U.S. GOVERNMENT PRINTING OFFICE BOARD OF CONTRACT APPEALS The Appeal of McDONALD & EUDY PRINTERS, INC. Docket No. GPO BCA 9-88 March 8, 1990 MICHAEL F. DiMARIO Administrative Law Judge SUMMARY OPINION The appeal of McDonald & Eudy Printers, Inc., 4509 Beech Road, Temple Hills, MD 20748 (hereinafter "Appellant"), from the April 5, 1988, final decision of Katherine M. Phillips, Contracting Officer, U.S. Government Printing Office (GPO), Washington, DC 20401 (hereinafter "Respondent"), is hereby formally denied for the reasons set forth in Respondent's ANSWER, which such reasons the Board adopts in the entirety as its own, Appellant having offered no evidence whatsoever to support its contentions that the reduction taken was unreasonable. Accordingly, the decision of the Contracting Officer is affirmed. It is so Ordered. U.S. Government Printing Office Office of the General Counsel Respondent's Answer In the Matter of: McDonald & Eudy Printers, Inc. GPO BCA Docket 9-88 MARGARET LEE BASKETTE, Assistant General Counsel August 1, 1988 Issue Presented for Review: Whether the Contracting Officer's Discretionary Decision of Discounting the Contract Price by 25% was Reasonable in the Particular Circumstances of This Case? A. Discretionary Authority Given to the Contracting Officer by the Contract Terms B. Facts Considered by the Contracting Officer in Determining the Amount of the Reduction in the Contract Terms C. Amount of Reduction in the Contract Price was not an Unenforceable Liquidated Damage Provision STATEMENT OF THE CASE After the contractor delivered nonconforming goods, the Contracting Officer issued a final decision to retain the nonconforming products and reduce the contract price. On April 13, 1988, McDonald & Eudy Printers, Inc. (McDonald & Eudy) appealed the Contracting Officer's final decision to the U.S. Government Printing Office Board of Contract Appeals (Board) under the "Disputes" clause of the contract. On June 3, 1988, the U.S. Government Printing Office (GPO) filed a Motion for a More Definite Statement or in the Alternative a Motion to Dismiss. The Board issued an order, dated July 18, 1988, denying GPO's motion concluding that the appellant had stated ". . . a justiciable cause of action, i.e., whether or not the imposition of 25% discount is fair or acceptable under the facts and circumstances." GPO contends that the discount imposed by the Government was proper, because it was both fair and reasonable under the circumstances. Thus, the decision of the Contracting Officer should be affirmed. STATEMENT OF FACTS On September 8, 1986, the GPO issued the Invitation for Bids (IFB) for the binding and printing of Schizophrenia Bulletin for use by the Department of Health and Human Services, Public Health Service (PHS). The specifications required the contractor to produce perfect- bound books with separate wraparound covers. (Exhibit A) 1 The Schizophrenia Bulletin is a quarterly publication; consequently, four print orders would be issued during the term of the contract. The term of the contract was from November 1, 1986, to October 31,1987. McDonald & Eudy was the successful bidder on the contract. On August 18, 1987, the GPO issued Print Order 60003. (Exhibit B) The estimated cost of the print order was $18,844.33. Under the terms of the print order, the contractor agreed to produce 6,281 copies of the Schizophrenia Bulletin, Vol. 13, No. 4. The ship/delivery date was November 13, 1987; a contract modification postponed the due date to December 18, 1987. Nonetheless, the contractor did not ship/deliver the goods until December 21, 1987. A few weeks after the ship/delivery date of the bulletins, GPO officials received a complaint from the agency customer concerning the Schizophrenia Bulletin, Vol. 13, No. 4. The departmental notice of quality defects, dated January 7, 1988, listed three types of finishing defects: (1) folding position or skewness; (2) wrinkles; and (3) edges- feathered/ragged/burred. (Exhibit C) Although the product did not meet the specifications, the agency indicated to GPO that the bulletins "can/must be utilized." Id. Responding to GPO's request, PHS officials forwarded the 20 unopened "blue label" samples 2 to GPO on January 11, 1988. (Exhibit M) On February 4, 1988, the GPO Quality Assurance Inspector, Cassandra Lomax, inspected the twenty blue label copies. (Exhibit C) Ms. Lomax found major defects for damaged edges and damaged covers. A major defect is defined as "a deviation from the specifications which is less serious than a critical defect." (See Appendix, Tab 2, Contract Terms, Quality Assurance Through Attributes Program (QATAP), Rev. June 1981 (GPO Publication 310.1, p. 1) According to the QATAP program, examples of damaged edges are untrimmed signatures and edges which are feathered, ragged, or burred. Id. at pp. 35, 36. A major defect labeled as a damaged cover may consist of wrinkles, bubbles, cuts, or scratches on the cover. Id. at pp. 37, 38. Specifically, Ms. Lomax found 20 major defects under the category of damaged edges and 14 major defects under the category of damaged covers, for a total of 34 major defects. 