Virgin Islands Department of Human Services, DAB No. 980 (1988)

	    DEPARTMENTAL GRANT APPEALS BOARD

	 Department of Health and Human Services

SUBJECT:  Virgin Islands   DATE:  August 30, 1988 Department of Human
	    Services Docket No. 87-193 Decision No. 980

			DECISION

The Virgin Islands Department of Human Services (Virgin Islands,
appellant) appealed a determination by the Administration on Aging,
Office of Human Development Services (Agency), disallowing $293,058 in
federal financial participation for funds charged to a grant awarded
under Title III-C of the Older Americans Act.  The disallowance is for
payments made under two contracts between the Virgin Islands and a food
service provider, Duvergee, Inc. (Duvergee), for the period September 1,
1986 through March 13, 1987.  The Virgin Islands had appealed an earlier
disallowance concerning the same contracts for the period February 11,
1986 through August 31, 1986, in which the Board upheld the Agency in
full.  Virgin Islands Commission on Aging, DGAB No. 890 (1987), Docket
No. 87-34.

The basis for the disallowance, that Duvergee was not the lowest
responsible bidder, was essentially identical in both cases and the
disallowance for the present appeal incorporated by reference the
disallowance determination in Docket No. 87-34.  In the course of this
appeal, the Virgin Islands clarified that it was both requesting
reconsideration of Decision No. 890 and seeking review of the
disallowance for the later period of time.  The parties submitted briefs
separately on the reconsideration request and the Board denied that
request in a ruling on March 23, 1988.  Board Docket No. 88-4.  As
reflected in Board rules, the accepted standard for considering a
request for reconsideration is narrow:  whether the party making the
request has promptly alleged a clear error of fact or law.  See 45
C.F.R. 16.13.  By contrast, the appellant has been allowed in this
appeal to present any additional arguments or evidence in support of its
position that the disallowance for the second disallowance period should
be overturned.

After considering the new arguments raised in this appeal, we have again
decided to uphold the Agency.  We have first rejected an argument of the
Agency that the appellant is precluded under the doctrine of collateral
estoppel from challenging any issue that was considered in the earlier
appeal.  Nevertheless, after considering the appellant's arguments as to
the merits of the disallowance, we have concluded:  Duvergee was not the
lowest bidder since the local preferred bidders statute could not
preempt federal regulations; the Agency was correct in finding that the
sanitary conditions of Duvergee's kitchen facility on the island of St.
Thomas were so poor that, with no evidence to the contrary, Duvergee
could not be said to be responsible during the period of this
disallowance; and Duvergee breached the contracts by its poor
performance and appellant should not have made payments to it.  We
therefore sustain the disallowance.  We do, however, give the Virgin
Islands an opportunity to show the Agency that Duvergee had entirely
separate kitchen facilities on St. Croix which were unaffected by the
conditions on St. Thomas, and thereby reduce the amount of the
disallowance on the contract payments on St. Croix.

I.  Factual and Procedural Background

The factual background of the disallowance actions was not in dispute.
Under Title III-C of the Older Americans Act, the Virgin Islands
received grant funds from the Agency, starting in 1983, to provide meals
for the elderly.  The Virgin Islands published a request for proposals
to obtain bids from catering service companies for furnishing meals for
the fiscal year (FY) 1984.  Duvergee was awarded the contract to provide
services on the islands of St. Thomas and St. John, and Marriott
In-Flite Services (Marriott) was awarded the contract for St. Croix.
These contracts were extended through FY 1985.

For FY 1986, the Virgin Islands again solicited bids to continue the
food services program.  Both Duvergee and Marriott made bids to provide
services on St. Croix, and Duvergee and Hughsons, Ltd. (Hughsons) made
bids for the island of St. Thomas.  Agency's Ex. R-1 in Docket No.
87-34.   Since both Marriott and Hughsons made lower bids than Duvergee,
they were awarded the contracts for FY 1986.

