terminated I cannot assume liability, speaking as a Government representative, but on the basis of some consideration being paid. That is in all your court decisions. You have to be a sort of surety, don't you see? Once the contract is terminated it no longer exists and then the Government cannot step in and say, "I'm going to be liable to somebody not a party to it originally."

Mr. COLLENS. But the liability is for terminating the contract.

Mr. SHERIDAN. I can see where your principle might be feasible if it was incorporated in respect of this all-out war program. But now the

program has been established we cannot go back. That water is over the dam now. It cannot assume liability unless you show us some way constitutionally that it can be done.

Mr. COLLENS. I think you will find in most termination provisions in prime contracts that in the event of termination the Government assume not only the costs to date of the prime contractor but his liabilities and commitments.

The CHAIRMAN. Thank you very much, Mr. Collens. We are very glad to have your testimony in the record. We are sorry to have kept you until such a late hour.

Mr. COLLENS. I want to make this final remark, Mr. Chairman, for the record. That the subject of legislation covering termination of Government contracts is one of the most serious things before industry so far as the future is concerned.

The CHAIRMAN. We agree with you.

Mr. COLLENS. And I hope there will be adequate opportunity for industry to appear here and present their problems because unless that is done I am afraid that the Military Affairs Committee will not get the full picture and certainly it is a serious enough problem to all industry that industry ought to be given time and opportunity to appear before this committee. I want to thank you for the opportunity I have had.

The CHAIRMAN. Let we make this statement for the record. This committee is fully aware of the fact it has on its hands the most serious problem it has had in many years, if not the most serious that it has had at any time. And there is not a single man, including the one lady who is a member of this committee, that is not thoroughly in sympathy with the situation in which industry is placed. But we have a knotty problem here and we are going to solve it.

The committee will adjourn to Monday, October 25, at 10 a. m. (Whereupon the committee adjourned to Monday, October 25, 1943, at 10 a. m.)

AUTHORIZING THE SECRETARY OF WAR TO USE FUNDS FOR ADJUSTMENT OF CONTRACTS

MONDAY, OCTOBER 25, 1943

COMMITTEE ON MILITARY AFFAIRS,
HOUSE OF REPRESENTATIVES,

Washington, D. C.

The committee met at 10 a. m., Hon. Andrew J. May (chairman) presiding.

The CHAIRMAN. The commitee will please be in order.

We will continue hearings on H. R. 3022 concerning the termination of war contracts. We have representatives of the chamber of commerce here who wish to make a statement to the committee.

STATEMENT OF PAUL E. SHORB, IN BEHALF OF COMMITTEE ON FEDERAL FINANCE, CHAMBER OF COMMERCE OF THE UNITED STATES

Mr. SHORB. Mr. Chairman and gentlemen of the committee, I am Paul E. Shorb, of Washington, D. C., appearing as a member of the committee on Federal finance, Chamber of Commerce of the United States.

For months the Chamber of Commerce of the United States, through its various committees and departments, and in conference with other business organizations, has devoted attention to problems connected with termination of war contracts. The demands upon the chamber for information and recommendations upon this subject are increasing daily.

The official position of the chamber, established by action of its delegate body in annual meeting, is that policies upon Government termination of contracts during and after the war should be equitable for the Government and contractors and subcontractors, and assure prompt settlement of amounts clearly due and that there should be no repetition of the situation which developed after the Armistice of 1918, when many thousands of contractors, through no fault of theirs, had to wait long periods before receiving any payments.

The board of directors of the chamber has asked our committee on Federal finance to examine the various proposals which have been advanced and to urge prompt legislation and suitable administrative procedures. Our committee has reached certain conclusions upon the situation as it sees it at this time.

Since, however, the broad nature, extent, and urgency of the problem have been presented to your committee, our presentation will be confined now to possible methods, consistent with the protection of the

interests of the Government and citizens of (a) providing for prompt and adequate advance payments and loans in connection with termination of contracts, and (b) providing for final adjustments of canceled

contracts.

OBJECTIVES

It will be generally conceded, we believe, that the primary objectives of termination financing are as follows:

1. The settlement of termination claims in the shortest possible time. 2. The adequate protection of the interests of the taxpayer and the Government.

Both with respect to an advance or partial payment and to final adjustment of the claims, it is essential in the public interest that these objectives be attained.

