UNITED STATES GOVERNMENT PRINTING OFFICE CONTRACT APPEALS BOARD PRINTERS II, INC. Jacket No. 298-428 Appeal dated February 12, 1980. Hearing held on May 9, 1980. Decision dated July 9, 1980. Panel 80-4 Decision by: James K. Mehan, Member Robert G. Cox, Member Dissent by: Thomas O. Magnetti, Chairman PRELIMINARY STATEMENT This is a decision on a timely appeal entered by Printers II, Inc., 5141 Frolich Lane, Tuxedo, Maryland (hereinafter referred to as the contractor). This appeal disputes the final decision of the Contracting Officer that denied the contractor's request to reconsider the Government Printing Office's (hereinafter GPO) decision to apply a percentage adjustment to the contract price for noncompliance with the quality provisions of the Quality Assurance Through Attributes (hereinafter QATA) contract terms. The appeal is taken pursuant to Article 29 (the "Disputes" clause) of the GPO Contract Terms No. 1 as incorporated by reference into the Bid and Acceptance document of this contract. See Exhibit 3 of the Appeal File. 1/ The contract (Jacket No. 298-428) required the contractor to print and bind the pamphlet titled "National Forest Vacations" for the Department of Agriculture. The Final Decision of the Contracting Officer held that the image position of page 19 was incorrect by more than one inch; that this defect was considered a conspicuous single page defect and classified as a major defect. Also, the image position of several pages was found outside the allowable tolerances. It was stated that the 50 percent contract price adjustment was determined by the QATA, which had been incorporated into the contract by reference. In accordance with a request of the contractor, an informal hearing before a panel of members of the Contract Appeals Board was held on May 9, 1980. The decision of this Board is based solely upon the record as evidenced by the documents and exhibits that constitute the Appeal File and the testimony taken at this hearing. This procedure is pursuant to GPO Instruction 110-10 titled "Board of Contract Appeals Rules of Practice and Procedure," and dated June 6, 1979. STATEMENT OF FACTS On October 13, 1979, in accordance with GPO contract award procedures, a purchase order for Jacket 298-428 was issued to the contractor requiring it to print and bind over 25,500 pamphlets with a shipping date of November 14, 1979 (Exhibit 4). This pamphlet was to be printed in strict accordance with the contract specifications and the Quality Assurance Through Attributes Program. 2/ (GPO Pub. 310.1 dated May 1979, Exhibit IV) 3/ As required by the specifications, the contractor provided 30 samples of the publication to the GPO (Exhibit 2, pg. 3). These samples were to be inspected and tested for conformance to the product quality specifications within the QATA. The GPO inspection revealed that in each of the pamphlets, the text and illustration image position on page 19 was incorrect. The text position on this page had been dropped approximately one inch below the tolerance level established in the QATA with no loss of information. This error was determined, according to the QATA, to be a defect which could warrant rejection as the text position did not conform with the established tolerance for text and image position as required for the level of work. 4/ Additionally, this error could be judged a conspicuous single page defect. Either method would bring about the same result. Under the terms of the contract, the contractor's failure to comply with the attribute standards provided the GPO with the option of either rejecting and requiring reprinting or accepting the publication at an appropriate reduction in the contract price as set out in QATA, Sec. 4, pg. 2. It was the decision of the Contracting Officer to accept the rejectable work and adjust the contract price ($8,300) by the appropriate discount, 50 percent, as provided by QATA (Exhibit 8). By letter dated January 18, 1980, the contractor requested a reconsideration of assessment of this adjustment on the grounds that the reduction of over $4,000 was excessive given the overall quality of the product (Exhibit 9). The Contracting Officer responded to this in his Final Decision, dated January 29, 1980. In denying the contractor's appeal, he stated that: "The findings of the inspection of the random sampling have been reviewed. The inspection revealed the image position of page 19 was incorrect by more than one inch. This defect is considered a conspicuous single page defect and classified as a major defect. Image position of several pages was also found outside the allowable tolerances." (Exhibit 10). This decision was appealed to the Public Printer by letter dated February 12, 1980, alleging that the GPO's assessment was excessive for the following reasons: "1. The publication in question was a revision. 2. The negatives were furnished. 3. No sample from the previous printing was supplied. 4. No proofs were requested, even though it was a revised publication." (Exhibit 11). The letter continued: ". . . the supplied negatives were not correct to begin with and that we are being penalized for the original contractor's error; or whomever made the corrections to the original product." Id. As requested by the contractor's letter dated March 24, 1980, a hearing was held on May 9, 1980, at which the representatives of the contractor explained the contractor's position. At the end of this hearing the Chairman asked whether any further evidence was to be tendered to supplement the record. Since neither party wished to submit additional evidence, the Chairman closed the record. MAJORITY'S OPINION It was the decision of the Contracting Officer to reject the order and apply the percentage adjustment provided for in the QATA against the contract price because of the failure of Printers II to furnish the contracted-for level of quality (Product Quality III). It is presumed that the QATA was established to reduce subjective judgments in determining the quality and the acceptability of a given product through an established system. This procedure measures quality quantitatively using demerits assigned for