On January 10, 1986, Duvergee filed suit in the Territorial Court of the
Virgin Islands to set aside the contract awards to Marriott and Hughsons
on the grounds that Duvergee was a local company, while its competitors
were not, and that Duvergee should be accorded preferential treatment
under a Virgin Islands "preferred bidders" statute designed to promote
local entities in the awarding of government contracts.  Appellant's Ex.
B in Docket No. 87-34.  The effect of the preferred bidders statute
would be to add 15 percent to the per meal bid of Duvergee's
competitors, enough to qualify Duvergee as the lowest bidder for FY
1986.  The Virgin Islands, represented by its Attorney General's Office,
opposed Duvergee's suit on the bases that the funds in dispute were
federal funds; that the preferred bidders statute did not apply to
federal procurement; and that Duvergee did not have the best sanitary
conditions of the bidders, so that Duvergee should have been denied the
bid for this reason.

The Territorial Court, in a decision on January 30, 1986, agreed with
Duvergee that the company was entitled to the benefit of the preferred
bidders statute.  Appellant's Ex. C in Docket No. 87-34 (the Court's
transcript of proceedings in the trial court action), pp. 295-298.  The
Court also found on the basis of the testimony presented that Duvergee
was the most responsible bidder, and therefore issued a permanent
injunction against awarding the contracts to Duvergee's competitors and
ordered that the contracts should be awarded to Duvergee, effective for
one year beginning on February 11, 1986.  Id., pp. 300-304.  The Virgin
Islands appealed this decision to the Appellate Division of the Virgin
Islands District Court.  The Virgin Islands had not informed us of a
disposition of this appeal by the date of our decision here.

On February 3, 1987, the federal Commissioner on Aging issued a
disallowance for the funds involved in the contract awarded to Duvergee
for the period February 11, 1986 (the date the contract with Duvergee
for St. Thomas went into effect) through August 31, 1986.  The Virgin
Islands appealed that disallowance to the Board in Docket No. 87-34.  In
its briefs to the Board, the Virgin Islands admitted that the preferred
bidders statute should not have been applied when federal funds were
concerned, that Duvergee was not the most responsible bidder, and that
Duvergee should not have been awarded the contracts.  The Virgin Islands
argued that the Board should nonetheless reverse the disallowance since
the territory had no choice but to comply with the order of its
Territorial Court.  The Virgin Islands also argued that the federal
government had an obligation to intervene in the Territorial Court
action if it intended to disallow the funds in question.

The Board in Decision No. 890 concluded that it had no choice but to
uphold the disallowance.  The appellant had in effect admitted the
merits of the Agency's disallowance determination, and the Board found,
as argued by the Agency in that case, that the Board was not legally
bound by the decision of the Territorial Court.  We also saw no merit in
the appellant's argument that the Agency had some obligation to
intervene in the local court proceeding; on the contrary, if there were
any obligation regarding intervention, the Virgin Islands should itself
have requested the intervention of the federal Agency in the court
action.  DGAB No. 890, p. 2.

In the present appeal before the Board, by contrast, the Virgin Islands
contested the merits of the Agency's position.  It took the position
that, while it still ultimately contested the decision of the
Territorial Court, the Agency was obligated to defer to the reasoning of
that decision, since it concerned purely local matters, i.e., the
applicability of the preferred bidders statute and whether Duvergee was
a responsible bidder.

II.      Whether the appellant's arguments are precluded under the
doctrine of collateral estoppel

The doctrine of collateral estoppel provides that, once a tribunal has
decided an issue of fact or law that is essential to a final judgment,
that issue may not be relitigated by the same party in a later
proceeding.  The Agency argued here that two matters which were decided
by Decision No. 890 may not be raised again by the Virgin Islands in
this proceeding:  whether the Agency must defer to the judgment of the
Territorial Court as to the awarding of a bid under the Virgin Islands'
preferred bidders statute, and whether Duvergee was a responsible
bidder.  The parties in their briefs agreed as to the elements of
collateral estoppel and also agreed, based on applicable authority, that
the doctrine should apply in administrative settings as well as in court
proceedings.

