Mr. LYNCH. We will certainly make every effort to do it. I presume that you would like to have a "Yes" or "No" answer to that now. Is that a meeting that is scheduled now?

The CHAIRMAN. The full committee meeting is scheduled for tomorrow for further consideration of reporting the bill on this termination clause contract.

Mr. LYNCH. I will say, Mr. Chairman, that we will certainly make every effort to do it, and I will anticipate that we will be able to get something. We would like to submit this draft of the bill to officials in the Treasury Department who have not had an opportunity to see it. It may be a considerable task to get that done in the remaining hour or so this afternoon that we will have when we get back.

The CHAIRMAN. We certainly want to work out something satisfactory to you people-because you were included in the first draft of this bill, were you not?

Mr. LYNCH. We will certainly make every effort to have that done. The CHAIRMAN. Is that satisfactory to the committee? Who is here this afternoon from the War Department?

Mr. MARBURY. I am W. L. Marbury.

The CHAIRMAN. Very well, Mr. Marbury, you may proceed.

STATEMENT OF W. L. MARBURY, CHIEF COUNSEL, PURCHASING DIVISION, ARMY SERVICE FORCES

Mr. MARBURY. In accordance with the understanding had at the last meeting, representatives of the War Department and of your legislative counsel have cooperated in the preparation of a draft, a redraft of the bill which we submitted to the counsel for the General Accounting Office in substantially its present form-as a matter of fact, except for two changes, both of which have the tendency to limit the operation of the bill, rather than extend it.

We were advised just before this hearing was set that the Comptroller General felt that he could not express an opinion about the bill in the absence of further opportunity to give it study.

Under the circumstances, we thought that we would do whatever the pleasure of the committee is in respect to the bill. We have the draft.

Colonel Cutter, who assisted in the preparation of it, would be glad to explain the differences that exist between the draft and the committee draft that was under discussion at the last hearing,

Colonel Mechem would be glad to furnish the committee with any further information which the committee might desire as to the practical necessity for the bill and practical operations. We believe that the bill in its present form meets every objection which has been made or suggested to the bill and is now a highly desirable piece of legislation. At the same time, in view of the fact that we are not in a position to say that the General Accounting Office approves the bill, we seek further guidance from the committee as to what they want us to do now.

The CHAIRMAN. I think it would be well to have an explanation of the bill where such changes have been made in the bill, and if somebody is here from the War Department to make that, he can come around and proceed to make a statement.

STATEMENT OF LT. COL. R. A. CUTTER, WAR DEPARTMENT

Colonel CUTTER. My name is R. A. Cutter.

The CHAIRMAN. Will you proceed to give us an explanation of this bill and the changes that have been made in it since the first draft of H. R. 3022?

Colonel CUTTER. The first draft of H. R. 3022, as printed, provided in very summary form a good deal of the material contained in a draft on yellow paper, dated June 29, 1943, which is before you. (See appendix 4, p. 139.)

The things accomplished by 3022 in its original form were that funds presently or hereafter available for the Military Establishment might be utilized by the Secretary of War in connection with the termination of War Department contracts under certain regulations to be prescribed for three purposes: First, for advance or partial payments to contractors with the War Department or subcontractors and suppliers under them; second, for loans or guaranties of loansto such persons, which were intended to be made in very much the same manner as "V" loans are now made, and guaranteed by the War Department, the Navy Department and the Maritime Commission; and, third, for the purchase of the rights of these persons arising in connection with the termination.

The subcommittee will recall that at the hearing before the full committee held, I think, on June 23, it was suggested that this type of legislation, if enacted, should also be applicable to the other principal departments and agencies engaged in war procurement. At that time, a rough draft of a revision of H. R. 3022 was handed to the committee which, in substance, did no more than to make 3022 applicable to the Navy, the Treasury, and the Maritime Commission in addition to the War Department.

Subsequently, as the subcommittee is aware, a hearing was held on certain general aspects of the termination problem, and a further hearing was held before the subcommittee yesterday afternoon, June 28, at which Colonel Royall appeared in behalf of the War Department. At that time there was handed to Colonel Rovall a draft of a revision of H. R. 3022, prepared by the Legislative Drafting Committee, Mr. Morgan-I believe, and by Mr. Burton, your counsel. (See appendix 5, p. 140.)

That draft was given to Colonel Royall and the suggestion was made that he endeavor to coordinate the views of the War Department, the views expressed in that draft, and the views of the General Accounting Office in a definitive draft, which would be acceptable to all three groups.

Yesterday evening a draft was prepared by the two groups in the War Department working on this problam, which was discussed, beginning early this morning, with the general counsel for the General Accounting Office, and at the time I had to leave in order to come to the hearing before the full committee this morning, I had every expectation that an agreement would be reached with the general counsel on the form then under discussion, with certain changes then in process.

I understand that the general counsel placed the revision, which he had gone over with us this morning, before Mr. Warren while our hearing here this morning was in process, and shortly after I returned

to the General Accounting Office to discuss certain other minor changes suggested by Mr. Morgan and Mr. Burton in the draft that was under discussion this morning, Mr. McFarland, the general counsel for the Comptroller General, was called, and informed that Mr. Warren had requested further time to consider the matter.