3 (Exhibit D) The QATAP tables provide that a 25% deduction in the contract price may be taken when a sample of twenty samples contains 34 major defects. Ms. Lomax forwarded her recommendation that GPO accept the product at a 25% reduction to the Contracting Officer. In a letter dated February 8, 1988, the Contracting Officer, Ms. Katherine Phillips, informed McDonald & Eudy of the defects in its product and pointed out that the order was rejectable. The Contracting Officer pointed out that the Government could decrease the amount paid to the contractor by up to 25% of invoice billing price. In closing, the Contracting Officer requested a written explanation of why the defects occurred and the steps taken to assure that this problem would not happen again. By letter of February 16, 1988, McDonald & Eudy conceded that the defects in the bulletin were the fault of its bindery personnel who failed to maintain proper gluing and margins. (Exhibit I) According to the contractor, the individuals responsible were admonished for their oversight and instructed to be more diligent in the future. In reference to the proposed reduction in the contract price, the contractor "felt" that a 25% decrease in the contract price ($4,584.86) was unfair. Mr. David McDonald, Vice- President of McDonald & Eudy, stated in his letter that "Bindery Quality Control personnel feel that there may have been a small poriton [sic] of the total copies bound that reveal the defects and that not all copies bound should be defective." The contractor asserted that the defects were only in a small number of copies; yet, it offered no records or documentation to support this statement. Id. Although the contractor offered to pick up the copies, inspect them for defects, and rebind the defective books to meet quality control specifications, the Contracting Officer had the authority to make the decision on what remedy to elect when the contractor delivers nonconforming goods. In making the decision to retain the goods and impose a discount on the contract price, Ms. Phillips considered the request of the ordering agency as well as the cost and delay of replacement and repair. The ordering department had informed GPO that it needed to utilize the bulletins. In fact, many of the bulletins were already in use in libraries and other health facilities around the country. 4 If the Contracting Officer had consented to the contractor's offer to replace or repair the defective books, McDonald & Eudy would have borne costs associated with replacement or repair as well as all transportation costs in picking up and redelivering the new publications. Undoubtedly, these costs would have exceeded the 25% reduction in contract price. In view of all these facts, the Contracting Officer decided to retain the materials and seek a reduction in the contract price. Not only did the Contracting Officer make a logical and pragmatic decision concerning the election of remedy in this case, she also deliberated on the appropriate amount of the reduction. Realizing that the QATAP tables are to be used as a guideline in determining the amount of discount, the Contracting Officer focused on the particular facts of the case. Further, the Contracting Officer considered all the relevant factors and gave the contractor every opportunity to submit evidence to assist her in the final decision. (Appendix, Tab 3) On February 25, 1988, Ms. Phillips issued a contract modification for print order 60003, reducing the contract price by 25%. (Exhibit H) Thereafter, McDonald & Eudy wrote the Contracting Officer on March 24, 1988. (Exhibit G) In this letter, the company repeated its assertion that only a small portion of the job was defective, but offered no proof. Although the contractor stated that the cost of typesetting the product ($6,601.48) should not be included in the reduction, it did not articulate a rationale for this argument. During a telephone conversation on April 1, 1988, Mr. David McDonald requested the Contracting Officer to reconsider the decision of the contract reduction. (Exhibit J) Throughout their negotiations, the Contracting Officer requested some evidence from the contractor to substantiate