Four criteria must be met in order for the doctrine of collateral
estoppel to apply:

	(1)   [T]he issue sought to be precluded must be the   same as
	that involved in the prior litigation;

	(2)   [T]hat issue must have been actually litigated;

	(3)   [I]t must have been determined by a valid and final
	judgment; and

	(4)   [T]he determination must have been essential to  the prior
	judgment.

Haize v. Hanover Insurance Co., 536 F.2d 576, 579 (3d Cir. 1976), quoted
in Agency's Brief, p. 8.

The Virgin Islands argued essentially that the second prong of the test
in Haize was not met here, i.e., whether the legal and factual issues
now under dispute were actually litigated in the prior proceeding.
Appellant's Reply Brief, pp. 3-7.  As to the legal issue considered in
Decision No. 890 (the significance of the Territorial Court order on the
federal determination), the Virgin Islands contended that this matter
was not actually litigated in the prior proceeding since the Board
explicitly based its decision there on an admission by the Virgin
Islands that the federal Agency was not legally bound by any such
determination, and the Virgin Islands made no other argument as to why
we should reverse the Agency's determination.  In this proceeding, by
contrast, the Virgin Islands argued that, while the federal government
may not be legally bound by the Territorial Court order, it nonetheless
is obligated to defer to the reasoning of that decision on matters of
purely local law unless it finds such a decision to be clearly
erroneous.

Regarding the collateral estoppel effect of the factual issue considered
in Decision No. 890 (whether Duvergee was a responsible bidder), the
Virgin Islands argued again that this issue was not actually litigated
in the prior proceeding since the Virgin Islands admitted in that
proceeding that the federal government was not bound by the Territorial
Court order.  Furthermore, the Virgin Islands observed that the issue of
whether Duvergee was a responsible bidder was not the same issue as that
considered in the first appeal, since the disallowance under dispute
here involved a later period of time.

We agree with the Virgin Islands that a party should not be precluded in
a later proceeding before this Board from raising the same issue as
considered in a prior proceeding when the explicit basis for the
decision in the prior proceeding was an admission by the party.  Both
the First and Second Restatements of Judgments, as well as at least one
federal court of appeals, adopt the view that a matter has not been
litigated for purposes of collateral estoppel if the matter was admitted
or stipulated to in the prior proceeding.  Restatement (First) of
Judgments (1942), section 68, comments f and g; Restatement (Second) of
Judgments (1980), section 27, comment e; Otherson v. Department of
Justice, 711 F.2d 267, 274-275 (D.C. Cir. 1983).

As to the factual issue of whether Duvergee was a responsible bidder,
appellant did not dispute the Agency's finding on the factual issue in
the prior Board proceeding, and thus one cannot properly say that the
matter was "litigated."  Indeed, as we noted in Decision No. 890, the
appellant in that appeal never actually discussed the issue of whether
Duvergee was a "responsible bidder," but instead adopted the position it
took before the Territorial Court that Duvergee was not the "most
responsible bidder."  DGAB No. 890, p. 3 (emphasis added). In any event,
regardless of the prior proceeding, the present appeal presents the
entirely new factual question of whether Duvergee was a responsible
bidder for the period of the later disallowance, and for that reason
alone appellant would not be estopped from presenting arguments on the
issue before the Board in this appeal.

III.     Whether Duvergee was the lowest bidder

The appellant invited bids for the food contracts by competitive bidding
as required by the Older Americans Act.  The Agency based the
disallowances on Department procurement regulations.  Appendix G of 45
C.F.R. Part 74  (hereinafter cited as Appendix G, made applicable to the
Older Americans Programs by 45 C.F.R. 1321.5), provides at section
11.b.:

     In competitive sealed bids (formal advertising), sealed bids are
     publicly solicited and a firm-fixed-price contract (lump sum or
     unit price) is awarded to the responsible bidder whose bid,
     conforming with all the material terms and conditions of the
     invitation for bids, is lowest in price.