The draft now before you, dated June 29, 1943, is one which I have gone over in considerable detail with Mr. Morgan, and he informed me just before I took the stand, that, in general, it was acceptable to him. I will call to your attention later one comment that he has on one

section.

Mr. Burton made two very helpful suggestions to us in connection with the draft that was under consideration this morning and those two suggestions have been incorporated, I believe, at the end of subsection (d) on page 3. I think he gave only tentative approval to that language, but it was adopted pursuant to his suggestion.

I think rather than attempting to discuss in detail variations from the draft which the committee presented to Colonel Royall yesterday afternoon and which, as far as I know, is not part of the record, it would be helpful if I merely went through and explained what each section of this present draft does do. Is that agreeable to the committee?

The CHAIRMAN. Yes.

Colonel CUTTER. The first thing that is done by the draft of June 29, 1943, subsection (a), is to make the legislation applicable in connection with the termination of any contract with the War Department, the Navy Department, the Treasury, or the Maritime Commission, where the contract is connected with or related to the prosecution of the war, and it authorizes the heads of those Departments and the chairman of the Maritime Commission, respectively, (1) to make advance and partial payments to the prime contractor and to subcontractors and suppliers under the prime contractor in whatever tier the subcontractor or supplier may be, but there is added, in addition to the language which appears in H. R. 3022, a limitation suggested, I believe, by Mr. Burton that in the case of an advance or partial payment to any such contractor or supplier, the United States shall be subrogated to the rights of the subcontractor to the extent of advance or partial payment made.

In other words, if the United States makes a direct payment to the subcontractor, the United States becomes entitled to enforce any rights which the subcontractor would have either against the prime contractor or the intermediate subcontractor with whom he was dealing.

Subparagraph (2) in substance extends to the termination of contracts the existing provisions of law contained in the First War Powers Act, the Executive Order 9112, relating to the so-called “V” loans, and in section 7 of the Smaller War Plants Act, which was Public Law 603 of the Seventy-seventh Congress. Those provisions of the statute are made applicable by the language here to loans in connection with terminations. The secretaries of the several departments are authorized to make or participate in making loans to the contractor and to the various tiers of subcontractors or to make commitments or guaranties with respect to any loan.

It is further provided by a limitation which was inserted in the draft which was handed to Colonel Royall yesterday afternoon that

such loans and guaranties shall be secured by assignments to or for the benefit of the United States or for the benefit of the United States and any other person who participates in the loan.

The traditional method of making "V" loans, I shall ask Colonel Cleveland to explain to you a little later. He is very much more familiar with them than I am, but for the purposes of the present discussion I might point out that the method by which the War Department has exercised its powers in connection with the "V" loans is to guarantee loans which are made by private institutions under an arrangement which has been worked out with the Federal Reserve banks. Therefore, those banks, as well as the United States, are interested in the loans and should receive to the extent of their interest the benefit of any assignment to secure the loans.

The third provision is substantially that which has been in every draft of 3022, since the first, and that is the provision authorizing the direct purchase or acquisition of assignments of the rights of subcontractors or suppliers under terminated contracts or subcontracts, so far as they arise out of the termination. However, the provision that was originally in H. R. 3022, relating to such purchases from the prime contractor has been eliminated on the theory that it was un

necessary.

Subsection (b) is wholly new, as compared with the printed draft. It is based upon the provision contained in the draft prepared by the committee's counsel and handed to Colonel Royall last night and in substance says that no advance or payment under subsection (a) (1) or (a) (3)—that is, no advance or partial payment and no purchase shall be in an amount in excess of 90 percent of the lower of the two amounts, and those two amounts are the following: First, the amount due on the claim with respect to which the advance or payment is made, as estimated in a preliminary computation made by the head of the department or agency making the payment. In other words, the department or agency fixes the 100 percent limit, as to which the 90 percent is applicable, and the other limitation is 90 percent of an amount certified by the contractor, subcontractor, or supplier as the minimum amount due on such claim.

My recollection is that was in accordance with an alternative provision suggested either by Mr. Sikes or Mr. Martin yesterday afternoon. I don't recall which one.

The final sentence in subsection (b) is that the limitations contained in the subsection shall not be construed as applying to final payment of the whole or any portion of the amount owing in connection with any such termination.

Obviously, if the departments are in a position to determine the amount which is owing as to any part of the rights arising on termination of any contracts, they ought to be able to pay that much without regard to the limitation. For instance, they might be able to pay to a prime contractor an amount sufficient to reimburse him for the amount which he, in turn, must pay to subcontractor A with respect to subcontract A where that amount has been agreed upon by the prime contractor and subcontractor A and has been approved by the contracting officer in accordance with the provisions of the usual termination article in the War Department contracts.

The CHAIRMAN. In other words, you could pay 90 percent of the elaims 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.

If

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. 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.