1. After cancellation of a contract under which supplies were to
be manufactured for the government in a plant to be built with
government funds and to belong to the government, the making of a
supplemental agreement by which the contractor bought the plant for
a price stated did not affect the contractor's claims growing out
of the termination of the original contract when the later
agreement was expressly without prejudice to them. P.
273 U. S.
232.
2. The just compensation to which a claimant is entitled upon
cancellation of a contract by the government, under the Act of June
15, 1917, is not to be measured by the profit that would have
accrued under the contract, but must embrace that value which was
taken from the contractor by the termination of the contract. The
contractor is to be credited with his outlays reasonably made for
the fulfillment of the contract. P.
273 U. S.
235.
Page 273 U. S. 228
3. In this case, where the obligation of the contractor was to
manufacture and furnish to the government a definite quantity of
xylol monthly, up to a specified amount, in a plant which was to be
erected by the contractor with government funds and belong to the
government, just compensation, upon cancellation of the contract,
must include what the contractor expended on the plant in excess of
the cost as estimated and adopted in the contract and paid by the
government, insofar as such additional expenditure was required to
fit the plant for production of the xylol as the contract
contemplated. P.
273 U. S.
234.
60 Ct.Cls. 343 reversed.
Appeal from a judgment of the Court of Claims in an action to
recover under an agreement with the government for the manufacture
of xylol.
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
This is an appeal from the Court of Claims, under §§ 242 and 243
of the Judicial Code, from a judgment of February 16, 1925, before
the effective date of the Act of February 13, 1925, § 14, c. 229,
43 Stat. 936.
The findings of fact by the Court of Claims show that the
Barrett Company, the claimant and appellant, a corporation under
the laws of New Jersey, entered into a contract with the United
States by which it undertook, with funds provided by the
government, to erect a plant at Frankford, Pennsylvania, for the
distillation of xylol at the rate of 225,000 gallons per month,
and, after completion, to operate the plant until a total of
2,700,000 gallons of xylol had been produced. The xylol was to be
distilled and refined from special solvent naptha furnished
Page 273 U. S. 229
by the government, and was at all times to belong to the Navy.
The byproducts, except what the Navy wished to retain, were to
belong to the Barrett Company as part of its profit, but not to be
sold without the Navy's written consent. Ninety percent of the
byproducts sold by the company was to be credited to the account of
the Navy, less one cent a gallon for rental of containers used for
shipment.
The price to be paid by the Navy to the company was to be
determined monthly for the preceding month by the actual
deliveries, first by a charge per gallon of xylol, prorating the
total approved estimated cost of the new plant against the
2,700,000 gallons to be made under the contract. At the same time,
the account of the Navy was to be credited with this charge as the
total approved estimated cost would have been advanced by the
United States to the company before the production of the xylol
would begin. To cover operating cost, there was to be a charge of 3
cents per gallon of naptha distilled, and an additional charge for
redistillation of fractions. These charges were to be multiplied by
the gallons of naptha distilled, and the resulting aggregate was to
be divided by the number of gallons produced monthly, to which 6.6
cents per gallon was to be added to cover overhead, profit, and use
of patents.
The new plant was to be an annex to the appellant's existing
distillation plant and equipment. The estimated cost to be
furnished by the government was to be exhibited to the authorities
of the Navy Department for approval prior to the execution of the
contract, and was to consist of two parts. First, there was to be
an itemized estimate to cover the cost of the separate unit plant
and equipment; and, second, an itemized estimate to cover the cost
of parts of the plant and equipment needed for the supply of
electric power, steam, water, and light which would not be
distinctly separate from the existing
Page 273 U. S. 230
plant and equipment of the company. One-half of the sum to be
advanced for construction was to be paid by the government at the
time of the execution of the contract, and the balance in two
months. Plant and equipment were to be ready for operation within
five months from the date of the contract, and to be continued in
operation until the company had delivered the full amount of
2,700,000 gallons of xylol to E. I. Du Pont de Nemours & Co.
The xylol provided for in the contract was to be employed in the
manufacture of trinitroxylol for use in mine barrage in the North
Sea, and was a new product requiring knowledge and skill in its
manufacture. The plant, when completed, was to belong to the
government. The company agreed to offer and to pay 25 percent of
the approved estimated cost for it, if accepted after the contract
was performed, but the government could dispose of it as it
chose.
It was stipulated in the contract that the Barrett Company
should furnish a bond for the faithful performance of the contract
equal to the approved estimate of the cost of construction; that
time was an essential element in the contract; that, by failure to
make delivery, in conformity with the requirements of the contract
and within the times prescribed, the United States would be
damaged; that the damage should be liquidated for each day's delay
at the rate of a certain percent of the contract price, and legal
excuse for delays was to be determined by the United States.