Furthermore, section 10.a. of Appendix G provides, "All procurement
transactions . . . shall be conducted in a manner that provides maximum
open and free competition consistent with this attachment."

Although Appendix G makes no particular reference to local preferred
bidder rules, it does refer generally to the issue of whether state and
local laws governing procurement practices are applicable:

     Grantees shall use their own procurement procedures which reflect
     applicable State and local laws and regulations, provided that
     procurements for Federal Assistance Programs conform to the
     standards set forth in this attachment and applicable Federal law.

Appendix G, section 2.b.  The Agency found here that the Virgin Islands
preferred bidder statute, Title 31, Chapter 23, Virgin Islands Code,
section 236(a), was directly in conflict with the federal rule that a
grantee may award a bid only to the responsible bidder whose bid is
lowest in price.  The Agency also cited a section of the Virgin Islands
Code itself, which states that "[n]o provision of this chapter [which
includes the preferred bidders law] shall apply where Federal funds are
involved. . . ."  Title 31, Chapter 23, Virgin Islands Code, section
249(b).

The Virgin Islands argued that the federal Agency was obligated to defer
to the ruling of the Territorial Court on the issue of the applicability
of the preferred bidders statute, since this was a matter of "local law"
which may be ignored only when it is found to be "inescapably wrong."
Gumataotao v. Government of Guam, 322 F.2d 580, 582 (9th Cir. 1963),
quoting Bonet v. Texas Co. (P.R.), Inc., 308 U.S. 463, 471 (1940).

The federal rules cited specifically provide for a competitive process
in the awarding of bids, and both the federal rules and Virgin Islands
law allow for the use of local procurement rules only when they are not
in conflict with the federal rules.  It is difficult to imagine a
situation in which local practice might be more contrary to the clear
directive of the federal rules than it is here.  The local rule here
conflicts with the concept of free and open competition and results in
the award of a contract to a party which is not the lowest bidder in
fact.

Further, we do not agree that the question involved here was a matter of
"purely local law."  The law that was primarily being interpreted here
consisted of federal regulations.  While the determination of whether a
preferred bidders statute should be applied may have involved some
understanding of how the local statute operated, the ultimate question
was whether federal regulation permitted its applicability in the
circumstances here.  The Territorial Court ruling itself recognized the
importance of interpreting federal regulations.  Appellant's Ex. C in
Docket No. 87-34, pp. 296-297.  Thus, appellant's reliance on the
Gumataotao and Bonet cases, which did involve matters of purely local
law, is misplaced.

We also do not find availing the Virgin Islands' argument that the
process by which the contracts were awarded to Duvergee was indeed
"competitive" within the purpose of the federal regulations.  The Virgin
Islands argued here that the Agency had "mechanically" applied the
federal regulations, and that, when all of the federal rules were
considered in light of how the bidding process worked in the Virgin
Islands, the Board should conclude that the disallowances were improper.
Appellant's Opening Brief, pp. 16-17.

The appellant pointed to the language in section 11.b.(2)(d) of Appendix
G, which provides that a contract must be awarded to the lowest
responsible bidder, whose bid ". . . conform[s] to the invitation for
bids. . . ."  See Appellant's Opening Brief, pp. 17-18.  The Virgin
Islands appeared to argue here that a determination of whether the bids
conformed to the invitation for bids would require a consideration of
whether a bidder was entitled to the 15 percent preference under local
law.  The clear purpose of this provision, however, is that the bidder
meet any substantive requirements that may be necessary to fulfill the
contract.  In this light, we fail to see how the bids of Duvergee's
competitors could be construed as not in "conformity" with the
invitation for bids because they did not incorporate the 15 percent
increase in the amount of their bids.

The Virgin Islands also cited section 10.b.(2) of Appendix G which
provides that:

     Awards shall be made only to responsible contractors that possess
     the potential ability to perform successfully under the terms and
     conditions of a proposed procurement.  Consideration shall be given
     to such matters as contractor integrity, compliance with public
     policy, record of past performance, and financial and technical
     resources.

