Omnia Commercial Co., Inc. v. United States
261 U.S. 502 (1923)

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U.S. Supreme Court

Omnia Commercial Co., Inc. v. United States, 261 U.S. 502 (1923)

Omnia Commercial Company, Inc. v. United States

No. 229

Argued March 1, 1923

Decided April 9, 1923

261 U.S. 502

APPEAL FROM THE COURT OF CLAIMS

Syllabus

1. A valuable contract right is property within the meaning of the Fifth Amendment, and, when taken for public use, must be paid for by the government; but when it is lost or injured as a consequence of lawful governmental action not a taking, the law affords no remedy. P. 261 U. S. 508.

2. When the government, for war purposes, requisitioned the entire production of a steel manufacturer, rendering impossible and unlawful of performance an outstanding contract between the manufacturer and a customer, the customer's rights were not taken by the government, but frustrated by its lawful action. P. 261 U. S. 511.

56 Ct.Clms. 392 affirmed.

Appeal from a judgment of the Court of Claims dismissing a petition on demurrer.

Page 261 U. S. 507

MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

The appellant, on May 19, 19 7, by assignment, became the owner of a contract by which it acquired the right to purchase a large quantity of steel plate from the Allegheny Steel Company, of Pittsburgh, at a price under the market. The contract was of great value, and, if carried out, would have produced large profits.

In October, 1917, before any deliveries had been made, the United States government requisitioned the steel company's entire production of steel plate for the year 1918, and directed that company not to comply with the terms of appellant's contract, declaring that, if an attempt was made to do so, the entire plant of the steel company would be taken over and operated for the public use.

Appellant brought an action in the Court of Claims, alleging, in addition to the foregoing, that, by the orders

Page 261 U. S. 508

of the government, the performance of the contract by the steel company had been rendered unlawful and impossible; that the effect was to take for the public use appellant's right of priority to the steel plate expected to be produced by the steel company, and thereby appropriate for public use appellant's property in the contract. As a result, it alleged that it had incurred losses in a large sum which it sought to recover as just compensation by virtue of Article V of the Constitution. To this petition the United States interposed a demurrer, which was sustained, and the petition dismissed. From this judgment, the case comes here by appeal.

A question is raised as to the statutory authority of the officer who made the order of requisition and gave the directions respecting noncompliance with the contract to bind the government, but, for the purposes of the case, we assume he was authorized, as he could have been under 39 Stat. 1193, c. 180, or 40 Stat. 182, 183, c. 29. We also pass, without deciding, a contention challenging the sufficiency of the complaint, and come to the case on the merits.

The contract in question was property within the meaning of the Fifth Amendment, Long Island Water Supply Co. v. Brooklyn,166 U. S. 685, 166 U. S. 690; Cincinnati v. Louisville & Nashville Ry. Co.,223 U. S. 390, 223 U. S. 400, and, if taken for public use, the government would be liable. But destruction of, or injury to, property is frequently accomplished without a "taking" in the constitutional sense. To prevent the spreading of a fire, property may be destroyed without compensation to the owner, Bowditch v. Boston,101 U. S. 16, 101 U. S. 18, a doctrine perhaps to some extent resting on tradition. Pennsylvania Coal Co., Inc. v. Mahon,260 U. S. 393.

There are many laws and governmental operations which injuriously affect the value of or destroy property -- for example, restrictions upon the height or character of buildings, destruction of diseased

Page 261 U. S. 509

cattle, trees, etc., to prevent contagion -- but for which no remedy is afforded. Contracts in this respect do not differ from other kinds of property. See Calhoun v. Massie,253 U. S. 170, where an act of Congress invalidating contracts made with attorneys for compensation exceeding a certain percentage for the prosecution of claims against the government was sustained although it had the effect of putting an end to an existing contract. This Court said (pp. 253 U. S. 175-176):

