DEAR MR. CAMPBELL: This responds to your letter of May 8, 1958, concerning an allowance for interest on advance payments for the sale of Indian timber on the Quinault Indian Reservation (Comptroller's decision of August 13, 1957, B-118601).

We are pleased to learn of your decision that action on the interest allowance may be held in abeyance pending the outcome of court action in the case of Warm Springs Lumber Company v. Fred A. Seaton, Secretary of the Interior, et al. (Civil No. 9046, USDC, Oregon).

Consideration will be given to the feasibility of establishing some arrangement, such as bonding or an escrow fund, to insure reimbursement to the Indians involved in the event of a court ruling unfavorable to this Department's position in the pending case. If such an arrangement is otherwise feasible, we shall determine in advance whether it would disrupt plans of the Department of Justice in its defense of the above case.

We shall keep you informed of further developments.

Sincerely yours,

D. OTIS BEASLEY, Administrative Assistant Secretary of the Interior.

COMPTROLLER GENERAL OF THE UNITED STATES,
Washington, May 8, 1958.

DEAR MR. SECRETARY: Reference is made to letter of January 28, 1958, with enclosure, from the Administrative Assistant Secretary referring to a conference held in this Office between representatives of your Department, the Bureau of Indian Affairs, and our Office, concerning an allowance for interest on advance payments under two contracts for the sale of Indian timber on the Quinault Indian Reservation, which allowance was the subject of our decision of August 13, 1957, B-118601, to you.

At the above conference your representatives requested authority to withhold any action on the above contracts pending the outcome of the pending case of Warm Springs Lumber Company v. Fred A. Seaton, Secretary of the Interior, et al., Civil No. 9046, in the United States District Court for the District of Oregon. In support of such request it now is stated that the pertinent stumpage provisions of the Warm Springs contract and the two Quinault Reservation contracts are essentially the same; that the plaintiff in the cited court case has taken the same position concerning changes in ratios as that taken by our Office in the above decision of August 13, 1957; and that our interpretation as outlined in that decision is inconsistent with the Government's defense in the Warm Springs case.

1 Only the letters and exhibits dated subsequent to Senate Report 971, 85th Cong., 1st sess., timber sale, Quinaielt Indian Reservation, State of Washington, are included herein.

Based upon the representations now made, action on the interest allowance under the two Quinault Reservation contracts may be held in abeyance pending the outcome of the court action in the Warm Springs case. In the meantime, it is suggested that consideration be given to the establishment of some arrangement such as bonding or an escrow fund to insure reimbursement to the Indians involved in the event of a court ruling unfavorable to the Department's position in the pending case. Also we will appreciate being kept informed of the progress of the pending court action and the final outcome thereof.

Sincerely yours,

Comptroller General of the United States.

Hon. JOSEPH CAMPBELL,

JANUARY 28, 1958.

Comptroller General of the United States,

Washington, D. C.

DEAR MR. CAMPBELL: On October 28, 1957, in response to our request, representatives of your office met with representatives of the Department of the Interior and of the Bureau of Indian Affairs to discuss further an allowance for interest that was made in the adjustment of prices charged for stumpage in two sales of timber on the Quinault Indian Reservation, Washington (your reference B-118601). At the conclusion of the meeting we agreed to address a letter to you, summarizing the views expressed by our representatives during the consultation. The discussions covered 2 general topics; 1 of them being the question of legal interpretation of the contract, and the other being the practical and administrative implications of the position taken in your letter of August 13, 1957.

It was called to the attention of your representatives that the position taken in your letter of August 13, 1957, with respect to the interest allowance in Quinault timber sale contracts, is inconsistent with the position being taken by the Govern ment in the pending case of Warm Springs Lumber Co. v. Fred A. Seaton et al, civil No. 9046, in the United States District Court for the District of Oregon. In that suit the purchaser is claiming that an increase in stumpage ratios by the Secretary was not permissible under the stumpage adjustment provisions of the contract.

The pertinent stumpage adjustment provisions in the Warm Springs contract, and in the two Quinault Reservation contracts, are essentially the same. Briefly, they provide that if the Secretary finds that the character of the operation, changes in marketing conditions, or technological developments (or other factors) have altered the situation to such an extent that, in his opinion, a change in the stumpage ratios is warranted, he may proceed to make such changes.

Our position is that the foregoing contract provision calls for a two-step procedure. First, the Secretary determines whether there has been a sufficient change in 1 or more of the 3-named factors to warrant a change in the stumpage ratios. Having made such a determination, he may then use any information that s prudent man would use in determining what the new ratios should be. It is not necessary that such information, in itself, be identified as a change in any 1 of the 3-named factors.

Your letter of August 13 took exception to this interpretation, and contende that any change in the ratios must be justified by a showing that there has beer a specific change in 1 or more of the 3-named factors. The Warm Springs Lumber Co. in its suit, has taken the same position as that of your office. It was pointed out at the meeting, therefore, that your present interpretation and decision in the Quinault case is inconsistent with the Government's defense in the Warm Spring

case.

