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.