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The CHAIRMAN. That is why I asked you the question, because they insert this specific clause in there, “without regard to any provision of law."

Mr. MORGAN. I just do not know.

Mr. Sikes. Getting back to Mr. Martin's statement just a moment ago that the War Department wants this measure to expedite the payment to war contractors, it does make it possible for them to get promptly into other war production. I believe they brought out yesterday the statement that it would also have a beneficial effect on manufacturers getting into peacetime production.

Mr. MARTIN. That is true. That is why I limited my question to the duration of hostilities, because immediately upon cessation of hostilities, of course, the Government is very, very desirous of helping them back into peacetime production.

Mr. SIKES. I saw that the item uppermost in the minds of the witnesses who appeared here yesterday for the bill was that the legislation would expedite and facilitate the termination of war contracts. As a matter of fact, that is written into the title of the measure. Now, Mr. Morgan, can you tell me something in this bill that will expedite and facilitate the termination? I do not see anything that will speed up the settlement of these contracts.

Mr. MORGAN. I cannot see how it expedites or facilitates the termination of the contract, and I do not see how it will expedite the settlement, that is, the final settlement of all the claims arising out of the termination of the contract. The only thing it can expedite is the performance of other contracts.

Mr. MARTIN. In your experience in making settlements, would you not think that the advancement of, say, three-fourths or 90 percent, or even 100 percent of the amount of the claim, would expedite the final negotiation on the settlement of the amount in dispute ?

Mr. MORGAN. No; I cannot see how it would. It might help get more business from them in the future, but that is the only thing I can think of.

Mr. SIKES. Are you prepared to say how far this bill with this statement that I quote, “without regard to any provision of law,"? how far that statement will go in absolving contracting agents of responsibility to the people for any settlement they may make with contractors?

Mr. MORGAN. I really cannot, because I do not know exactly what the purpose of that "without regard to any provision of law" clause is.

Mr. SIKES. Regardless of the purpose and I certainly would not think that was the main purpose of the bill, or even an incidental purpose—but regardless of the purpose of the bill, might it not have that effect of absolving the contractor of legal responsibility?

Mr. MORGAN. Yes; I think it might.

Mr. BURTON. Is it not perfectly clear that as things stand at this time there is no doubt in the minds of the War Department that they have a right to settle with the contractor upon the termination or cancelation of the contract? That is substantiated by the fact that they have terminated some 3,500 contracts, and they settled 1,800 of them, so that they must feel that authority of the War Department to enter into a contract under the war measures carries with it the inherent right to settle with the contractor upon the cancelation of that contract.

Now, does it not reasonably follow that if the War Department has the right to cancel the contract and to enter into an agreement of settlement and pay the contractor after that settlement agreement is consummated, that it carries with it the right to make a payment in advance of settlement to that contractor, but that that payment must be well within the amount which they expect to pay in final settlement?

In other words, does not the one right carry with it the other rightthat is, to make the advance payment?

Mr. MORGAN. I think there are really two thoughts that you have there, Mr. Burton.

Mr. BURTON. I am going to follow that up with something else.
Mr. MORGAN. Yes?
Mr. BURTON. I just wanted to ask you if I am right so far.

Mr. MORGAN. I think you have really two questions there. On your first question, whether they have the inherent right to settle upon termination of the contract, my opinion is that they have that inherent right. That is, whenever you give a person the right to contract, why, you give him the right to make agreements arising out of the termination or modification or anything else of the contract.

So far as the United States is concerned, there are a great many rulings of the Comptroller General with respect to the modification of Government contracts. As you know, you cannot modify a contract unless it is to the interest of the United States to do so. After you have the inherent right to settle a contract—by "settle” I mean enter into an agreement to settle—so far as the payment under that settlement is concerned, that is a matter of availability of appropriations.

Now, as I gathered from listening in on this conversation with Mr. Marbury the other day, Mr. Burton asked him what funds were used to make the payments which they are now making, and he said he was not sure of this statement, but he thought the funds they used were the funds that were available for the tanks, the airplanes, or whatever it happened to be under the contract.