its claim that only a small portion of the bulletins was defective. McDonald & Eudy admitted that it had no records on the inspection and quality control of the goods. In view of the severity and frequency of the defects; the importance of the publication; the significance of the cover in the overall appearance of the bulletin; the possibility that the defective covers could further deteriorate over time and with use; the costs associated with the replacement or repair of the books; and the fact that the contractor failed to submit any records in support of its position, the Contracting Officer refused to alter her decision to take a 25% discount from the contract price. The Contracting Officer made a final decision on the reduction on April 5, 1988. (Exhibit K) The contractor appealed this decision to the Board. (Exhibit L) ISSUE PRESENTED FOR REVIEW Whether the Contracting Officer's discretionary decision of discounting the contract price by 25% was reasonable in the particular circumstances of this case? In order to ascertain if the Contracting Officer's exercise of judgment was reasonable under the circumstances, it is first necessary to examine the relevant parts of the contract. 5 A review of the contract terms reveals that the Contracting Officer is given the discretionary authority to determine the equitable amount of a reduction in the contract price. Prior to assessing the discount, the Contracting Officer negotiated with the contractor and considered all the relevant facts of the case. Since the decision of the Contracting Officer was reasonable and was not arbitrary or capricious, the Board should affirm the decision. The Government also asserts that the reduction in the contact price should not be construed as a liquidated damages clause because it was not a pre-determined penalty nor was it confiscatory in nature. Rather, as the evidence shows, the Contracting Officer reached her decision only after considering all the facts of the case. A. Discretionary Authority Given to the Contracting Officer by the Contract Terms Pursuant to the IFB, the contract was subject to all the terms and conditions of U.S. Government Printing Office Contract Terms No. 1, Rev. October 1980 (GPO Publication 310.2) and the Contract Terms, Quality Assurance Through Attributes Program (QATAP), Rev. June 1981 (GPO Publication 310.1). (See Appendix, Tabs 1 and 2) The contract includes the following warranty clause: 2-13. Warranty (a) Notwithstanding inspection and acceptance by the Government, implied at law payment or any provision of the contract regarding the conclusiveness thereof, the contractor warrants for a period of 120 days from the date of the check tendered as final payment that: (i) all supplies furnished under the contract are free from defect in material and workmanship and conform to the specifications and all other requirements of the contract; . . . (c) The Government, at its option, may either: (i) require the contractor to promptly correct or replace all or any part of the supplies (including preservation, packaging, packing, and marking) without correction or replacement in which event the contract price shall be reduced by the amount which is specified by the contract or, if not specified, by an amount which is equitable under the circumstances. In the event the con- tract has been completed and payment made, the contractor shall promptly refund the amount so determined. (Emphasis added.) * * * (f) The rights and remedies of the Government provided in this article are in addition to and do not limit any rights afforded to the Government by any other provision of the contract. (g) Failure to agree on any of the determinations made by the Contracting Officer pursuant to this article, shall be a dispute concerning a question of fact within the meaning of the "Disputes" article of the contract. Thus, under the warranty provisions, the Contracting Officer may elect to retain the nonconforming goods and seek a reduction in the contract price. The reduction amount may be specified under the contract; if not specified, the reduction must be equitable under the circumstances. The warranty provision also makes it clear that these remedies are in addition to any rights afforded to the Government by the contract, and do not limit the rights of the Government. Finally, a dispute under this article will be considered a question of fact by the Board. The primary function of the QATAP is to describe quality in terms of definable and measurable attributes. The QATAP allows for quality requirements to be quantitatively stated in specifications and for products to be assessed as defective or nondefective