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SNF Holding Co. v. Dep’t of Citywide Administrative Services
OATH Index No. 1612/06, mem. dec. (Sept. 14, 2006)
Petitioners entered into a contract with respondent to supply chemicals used in water treatment. Petitioners sought a change in the price adjustment mechanism for these chemicals and accompanying additional compensation. Board denied petitioners’ claim on the ground that there was no basis for changing the pricing index.
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NEW YORK CITY OFFICE OF
ADMINISTRATIVE TRIALS AND HEARINGS
CONTRACT DISPUTE RESOLUTION BOARD
In the Matter of
SNF HOLDING COMPANY, CHEMTALL INCORPORATED, and POLYDYNE INC.
Petitioners
- against -
DEPARTMENT OF CITYWIDE ADMINISTRATIVE SERVICES
Respondent
MEMORANDUM DECISION
KARA J. MILLER, Administrative Law Judge / Chair
KENNETH JOCKERS, Deputy Counsel, Mayor’s Office of Contracts
ROBERT RUBINSTEIN, Prequalified Panel Member
Pending before the Contract Dispute Resolution Board (“the Board”) is the petition of SNF Holding Company, Chemtall Incorporated and Polydyne, Inc. (“petitioners”) against the Department of Citywide Administrative Services (“DCAS,” “respondent”). The petitioners seek a price adjustment for chemicals supplied to DCAS. For the reasons set forth below, the Board denies petitioners’ claim.
BACKGROUND
On or about July 2003, petitioners entered into a three-year contract (Contract No. 20040002672) to supply respondent with chemicals to treat waste water. The contract provided that the price would be adjusted in August 2003, 2004 and 2005, according to an index maintained by the Department of Labor, product code #2899 57, "Chemicals & Chemical Preparation, NEC - Other Water Treating Compounds" (“the contract index”).
The contract index was discontinued by the Department of Labor in January 2004 (Pet. at 4). In a letter dated August 26, 2004, respondent notified petitioners that the price would be adjusted by 2.4% pursuant to product code #325998325998A, "Other Miscellaneous Chemicals - Water Treating Compounds" (“the superseding index”), which the Department of Labor selected to replace the contract index (Pet. Ex. F). It is undisputed that the superseding index is similar to the original contract index and tracks at least eighty percent of the same components. The Department of Labor classifies the superseding index, not as a replacement index, but as a “continuous” index (Resp. Ex. A).
On October 18, 2004, petitioners notified the Department of Environmental Protection ("DEP") in writing that they objected to the use of the superseding index on the grounds that none of the raw materials that they used were tracked by this index (Pet. Ex. F). Petitioners argued that product code #325211325211, "Plastic Material and Resins Manufacturing" (“the polymer index”) should be used instead because this index contains components petitioners used in the product supplied to respondent. Petitioners maintained that the polymer index is a more appropriate pricing index because it contains four of the forty elements petitioners use to create the product supplied under the contract whereas both the contract index and the superseding index contain none of these components. Petitioners asserted that they had verbally objected to the use of the contract index during the pre-bid meeting for the contract and suggested that the polymer index be used instead. Petitioners contended that they were told by a person they identified as the contract buyer that the index would be changed (Pet. Ex. H). Nevertheless, no such change was made to the final written contract and petitioners signed the contract even though it incorporated the contract index as the source of the pricing adjustment.
In a letter dated December 10, 2004, petitioners notified the Office of the Comptroller that they were disputing the use of the superseding index to establish the pricing schedule for the second and third years of the contract (Pet. Ex. F). On January 19, 2005, the Comptroller notified petitioners that pursuant to its contract and the rules of the Procurement Policy Board ("PPB"), they must file their Notice of Dispute with the agency head (Pet. Ex. F). Petitioners filed a Notice of Dispute with Commissioner Martha Hirst of DCAS on January 31, 2005, requesting that respondent apply the polymer index to the contract (Pet. Ex. F).
Following a meeting between petitioners and respondent on March 18, 2005, respondent notified petitioners in writing on June 13, 2005, that "although the City is under no legal obligation to change the index specified in the bid documents," it was amending the contract to use the polymer index starting August 2005 (Pet. Ex. F). This decision changed the pricing structure for 2005, the last year of the contract, but the pricing for 2004 remained pegged to the Department of Labor’s superseding index.
Petitioners filed a Notice of Dispute with the Comptroller on July 6, 2005 disputing the use of the superseding index for the second year of the contract (Pet. Ex. F). Following an agreed-upon extension of time and a meeting with petitioners, the Comptroller issued a determination on December 13, 2005, settling the matter and determining that petitioners were entitled to an 11.3% retroactive increase in accordance with the polymer index for product supplied from August 1, 2004 to July 31, 2005, the second year of the contract (Pet. Ex. E).