Mr. BURTON. In other words, for that particular contract?

Mr. MORGAN. For that particular contract. Of course, the funds, in my opinion, are not available for that particular contract; they are available for airplanes, or tanks, or guns, or something else.' So I personally doubt very much whether the funds that are made available through an appropriation for airplanes or tanks or ordnance of some character are available to make payment to a contractor in the nature of damages for termination of the contract.

Dr. FENTON. In other words, those funds are there for the finished product.

Mr. MORGAN. They are there for the finished product, in my opinion; they are not to pay the contractor any amount in the settlement of a contract. So, to answer your question, I would say that although the contracting officer or the Department, I think, has an inherent right to enter into agreements for the settlement of claims, that they have no authority to make any payments pursuant to that settlement unless funds are available for that purpose. I do not know that funds at the present time are available for that purpose, and I would be kind of interested to know if the War Department has made any inquiry from the General Accounting Office as to the availability of these funds for that purpose.

Mr. BURTON. In other words, let use say that the War Department enters into a contract for the manufacture of a certain number of tanks and they expected to pay for those tanks out of an appropriation which had been made for that particular purpose, that they could not use those same funds for the settlement upon cancelation of a contract, can they?

Mr. MORGAN. No; I do not believe they can, because the appropriations are available for tanks, they are not available for damages to the contractor when the United States cannot complete the contract.

Mr. BURTON. In other words, the funds are made available for the purpose of purchasing the tanks, the finished product, and not for the purpose of paying damages arising out of a cancelation of the contract?

Mr. MORGAN. Or getting half-finished tanks which they take over from the contractor on termination.

The CHAIRMAN. You think this revised draft of H. R. 3022 would give them authority?

Mr. MORGAN. The last sentence of this revised draft, Mr. Chairman, makes any appropriation of the War Department available for the purpose of making these payments. Of course, then this committee would not have any authority to report a bill with that last sentence in it, because that constitutes an appropriation, and that is within the jurisdiction only of the Appropriations Committee.

Now, going down to the bill itself, it authorizes the War Department, the Navy Department, the Treasury Department, and the Maritime Commission to make contracts for certain specified purposes, or to make payments for certain specified purposes, and the purposes are enumerated in paragraph (a), (b), and (c). Now, it seems to me that writing it in that fashion, you can make a payment for the purpose of doing something else. You are not limiting the payment.

That is, you are not authorizing them to make an advance payment, you are authorizing them to make a payment for the purpose of making the advance payment. It seems to me that is a great deal broader than making an advance payment. Why it was written in that particular fashion, I do not know.

Mr. MARTIN. Maybe they did that on the assumption that they had the right to make the payment, and this was supposed only to expand it to making the advance payment. According to your interpretation, their assumption that they had the right to make that payment is questionable?

Mr. Morgan. I think it is, by reason, in my opinion, of the nonavailability of the appropriation for that purpose.

Mr. MARTIN. I think the men who drafted this bill, or who sponsor this bill, are doing so on the assumption that they had the right to make the payment but not in advance.

Now, from your explanation here, I take it that it is your belief the sounder approach on this is to bring out, or approach it through a bill to authorize future appropriations for the purpose of settlement of contracts, some part of which might be authorized also to be paid in advance, and then leave it to future specific appropriations, to go through the regular channels to meet whatever need there might be in that field.

Mr. MORGAN. If I were a member of the Appropriations Committee I feel I could keep a much better check on expenditures if I made appropriations specifically for this purpose, instead of giving the War Department the right to take this $71,000,000,000 to enter into a contract with some large contractor, cancel it the next day and then give them authority to make any payment which they wanted to make in settlement of the contractor's claims by reason of that cancelation.

In other words, I thought I was appropriating for a bunch of airplanes and it turns out I was appropriating for a bunch of damage claims by reason of cancelation by the War Department of the contract. It seems to me it would be much better if the Appropriations Committee came along and said, “Now, we will make so much money available for the termination of the contract."

