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The CHAIRMAN. In other words, you could pay 90 percent of the claims all the way down the tier, is that correct, in this clause?
Colonel CUTTER. Under that clause we could not make a payment in excess of 90 percent of the amount owing to the particular person, as determined by this preliminary estimate, but if we finally settled the amount owing with respect to any separate part of the claim of the prime contractor, the limitation would not apply to that payment if it was made as a final payment pro tanto of the amount owing with respect to that part of the claim.
The CHAIRMAN. But it does look like, to me, that leads up to the termination of the contracts because of the fact that the contracting officer in that immediate area or corresponding area would be in a position to go ahead immediately and pay 90 percent of the claim and the other matters could be just in accordance with agreements.
Colonel CUTTER. I just want to make it perfectly plain-and I think Mr. Morgan agreed with me on this when I explained it to him—that the limitation in the first part of subparagraph (b) was not intended to limit the final agreement to any extent on any part of the claim. If you could finally determine that one subcontractor was owed $10,000, he was not to be prevented from receiving the full amount which was owing to him where everybody approved it merely because of the limitation in the first sentence, and that is the only purpose of the last sentence.
Do I make myself clear, sir?
The CHAIRMAN. If you could reach a final agreement on your 100 percent, all right, good and well. If you could not reach it, you could immediately pay your 90 percent.
Colonel CUTTER. You will observe that the last sentence is merely meant to protect the right to pay off anything that was finally agreed to be due.
Mr. BURTON. It is conceivable that there might be a great many such claims settled as between the prime contractor and the subcontractor and on down the tier.
Colonel CUTTER. Right, and approved by the contracting officer.
Mr. BURTON. And that also the total of those claims could exceed the 90 percent of the amount due the prime contractor.
The CHAIRMAN. It would certainly be better to proceed and pay him 90 percent than to tie him up for 6 or 8 months in this agreement probably on a few dollars.
Colonel CUTTER. I think that is true, but where you can reach an agreement as to the whole amount, too, it ought to be paid. The CHAIRMAN. This bill does not deal with that at all. Colonel CUTTER. No, and I wanted to make it clear that it did not. Subsection (c) is, again, a provision which I think Mr. Burton and Mr. Morgan drafted together. I think it has been put in with only two changes. The purpose of the provision is to make it perfectly plain that in the case of any advance or partial payment under subsection (a) (1) that exceeds the amount of the claim as finally determined, any excess will be regarded as a loan and repaid with interest.
That provision is wholly consistent with the original intention of the War Department with respect to the bill. It expresses clearly, and I think accurately, just what we intended and it seems to me personally a very distinct improvement in the bill and one that is helpful.
There were only two changes in the provisions which they drafted which have been made. The first is to make the rate of interest one which
may be varied instead of fixing it by the legislation, and there are many reasons for wanting to do that. You may find after a short experience that the rate of interest that you wanted to put in at the present time would be too low to discourage excessive estimates by contractors and you might want to change it.
The other feature is that the similar limitation placed in their draft with respect to guaranties has been eliminated, because in the case of a guaranty the Government is a secondary party to a loan in any event and if the guaranty has to be paid it is solely because the principal borrower has not paid the loan himself. The provision, we felt was confusing and did not clearly express a proper limitation.
Mr. Morgan concurred in that view. I do not think I have had an opportunity to discuss it with Mr. Burton.
Subparagraph (d) relates to regulations. I think only two changes have been made in the draft that was submitted to Colonel Royall. As submitted to Colonel Royall, the bill provided for joint regulations to be prescribed by the Secretary of War, the Secretary of the Navy, the Secretary of the Treasury and the Chairman of the Maritime Commission.
I pointed out to Mr. Morgan this morning that that involved certain difficulties from the standpoint of the War Department, and I would like to point out what those are.
The first difficulty is that whereas the Navy, the Treasury and the Maritime Commission do most of their procurement from Washington, the War Department's procurement operations are spread out all over the world and regulations which were applicable to a closely concentrated procurement agency might, in detail, at least, be inapplicable to the War Department so spread out.
The other objection is that although-well, it is really part of the same objection—the War Department in such matters has in other instances coordinated its regulations with those of other departments, they cannot really be the same in the operating mechanics.