"An appropriate exercise by a state of its police power is consistent with the Fourteenth Amendment, although it results in serious depreciation of property values, and the United States may, consistently with the Fifth Amendment, impose, for a permitted purpose, restrictions upon property which produce like results. Lottery Case,188 U. S. 321, 188 U. S. 357; Hipolite Egg Co. v. United States,220 U. S. 45, 220 U. S. 58; Hoke v. United States,227 U. S. 30 , 323; Hamilton v. Kentucky Distilleries & Warehouse Co.,251 U. S. 146. The sovereign right of the government is not less because the property affected happens to be a contract. Louisville & Nashville R. Co. v. Mottley,219 U. S. 467, 219 U. S. 484; Union Dry Goods Co. v. Georgia Public Service Corporation,248 U. S. 372."

In Louisville & Nashville R. Co. v. Mottley,219 U. S. 467, it was held that an act of Congress, prohibiting the issuance of free transportation by interstate common carriers, which invalidated a contract for transportation previously entered into and valid when made, did not have the effect of taking private property without compensation. The Court, speaking through Mr. Justice Harlan, said (p. 219 U. S. 484):

"It is not determinative of the present question that the commerce act as now construed will render the contract of no value for the purposes for which it was made. In Knox v. Lee, 12 Wall. 457, above cited, the Court, referring

Page 261 U. S. 510

to the Fifth Amendment, which forbids the taking of private property for public use without just compensation or due process of law, said:"

"That provision has always been understood as referring only to a direct appropriation, and not to consequential injuries resulting from the exercise of lawful power. It has never been supposed to have any bearing upon or to inhibit laws that indirectly work harm and loss to individuals. A new tariff, an embargo, a draft, or a war, may inevitably bring upon individuals great losses -- may, indeed, render valuable property almost valueless. They may destroy the worth of contracts."

The conclusion to be drawn from these and other cases which might be cited is that, for consequential loss or injury resulting from lawful governmental action, the law affords no remedy. The character of the power exercised is not material. C., B. & Q. Railway v. Drainage Comm'rs,200 U. S. 561, 200 U. S. 583-585, 200 U. S. 592-593. If, under any power, a contract or other property is taken for public use, the government is liable; but, if injured or destroyed by lawful action, without a taking, the government is not liable. What was here requisitioned was the future product of the steel company, and, since this product, in the absence of governmental interference, would have been delivered in fulfillment of the contract, the contention seems to be that the contract was so far identified with it that the taking of the former, ipso facto, took the latter. This, however, is to confound the contract with its subject matter. The essence of every executory contract is the obligation which the law imposes upon the parties to perform it.

"It [the contract] may be defined to be a transaction between two or more persons in which each party comes under an obligation to the other and each reciprocally acquires a right to whatever is promised by the other."

Dartmouth College v. Woodward, 4 Wheat. 629, 17 U. S. 654. Plainly, here, there was

Page 261 U. S. 511

no acquisition of the obligation or the right to enforce it. If the steel company had failed to comply with the requisition, what would have been the remedy? Not enforcement of the contract, but enforcement of the statute. If the government had failed to pay for what it got, what would have been the right of the steel company? Not to the price fixed by the contract, but to the just compensation guaranteed by the Constitution.

In exercising the power to requisition, the government dealt only with the steel company, which company thereupon became liable to deliver its product to the government, by virtue of the statute and in response to the order. As a result of this lawful governmental action, the performance of the contract was rendered impossible. It was not appropriated, but ended.

Parties and a subject matter are necessary to the existence of a contract, but neither constitutes any part of it; the contract consists in the agreement and obligation to perform. If one makes a contract for the personal services of another, or for the sale and delivery of property, the government, by drafting one of the parties into the army, or by requisitioning the subject matter, does not thereby take the contract. In Marshall v. Glanville et al., [1917] L.R. 2 K.B. 87, the plaintiff had been employed by the defendants upon a contract of service. While the agreement was in force, the former was called into the military service. It was held that this put an end to the contract. The court said:

"Here, the parties clearly made their bargain on the footing that it should continue lawful for the plaintiff to render and for the defendants to accept his services. The rendering and acceptance of these services ceased to be lawful in July, 1916, and thereupon the bargain came to an end."

