SECTION 36.

SETTLEMENT OF CONTRACTS.

VALID CONTRACTS.

Prior to the armistice the War Department had taken steps to standardize the procedure for settling contracts. For this purpose a board of contract adjustment, composed of three members who were commissioned officers recommended by the Director of Purchase, Storage, and Traffic and appointed by the Secretary of War, had been instituted in the Purchase, Storage, and Traffic Division under General Order No. 103 of November 6, 1918. The Judge Advocate General was directed to assign a judge advocate to act as legal advisor of the board, and it was authorized to have a recorder and one or more examiners appointed by the Director of Purchase, Storage, and Traffic, who were to be commissioned officers. The duties of the board as defined in the above general order were as follows:

It shall be the duty of the board to hear and determine all claims, doubts, and disputes, including all questions of performance or nonperformance which may arise under any contract made by the War Department.

The board shall have all powers necessary and incident to the proper performance of its duties, and shall adopt its own method of procedure and rules and regulations for its conduct.

All members of the board, the judge advocate, the recorder, and the examiners were authorized to administer an oath to any witness. The findings of the board were to be final and conclusive, subject only to the review of the Secretary of War.

Claims boards were established in the various bureaus of the War Department. In bureaus having regional offices, districts, or zone claims boards were established at the regional offices, acting under the Washington office. On May 14, 1919, there were 44 of these bureaus district, and zone claims boards.

For the guidance of these bureaus Supply Circular No. 111 was issued on November 9, 1918, by the Purchase, Storage, and Traffic Division. This circular gave the procedure for terminating contracts or purchases for material or supplies. Two methods were providedwhenever a contract had a provision for its termination that was used; whenever a contract did not have a provision for its termination the contractor was requested to suspend work and to supply in detail a statement under oath, giving the following data in so far as applicable to his work:

(1) Cost of raw materials on hand, including overhead directly applicable.
(2) Cost of partly finished product on hand.

(3) Cost of finished product on hand.

(4) Cost of special facilities provided by the contractor for the performance of the contract; and

(5) The contractor's commitments to suppliers, subcontractors and others for contributing materials or work.

If the contractor claimed additional compensation for other items he was required to make a detailed statement of the claim without including any prospective profits.

If an agreement on these claims could be reached it was to be embodied in a supplementary contract which should provide that all raw materials, partly finished products, and finished products on hand be credited to or become the property of the United States. The supplementary contract provided that it should not become. valid or binding upon the United States until approved by the Board of Contract Review of the supply bureau in charge, and that in case an agreement could not be reached the matter should be referred to the Board of Contract Adjustment.

On January 20, 1919, by War Department Supply Circular No. 26, a War Department claims board was appointed, composed of the Assistant Secretary of War, as president, and six members from various bureaus of the War Department. The duties of this board

were

to supervise and coordinate the work of the various War Department agencies engaged in the settlement of claims resulting from the termination of contracts or other procurement obligations of the Department consequent upon the suspension of hostilities and to authorize and approve such settlements.

The president of the board was authorized to appoint such additional members as were necessary in connection with other procurement bureaus or agencies of the War Department.

This board, as constituted; had the following personnel on May 14, 1919:

President: Hon. Benedict Crowell, the Assistant Secretary of War.

General members:

Maj. Gen. George W. Burr, Director Purchase, Storage and Traffic Division.

Mr. G. H. Dorr, Assistant Director of Munitions.

Brig. Gen. H. M. Lord, Director of Finance.

Col. H. H. Lehman, Assistant Director, Purchase, Storage and Traffic Division (with Board of Contract Adjustment).

Mr. W. H. Davis, general counsel.

Mr. R. D. Stevens, representing Finance Division.

Special members:

Col. C. A. McKenney, Purchase, Storage and Traffic Division.

Maj. H. L. Goodhart, Air Service.

Maj. H. D. Rawson, Signal Corps and Chemical Warfare Service.

Maj. F. G. Bolles, Engineer Corps and Construction Division.

Mr. Henry T. Hunt, Ordnance Department.

Maj. James R. Frazer, member at large.

Maj. Erskine Bains, recorder.

Maj. Leigh S. Keith, statistician.

The special members sat with the various bureau claims boards with authority to act for the War Department claims board and as liaison officers between the bureau boards and the War Department claims boards.

On March 6, 1919, by Supply Circular No. 19 the Assistant Secretary of War, acting as president of the War Department claims board. directed that

*

*

*

Under cost plus contracts where work has been reduced by the direction of the department, all proper items of expense to contractors, such, for example, as payments by them to subcontractors, should be vouched as items of cost. and their payment proceeded with as in the case of any other proper item of cost under such contract without awaiting any settlement contract.

Where a contract contains a termination clause which provides for the reduction of production and the method of payment to the contractor for disbursements made and work done in preparing to perform the uncompleted portion of such contract. and the contractor is willing to waive any right to proceed further with production under such contract, it will frequently greatly expedite the making of payments under such contracts for the bureau, upon such waiver by the contractor to give the notification of termination required by the contract and to proceed to make the pay ments to the contractor by the method and in the manner provided for in the termination clause.