based on objective measurements. In turn, these measurements form the basis for acceptance or rejection of the product and for determining the applicable discount to be taken from the contract price should the customer agency decide to use the defective items. (See Printing Procurement Regulation, Quality Assurance, Chapter XI, Section 1, (3) (a), 1980.) The Contract Terms of QATAP regarding the acceptability of a product state in pertinent part: If the defects exceed either or both the AQL's (acceptable quality level), the Government will have the option of having the lot or batch replaced, having the defects corrected, or accepting the lot or batch with an equitable reduction in the contract price. The discount tables contained in Appendices A & B will be used as a guide by the Contracting Officer to determine reductions. Likewise, the preface to Appendices A & B states that the tables will be utilized as a guide by the Contracting Officer in determining an equitable reduction in the contract price. By the very terms of the contract, if nonconforming goods are retained and a reduction in the contract price is sought, the Contracting Officer is given the authority to make a discretionary decision on the amount of the reduction of the contract price. (Appendix, Tab, 1) Therefore, the Board is reviewing a contractually-provided judgmental decision of the Contracting Officer. Monarch Enterprises, Inc., ASBCA No. 31375, 86-3 BCA ¶ 19,227; Thomas W. Yoder Company, Inc., VACAB No. 997, 74-1 BCA ¶ 10,424. Unlike other cases, the Board may not substitute its judgment for that of the Contracting Officer. John T. Brady & Company, VACAB No. 1300, 84-1 BCA ¶ 16,925; Henry C. Beck Company, VACAB No. 523, 66-1 BCA ¶ 5323. The amount of the reduction taken by the Contracting Officer is a question of fact, and the Board will presume the subjectivity of such judgment. Fry Communications, Inc., GPO BCA 22-84, at page 19. Nevertheless, this does not mean that the Contracting Officer's decision is unquestionable. Where contract provisions allow the Contracting Officer the right to make discretionary judgments, it is implied that these judgments must not be unreasonable or capricious. John T. Brady & Company, VACAB No. 1300, 84-1 BCA ¶ 16925; Cleveland Electric Company of South Carolina, VACAB No. 556, 67-1 BCA ¶ 6293. A party vested with contractual discretion must exercise his discretion reasonably and may not do so arbitrarily. Squirrel Creek Associates v. United States, 11 Ct. Cl. 212, 217 (1986). Thus, the Board needs to decide, based upon the evidence presented, whether the decision arrived at by the Contracting Officer was within proper limits of her discretionary judgment or whether it was so unreasonable, arbitrary, or capricious as to be invalid. In absence of gross error, a discretionary decision by the Contracting Officer should not be overruled. Corbetta Construction Company of Illinois, Inc., 55 Comp. Gen. 972 (1976). B. Facts Considered by the Contracting Officer in Determining the Amount of the Reduction in the Contract Price Generally, if the Government elects to take a reduction in the contract price, the appropriate reduction is the difference between the contract price and the value of the goods. Auto- Skate Company, Inc., ASBCA No. 14716, 72-1 BCA ¶ 9,201. See also, J. White and R. Summers, Handbook of the Law Under the Uniform Commercial Code, § 10-2 (2d ed. 1980). The value of the nonconforming supplies are to be determined from the viewpoint of the buyer. McGrath and Company, ASBCA No. 1949, 58-1 BCA ¶ 1,599. Understandably, the views of the injured party concerning the value of the product may differ from the views of the seller, or indeed, the general public. Where the fact of damages has been clearly established, lack of certainty and precision as to amount of damages is not fatal and will not preclude recovery, provided there is a reasonable basis for computation of damages. Jackson v. United States, 12 Cl. Ct. 363 (1987); G. M. Shupe, Inc. v. United States, 5 Cl. Ct. 662 (1984). A reasonable certainty of the damages will suffice. See, J. Calamari and J. Perillo, The Law of Contracts §14-8, (2nd. ed. 1977). In this case, it may not be possible to precisely calculate the amount of damages sustained by the Government; however, it is clear that the Contracting Officer had a reasonable basis in determining the amount of the reduction in the contract price. A review of the facts and the considerations taken into account by the Contracting Officer illustrate the reasonable basis in assessing the 25% reduction in contract price. (Appendix, Tab 3.) First, the fact that the defects were located