The American and English cases all agree that the result is the same where the subject matter of the contract

Page 261 U. S. 512

is requisitioned. Texas Co. v. Hogarth Shipping Co.,256 U. S. 619, 256 U. S. 629-631; The Claveresk, 264 F. 276, 282-284; The Frankmere, 262 F. 819, 822. In re Shipton, [1915] L.R. 3 K.B. 676; Steamship Co. v. Le Nickel Societe Anonyme, 8 British Ruling Cases 546; Bank Line, Limited v. Arthur Capel & Co., [1919] L.R.App.Cases 435, 445.

In The Frankmere, supra, where a ship under charter was requisitioned by the British government, the court said that:

". . . the contract was thereby frustrated when the government to took possession of the ship, and the rights of the charterer were absolutely ended and terminated, and those of the owner, subject, however, to the paramount power of the government to use the ship, without consulting the desire of the owner, revived as though the charter had never been entered into."

In In Re Shipton, supra, a parcel of wheat then lying in a warehouse was sold for future payment and delivery. The wheat was subsequently requisitioned by the English government, and, in consequence, the sellers were unable to deliver. A claim for damages was put forward against the sellers, but the Court of King's Bench Division held that they were not liable, upon the ground that performance had become impossible without their fault. Darling, Justice, agreeing with the opinion of Lord Reading, said (pp. 683, 684):

"If one contracts to do what is then illegal, the contract itself is altogether bad. If, after the contract has been made, it cannot be performed without what is illegal being done, there is no obligation to perform it. In the one case, the making of the contract, in the other case, the performance of it, is against public policy. It must be here presumed that the crown acted legally, and there is no contention to the contrary. We are in a state of war; that is notorious. The subject matter of this contract

Page 261 U. S. 513

has been seized by the state acting for the general good. 'Salus populi suprema lex' is a good maxim, and the enforcement of that essential law gives no right of action to whomsoever may be injured by it."

In the present case, the effect of the requisition was to bring the contract to an end, not to keep it alive for the use of the government.

The government took over during the war railroads, steel mills, shipyards, telephone and telegraph lines, the capacity output of factories and other producing activities. If appellant's contention is sound, the government thereby took and became liable to pay for an appalling number of existing contracts for future service or delivery, the performance of which its action made impossible. This is inadmissible. Frustration and appropriation are essentially different things.

There is nothing in Monongahela Navigation Co. v. United States,148 U. S. 312, or in the other cases cited by appellant, which in any way conflicts with what we have said.

In the Monongahela case, the property which was taken was a lock and dam, built by the company pursuant to the invitation of the United States and the State of Pennsylvania, the latter, in consideration, giving the company a franchise to exact tolls. The franchise therefore was not merely a contract in respect of the property taken, but was an integral part of it, and this Court (p. 148 U. S. 329) said:

"So, before this property can be taken away from its owners, the whole value must be paid, and that value depends largely upon the productiveness of the property, the franchise to take tolls."

The lock and dam constituted, in effect, a going concern whose value was, of course, affected by what it would produce. Moreover, the case rested primarily upon the doctrine of estoppel, as this Court has in several cases since

Page 261 U. S. 514

pointed out. Greenleaf-Johnson Lumber Co. v. Garrison,237 U. S. 251, 237 U. S. 264; Oyster Co. v. Briggs,229 U. S. 82.

In Long Island Water Supply Co. v. Brooklyn,166 U. S. 685, the statute providing for condemnation expressly included contracts, and these were in fact taken, and compensation therefor specifically allowed. This was pointed out in the opinion of this Court (p. 166 U. S. 691): "In other words, the condemnation proceedings did not repudiate the contract, but appropriated it and fixed its value."

We have examined the other cases relied upon, but find nothing to justify a conclusion other than that which we have reached.

The judgment of the court below is

Affirmed.

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