defects (based on tolerances from a standard) and a determination of defect class (i.e., critical, major, or minor). Upon consideration of the Acceptable Quality level, the product would be accepted or rejected. Failure to conform with the established standards, attribute description or tolerance tables for a particular attribute could result in either the rejection of the order and the requirement to replace any or all of the rejected items or, acceptance of the defective items or the entire order and the application of a percentage adjustment or discount to the contract price of the rejected quantity (Sec. 4, QATA). It is clear that page 19 of the contractor's publication (Exhibit I) did not conform to the tolerances established for Text and Illustration Image position as required for Product Quality Level III work (Sec. p-5, QATA, Pg. 12). The Contracting Officer cited this defective attribute when he notified the contractor of the 50 percent reduction (Exhibits 7 and 8). There was also testimony at the hearing to the same effect from Mr. Darwin Hughes, Chief, Quality Assurance Group. It should be noted here that this was not disputed by the contractor. The Final Decision of the Contracting Officer stated that the decision was based on a determination that: "The inspection revealed the image position of page 19 was incorrect by more than one inch. This defect is considered a conspicuous single page defect and classified as a major defect. Image position of several pages was also found outside the allowable tolerance." (Exhibit 10, emphasis added.) Section 8.6 of the QATA deals with conspicuous single page defects and directs the assessment of a single major defect for that defective page. After this major defect is assessed, if the defect is present throughout the sampling, the Government can either reject or accept, at its option, with the appropriate reduction. Paul Barlow, the Contracting Officer who signed the Final Decision, testified at the hearing that it was the determination that this was a conspicuous single page defect that was the basis of the 50 percent price adjustment. Testimony at the hearing from Mr. Hughes demonstrated that regardless which method was used, either would allow the Government to assess the reduction. Moreover, at the hearing, the representatives of the contractor reviewed the negatives and admitted that a mistake in the image position had been made by the contractor. Further, they conceded that according to the tolerances for this attribute, the calculation of the penalty was correct. The majority now determines that the contractor's basis for its appeal was not substantiated in that the contractor failed to prove that its noncompliance was necessitated by any of the reasons set forth in its appeal letter. The contractor was responsible for complying with terms of its contract. At the hearing, the contractor admitted that it had not conformed with the provisions of the Quality Assurance program, therefore, the contractor's appeal is denied in its entirety. James K. Mehan, Member Robert G. Cox, Member DISSENT While this dissenting member does accept the Government's right to assess some penalty for the contractor's noncompliance with the terms of the contract as present in the QATA, I cannot agree with the majority that the application and amount of the assessment was proper. Given the nature of this particular breach, the formula used in this case brought about a particularly harsh result. Mr. Hughes testified that there was little flexibility designed into the system. The purpose of the program is to require from contractors strict adherence to the attribute descriptions for each separate level of printing with little regard for any anticipated damage that might be caused by the noncompliance to these rigorous and exacting standards. Moreover, the method for adjusting the contract price when there is noncompliance with the Quality Assurance Through Attributes program in effect operates as a liquidated damage clause. A liquidated damage clause is ordinarily used when actual damages caused by a breach in the contract or a failure to perform would be difficult to determine or predict at the time of the negotiation of the contract. Federal Procurement Law, Nash & Cibinic, (2nd Ed. 1969), Chap. 17, pg. 688. Although the 50 percent reduction in the contract price is not characterized as liquidated damages clause in the contract, 5/ and the drafters of the Quality Assurance program did not consciously intend such a result, the effect of the adjustment provision is the same as if it were a liquidated damage clause. This is because Section 4 has set out a schedule for predetermining the damages to be assessed against a contractor before any breach of the contract terms has occurred and regardless of the actual damages suffered. Having construed this contract term to be in fact a liquidated damage clause, it must then be determined whether in this case the 50 percent reduction was a proper assessment. 6/ In defining the parameters of an enforceable liquidated damage clause, Williston states that such a clause is valid when: "(1) An agreement made in advance of breach, fixing the damages therefor, is not enforceable as to a contract and does not affect the damages recoverable for the breach, unless '(a) the amount so fixed is a reasonable forecast of just compensation for the harm that is caused by the breach, and '(b) the harm that is caused by the breach is one that is incapable or very difficult of accurate estimation." 5 Williston on Contracts, (3rd Ed. 1961), Sec. 769, pgs. 637-639; Priebe & Sons v. U.S., 332 U.S. 407 (1947). See also, Restatement, Contracts, Section 339 (1932). A liquidated damage clause will be enforced if it represents a genuine, reasonable pre-estimate of the extent of an injury caused by a future breach of the contract. 