date of the Final Judgment and the apparatus to be manufactured thereunder presently employs no invention of a Western patent issued subsequent to the date of the Final Judgment, it appears unlikely that royalties will be payable to the Western Electric Company. No royalties will be payable unless a Western patent covering an invention employed by the licensed apparatus issues before the apparatus has been manufactured.

2. Pursuant to the terms of a license agreement between the International Telephone and Telegraph Corporation and the Radio Corporation of America, effective as of January 1, 1955, Federal Telephone and Radio Company, as a manufacturing division of IT&T, is licensed to sell radio apparatus and accessories therefor. Royalties are payable on sales of said licensed apparatus and accessories provided they employ the invention of any patent under which IT&T is licensed by RCA.

The royalty rate on sales to the United States Government is one per cent of the net selling price of the apparatus. The net selling price differs from the genuine or gross selling price by certain allowable deductions, e.g., all vacuum tube components, antennas, repair parts, packing material, instruction books, drawings, etc.

At the present time it is impossible to say just what royalties, if any, will be payable to the Radio Corporation of America under our agreement with them. Royalties are payable only upon delivery and billing of equipment manufactured under the contract. No deliveries have as yet been made and it is impossible to predict at this time whether or not the equipment when delivered will employ the invention of any unexpired patent under which IT&T is licensed by RCA. A future report will be prepared when all of the equipment specified to be delivered under this contract has been delivered.

On April 21, 1959, ITT Federal advised the contracting officer that no royalties in excess of $250 would be paid to any one licensor under the contract. As required by the contract reporting of royalties clause, ITT Federal certified on that date "that royalties in excess of $250 have not been paid and are not to be paid to any one licensor in connection with the performance of the above identified contract." In view thereof, the contracting officer withheld $11,950.50—approximately 1.75 percent of the contract price for the radio sets delivered-from amounts otherwise due under the contract on the basis that such amount represented an erroneous payment to ITT Federal for a contract cost which had not been incurred in connection with contract performance.

Your company contends that the action taken in withholding the $11,950.50 otherwise due under the subject contract was improper for the following reasons:

1. That the contract was a firm fixed-price contract and that any particular element of cost is not subject to adjustment because of changes in actual cost;

2. That your company was obligated to pay royalties on the date of award and thereafter to March 14, 1956, when advice was first received from Western Electric that the obligation ceased;

3. That there was no mistake of fact or law since the exemption from royalty payments did not arise until March 14, 1956;

4. That there was no misrepresentation concerning the obligation to pay royalties.

We agree that the subject contract was a firm fixed-price agreement and that no deliberate misrepresentation was made respecting royalty payment liability. However, we are of the opinion that the cost of the radio sets was overstated to the extent of royalty costs which ITT Federal was not legally required to pay, and did not pay, on and after January 24, 1956, in connection with performance of the contract. We are of this opinion because the contract was negotiated and executed under the mistaken belief that royalty payments were required to be paid by ITT Federal to Western Electric under existing license agreements which were effectively avoided by the Federal court by its final judgment of January 24, 1956. It is clear from the record before us that the parties conducting the negotiations leading up to the execution of the contract were under the impression that a liability existed to pay royalties. Moreover, it is clear that had the Government, or for that matter ITT Federal, been aware of the final judgment, an item of cost for royalty payments would not have been included as part of the negotiated price of the radio sets. Thus, absent the necessary knowledge of the existing facts respecting royalty payments on the part of both negotiating parties, we are of the view such circumstances constitute a basis for contract reformation. 76 C.J.S., Reformation of Instruments, section 29; Leathem Smith-Putnam Nav. Co. v. Natl. U. F. Ins. Co., 96 F. 2d 923.

The principle of law applicable here is that mistake on one side and misrepresentation on the other side, whether willful or accidental, constitutes a ground for reformation when the party deceived has relied on the misrepresentation of the other party. Restitution may be obtained for misrepresentations of material facts on the premise that it would be unjust to allow one who made the misrepresentation, though innocently, to retain the fruits of a bargain induced, in all or part, by such misrepresentations. See Williston on Contracts, Rev. Ed., sections 1500 and 1509, and the cases therein cited; Restatement, Contracts, section 476, Comment b. In Grand Trunk Western R. Co. v. H. W. Nelson Co., Inc., 116 F. 2d 823, 832, the court stated:

*. A party is guilty of fraud in negotiating a contract when he makes a false representation concerning the subject matter by means of which he puts the opposite party under mistake as to the terms of the bargain and whether a party misrepresenting a material fact knows it to be false or makes the assertion without knowing whether it is true or false is wholly immaterial, for the affirmation of what one does not know or believe to be true is equally in morals and law as unjustifiable as the affirmation of what is known positively to be false and even if a party innocently misrepresents a material fact by mistake, it is equally conclusive for it operates as a surprise and misrepresentation on the other party. * * *

See, also, Van Meter v. Bent Construction Co., 297 P. 2d 644, involving an action by a subcontractor against a general contractor for reformation of a contract, where it was held that even in the absence

of any misrepresentations, negligent failure of a party to know or discover facts as to which both parties are under mistake does not preclude reformation because of such mistake. The court stated on page 648: "There is even more reason for not barring a plaintiff from equitable relief where negligence is due in part to his reliance in good faith upon the false representations of a defendant, although the statements were not made with the intent to deceive."

The Supreme Court pointed out in the case of United States v. Barlow, 132 U.S. 271, that it would indeed be a mischievous doctrine if actions by public officials based upon guesses only and without regard to the true facts could preclude the Government from recovering its money paid for items not required or employed in performing the contract in question. The court also referred to the rule of law that where money is paid to another under the influence of a mistake, that is, upon the supposition that a specific fact is true, and the money would not have been paid if it had been known to the payer that the fact was untrue, an action will lie to recover it back, and it is against good conscience to retain it. Cf. Kostelac v. United States, 247 F. 2d 723.

The Government was entitled to rely on the representation that royalty payments were a proper item of cost of producing the radio sets not only because it was a matter in which ITT Federal should have had special knowledge but also because the Government could not have reasonably discovered the true facts during the course of negotiations in the absence of some indication that the royalty cost figures were questionable.

In conclusion, we point out that the remedy of contract reformation to correct mutual mistakes has been applied consistently by our Office and the courts in proper cases without regard to whether the contract. be fixed price or otherwise. 20 Comp. Gen. 533; id. 782; 30 id. 220; United States v. Hurwitz, 174 F. Supp. 925; Eastern Freight Ways, Inc. v. United States, 257 F. 2d 703; Held v. United States, 63 Ct. Cl. 392; Pacific Maritime Association v. United States, 125 Ct. Cl. 216. Accordingly, we adhere to the disallowance of December 6, 1960.

[B-145659]

Re-retirement

Re

Military Personnel - Retired Pay serves-Inactive Time-Election Under Section 411 of the Career Compensation Act of 1949

Under section 402 (i) of the Career Compensation Act of 1949, 10 U.S.C. 1215, which extends to all members of the reserve components heretofore retired because of disability the same pay, rights, benefits and privileges provided by law or regulation for retired members of the Regular services, a member of the uniformed services who served in the naval forces prior to November 12, 1918, and who, after placement on the retired list of the Naval Reserve Force by reason of disability, serves on active duty and is re-retired is entitled by virtue

of election made under authority of section 411 of the Career Compensation Act to the benefits of paragraph 4 of section 15 of the Pay Readjustment Act of 1942, 37 U.S.C. 115, and therefore may have inactive time on the retired list credited in the computation of retired pay effective from October 1, 1949, based on rates of pay prescribed in law that were in effect on September 30, 1949, plus all percentage increases.

The holding in Andrews, et al. (Robert S. Raymond, Plaintiff No. 3) v. United States, Ct. Cl. No. 240–58, and Darling v. United States, Ct. Cl. No. 229-58, that members of the uniformed services retired for physical disability prior to October 1, 1949-the date of the Career Compensation Act of 1949-are entitled pursuant to elections made under section 411 of the Career Compensation Act of 1949, 37 U.S.C. 281, to have retired pay computed on the basis of 402 (i) of the Career Compensation Act, 10 U.S.C. 1215, at rate of 75 percent of pay authorized by paragraph 4 of section 15 of the Pay Readjustment Act of 1942, 37 U.S.C. 115, is to be distinguished from the holding in Palmer v. United States, 139 Ct. Cl. 376, that an election under section 411 of the Career Compensation Act by an officer previously retired is not a retirement under the 1949 act and there is no provision of law under which he can have retirement pay based on 75 percent of the rates of the Career Compensation Act.