There is enclosed a memorandum which outlines the discussions at the meeting with respect to the practical and administrative implications of your decision We believe your representatives at the meeting have firmly in mind the relation ship of that decision to the Government's defense in the Warm Springs case.

We appreciate the opportunity you afforded us to discuss this important ques tion with representatives of your office. We believe the discussion, and you further consideration of the subject in the light of that discussion, will lead to better mutual understanding of the procedure to be followed.

Your representatives concurred in the suggestion that we hold in abeyance any action on the so-called interest allowance pending the results of your consideration of this report on the meeting.

Sincerely yours,

D. OTIS BEASLEY,

Administrative Assistant Secretary of the Interior.

ADMINISTRATIVE IMPLICATIONS OF COMPTROLLER GENERAL'S DECISION RE INTEREST ALLOWANCE IN ADJUSTMENT OF STUMPAGE RATES

On October 28, 1957, representatives of the Secretary's Office and of the Bureau of Indian Affairs met with representatives of the Comptroller General's Office. The purpose of the meeting was to discuss the Assistant Comptroller General's letter of August 13, 1957, with regard to the allowance for interest on advance payments under two contracts for the sale of timber on the Quinault Indian Reservation (Comptroller's reference B-118601).

This statement covers the points developed by departmental and Bureau personnel with respect to the practical and administrative implications of the Assistant Comptroller General's letter of August 13, 1957.

The Indians, and not the purchasers, benefited by the Indian representative's oversight In the Assistant Comptroller General's letter of August 13 there is a brief discussion at page 4 of our contention that when the contracts were entered into the Department and the purchasers were dealing at arms length in their appraisals of stumpage values. The letter then states:

"*** While it may be, as suggested, that the failure to include a provision for interest allowance was an oversight on the part of the Department, there is no showing that it was also overlooked by the purchaser; nor can it properly be assumed that the purchasers did overlook such factor in view of the clear provisions for advance payments in the contracts and the magnitude of the payments required."

We agree that the situation was essentially as described above. We believe, however, that the Comptroller has concluded in these circumstances that there was no mutuality of oversight with respect to interest allowance and, lacking such mutuality, there is no authority for subsequent adjustment.

We would agree with the foregoing conclusion if the oversight had worked to the disadvantage of those who made it. In the present instance, however, quite the opposite is true, as revealed by the following brief review.

The timber was advertised for sale at minimum prices derived from the Indian Bureau's stumpage appraisal. The appraisal did not include sufficient allowance for interest on invested capital. If a sufficient interest allowance had been included, the originally appraised stumpage prices would have been less by the amount of such allowance. The timber would have been offered for sale at the lower figure and, since only one offer was received for each timber unit, the timber would have been sold at the lower figure. The Indian owners benefited accordingly from the oversight in this Bureau's original appraisal.

In the circumstances, the purchasers will probably ask what justification there is for compounding an error by retaining it in all subsequent stumpage adjustments. They will ask why they should be forever penalized for an oversight to which they were not a party, and of which they had no knowledge when they bid for the timber.

There was no mutuality of mistake as to timber quality

The timber was offered for sale at this Bureau's appraised prices, which were inflated because of the lack of interest allowance. The purchasers offered to buy at these appraised prices, despite the proper assumption that they had included an interest allowance in their calculations of stumpage values. There was, therefore, a meeting of minds as to the initial stumpage values. It follows that there must have been some other items in which there were compensating differences of valuation in original appraisal by the two parties. This situation leads to consideration of the following statement in the last paragraph, page 4, of the Assistant Comptroller's letter:

*** The original estimate of quality was based on the best information then available and apparently the parties to the contract expected that this reasonably represented the actual quality of the logs. ***”

We believe the Comptroller has concluded, from the foregoing statement, that there was a mutual mistake as to the quality of logs, and a mutual understanding that this mistake could be corrected through subsequent adjustment of stumpage ratios.

We can find nothing in the contracts or in our records to substantiate the assumption that there was a mutual mistake as to the quality of this timber. The "original estimate of quality" to which reference is made is the original estimate by the Bureau of Indian Affairs and, for that Bureau, it was the best information then available. This is not necessarily true with respect to the purchaser's knowledge of quality at the time of bidding. In fact, there is evidence

that, at the time of bidding, the purchaser of the Crane Creek unit had better knowledge of quality and quantity of timber than was possessed by the Bureau. Considerable testimony on this point was developed at the recent Senate subcommittee hearings on Quinault Reservation timber sales. The testimony included the following observation by a member of the subcommittee staff with respect to the two timber sales here in question:

"In addition, the Bureau of Indian Affairs does not have any sound data for the stand. Thus, its original estimate is nothing more than a guess.

"In testimony before this committee in 1955, page 1595 of the record, the Bureau of Indian Affairs' representatives indicated that aerial photographic information was not applicable in arriving at volume estimates on this reservation. However, on Friday the Rayonier representatives testified that they had a complete type map of the timber and a cruise based on aerial photography made in 1951 before they bought that tract.

