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.