On March 1, 2006, the Comptroller rescinded its December 13, 2005 determination stating that it was advised by the New York City Law Department that a retroactive price adjustment would be in violation of the PPB Rules and laws relating to public bidding on City contracts. The Comptroller noted that DCAS's decision to grant a prospective product code change for the third year of the contract was not relevant to its determination regarding the second year of the contract (Pet. Ex. A).
The use of the polymer index instead of the superseding index for the 2004 adjustment period would be significant. Under the polymer index, petitioners would have been entitled to an 11.3% price increase whereas there is no increase in price under the superseding index because the change from 2003 to 2004 was less than 1%.[1]
Petitioners filed the instant application with the Board on March 31, 2006, contesting respondent’s decision to apply the superseding index to set the price for the second year of the contract. After the Board granted respondent an extension of time in which to respond, the respondent filed its response with the Board on May 31, 2006. Petitioners filed a reply on July 20, 2006. Oral argument was held on August 2, 2006. The record remained open until August 9, 2006.
ANALYSIS
In its application before the Board, petitioners argue that, when the Department of Labor discontinued the contract index, respondent should have switched to the polymer index instead of adopting the superseding index because the former more accurately reflects the chemical composition of the product supplied to respondent. Petitioners relied upon section 2 305 of the Uniform Commercial Code ("UCC"), which states:
(1) The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time of delivery if
(c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.
U.C.C. § 2-305(1)(c).
Petitioners argue that the discontinuation of the contract index triggered section 2-305 because the price was not set and that a "reasonable price" would be one adjusted pursuant to the polymer index, as this index more accurately reflects the cost of materials used by petitioners for the product supplied to respondent.
Section 2-305, however, is not triggered unless the index fails to set the price of the product. Here, the price of the goods continued to be set by the superseding index and, as there was never a time that the price was not fixed, this section of the UCC is inapplicable. When the DOL stopped publishing the contract index, “Chemicals & Chemical Preparation, NEC – Other Water Treating Compounds”, it was replaced with, “Other Miscellaneous Chemicals – Water Treating Compounds,” the superseding index.
Petitioners concede that these indices are at least eighty percent similar and that the Department of Labor classifies the superseding index as “continuous” with the contract index. These two indices even have the same descriptive label, “Water Treating Compounds”. There was therefore no gap in the contract that would trigger the application of the reasonable price provisions of section 2-305 of the UCC. The change from the contract index to the superseding index was one of name, rather than kind.
Further, while petitioners argue that the polymer index is more appropriate because it tracks the components they use to create the supplied product, both the contract index and the superseding index track the price of a finished product. Petitioners were well aware that a finished compound index was incorporated into the contract when they bid on it. Although petitioners may have preferred that pricing under the contract be adjusted by a different index than the one chosen by respondent, they accepted this index when they agreed to the contract. The fact that respondent agreed to use the polymer index prospectively is of little significance because respondent was not legally obligated to change the index agreed to by contract. The prospective change for the 2005 price adjustment was an accommodation, not an obligation.
Moreover, changing the pricing index for only one City contractor contravenes the competitive bidding process. While respondent agreed to use the polymer index for the 2005 adjustment period, respondent maintained it made this same change for all City contractors under a contract tied to the contract index, not just these petitioners. Changing the pricing index for only one contractor would have given petitioners a better deal than they bargained for, a change which, at the time, was unavailable to other City contractors.
While petitioners may not have agreed that the contract index was the best pricing adjustment mechanism for this contract, they did not take the proper steps to modify that portion of the contract prior to submitting their winning bid. Petitioners knowingly executed the contract specification as offered by respondent. The superseding index continued to set the price under the contract and therefore did not trigger the UCC’s gap-filling provisions. Accordingly, petitioners are bound by the terms of the contract, including the use of the superseding index to peg price adjustments for the product supplied from August 1, 2004 to July 31, 2005.
CONCLUSION
The majority of the Board denies petitioners' claim. Panelist Robert Rubinstein dissents without comment.
KARA J. MILLER
Administrative Law Judge / Chair
September 14, 2006
APPEARANCES:
HUGHES HUBBARD & REED, LLP
Attorneys for Petitioners
BY: VILIA B. HAYES, ESQ.
MICHAEL A. CARDOZO, ESQ.
CORPORATION COUNSEL
Attorney for Respondent
BY: PAMELA A. KOPLIK, ESQ.
[1] Although the index originally reflected a change of 2.4%, the index was later adjusted resulting in a smaller change.