While this regulation may give recognition to matters of local public
policy, the first sentence of the provision clearly indicates that it
requires consideration of public policy only in the context of
determining whether a bidder was a responsible bidder, and would be able
to "perform successfully" under the proposed contract.  The regulation
does not provide that matters of local public policy should override an
ultimate determination of who is the lowest responsible bidder.

The Virgin Islands also argued that once the Territorial Court made the
decision that the contracts should be awarded to Duvergee, the territory
in effect had no choice but to comply with this decision in order to
ensure the continued operation of the program.  Appellant's Brief, p.
19.  The appellant cited section 11.b.(2)(e) of Appendix G, which
provides that "[a]ny or all bids may be rejected when there are sound
documented business reasons in the best interest of the program."  The
appellant maintained that the continued operation of the program in the
context here was a "business reason" to award the contracts to Duvergee.

This argument in our view stands things on their head.  Allowing such
matters to be considered valid "business reasons" for awarding a
contract would in many cases make the federal government prey to
internal disputes that might cause a state or territory to award a
contract to a particular bidder.  By interpreting this provision of
Appendix G in such a manner, the Virgin Islands would have us in effect
subvert other requirements of the federal rules designed to ensure the
fairness and efficiency of the bidding process.  The unreasonableness of
this interpretation is readily apparent in the case at hand, since it
would dictate a result that would directly conflict with the rules
requiring an open competitive bidding process.

In sum, we find that Duvergee was not the lowest bidder; there were
other lower bids; the preferred bidders statute could not be applied to
change the standing of the bidders; and the contracts should not have
been awarded to Duvergee.  The order of the Territorial Court to the
contrary is not binding on the Agency or this Board.  The next issue is
whether Duvergee was a "responsible" bidder.

IV.  Whether Duvergee was a responsible bidder

As already noted, the regulations require that the award be to the low
"responsible" bidder.  45 C.F.R. Part 74, Appendix G, section 11.b.
"Responsibility," in a procurement context, is a long-used term meaning
essentially that a contractor is qualified and competent to perform a
particular contract.  Responsibility determinations consider factors
such as history of satisfactory performance and integrity, skills,
production capability and resources to perform the job in question.  See
R.C. Nash, J. Cibinic, Federal Procurement Law, Vol. 1, pp. 181-82.

Our Order to Develop the Record raised the question whether Duvergee was
a responsible bidder when the contracts were awarded.  The Agency's
determination that Duvergee was not a responsible bidder was based on a
finding that Duvergee's "sanitation standards" were not satisfactory.
February 3, 1987 disallowance determination, p. 2.  The Agency
introduced into the record three documents which it relied upon in
making this finding.  The first two dated from August and September
1984.

The third document was a May 23, 1986 inspection report from the U.S.
Food and Drug Administration which detailed numerous deficiencies and
recommended that the company's classification be "non-approved."
Agency's Ex. R-3 in Docket No. 87-34.

The appellant argued that the Agency's determination that Duvergee was
not a responsible bidder was incorrect for the following reasons:  the
Agency examined services only on the island of St. Thomas, and
Duvergee's contract in 1986 and 1987 also included the island of St.
Croix; it did not consider the conclusions of and evidence presented to
the Territorial Court; and it was based on "insufficient and outdated
facts."  Appellant's Opening Brief, p. 20.

We agree that St. Croix should be considered separately, as we discuss
below.  We do not need to consider the proceedings before the
Territorial Court in January 1986 because they applied to conditions
before the May 1986 report.  We also do not consider the 1984 reports
which appellant claimed were outdated.

As we indicated in our Order, the evidence impugning Duvergee's
performance and capabilities shortly before the second disallowance
period began could -- and did -- reasonably lead the Agency to refuse to
participate in the contract costs thereafter, irrespective of the
accuracy of the "responsibility" label.  Therefore, it was not necessary
for us to make any finding whether Duvergee was a responsible bidder
when the contracts to it were awarded.

