UNITED STATES GOVERNMENT PRINTING OFFICE
CONTRACT APPEALS BOARD

Appeal of Industrionics, Inc.
Appeal dated March 26, 1982
Hearing held on July 28, 1982
Decision dated October 21, 1982

Panel 82-5
Thomas O. Magnetti, Chairman
Paul J. Barlow, Member
Ernest W. Henson, Member

Preliminary Statement

This is a decision on a timely appeal filed by Industrionics,
Inc.  (hereafter the contractor).  The contract at issue required
the contractor to provide to the Government Printing Office (GPO)
equipment that could recover silver from chemical solutions.  The
GPO Contracting Officer terminated the contract for default
because the machinery allegedly did not comply with the contract
specifications.  The contractor disputes this termination and
takes this appeal in accordance with Article 12 of the general
provisions of the contract (Exhibit 1, Appeal File, hereafter
cited as Ex. 1).

The jurisdiction of the GPO Contract Appeals Board over this
appeal is established pursuant to GPO Instruction 110.10B,
entitled "Board of Contract Appeals Rules of Practice and
Procedure", and pursuant to the contract, supra.  This decision
is based solely on the record which consists of the thirty-one
(31) exhibits within the Appeal File and the oral testimony and
argument presented to the Board at a hearing held on July 28,
1982.

Statement of Facts

In accordance with standard GPO contract award procedures,
Purchase Order 04210 was awarded to the contractor on May 12,
1981.  Ex. 3.  The Purchase Order directed the contractor to ship
to the GPO two silver recovery machines.  The machines had to
conform to various specifications set out in the bid package.
Ex. 1.  Primarily, the machinery had to remove silver from a
photographic fixing solution by using an electrical current to
plate the silver in the solution onto a series of discs attached
to a cathode.  While there was some controversy between the
parties as to the exact meaning of the specifications, according
to the description of the equipment in the specifications, the
system was supposed to recover 95% of the silver from the
solution, and at least 2 troy ounces of silver per hour.  The
silver recovery system was to be capable of batch or continuous
operation.  Id.

The recovery units were received on July 10, 1981 and were tested
by the GPO using the batch method of recovery.  Ex. 6.  The
results of that test indicated that the machinery recovered
silver at less than the expected 95% and less than the 2 troy
ounces per hour.  Despite these test results, the Government paid
for the units.  Ex. 26; Testimony of J. Kenneth Mehan, the
Contracting Officer.  The contractor modified the unit on July
21, 1981.  However, when the machinery was retested by the GPO,
it failed to increase substantially its output of recovered
silver.  Ex. 6.  Based on these test results, the Contracting
Officer notified the contractor on August 6, 1981, that the units
were rejected because of a failure to recover a sufficient amount
of silver.  Ex. 8.  After certain correspondence had taken place,
the rejection was apparently rescinded on November 20, 1981, when
the GPO accepted the proposed modification of the recovery unit.
Ex. 16; Testimony of Mr. Mehan.

After these modifications were made at the contractor's plant,
and the unit was returned to the GPO and was again retested on
January 15, 1982.  Ex. 20.  The four tests utilizing the batch
method of operation indicated that the percentage of silver being
recovered varied between 67.5% and 88.4% and the amount of silver
recovered per hour varied between 1.24 troy ounces and 1.99 troy
ounces.  Ex. 22.  The tests also indicated that while the silver
was removed from the fixing solution, it did not adhere or plate
onto the discs on the cathode.  Rather, the silver collected in
the bottom of the basin in the form of a sludge.  According to
testimony provided at the hearing, the sludging was not a problem
when the units were first tested but occurred because electrical
current passing through the cathode was increased. Testimony of
J. D.  Hersey.  This increase in amperage was a result of the
contractor's modifications made in December 1981.  Ex. 20.  Based
on the latest test results, it was again suggested that the
recovery units be rejected.  Ex. 22.  The GPO sent out another
notice of rejection dated March 12, 1982, stating that the cause
of the rejection was the inability of the machine to Plate the
silver onto the cathode or to recover 95% of the silver after one
hour of plating.  Ex. 25.  This was followed by a Notice of
Termination dated March 24, 1982.  Ex. 27.  The reason for the
termination as set out in this notice was "the equipment's
failure to meet the requirement that silver be plated onto the
cathode."