The company's estimate for the separate unit and equipment was
$192,547.80, and that, for the plant for supplying electric power,
steam, water, and light was $60,773.32, a total of $253,321.12.
These estimates were approved by the Navy Department, and one-half
of the cost, $126,660.56, was advanced to the plaintiff on the
execution of the contract, and the remainder was paid two months
thereafter.
Page 273 U. S. 231
On May 18th, 1918, the Navy Department gave notice to the
company that it might proceed immediately upon the construction of
the plant. It did so, and completed the separate plant at a cost of
$284,882.66. The electric, steam, water, and light plant had been
at the time of the Armistice, about half constructed at a cost of
$52,897.53. The total expenditure on plant and equipment by the
company was thus $337,780.19, or $84,459 more than the estimates
submitted by the plaintiff. The increased cost of construction was
due to the increases in the cost of labor and materials and a
change in construction from steel and brick to reinforced concrete
and brick, due to inability to secure steel, and to certain changes
in the tanks as originally proposed in order to increase their
capacity. None of these changes was either directly authorized or
approved by the Navy Department, but it does appear that the
department had knowledge of the changes and made no objection
thereto.
After the Armistice, November 18, 1918, the Navy Department
notified the plaintiff that the manufacture of xylol under the
contract should be discontinued, that construction work remaining
to be completed under the contract would not be undertaken, and the
fact that the Navy would receive a partly finished plant would be
considered in the final adjustment to be made with regard to the
contract. The Navy thereafter discontinued further supply of
naptha, and work under the contract was terminated.
The Navy Department on December 1, 1918, made a supplementary
agreement with the company, by which the company bought the whole
plant for $110,000. This supplemental contract contained the
following:
"It is further agreed that this supplementary contract does not
prejudice the right of the contractor to secure payment of claims
in settlement for the termination of the original contract No.
38925 by the government. "
Page 273 U. S. 232
From the xylol produced and delivered for three months, the
company made a profit of $7, 195.59. It was testified by
accountants that the profits to the company on the undelivered part
would have been $73,792.66, and that its profits from the future
byproducts would have been $8,237, but these results were uncertain
and problematical.
The Court of Claims allowed four items claimed by the appellant,
amounting in all to $10,995.08, and for this amount gave
judgment.
The statute under which this contract was cancelled by authority
of the President, and under which this suit was brought, provides
that
"whenever the United States shall cancel, . . . suspend or
requisition any contract, . . . it shall make just compensation
therefor, to be determined by the President,"
and, if the amount determined by him is unsatisfactory to the
claimant, he may sue the government to recover such sum as added to
that which he may have already received, will be just compensation
therefor. Act June 15, 1917, c. 29, 40 Stat. 183.
The appellant makes but three assignments of error.
1. That the court held that the supplemental contract of
December 1, 1920, was a bar to reimbursement of claimant for
expenditures in connection with the erection of the plant.
2. That it failed to allow claimant as just compensation for
cancellation $84,459.07 expended for construction of plant over and
above the approved estimate.
3. That it did not allow interest on the sum included in the
judgment.
First. The Court of Claims seems to have held that the
supplemental contract by which the company purchased the plant for
$110,000 operated as a final settlement of all claims it had
against the government. In its opinion, speaking of the purchase,
it said:
"In many respects, this transaction alone would be sufficient to
preclude the recovery claimed for this item of
Page 273 U. S. 233
loss. It was a final adjustment of losses with respect to this
particular controversy."
We are unable to see that the supplemental agreement could have
any such effect, in view of the specific clause of the supplemental
contract stipulating that the claims of the contractor should not
be prejudiced thereby.
Second. The Solicitor General tenders to the Court the opinion
of the Court of Claims and an extract from the brief of the United
States in that court, to show the argument there made against
including in the recovery of the plaintiff as part of just
compensation the amount expended by it in excess of the estimate it
made for the cost of the plants to be erected. The Solicitor
General, however, finds himself obliged to assist the Court (and in
this we think he is to be commended) in presenting a view adverse
to the conclusion of the Court of Claims and to the contention of
the United States in that court.