	A.  The May 1986 report

On May 23, 1986 the local office of the Food and Drug Administration
(FDA) conducted an inspection of the Duvergee facilities in St. Thomas.
The report noted 15 separate deficiencies, including live insects and a
cockroach inside food packages, inadequate handwashing facilities, and
toilet facilities not accessible to employees.  The investigator
concluded that "since 5 out of seven critical items were checked the
classification should be the lowest (non-approved)."  Respondent's
Exhibit R-3.  (In Board Docket No. 87-34)

Appellant never made any attempt to refute these findings.  It did not
allege that the report was incorrect, nor did it present affidavits or
any other evidence to demonstrate that the FDA findings were wrong.

	B.  Inferences from the May 1986 report

Appellant also never presented any affidavits or other evidence to show
that the deficiencies found in the May 1986 report were corrected during
the disallowance period.

However, appellant argued that there was no evidence pertaining to the
sanitary conditions during the time period covered in this appeal, which
is after the May 1986 inspection.  "At most," said appellant, "the
report from May 1986, indicates there were deficiencies for a reasonable
time around that date."  Appellant's brief, p. 22.  Appellant concluded
therefore, that the report "is not proof that those deficiencies always
existed or that they were never corrected."  Id.

Appellant's Memorandum in reply to the Board's Order to Develop the
Record repeats the same theme, that the May report showed deficiencies
for only a reasonable period of time after the inspection, that the
conditions could have been corrected later, and respondent must show
they were not.

     While the May report revealed deficiencies which were in existence
     during the time of the FDA inspection, no evidence has been offered
     to show that the deficiencies continued throughout the period
     affected by the disallowance . . .  The scope of the May 1986
     report must be limited to a reasonable period around that date . .
     . Respondent's inability to build an evidentiary record must lead
     the Board to conclude that respondent's data was completely
     inadequate to justify the disallowance.

pp. 4-5.

The obvious answer to appellant's contention is that there is no reason
to assume, in the absence of evidence to the contrary, that the
conditions found in May 1986 did not continue until the end of the
disallowance period in February 1987.  Moreover, it was appellant which
administered the nutrition program.  It either supervised the
performance under the contract, or should have.  It would be the one to
have any evidence available to show that Duvergee corrected the
conditions found in May 1986.  Under these circumstances it is
reasonable to place the burden of going forward to show that conditions
improved after the May 1986 inspection on the appellant, rather than on
the respondent to show that they did not.

There is, moreover, one element which appellant overlooked which shows
that even the Territorial Court, hardly hostile to Duvergee, was
impressed with the deplorable sanitary conditions of Duvergee in 1986.
Appellant in its brief in Board Docket No. 87-34 referred to a
significant fact:

	   It should be stated that in January and February of 1987 the
	   [Territorial] court again considered the bid award for the
	   food for the senior citizens under this contract, and taking
	   into consideration the sanitary conditions of Duvergee as
	   cited by the Federal Government during the 1986 performance,
	   the court made a determination to award the contract to other
	   bidders and not to Duvergee.

p. 11 (emphasis supplied).

Appellant did not tell us in this case that the same Territorial Court
which had ordered the 1986 contracts awarded to Duvergee when it found
Duvergee the "most responsible bidder" refused to award the contracts to
Duvergee for 1987, based on the sanitary conditions during 1986.  This
alone should be enough to establish that appellant should not have paid
Duvergee after May 1986 and appellant should not receive FFP in those
payments.

	C.  Failure of Duvergee to perform satisfactorily under the
	contract

As we noted above, appellant substantially conceded that Duvergee was
not "responsible" for a "reasonable period" around the date of the May
1986 inspection.  We have pointed out that it was the duty of the
appellant, and not the respondent, to prove, if it could, that the
reported conditions did not continue on until the end of the 1986
contracts.

Appellant had the opportunity throughout this appeal to present any
evidence it might have to show that during the period of the
disallowance in the appeal before us Duvergee did in fact correct the
conditions found in the 1986 inspection, and so became and remained
"responsible" from September 1986 to March 1987 and entitled to payments
under the contracts.  Nothing has been offered.