The contractor appealed the decision of the Contracting Officer
to terminate the contract for default by letter dated March 26,
1982. Ex. 28.  On May 11, 1982 the contractor requested an
informal hearing. In accordance with this request a hearing on
the appeal was held on July 28, 1982 before a three member panel
of the GPO Contract Appeals Board.

Discussion

The Government is entitled to expect a contractor to comply with
the contract's specifications.  To enforce strict compliance, the
Government may reject defective work.  Ex. 1, General Provisions,
Article 5.  This right to reject may lead ultimately to a right
to default a contractor who has failed to supply a conforming
product within the time limitations set by the contract.  Id.
However, this right to reject equipment or to terminate the
contract for default is curtailed in cases where the Government
has accepted the contractor's performance.  Under ordinary rules
of contract law, final acceptance and payment for work precludes
recovery for known defects existing at the time of acceptance.
Where performance on a contract has occurred and the stipulated
consideration has been tendered, the transaction is closed.  C.
H. McQuagge v. United States, 197 F. Supp. 460, (W.D. La. 1961)
and cases cited therein.  This acceptance operates as a waiver of
the right to reject for defective performance existing at the
time of the acceptance.

The contract at issue sets out the conditions for final
acceptance at pg. 8 of the Solicitation.  Ex. 1.  Section F of
this document, entitled "Inspection and Acceptance", reads in
part as follows: "[t]he equipment shall be subject to 30 days
satisfactory operation before final acceptance and payment is
made." Here, final payment was made during the same time period
that the Government was testing the recovery units.  The
Government's testing indicated that the equipment did not comply
with the Government specifications. 1/   Regardless of whether or
not the equipment was in compliance with the specification, the
Government believed the units to be defective but still paid for
them.  As stated above, paying for goods or services is evidence
that acceptance has occurred.  Therefore, by paying for the two
recovery units before 30 days of satisfactory operation had
elapsed, the Government waived its right to reject any
nonconforming goods or its right to invoke the Inspection and
Acceptance clause.  This interpretation is further supported by
the language of the contract itself.  Article 7 of the contract's
General Provisions, entitled "Payments" states in part that: "[t]
he contractor shall be paid, upon submission of proper invoices
or vouchers, the prices stipulated herein for supplies delivered
and accepted or services rendered and accepted, less deductions,
if any, as herein provided." (Emphasis added.) Ex. 1.  Under the
contract, payment cannot occur until after supplies have been
accepted.  Since the units were in fact paid for, acceptance of
the units must be implied.

This finality of acceptance can only be avoided if the Government
can demonstrate that the defects were latent in nature or caused
by fraud or by gross mistake as would amount to fraud.  The
record is devoid of any such evidence.  Acceptance being final
upon the payment of the contract consideration, the only recourse
the Government might have is to invoke the Warranty Clause in the
contract and proceed under the appropriate remedy set out in that
clause.2/

The right to terminate a contract for default is limited to the
executory or unfinished portion of a contract.  Acceptance of
supplies bars a default termination on that work that was
accepted.  K Square Corp., IBCA 959-3-72, 73-2 BCA  10,363;
Astubeco Inc., ASBCA 8727, 1963 BCA   3941.  Therefore, the
Government's payment for the recovery units, constituting as it
did acceptance, prevented the Government from validly terminating
the contract for default.

Decision

Based on the foregoing reasons, the Board holds that the default
termination is void in effect and remands the appeal to the
Contracting Officer to pursue whatever remedy the Government
might possess under the warranty clause.  In the event that
negotiations regarding any equitable adjustment in price or
correction or replacement of defective units should prove
unsatisfactory to the contractor, it has the right to appeal the
matter to this Board in accordance with the contract's Dispute
clause.
_______________


2/ The term of the Warranty clause runs for one year after
acceptance.  Ex. 1, Sec. G, Pg. 9.  Accordingly, some or all of
the Government's rights under this clause may have lapsed due to
passage of time.

1/ In this decision the Board does not find that the units were
in fact nonconforming.  It is unnecessary to reach this question
since the appeal is resolved on other grounds.  However, the
Board would like to note that according to the specifications,
this equipment was to be capable of operating by batch or
continuous operation.  Ex. 1, Sec. B, 2.b., Pg. 7.  The testimony
of Dennis Carey indicated that the testing utilized by the
Government to support its contention that the units were
nonconforming was the batch method of operation.  Based on this
testimony, there is no evidence in the record that would
demonstrate that this equipment could not comply with the
specifications when operating in a continuous mode.