"Thus, it would appear that the Bureau of Indian Affairs knows less about the quality and quantity of the timber it sold than does the buyer." 1

Basis for meeting of minds at time of bidding

At the time of bidding, therefore, there was no more a meeting of minds with respect to timber quality than there was with respect to production costs. The purchaser is in an excellent position to claim that he was much better informed than the Bureau as to the quality of the timber. He may argue, successfully, that there was a meeting of minds as to the original stumpage prices, despite the inadequate interest allowance in the Indian Bureau's appraisal, because he placed a higher value on the timber quality than did the Bureau. He may then argue that in any subsequent adjustment of stumpage ratios by the Department it is unreasonable and improper for the Department to ignore the oversight with respect to interest and, at the same time, take advantage of improved knowledge with respect to quality of the timber.

Application of interest allowance and quality corrections to stumpage adjustments

The purchaser may contend that the Indian Bureau used a lower figure for production costs than he had used, because the Bureau made an inadequate allowance for interest. He may also contend that the Bureau originally used a lower figure for product value than he had used. He can claim that the resultant estimates of stumpage value, by the Bureau and by himself, were essentially the same, and that this led to the meeting of minds as to the initial stumpage prices. He may then contend, with considerable justification, that if estimates of quality are brought to a common level of understanding, as a part of a subsequent price adjustment, then the estimates of cost should also be brought to a common level of understanding. In this leveling process the Indian Bureau's estimate of product value would be increased in recognition of better quality than originally estimated; and its estimate of costs would be increased in recognition of the interest allowance.

Allowance for interest in other stumpage adjustments

This point was not discussed at the meeting, but it is pertinent to the subject. The last sentence, page 1, of the Assistant Comptroller's letter states:

"To our knowledge, such (interest) allowances have never been included in appraisals or reappraisals in connection with other timber sales conducted by the Bureau of Indian Affairs."

We have pointed out in previous correspondence that only on the Quinault Indian Reservation is the magnitude of advance payments such as to warrant special consideration. We do not recall such a circumstance, but it is possible that allowances have been made in other Quinault timber sales. Stumpage rate adjustments were made from time to time in other sales of Quinault timber. In many instances the purchasers protested the increases, but the protests were either withdrawn, upon explanation, or were overruled. To the best of our knowledge, the question of interest on advance payments was never previously raised by the purchasers and, therefore, was not considered. To the extent that they were not included in other sales, the Indians have benefited.

1 Hearings, Quinaielt Timber Sales, p. 210.

Function of consultation in present contracts

In the present instance, the situation is very different. These contracts provide for consultations with the purchasers, at their request, prior to any adjustment of stumpage ratios. The reason for such consultation is, quite obviously, to supply the Secretary with the greatest possible amount of information pertinent to his study of the adequacy of stumpage ratios, and to inform all parties of the grounds for his contemplated actions. During the consultations the purchasers submitted evidence that we could not refute, to the effect that our cost estimates failed to include the important item of interest on advance payments. In the circumstances we found nothing in the contracts that would permit us to ignore this showing by the purchasers.

UNITED STATES DEPARTMENT OF THE INTERIOR,

OFFICE OF THE SECRETARY, Washington, D. C., September 27, 1957.

Hon. JOSEPH CAMPBELL,
Comptroller General of the United States,

Washington, D. C.

DEAR MR. CAMPBELL: This is in response to a letter of August 13, 1957 (reference B-118601), signed by Assistant Comptroller General Weitzel, concerning the allowance for interest on advance payments under two contracts for the sale of timber on the Quinault Indian Reservation. The last paragraph of the letter reads in part:

"We must conclude, in view of the foregoing, that the assessment against the Indians of interest on advance payments not contemplated in the original contract may not subsequently be included under the authority of article 10 of the contracts. Please advise us of the steps you intend taking in order to rectify the situation." It appears that the appropriate step will be to make a demand upon the purchasers for payment in the amount determined to be due. If this action is not taken, the affected Indians will apparently have ample grounds for a claim against the Government.

The required payments may be in the neighborhood of $200,000. With such large amounts involved, the purchasers will do no less than call for a full explanation. Very possibly litigation may ensue. In that event the Government's position will be based largely on the views expressed by your Office.

In the circumstances, it appears very desirable that a conference be arranged between representatives of your Office and of this Department, to make certain that there is a mutual understanding of the circumstances which led to the so-called assessment against the Indians. It will also provide the opportunity for us to obtain a clearer understanding of your position on some of the points made in your letter. This understanding and clarification are necessary if we are to make prompt and appropriate answers to questions that will undoubtedly be raised by the purchasers.

It is suggested, if you concur, that the conference be arranged for some convenient time subsequent to October 7, when personnel of the Bureau of Indian Affairs, who should attend, will have returned from a field trip.

Sincerely yours,

D. OTIS BEASLEY, Administrative Assistant Secretary of the Interior.