Under these circumstances we need go no further into the technical
question of whether Duvergee was a responsible bidder when the
Territorial Court ordered appellant to award it the contracts in 1986.
It clearly was not responsible in May of 1986, and in the absence of any
proof to the contrary, it continued to be not responsible until the
Territorial Court ordered the 1987 contracts given to someone else.

In addition, the deplorable sanitary conditions were clearly a breach of
the contract provisions.  See Invitation for Bids, Agency Exhibit R-1,
p. 13, 14.  Appellant knew of the May 1986 report.  If appellant did not
know otherwise, it certainly learned of it when the New York Regional
Office requested a copy from FDA and sent appellant's Commissioner a
copy of the letter on June 4, 1986.  Agency Exhibit R-2.  It was
therefore appellant's duty to take steps to terminate the contract and
stop making payments to Duvergee under it.

In our Order to Develop the Record we asked appellant why it did not
take any action to terminate the contract for cause, if it knew of the
unsanitary conditions.  In its reply appellant offered the weak excuse
that it sought instead to take the contract away from Duvergee by
appealing the Territorial Court order which originally awarded the
contract to Duvergee.  The sanitary conditions, however, constituted an
immediate crisis.  Appellant should have at once notified Duvergee of
its intention to terminate the contract for a substantial breach, and
immediately have stopped payments on the contract.

We alluded in our Order to the possibility of the injunction of the
Territorial Court barring such action, and asked why appellant did not
take any steps to modify or vacate the injunction to permit appellant to
terminate the contract.   Appellant did not give a satisfactory reply.
It appears that the Court probably would have permitted such
termination, since when the poor sanitary conditions were brought to its
attention it did give the next year's contract to someone else.  In any
case, it was appellant's duty to take any required steps and it did not.

Therefore, whether it was because Duvergee was not a responsible party
to the contract from September 1986 to March 1987 (in the absence of any
evidence furnished by appellant to the contrary), or whether the May
1986 report constituted clear grounds for termination of the contract,
respondent should not have to share in any payments made to Duvergee for
the St. Thomas contract after May 1986.

IV.  The St. Croix Contract

Appellant argued that even if there is cause to disallow payments under
the Duvergee contract on the island of St. Thomas, there is no reason to
disallow payments for meals furnished on the separate island of St.
Croix.  The Board referred to this issue in the Order to Develop the
Record, when we pointed out that the May 1986 FDA findings did not cover
St. Croix, and the facilities and personnel there presumably were
different from those found deficient on St. Thomas.

Neither party's answer was of much assistance to the Board.  Respondent
replied as follows:

	 In addition, there is no evidence in the record that Duvergee
	 maintained any other kitchen facility during the contract term.
	 It therefore follows that there can be no presumption that the
	 underlying relevant facts on St. Croix were any different from
	 those on St. Thomas.

	 Thus, in the absence of any contradictory evidence, it must be
	 concluded that the portion of the disallowance allocable to St.
	 Croix is not severable, as the cited deficiencies refer to the
	 Duvergee kitchen and not to a particular delivery site. . . .

p. 7.

Appellant's reply to the Order to Develop the Record said that the May
1986 FDA report did not refer to Duvergee's operation on St. Croix, and
no other evidence had been submitted to indicate that respondent
possessed any data at all pertaining to Duvergee's contract on St.
Croix.  Appellant then referred us to its original brief in this appeal.

In this brief appellant left us with a factual question, by stating not
only that the contracts were separate, but that "the facilities were
separate."  p. 21.  If in fact Duvergee had a separate kitchen facility
on St. Croix where food was prepared on that island, then the issue on
St. Croix is truly different from that on St. Thomas.  If there was but
one kitchen facility, then the May 1986 report would obviously apply
also to conditions pertaining to the St. Croix contract.  On the other
hand, as we implied in our Order to Develop the Record, if Duvergee ran
the two contracts completely separately, with separate kitchen
facilities and equipment on each island, then there was no basis to
refuse any FFP for payments on the St. Croix contract.