Then when they came down with their budget estimate-of course, this is not a thing you can estimate very well, but they would come down with their supporting data-next year, of course they would have to show what they did with the money this year.

Mr. MARTIN. Before the Appropriations Committee would appropriate the funds ?

Mr. MORGAN. Yes.

Mr. MARTIN. And also if we appropriate that way we should consider the enactment of legislation giving specific authorization for that type of appropriation.

Mr. MORGAN. Yes, I think so.

Mr. MARTIN. And also, if thought advisable, include in that whatever provision you needed or thought most advisable for advance payment.

Mr. MORGAN. Yes; of course, under the bill now, it says that the War Department can make advance payments. There is not any limitation on how much they can advance.

Mr. BURTON. That is, advance payments in anticipation of settlement.

Mr. MORGAN. Advance payments in anticipation of settlement. There is not any limitation in this revised draft on how much they can advance. There is not any limitation, and I do not suppose there really ought to be one, but I am a little afraid of this "without regard to any provision of law” clause, as to the factors which are taken into consideration in making a settlement. I think if you leave out that “without regard to” clause, why, the factors which would be taken into consideration would be the same factors which a businessman would take into consideration, that is, just the law on the termination of contracts.

Mr. Burton. Does not it reasonably follow under this bill that the War Department could enter into a contract for $100,000,000 with a contractor, and 1 month later cancel that contract and in anticipation of settlement of all claims the contracting officer could pay to that contractor an amount which would equal, in the opinion of the contracting officer, the amount of the final settlement ?

Mr. MORGAN. Certainly.

Mr. BURTON. Then does it not also follow that if the full amount is paid to the contractor, according to their agreement as to what would be due, that there could no longer be any incentive on the part of the contractor to come to a settlement ?

Mr. MORGAN. That would be my personal reaction. It seems to me that would be more or less human nature. There is no provision in here as to what happens when the United States has made an advance payment which turns out to be more than is due. Now, as I understand it, is is their practice to consider any excessive payment as a loan to the extent of the excess. How much interest is charged and what the terms of the loan are-I assume it is a demand loanwhat interest is charged, I do not know, if any.

Mr. BURTON. Also it is left to the contracting officer to determine how good the credit of the contractor is, that is, what the chances are for the United States to get back any difference.

Mr. MORGAN. That is perfectly true. As I understand it, one reason they want to make these advance payments and these loans especially to subcontractors and suppliers, is because they are not in in a position to get credit elsewhere. In other words, to do the job which they want to do, to keep these fellows going producing war materials, why, they do, in effect, make loans to what a banker might consider a poor credit risk, because if a banker considered him a good credit risk, why, he could get a loan from the bank.

So you really have a conflict there, where you want to make a loan to keep this fellow going, and the reason you have to make the loan is because his banker does consider him a poor credit risk.

Well now, it seems to me you have to decide whether you want to give the authority to make these loans for the purpose of continuing these people in war production and necessarily have to make loans to poor credit risks, or whether you want to take the chance of their getting the money elsewhere and not make these loans. That is, whether or not making these advances on these loans is going to seriously interfere with war production. That is really what it comes down to.

There is one other thing I might mention, and that is the effect of a settlement agreement on the renegotiation provisions. Now, under the present renegotiation laws, a contract cannot be renegotiated more than 1 year after it is completed. I think that is what it is.

Now assume that the contract is completed when it is terminated. I assume that would be the interpretation of "completed” for the purpose of the renegotiation provision. Now, if it takes any length of time to settle these contracts, and if anticipated profits are taken into consideration, it seems to me that it may give the Price Adjustment Board under the renegotiation provision a very short time to look into that matter and see if the contractor got too much money. Now you might want to make the settlement agreement subject to renegotiation, or you might want to exempt that renegotiation, I don't know what

you would want to do about that, but I do think you have that problem in these settlement agreements.

The CHAIRMAN. In other words, this law then might abrogate all renegotiation settlements?

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