To Lieutenant Commander E. C. Dodd, Department of the Navy, July 25, 1961:

Your letter of March 9, 1961, and endorsements, presents for decision under Department of Defense Military Pay and Allowance Committee Submission No. DO-N-572, the question whether Lieutenant Claude Chandler, U.S. Naval Reserve, retired (file No. 27318), is entitled to an increase in his retired pay by reason of the provisions of section 402 (i) of the Career Compensation Act of 1949, 63 Stat. 820 (now codified in 10 U.S.C. 1215, 70A Stat. 100).

The specific question presented is whether Lieutenant Chandler is entitled, on the basis of section 402 (i) and the fourth paragraph of section 15 of the Pay Readjustment Act of 1942, 37 U.S.C. 115, to count inactive service on the retired list in computing his retired pay on the base and longevity pay prescribed in the Pay Readjustment Act of 1942 for a lieutenant with over 30 years of service effective October 1, 1949. There is not involved a question of entitlement under those provisions of law to retired pay on the basis of 75 percent of the pay rates prescribed in the Career Compensation Act of 1949.

Lieutenant Chandler served in the naval forces of the United States prior to November 12, 1918, and on August 20, 1920, he was placed on the retired list of the Naval Reserve Force in the rank of lieutenant, junior grade, by reason of physical disability. He remained in an inactive (retired) status until his recall to active duty in 1942. It is stated that upon release from active duty effective August 26, 1945, "he had completed 10 years and 2 months service for basic pay purposes and 21 years 10 months and 6 days inactive service on the retired list, a total of 32 years and 6 days service." It is further stated that in accordance with section 10, act of July 24, 1941, as amended by section 8(a) of the act approved February 21, 1946, 34 U.S.C. 350i (1946 Ed.), the Secretary of the Navy advanced Lieutenant Chandler on the retired list to the grade of lieutenant, the highest temporary

grade and rank in which he served satisfactorily on active duty during World War II, and that in June 1954 Lieutenant Chandler elected under authority of section 411 of the Career Compensation Act of 1949, 63 Stat. 823, 37 U.S.C. 281 (1952 Ed.), to receive retired pay effective from October 1, 1949, as prescribed in method (a) of section 511, that is, monthly retired pay in the amount authorized by the provisions of law which were in effect on September 30, 1949.

There is no doubt that having been retired in 1920 for physical disability, Lieutenant Chandler's retired pay status came squarely within the scope of section 411 of the 1949 law, thus permitting him to elect to qualify for disability retired pay effective from October 1, 1949 (the effective date of the Career Compensation Act of 1949), as prescribed in section 402 (d) of that act, 37 U.S.C. 272(d) (1952 Ed.), or to receive retired pay computed by one of the two methods set forth in section 511 of the act. Lieutenant Chandler elected to receive retired pay under section 511. His retired pay computed under method (a) of that section-75 percent of the active duty pay of a lieutenant with 10 years and 2 months' creditable service based on the rates of active duty pay in effect September 30, 1949-exceeded the amount of retired pay due him when computed on the rates of active duty basic pay prescribed in the 1949 act under method (b) of section 511 (based on years of active service), or disability retired pay as prescribed in section 402(d) of the act computed (1) on years of active service or (2) on the percentage of his disability, which is indicated as rated at 30 percent.

Paragraph 4, section 15 of the Pay Readjustment Act of 1942, 37 U.S.C. 115, provides:

The retired pay of any officer of the Army, Navy, Marine Corps, Coast Guard, Coast and Geodetic Survey, or Public Health Service who served in any capacity as a member of the military or naval forces of the United States prior to November 12, 1918, hereafter retired under any provision of law, shall, unless such officer is entitled to retired pay of a higher grade, be 75 per centum of his active duty pay at the time of his retirement.

Under the "re-retirement" concept which the Court of Claims has applied to the above-quoted statutory provisions (see the Carroll and Danielson decisions, 117 Ct. Cl. 53 (1948), and 121 Ct. Cl. 533 (1952), respectively), an officer of the Regular military or naval forces of the United States who served in any capacity prior to November 12, 1918, and who was retired for disability and later recalled to active duty from an inactive status on the retired list became entitled, upon release ("re-retirement") prior to October 1, 1949, from such period of active duty, to retired pay at the rate of 75 percent of the active duty pay he was receiving on the date of his "re-retirement" thereby receiving credit not only for his active service as a retired officer, but also for the period of his inactive time on the retired list. The provisions of paragraph 4, section 15 of the 1942 law apply only to