The Court of Claims, in its opinion, said upon this point:
"It is true the plaintiff, because of emergency conditions,
determined to go beyond its express warrant of authority and incur
added expense in the construction of the desired plant; but the
contract itself contemplated no such increased expense, and there
were manifestly no contractual obligations imposed upon the
plaintiff to do what it did do. But, says the plaintiff, except for
the exercise of the right of termination, the additional expense of
construction would have been amortized in the total profits
received upon completion, and therefore becomes a sum indispensably
necessary to make the plaintiff whole. Apparently a sufficient
answer is the assumption of such risk by the plaintiff. The right
to terminate under the statute was part of the contract, and an
unauthorized expense incurred depended for reimbursement upon the
contingency of its exercise. What the plaintiff did, over and above
the limitation of its contractual obligations and rights, it did of
its own free will
Page 273 U. S. 234
and assumed the hazards of recouping the same out of its final
profits, in the event the contract proceeded to conclusion. It is
not asserted that the contract supports the plaintiff's contention.
The contention is predicated entirely upon the theory of just
compensation. We have been unable to resolve the issue in
plaintiff's favor. The just compensation to which the plaintiff is
entitled, under the cases heretofore considered by the court, is
limited to the stipulations of the contract, which, by its terms,
imposed obligations and reciprocal rights and privileges upon the
parties to the contract. . . . The contract fixed the status of the
parties thereunder. If one goes beyond its terms, it is difficult
to perceive how financial obligations to pay more than is agreed to
be paid can be inferred on the single theory that the defendant, in
the exercise of a lawful right, terminated all further proceedings
under the same, and is held thereafter to account for no more than
just compensation. In view of the cases cited, the just
compensation to be awarded must be a loss lawfully resulting from a
performance of the contract according to its terms, and may not
embrace one occasioned by the contractor's departure from the
contract, although considered by the contractor at the time as
expedient and in promotion of the rapid completion of the whole
contract."
We cannot concur in this view of the effect of cancellation,
under the circumstances and the terms of the contract. We think,
with the Solicitor General, that the provisions for the
construction of the plant and the production and payment of the
product and the disposition of the byproducts are all to be
construed together as one contract. The main obligation of the
company and the chief purpose of the contract was to furnish to the
government 2,700,000 gallons of xylol at 225,000 gallons monthly.
All else was incidental and ancillary to that. I t was obliged to
distill 225,000 gallons monthly in the months required. The money
to be advanced by
Page 273 U. S. 235
the government was doubtless an indispensable aid to the
company's fulfillment of its contract. The estimates limiting the
amount were in the interest of the government. But the possibility
that the estimates might not furnish a plant of sufficient capacity
to do the work within the time mentioned did not relieve the
company, and, if it thought a larger expenditure necessary for
this, it must make it. Just compensation for cancelling the
contract requires that the contractor shall be made whole and
recover the expenditures necessary to perform the contract. It
would have been no defense, had the company failed to perform and
the government had sued for a breach, that the plant erected upon
the estimate was not sufficient to do what was agreed. That was the
contractor's risk.
The contract, in fixing the elements of the price per gallon of
xylol, speaks of adding 6.6 cents to cover overhead, profit, and
use of patents; but we are not concerned with profits in this case.
Russell Motor Car Co. v. United States, 261 U.
S. 514;
College Point Boat Corp. v. United
States, 267 U. S. 12.
What the company is entitled to is just compensation for the
contract which was taken from it, and, under the cases just cited,
it should certainly be credited with the outlay which it can show
there was reasonable ground for making in order to fulfill its
engagements. On the other hand, the government may show, without
regard to the estimates, that the actual additional expenditures
were really not required for the fulfillment of the contract, or,
if less than what was spent was needed, then how much less. The
case must be remanded for new evidence and new findings on this
issue.
The other assignment of error is to the failure of the Court of
Claims to allow interest on that which was or should be recovered.
In support of this assignment of error, the appellant contends
that, as prospective profits
Page 273 U. S. 236
cannot be calculated as part of the recovery in a cancellation
case, and as just compensation under the decision in the
Seaboard Air Line case,
261 U. S. 299,
must include interest on the amount due from the time of
cancellation, interest must be allowed here. The government argues
that, as this contract was made after the power of cancellation was
given by the statute, its provision for the cancellation must be
regarded as written into the contract,
Russell Motor Car Co. v.
United States, 261 U. S. 514;
College Point Boat Corp. v. United States, 267 U. S.
12; that, when so written in, cancellation is part of
the risk run under the contract, and therefore that interest on the
amount due under the contract cannot be collected because of lack
of specific agreement for it under § 177 of the Judicial Code. This
exact point has never been decided by the Court. Several especially
set cases are now pending in which this is the sole issue raised.
As the case must go back for further consideration, we prefer to
leave the point undecided and to await the argument in those cases,
which will probably be disposed of before the issue here will be
ready for further consideration by the Court of Claims in this
case.
The judgment of the Court of Claims is reversed and remanded for
further proceedings.