Whatever may be appellant's burden of proving its entitlement to FFP, it
does not automatically have the burden of proving in advance every fact
that may possibly raise an issue.  Appellant did in its opening brief
raise the issue of separate facilities on St. Croix.  The Agency did not
initially challenge appellant's allegation but simply contradicted it in
response to our order.  Neither party saw fit to offer any evidence on
this issue.  We have determined that, under the circumstances, appellant
should not be foreclosed from now being allowed a last opportunity to
prove that the meals were prepared in separate kitchen facilities. We
will therefore sustain the disallowance on St. Croix, as well as on St.
Thomas, but with the opportunity for appellant to submit to the Agency,
within 30 days of receipt of this decision, evidence showing that the
Duvergee kitchen facilities on St. Croix were entirely distinct from
those on St. Thomas.  If they were, then appellant should not be
penalized by a disallowance of all FFP.  If there has been no evidence
to show that on St. Croix Duvergee was not a responsible bidder, or not
a responsible party in performing the contract, even though it was not
the lowest bidder, then appellant should be held to account for only the
difference between the Duvergee bid for St. Croix and the amount of the
lowest bid.

While the procurement regulations require award to the lowest
responsible bidder, they are silent on what the amount of the
disallowance should be for a grantee who does not comply.  Ordinarily,
and in the absence of evidence of pernicious intent to violate the
principle of award to the lowest bidder, it is only common sense--as
well as fair--that if the contractor who was not the lowest bidder
complied with all the contract requirements and furnished suitable meals
to the elderly on St. Croix, the Virgin Islands should not be deprived
of all FFP in the contract payments.  Appellant should not have to
suffer any greater loss than the Agency did, namely, paying more than
the low bid price.  This is in line with the cost principles in Office
of Management and Budget Circular A-87, which require in Attachment A at
par. C.1.a. that to be allowable under a grant program, costs must be
necessary and reasonable for proper and efficient administration of the
grant programs.  The price which would have been paid to the low bidder
was necessary and reasonable for furnishing meals on St. Croix.  The
amount over this, the difference between this amount and the amount
actually paid Duvergee, was not necessary or reasonable.  The Agency
should not have to share in it.

In South Carolina Department of Social Services, DGAB No. 256 (1982),
cited in Decision No. 890, an agency of the Department of Health and
Human Services recognized this principle when it approved a contract
awarded to a higher bidder without the required prior agency approval,
but allowed the contract costs only in the amount of the lower offer.

Conclusion

For the reasons stated above, we conclude as follows:

(1)  We uphold in full the part of the disallowance attributable to the
St. Thomas contract.

(2)  Concerning the part of the disallowance attributable to the St.
Croix contract, we --

     (a)  uphold the part of the disallowance for the difference between
     the amount paid Duvergee and the amount of the low bid; and

     (b)  uphold provisionally the remainder of the disallowance,
     subject to an opportunity for appellant to submit evidence that the
     kitchen facilities on St. Croix were entirely separate from those
     on St. Thomas and that the meals on St. Croix were not prepared in
     the St. Thomas kitchen.  Appellant should submit any such evidence
     to the Agency within  30 days after receiving this decision (or
     such longer time as the Agency allows).  If appellant submits no
     evidence within the specified time, the disallowance is upheld in
     full without further action by the Board.  If appellant submits
     such evidence, the Agency should review it and respond in writing.
     The Agency should also advise the appellant in writing of any
     revision in the amount of the disallowance and how it was
     calculated.

(3)  If the appellant disputes the Agency's response to evidence
submitted on the St. Croix contract, or disputes any recalculation of
the disallowance amount, the appellant may appeal those determinations
(only) to the Board within 30 days after receipt of the Agency's
submission.

	________________________________ Judith A. Ballard

	________________________________ Norval D. (John) Settle

	________________________________ Alexander G. Teitz Presiding
	Board