The CHAIRMAN. Suppose you could guarantee a certain percentage of it, not 100 percent?

Colonel ROYALL. Even then, sir, it runs into an enormous figure.

The third way, or a third way, is to have a standing offer in certain classes of cases for the Government to buy the subcontractor's claim at a discount if the subcontractor wants to sell it.

We had in mind various figures. It is hard to be dogmatic about it, but the thought about it was, that if we could buy this claim for 80 or 90 percent, in case the subcontractor wanted to sell, this margin of 10 or 15 percent, over the long run, would probably put the Government in the clear, and it would give the subcontractor, if he wanted to, the right to realize on his claim and give a little cash discount, so to speak.

Mr. MAY. Twenty percent.

Colonel ROYALL. Or 10 percent. He doesn't have to do that. If he wanted to work it out in the normal process, he could do so. But we didn't feel like putting in the bill exactly what the percent would be. It might vary.

Mr. BURTON. Should that not be predicated upon a consummated agreement between the subcontractor and the prime contractor so that all equities would be removed?

Colonel ROYALL. That is right, sir; and that is the purpose and what we hope to do in this matter.

Mr. BURTON. I would like to ask you another question, Colonel. Colonel ROYALL. Yes.

Mr. BURTON. Isn't it true that under the bill as drafted it would be possible for these various departments, through their appropriate contracting officer, to advance the full amount of the sum which they expected to pay in settlement?

Colonel ROYALL. Yes, sir; and I think that right ought to be there in the case of a guaranteed loan.

The CHAIRMAN. You have almost got to have that in the case of a guaranteed loan, because the bank will keep that individual tied up until it gets all its funds.

Mr. BURTON. I was speaking now of the prime contractor, Mr. Chairman, because under this bill the War Department could advance the full amount to a prime contractor, and certainly if that was done there would be no incentive left for that contractor to proceed to settlement of the contract.

Colonel ROYALL. I would say, sir, that there are two answers to that, although it is substantially correct. Rather, there are two qualifications. One is that the contractor would remain liable until he had established the fact that that much money was owed to him, and if it was determined that the Government didn't owe him that much money, he would have to pay the other back, if he was solvent.

Mr. MAY. If he was solvent; yes.

Colonel ROYALL. That is the qualification on it. But on the other hand, the answer to it is, that 100-percent loans should not be made and are not made except in very extraordinary circumstances. Today the same authority exists under 9112, but I am sure that the records, and Colonel Mechem can show you that, will show that that authority has not been abused.

It is conceivable that a case might arise where a small company has made a bad contract and unless it does get substantially all of the

amount that is coming to it, and get it quickly, it will go out of business. There are bound to be some instances where that will be the case. It won't be the general policy of the War Department to make 100-percent loans and has not been in the past.

The CHAIRMAN. You are going to have thousands of contractors over the country with raw material that they do not normally use in their regular civilian business.

Colonel ROYALL. That is right.

Mr. MAY. Something he would have no use for after the termination of the contract.

Mr. BURTON. That is true. However, in arriving at a settlement with the prime contractor, you also take into consideration the anticipated profit. In other words, you take everything into consideration. Colonel ROYALL. That is right.

Mr. BURTON. It would seem to me that if Congress gave a carte blanche to these various agencies to pay the full amount of the anticipated settlement to a contractor, it would be responsible to the taxpayers of the country for having given a carte blanche authority for the use of funds.

Colonel ROYALL. Well, I do not think your fears along that line wil prove to be serious in actual fact, because as I say under 9112 that authority exists today.

Mr. BURTON. That is an Executive order.

Colonel ROYALL. That is right, sir, but the War Powers Act, you know, says that in the prosecution of the war you can make any contract without regard to existing law.

Mr. MAY. Yes.