on the cover of the publication was significant. As in all published work, the cover is an integral and significant part of the book - a key selling point. According to the inspection report, the books had defects with the cover and edges. The ragged edges, the wrinkled covers, the cuts on the front cover, and the scratches on the surface of the covers severely affected the aesthetic value of the bulletin. Second, through her discussions with agency personnel, the Contracting Officer was aware of the prestige and the importance the agency attached to this publication. It is a quarterly publication that is read by thousands of medical professionals throughout the country. The high level of quality the agency expected is evident from their choice of Quality Level II for the cover of the bulletin. The importance of a product and the scrutiny it may be subject to by the buyer is a valid and appropriate consideration by the Contracting Officer. Thomas W. Yoder Company, Inc., VACAB No. 997, 74-1 BCA ¶ 10,424. Therefore, it was proper of the Contracting Officer to take into account the prestige of the Schizophrenia Bulletin and the fact that medical professionals throughout the country would be reading the booklet. Third, the Contracting Officer thought the defects could worsen over time. Unlike newspapers or other disposable reading materials, this bulletin is a reference material that would be used by the reader over a number of years. In reaching the decision to take the 25% discount, the Contracting Officer believed the cuts, wrinkles, scratches, and ragged edges could cause the covers to further deteriorate with time and use. See, Graphic Litho, GPO BCA 21-84. Fourth, the Contracting Officer considered the cost of repair or replacement as well as the transportation cost in her decision to take the 25% discount. Obviously, the Government would mitigate the amount of costs incurred by electing to retain the product and take a reduction. It would have been an impractical and extremely expensive proposition for the contractor to repair or replace the publication. Fifth, in the course of their negotiations, the Contracting Officer did consider the suggestion to deduct the cost of the typesetting from the contract price before applying the discount. However, it was very difficult to separate the cost of the cover and the printing when the defects severely affected the entire booklet. These defects range from ragged edges to cuts and tears in the cover to wrinkles, bubbles, and scratches on the cover and back bone of the booklet. In addition, the Contracting Officer knew that, in a sample of 20 bulletins, there were 34 defects; this is 1.7 defects per book. The acceptable quality level (AQL) for this publication was 6.5 6 Utilizing the AQL formula, in a sample of 100 Schizophrenia Bulletins, there would be 170 defects. 7 Taking the AQL formula one step further, out of 6,281 booklets in the print order, there could be as many a 10,677 defects (plus or minus 2-1/2 %). Because this order was replete with defects, the Contracting Officer rejected the suggestion to omit the cost of the typesetting from the contract price. Finally, Ms. Phillips gave the contractor every opportunity to submit any reports or records during the negotiation process. McDonald & Eudy failed to provide any documents or records in support of the company's assertion that the defects were only in a small portion of the copies. To accept the contractor's opinion about the frequency of the defects, without any evidence, would have been arbitrary and capricious. The burden is on the appellant in a case of this kind to show that the Contracting Officer abused his discretion. Solis Enterprises, Inc., VACAB No. 1576, 84-3 BCA ¶ 17,606. The Government, unlike private parties, is always assumed to act in good faith, subject to only an extremely difficult showing by the plaintiff to the contrary. Torncello v. United States, 681 F. 2d 756, 770 (1982). In reviewing the evidence proffered by the appellant, it is obvious that the contractor has not met its burden. There is not a shred of evidence to support its position that the defects are only in a few bulletins. On the other hand, the Contracting Officer, in good faith, reviewed the inspection reports from GPO, as well as the notice from ordering agency, describing the type and frequency of the defects. Thus, she considered all the pertinent facts. C. Amount of Reduction in the Contract Price was not an Unenforceable Liquidated Damage Provision An enforceable liquidated damage provision must be a genuine pre-estimate of the injuries that will be caused by a future breach of the contract. 