*

* *

These directions also urged the use of provisions previously made for a partial payment amounting to 75 per cent of the amount ascer tained by the department to be due on any claim of the contractor or any item of such claim. It also directed the speedy settlement of subcontracts, and further pointed out that under Supply Circular No. 111, of 1918

The principal adjustment which is intended to be applied by Supply Circular No. 111 is that in so far as the contractor had properly made expenditures and incurred obligations in performance of his contract, which, because of the suspension had not resulted in a finished product, the adjustment offered by the department should, in general, provide for reimbursement to the contractor of such expenditures properly incurred, with a reasonable remuneration for the use of capital and services of the contractor in that part of his performance under the contract which did not result in finished product.

INVALID CONTRACTS.

On March 2, 1919, a bill was approved by Congress entitled "An act to provide relief in cases of contracts connected with the prosecu tion of the war, and for other purposes.'

Under this law the Secretary of War was

authorized to adjust, pay, or discharge any agreement expressed or implied upon fair and equitable basis that has been entered into in good faith during the present emergency and prior to November 12, 1918, by any person or agent acting under his authority, direction, or instruction, or that of the President, with any person, firm, or corporation for the acquisition of land, or the use thereof, * or for the production, manufacture, sale, acquisition, or control of equipment, materials, or supplies, or for services or for facilities or other purposes connected with the prosecu tion of the war, when such agreement has been performed in whole or in part, or

*

*

expenditure has been made or obligation incurred upon the faith of the same by any such person, firm, or corporation prior to November 12, 1918, and such agreement has not been executed in the manner prescribed by law.

*

*

*

On March 3, 1919, under General Order No. 33, the War Department claims board was authorized and directed, in the name of the Secretary of War and by his authority, to proceed with the settlement of all such claims as fell within the sections of the above act, and for the expeditious performance of its duties the board was further authorized to make use, as it might find desirable, of the board of contract adjustment or any agencies in the respective bureaus of the War Department.

On March 3, 1919, Supply Circular No. 17 was issued by the Purchase, Storage, and Traffic Division, calling the attention of the various supply bureaus to a resolution of the War Department claims board for their information, action, and guidance, in connection with the administration of the power conferred upon the Secretary of War by virtue of the act of Congress, approved March 2, 1919. Under the procedure set forth in this circular claims were classified as follows:

Class A: Claims based on agreements made by an officer or agent acting under the authority, direction, or instructions of the Secretary of War, and the nature, terms, and conditions of which have been reduced to contract form or are otherwise established by written evidence.

Class B: Claims based on all other agreements covered by the provisions of section (1) of said act.

Claims falling under class A are presented on a special form to the district or local board if any, otherwise to the bureau claims board, which proceeds to examine into and determine the facts as to the nature, terms, and conditions of the alleged document. If it finds that an agreement within the provisions of section 1 of the said act of March 2, 1919, was entered into, i. e., that it was either "(1) an agreement heretofore reduced to contract form; or (2) a purchase order heretofore signed; or (3) a procurement order or notice of award heretofore signed which sets forth all of the terms and conditions of the agreement; or (4) a document which shall be prepared under the supervision of such bureau claims board and shall fully set forth the nature, terms, and conditions of the agreement * * *" it attaches its certificate thereto.

After the claims board has thus determined, established, and certified the claim it is submitted to the claimant, and after his acceptance and approval the board proceeds to make a detailed examination of the claim and recommends a fair and equitable award as a basis for adjustment or payment. Each award must be submitted to the claimant and his acceptance indorsed thereon and must be approved by the bureau claims board and by a member of the War

Department claims board prior to payment. Several awards may be made instead of one if more desirable.

Claims falling under class B are forwarded to the Board of Contract Adjustment, which proceeds in the same manner as the bureau claims board to determine whether the claim is valid.

The Board of Contract Adjustment is empowered in any case where the nature, terms, and conditions of the agreement have been established and certified by it to refer the claim to the appropriate bureau claims board for examination and recommendations for settlement on a fair and equitable basis. In the event that the claimant is unwilling to accept an award recommended by a bureau, district, or zone claims board, he has the right to appeal to the Board of Contract Adjustment.

In all proceedings under the act witnesses may be compelled to attend and testify and produce papers, books, and other documents. The bureau claims boards and the Board of Contract Adjustment are directed to present to the War Department claims board any special cases or classes of cases in which they find that the procedure as above outlined can not adequately or appropriately be employed.

The method of settlement of a claim is as follows: The contractor presents his claim to the appropriate bureau, district, or zone claims board which examines the same to determine whether it is to be treated as:

(1) A valid contract.

(2) An invalid contract.

(3) An oral or implied contract.

If the supporting papers indicate that there was a valid contract (1), the settlement proceeds in one of two ways:

(a) Under the termination clause in the contract, if one exists. (b) If there is no termination clause, then as indicated in Supply Circular No. 111. If agreement is reached on this basis payment is made by the proper disbursing officer after review by the Board of Contract Review of the supply bureau affected.

If the board finds that the claim falls under (2) an invalid contract, or (3) an oral or implied contract, it also determines whether the claim belongs to class A or B.

If the board finds that the claim falls in class A it so certifies, and the claimant's agreement is secured. On this basis the board examines and determines the amount of award, and after acceptance and indorsement of the award by the claimant, payment is made by the proper disbursing officer. In the case of a district or zone claims board the claim is forwarded by such board, with all supporting papers and its findings, to the bureau claims board of the department involved for final review and confirmation of the award before payment is authorized.