5 Corbin on Contracts, Sec. 1059 (1964). In addition, Williston states, that although this area of contract law is somewhat murky, courts have uniformly held that any liquidated damage claim is unenforceable "unless the sum bears some reasonable relationship to the probable damages." Williston, supra, pg. 640, see also, Graybar Electric Company, Inc., ICBA No. 773-4-69, Feb. 20, 1970, 70-1 BCA ¶ 81121. Therefore, the amount assessed must not be greatly disproportionate to the presumed loss or injury. In cases where there is an obvious disproportion between the presumed loss and the amount assessed against the breaching party, the courts will construe the assessment of these damages that have been fixed without any reasonable reference to the probable damages caused by the breach to be a penalty and therefore unenforceable. Kothe v. R.C. Taylor Trust, 280 U.S. 224 (1930), United O.A.B. & S.M.U. 21 v. Thorieif Larson & Son, Inc., 519 F.2d 331 (1975). Williston defines a penalty as: ". . . . a sum named, which is disproportionate to the damage which would have been anticipated from the breach of the contract, and which is agreed upon in order to enforce performance of the main purpose of the contract by the compulsion of this very disproportion." Williston, supra, Sec. 776, at pg. 668, Marathon Battery Co., ASBCA No. 9464, July 14, 1964, 1964 BCA ¶ 4337.. In the case at bar, a 50 percent reduction in the contract price was assessed on account of a misplacement in the text and image position on page 19. This error caused no information loss and presented no glaring defect to the layman's eye. In fact, the breach of the contract which brought about this adjustment did in no way materially damage the publication. Strong support for this can be inferred from the fact that neither the GPO nor the originating agency required a reprinting of the document. The defective document was distributed as was originally intended. The testimony of the Contracting Officer, James A. Markley indicated that the Government did accept the proffered goods instead of rejecting them outright or requesting reprinting. There was no evidence presented by the Government that indicated that the assessment of this flat rate was justified in terms of the anticipated or actual damage suffered because of this particular breach. This circumstance tends to negate the notion that the Government required this 50 percent contract price reduction as a means of providing a measure of just compensation for anticipated damages or actual damages suffered. The only remaining rationale for the presence of this provision in the QATA is to punish a contractor for not complying with the program. This clause operates to assess a penalty for a minor breach, such as this clearly was, as well as a major breach without any showing that this stipulated sum is reasonable in relation to anticipated damages. Given the above reasoning, this member must conclude that this clause as it operated in this case, is a classic in terrorem provision and, as such, must be construed a penalty and held unenforceable. H.H. Reisman, GSBCA No. 3262, Dec. 15, 1971, 72-1 BCA ¶ 9223, see also Pre-Con, Inc., IBCA No. 986-3-73, Dec. 2, 1974, 74-2 BCA ¶ 10,957, Marathon Battery Co., supra. While this member appreciates that Section 4 of the QATA may not have been intended to work as a penalty, in this case, it was not a fair estimate of damages suffered but served only as a spur for performance. Although most provisions for damages act as deterrents to default or breach, an exaction of punishment for a breach which has produced little damage has long been viewed as being unjust and unenforceable. Priebe & Sons v. United States, supra. Furthermore, this member cannot ignore the fact that the adjustment procedures have already been revised by the Government to affect results which are far less severe than those that occurred in this situation. This dissent is solely with the majority's decision as this member is in agreement with the facts as set forth in the Statement of Facts except where such facts conflict with the minority's opinion. Thomas O. Magnetti, Chairman _______________ 1/ Hereafter, unless otherwise noted, every citation is to an exhibit from the Appeal File. 2/ The Quality Assurance Through Attributes program (GPO Pub. 310.1) will be described in a later portion of this decision. The specifications for this contract incorporated this Quality Assurance document by reference, thereby making the document an integral part of the contract (Exhibit 2). 3/ There were 4 additional documents that were proffered as evidence at the hearing to be included in the Appeal File and the official record. They are as follows: Exhibit I: One copy of the allegedly defective document printed by the contractor. Exhibit II: The set of negatives furnished by the Government to the contractor in accordance with the contract specifications. Exhibit III: One xerox copy of a previous printing of the publication by a private contractor. Exhibit IV: Quality Assurance Through Attributes program. Upon objection from Government's counsel, the Panel ruled that Exhibit III was irrelevant to the issues at bar, and therefore would not be included in the record. Exhibits I, II, and IV were accepted into the record under Roman numerals to avoid confusion with the exhibits marked with Arabic numerals. 4/ Although there was some evidence of other errors in the sample, it was the defect on page 19, according to the Government witnesses that was the basis of the Government's decision to reject the order and assess the appropriate adjustment to the contract price. It was not necessary to document any more errors in the publication once the inspection revealed one ground for possible rejection. See Exhibits 6 and 7. 5/ While the GPO used liquidated damage clauses in the past as compensation for damages caused by a contractor's late delivery, their use was discontinued because it was felt that the clause was not used properly. 6/ While the Contractor did not specifically raise the issue of the validity of the contract price reduction as a liquidated damage clause in its appeal letter or at the hearing, it has claimed, through its pro se representatives, that the adjustment was far too severe in light of the probable damage suffered by the Government. As stated above, the nature of its operation is enough to indicate that it is, in effect, a liquidated damage clause.