1. ADVANCE PAYMENTS

Recomendations: 1. Subject to a preliminary review for a period of 30 days, there should be mandatory requirement of payment of 75 percent of the prime contractor's claim as certified by him; similar provision should apply to subcontractors and suppliers for advance payments through the prime contractor or directly by purchase of the rights of subcontractors and suppliers.

If the review indicates that the claim is overstated there should be authority to withhold the advance payment upon notice to the contractor, who then should have opportunity to furnish bond for the amount of the advance, submit a certificate of independent public accountants that the amounts claimed are correct, or submit other evidence satisfactory to the contracting officer as to the amount that is due.

As to that, you gentlemen appreciate we believe that will take care of the possibility of overstated claims. Of course, you want to get expedition, but we thing the Government needs protection where tests do show that.

Mr. JOHNSON. May I ask a question?

The CHAIRMAN. Yes.

Mr. JOHNSON. As a matter of fact, won't it work out this way— that in practically every case the contractor will build up his claim in order to have a safe margin to work on?

Mr. SHORB. On the 75-percent advance?

Mr. JOHNSON. Yes.

Mr. SHORB. I do not think so, Mr. Johnson; but you may be right. Mr. SPARKMAN. What do you mean by the statement, "subject to a preliminary review" of 30 days? Do you mean by that the contractor will make his estimate and then the Government will be given 30 days to review before the 75-percent advance is made?

Mr. SHORB. That is right.

Mr. SPARKMAN. And if the Government within 30 days comes to the conclusion there is an overstatement it will tell the contractor so? Mr. SHORB. That is right.

Mr. SPARKMAN. And then the contractor will not get paid, but he must either put up a bond or must submit proof that he has not overstated his claim?

Mr. SHORB. That is right. And we think, to follow your thought through on it, that probably the very fact that he may meet with delay because he is going to be required to submit further evidence should make him quite careful with respect to the amounts of his claims.

Mr. SPARKMAN. In other words, it would be a deterrent against the very fear that Mr. Johnson expresses?

Mr. SHORB. Yes, sir. I might say I have discussed that a little more fully later in the body of my prepared statement and I was really outlining the points first, and then we have some discussion. But I am glad to have questions as we go along.

Mr. DURHAM. With reference to your proposal for a 30-day review period, and, of course, you have had quite a few requests from people, I imagine, who have contracts, through the chamber of commerce, but do you think 30 days would be the correct time, or would give the contractor time to get his inventory and all of the other things necessary in for review? Do you think it is possible for him to do that?

Mr. SHORB. Your Honor, it is 30 days that the Government has to review the claim after he files it.

Mr. DURHAM. It is 30 days after?

Mr. SHORB. Yes, sir.

The CHAIRMAN. Proceed with your statement.

Mr. SHORB. 2. Amounts in addition to the advance payments should be made available as loans or guaranties of loans to prime and subcontractors and suppliers. In order to induce banking institutions to participate in such loans the deferred portion of a termination claim should bear interest at a suitable rate, about 4 percent.

3. In protection of claimants and of the service departments there should be specification, as far as may be feasible, in the statute or in regulations, of the bases of allowable costs and profits, as guides to the proper determination of advance payments-and final settlements and adjudication of disputes.

Mr. SHORT. Pardon my interrupting, but you mean the Government should pay the contract 4 percent interest.

Mr. SPARKMAN. Yes; does the Government pay 4 percent interest on the deferred payment?

Mr. SHORT. Yes; we want to get that straight.

Mr. SHORB. The Government does pay interest at whatever the rate you gentlemen think is fair. We suggest 4 percent. You remember the War Department bill, I believe, provides 2.5 percent. We were a little concerned as to whether or not you would get at this lower rate the bank guaranties needed on wholesale terminations and we will need the full cooperation of private financing of all these loans, whatever arrangement is worked out, the same as the V loans are now used for war-production purposes.

Mr. DURHAM. You would recommend that 4 percent be paid on overpayments?

Mr. SHORB. We recommend a charge of 6 percent on overpayments. We will come to that later, but if a contractor is overpaid through this advance payment we think he ought to pay 6 percent on that amount. But we believe that there should be a 4-percent rate from the date of the claim. That is something, of course, for the commit