I think if this first sentence were put into the act finally adopted, the effect would be that the three Secretaries and the Chairman would get together and agree upon the general policies to be embodied in the regulations but make the operating detail meet the needs of their respective agencies.
The last sentence, as redrafted this morning by Mr. Morgan, authorizes the three Secretaries and the Chairman of the Maritime Commission to exercise the powers given them under the act by means of such delegations and redelegations as they may prescribe.
The final provision is the provision which was based on Mr. Burton's suggestion in an effort to meet one problem which caused the inclusion in the original bill H. R. 3022 of the words found in the First War Powers Act and found in H. R. 3022 in line 8 and following:
Without regard to any provision of law relating to the making, performance, amendment, or modification of contracts.
The reason for including those words in the original bill was to make it perfectly plain that these loans and guaranties of learns tu be carried out under the provisions of section (a) (2) of the bill would be made subject to the same conditions and with the same freedom
from technical restrictions and contract procedures as the "V" loans made under the First War Powers Act, Executive Order 9112 and Public Law 603. That is, that they do make it perfectly plain that there was no necessity for including any technical or special provision in the contracts made with respect to such loans.
Mr. Burton felt, and I gathered that certain members of the committee felt, that that language was unduly broad and that a very much more limited exemption from the provisions of existing statute law would suffice to meet the purpose, and that has been included in the last sentence of subparagraph (d).
Mr. SIKES. Do I understand, Colonel Cutter, that Mr. Burton collaborated with you in preparing that language?
Colonel CUTTER. I don't think he is bound to it in any sense, and I do not want to suggest to you that he is in any sense, but I pointed out to him what the difficulty that we encountered was. We wanted to avoid having to include any special provisions that may be required by any other provision of statutory law in these rather complicated financial contracts which are made with the Federal Reserve banks and with the borrower banks under these loan guaranties, and he suggested that some such language as this would meet that situation without going to the broader extent that the original language does.
Mr. SIKES. Has Mr. Morgan been consulted on this language?
Colonel CUTTER. Mr. Morgan has seen the language and as far as I understand has no objection to it, but he is here and can speak for himself.
Mr. MORGAN. As I understand, I would say that the language carries out the policy of the War Department.
As I understood the purpose of that, without regard to the clause in the other bill, that was to do away with the provisions of law such as the one requiring that there be included a provision in the contract that no Congressman is to benefit. I think that is one of themWalsh-Healy-all that sort of stuff. Evidently, there is a whcle mass of Federal law which has grown up over the years that this provi
that provision and the other provision has to be included in all Federal contracts, and Colonel Cutter told me this morning that these contracts that they contemplate making under this bill are of an entirely different character. That is, their negotiations and settlements arising out of negotiations, and some of them are financial contracts made with banks, loans, guaranties, and they are not contracts for procurement at all, but to do away with all the questions that might arise as to whether or not it was necessary to put all the miscellaneous provisions in this type of contract, they included in the former draft that language without regard to any provision of law relating to the making and modification, amendments, and so forth, of any contract.
When he told me that that was the purpose, I suggested that he approach in the affirmative but that the contract need include only those provisions which the Secretary wanted to include.
Mr. SIKES. In your opinion, does this language substantially minimize the possibility of evils, such as we discussed, relating to previous broader language?
Mr. MORGAN. Oh, yes; I think it is much more restraining. If you recall, that other language preceded the various paragraphs de
scribing the powers that were granted, and all these powers that were granted had to be exercised without regard to any provision of law, and the making of contracts and agreements was only one of those powers.
Inasmuch as Colonel Cutter said that the only reason they wanted that provision was to do away with whatever requirements there are at present that these miscellaneous provisions be included in all Government contracts, it seemed to me that this was the most desirable way to go about it.
The CHAIRMAN. We have already done that under the War Powers Act.
Mr. MORGAN. Yes.
Colonel CUTTER. This, it seems to me, is very much more narrow than the War Powers Act.
Mr. SIKES. I think so, too.
Colonel CUTTER. I think this goes to the extent of our needs at this time, and I think Mr. Morgan's suggestion is a very happy way out of the problem.