Colonel ROYALL. And I will say this, that if under the pressure of wartime production there hasn't been an excessive use or abuse of that power, it is hard to believe that it would be abused in time of peace. What you say is absolutely correct in fact, sir, and if you could assume that the War Department was going to abuse it, or any agency, why, then, of course, your objection would be sound. But I think you can be sure, not only because it is a department of Government but because of its history in the advance payments and loans in the past, that they won't abuse that authority.

Now, when it comes to the question of buying the claim, sir, which is an assignment without recourse, so to speak, then there are no circumstances under which 100 percent ought to be paid. I will agree with that. The only question is whether you want to write into the bill a specific percentage amount or not.

Mr. MAY. I don't think it ought to be in there.

Colonel ROYALL. I think it would be better to leave that to negotiation. However, if that were the only criticism, why, there wouldn't be any serious objection to it.

Mr. MARTIN. Colonel, what would you think of a limitation in the bill of a given percentage for the normal procedure of settlement by a contracting officer and then provide that any settlement in excess of that percentage should be done only on specific approval of the head of the particular branch?

Colonel ROYALL. Are you speaking, sir, of all three of the methods, advance payments, loans, and purchase?

Mr. MARTIN. I was speaking only, in this case, of the advancepayment feature.

Colonel ROYALL. Well, sir, I think really the restriction, if it is going to be anywhere, ought to be put on the purchase, on acquisition of it by assignment without recourse, rather than on advance payment. I don't see any very critical objection to a provision of that kind except for the administrative difficulty. I understand that there are more than 250,000 contracts of the War Department of sufficient size to be important contracts, and that is a whole lot of contracts. Mr. BURTON. And it is a whole lot of money.

Colonel ROYALL. It certainly is; I agree with you.

Mr. BURTON. Colonel, I would like to submit this clause, which I prepared, to you, and

Mr. MARTIN. May I, before you do that, make this further observation?

Mr. BURTON. Yes.

Mr. MARTIN. Out of the huge number of contracts that are in process and-is that an estimate of the total number of contracts, that you mentioned there, or is that the number to be renegotiated?

Colonel ROYALL. No; I think that is the total number of contracts of some size. I don't know just what the size is.

Mr. MARTIN. Out of that number there will be only a small percentage of them either terminated or renegotiated?

Colonel ROYALL. Well, I would say you have got to use a different perecentage on termination. When the war ends all contracts that are then outstanding, substantially all, will be terminated, and under renegotiation that depends on the figure that you gentlemen put in your law.

Mr. MARTIN. How many have the War Department terminated at the present time?

Colonel ROYALL. Again, that does not come under my particular department, but my information is it is 3,900, or something like that. Mr. BURTON. I asked Mr. Marberry several days ago and he said they had terminated 3,800 and settled 1,800.

Colonel ROYALL. Yes. Somebody told me 3,900 and approximately half settled.

Mr. MAY. The War Department has terminated 3,800 and settled 1,800.

The CHAIRMAN. That is what we were disturbed about, how rapidly we can terminate them. We want to provide machinery in this act to give you people full authority to terminate these things immediately.

Colonel ROYALL. We don't need that in this act. This act is not designed to cover anything but the financing. We have in our contract a provision that the Government can terminate at its own convenecience and it prescribes a method of arriving at what should be paid in the event of termination, and it further prescribes in the contract itself, that the parties may negotiate a settlement.

Mr. MAY. That is right.

Colonel ROYALL. Now, personaly, I don't see any possibility, unless everybody in the United States turns out to be an auditor, to settle the Government contracts at the end of the war by formula. The only way we are going to settle them is by reasonable and fair negotiation. Mr. MAY. Ninety-five percent of them can be settled that way.

Colonel ROYALL. I understand that today a great many more than 95 percent are being settled that way, and we believe that certainly 95 percent can be settled that way. Maybe we will have to provide scme business personnel to do it, but we don't need any statute to enable us to settle the contracts.

The CHAIRMAN. We have had evidence from the Navy Department and, I believe, your department, too, that some of these terminations have been hanging around 6 months without settlement.