5 Corbin on Contracts, § 1059 (1964); See also, Priebe & Sons v. United States, 332 U.S. 407, 411, 68 S. Ct. 123, 126 (1947). In deciding if liquidated damage provision is valid, the court will determine whether the damages are difficult to ascertain and whether the liquidated damages bear a fair and reasonable relationship to anticipated damages caused by the breach. Cegars v. United States, 7 Cl. Ct. 615 (1985) In the present case, there was not a pre-determination of the damages or probable loss. Although the Contracting Officer utilized the QATAP tables in reaching her decision on the amount of the reduction, the tables were only a guide. The Government agrees that if the QATAP tables had been applied by the Contracting Officer in a mechanical fashion, the amount of the reduction would have been equivalent to an unenforceable liquidated damage provision. Here, the Contracting Officer's final decision on the discount was not reached until negotiations had been conducted and all the facts of the case reviewed. In Fry Communications, GPO BCA 22-84, the contractor delivered a guidebook for the Department of Commerce which was deemed nonconforming; the inspection results showed that the paper was not equal to the color specifications in the IFB. Specifically, the inspection by GPO officials revealed that there were 36 demerits in each publication. As a consequence, the Contracting Officer, using the QATAP tables, decreased the contract price by 18.9%. The contractor appealed to the Board. In its analysis of the case, the Board pointed out that the JCP Paper Specification Standards required the Contracting Officer to make a judgment weighing the extent of the defects present in the product against the intended use of the product. The Board held that neither the documentation nor the testimony in the record established that this legal requirement was met. Although the guidebook for the Department had an apparent color deviation, the Board believed that the Contracting Officer applied the QATAP tables in a mechanical fashion. This amounted to a penalty against the contractor. It is clear that the QATAP tables must be utilized on a case- by-case basis. Edward & Broughton, Co., GPO BCA 6-84. In determining that McDonald & Eudy should be assessed 25% of the contract price, the Contracting Officer painstakingly considered all the factors in the case. She only used the table as a guideline. Similar to the actions of the Contracting Officer in Graphic Litho, GPO BCA 21-84, the Contracting Officer considered the severity and the frequency of the defects. Thus, the amount of the reduction was equitable and cannot be construed as an unenforceable liquidated damage clause. CONCLUSION The reduction in the contract price assessed against the contractor was reasonable under the particular circumstances of this case. Therefore, the decision of the Contracting Officer should be affirmed. _______________ 1 All exhibits referred to in the answer are located in the Rule 4 File. 2 Blue label samples are copies of the Publication randomly selected in accordance with the instructions in the specifications. This process allows the Government an opportunity to inspect a statistically valid sample when they receive a customer complaint. 3 Significantly, Ms. Lomax suspended her inspection of the samples after she discovered 34 major defects. The Purpose of the inspection is to determine if the Publication is acceptable or rejectable, not to find every defect in the Publication. Additionally, it is the Prime responsibility of the contractor, not the Government, to ensure that the Product meets the requirements of the contract. (See Contract Terms No. 1, § 2-12, Inspection and Tests) 4 The specifications required the contractor to Produce 6,281 copies of the bulletin. Of the 6,281 copies, 190 were mailed by the contractor using Government furnished labels. The contractor also delivered 5,000 copies to the GPO Public Documents Warehouse; these copies were then mailed to subscribers. Consequently, a majority of the bulletins were already mailed to readers by the time the GPO received the complaint. 5 There is no dispute that the contractor delivered nonconforming goods. McDonald & Eudy conceded numerous times that the defects were the fault of its Bindery Department. 6 This means that, out of 100 samples, the Government will allow 6.5 defects and still accept the publication. 7 The statistical basis for this formula has a 95% confidence. As such, there is a 2-1/2% chance that out of 100 bulletins there may be as many as 238 defects. Similarly, there is a 2-1/2% chance that in the sample of 100 copies, there may be as few as 118 defects.