The next provision is one which attempts to meet the problem arising as to the use of funds. With respect to advances and partial payments, as I think I stated to the subcommittee when I appeared before it the other day, the normal sources of funds to be used and logical sources of funds to be used would be the funds allocated in the first place, appropriated, and, in the second place, allocated for the particular contract which has been terminated and those funds, upon the termination of the contract are applied to the extent neces
pay off the contractor and his various subcontractors for the work which has been done.
However, with respect to guaranteed loans, a rather broader authorization is necessary. For those there is need for use of funds which cannot conveniently, for reasons which Colonel Cleveland will point out to you a little later, and I would like to leave that to him to do, be traced to the particular appropriations back of the contracts which have been terminated. I think one illustration may show why that is so.
There are a great many subcontractors and suppliers who have at any one time five or six hundred purchase orders in varying amounts coming from, perhaps, Treasury Procurement, Navy, all the branches of the Army, and it would be very difficult in the event of a loan made by a single banking institution, guaranteed by the Government on the strength of the termination of a large number of those purchase orders, to allocate the funds to any particular appropriation on the basis of the particular appropriation out of which the prime contract under which each of these purchase orders was issued was to be paid for.
Mr. BURTON. I have some doubt about the second paragraph of (e) because of the broadness of that authority, as it apparently includes all appropriations for materials, supplies, and equipment incident to the war program. I think it should be very carefully considered.
Colonel CUTTER. I would like to point out, Mr. Burton, that that language is taken practically verbatim from section 7 of Public Law 603 of the last session of Congress, the Smaller War Plants Act. It has been changed only to the very limited extent necessary to fit it into this particular measure.
Mr. BURTON. Isn't it true that the Smaller War Plants Corporation had an appropriation of about $150,000,000 ?
Colonel CUTTER. They had a very large appropriation. Mr. BURTON. About $150,000,000, Colonel CUTTER. Yes, sir; but section 7 of that act had nothing whatsoever to do with that appropriation, as I understand it. Am I correct in that?
Colonel CLEVELAND. That is correct. That section merely gave the express power to use any funds for procurement purposes, as in Executive Order 9112, and this is the statutory extension of Executive Order 9112 determination.
The CHAIRMAN. It would be difficult for you in the termination of the contracts, probably, to find the funds that are set up for, say, 50 schools here and 100 in another place. I see where the difficulty would come, of course, in working out something definite in that.
Mr. BURTON. But, Mr. Chairman, in the termination of contracts, as I understand it, those funds which were appropriated for the particular contract which is being terminated are considered adequate by the War Department for the purpose of settling, or the termination or cancelation of that particular contract.
Colonel CUTTER. That is correct, so far as the making of the advances and partial payments are concerned.
Mr. BURTON. And the final settlement could come from the particular appropriation for those particular articles.
Now, we come to 2 (a) (2) which has to do with the making of loans and the guaranteeing of loans, and this second paragraph makes all appropriations for war supplies available for the purpose of paying those guaranties or extending those loans.
Considering the fact that there is something over $100,000,000,000 involved, it seems to me that it should be considered with a great deal of care. That is my only suggestion, that it be considered, because it is extremely broad.
Mr. MARBURY. We agree, of course, that it should be considered with great care, but that very authority has been given by Congress to the War Department with respect to such loans made prior to termination, so we are merely asking that the authority already existing by express act of Congress be extended to the loan which may be made in connection with termination, as well as the loan with respect to a prior termination.
Mr. BURTON. But you have an entirely different situation there for the reason that in the other type of loan you are protected by assignments of contracts.
Mr. MARBURY. It would be similarly protected here.
Mr. Burton. But these are indeterminate, and the other could very easily be determined.
Mr. MARBURY. These loans, by the interpretation which you have now written into subsection (b), cannot be in excess of 90 percent of what the contracting officer or the other representative of the Secretary determines to be the probable amount due in respect to the termination.
Mr. BURTON. That is true, and that would be beneficial from that angle. There is no question about it.
Mr. MARRTIRY. There is one more thing to point out and that is, under the existing authority where the loan is made prior to termi