Colonel ROYALL. That is right. That is an administrative matter, and it has got to be hurried up. This committee that they have got working on it is working on the administrative regulations, trying to expedite the settlement. That is a matter of efficient administration. Of course, today, everybody is more interested in fighting the war than they are in terminating contracts.

The CHAIRMAN. That is true.

Colonel ROYALL. And we have got to provide the machinery that can terminate them. We do not need legislation for that.

What this legislation is directed at is this, this situation: No matter how efficient we are going to be, there is going to be some delay in terminating the contracts. If you have a contract of $50,000,000, built in 10 plants, with 100 subcontractors and 150 sub-subcontractors, and 500 suppliers, you can't meet on Wednesday afternoon and settle it. It is going to take some time, no matter how efficient you are. But it is that interim of delay for normal and expeditious settlement we have got to provide for.

Mr. MAY. Mr. Chairman, isn't this the only question: I understand the Colonel's testimony here to mean that there is just one single little loophole in the thing that has got to be covered by legislation, that under the War Powers Act, which gives the President power to make settlements and advance payments, and so forth, and the regulations that they make under his Executive order, they can do everything but one little thing, and that is to adjust the accounts of these subcontractors that are in distress financially, or about to get in distress, or about to go broke?

Colonel ROYALL. We can do that today, sir; everything but one thing. May I make this one qualification? When the war ends I doubt that the War Powers Act would justify an Executive order that would permit advance payments and loans for the purpose of termination because it would be hard to say that it was facilitating the prosecution of the war. That is the reason the provisions for advance payments and loans are put in there, to meet that situation.

The CHAIRMAN. Of course, we could discuss this thing all day. We all have a pretty clear idea of what we want. I would like for the Colonel to look over this draft that was drafted by the drafting service here and also along with the help of the Appropriations Committtee. Mr. BURTON. There is one slight amendment that I would like to offer on page 2.

The CHAIRMAN. Well, this is just something to go by. We want to submit that and see what you think of it, Colonel.

Colonel ROYALL. Gentlemen, we will follow that suggestion and get right on it.

The CHAIRMAN. Very well.

(Whereupon the subcommittee proceeded to the consideration of other matters.)

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

TUESDAY, JUNE 29, 1943

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE OF THE COMMITTEE ON MILITARY AFFAIRS,

Washington, D. C.

The subcommittee met, pursuant to notice, at 3:20 p. m., in room 1310, New House Office Building, Representative Carl T. Durham (chairman) presiding.

Present: Representative Durham (chairman), Sikes, Martin, and

Fenton.

Also present: Mr. H. Ralph Burton, general counsel, Military Affairs Committee.

The CHAIRMAN. This is a continuation of the hearings on H. R. 3022. It has to do with the termination of contracts.

STATEMENT OF THOMAS J. LYNCH, ASSISTANT GENERAL COUNSEL, TREASURY DEPARTMENT

The CHAIRMAN. Will you give to the stenographer your name and whom you represent and tell us what you people think of this proposed H. R. 3022?

Mr. LYNCH. Thomas J. Lynch, assistant general counsel, Treasury Department.

Mr. Chairman, we have had opportunity for the last few minutes to look at the revised draft. I would like to say in general, however, that the Treasury Department certainly would be in agreement with the principle and general objectives of this bill.

It is our understanding of the bill that it has for its purpose the relief of hardship situations that might befall war contractors upon termination of contracts where final audits, settlements, of their claims might take a considerable time, and in the meantime they would be without relief and, perhaps, without funds which would enable them to make necessary conversions.

Mr. BURTON. I would like to take the opportunity of interrupting you at this point to call attention to the chairman that the draft of the revised bill from which you are reading is one which was prepared since yesterday by the representatives of the War Department in conjunction with others and is not the revised draft which was prepared by the legislative counsel and which has been before you previous to this.

I have here copies, and hand them to you now, of this last revised bill which Mr. Lynch is reading.