1. Contracts made in the emergency of war between the Fleet
Corporation and a shipbuilding company, for the construction of
ships for the United States, provided that the price to be paid the
builder should include the actual cost of the ships and two
elements of profit, (1) a fixed amount calculated on an agreed
Page 315 U. S. 290
estimate of cost and (2) a "bonus for savings," of one-half the
amount by which the actual cost turned out lower than the estimate;
but no obligation of the builder to make special effort to effect
such savings by increasing its efficiency was expressed in the
contracts.
Held:
(1) There is no ground to imply such an obligation. P.
315 U. S.
297.
(2) The savings clause was a nonseverable part of the contract.
P.
315 U. S.
298.
2. Whether a number of promises constitute one contract or more
than one is to be determined by inquiring whether the parties
assented to all the promises as a whole, so that there would have
been no bargain whatever if any promise or set of promises were
struck out. P.
315 U. S.
298.
3. With respect to contracts for the building of ships, entered
into by the Fleet Corporation, on behalf of the Government, and a
shipbuilding company while the country was at war, and which netted
the company a very large profit partly by reason of the clause
granting it the right to one-half of the amounts by which the cost
of construction should be lower than the liberal estimate provided
by the contracts,
held:
(1) The Government's present claim that in the negotiations the
officials acting for the Fleet Corporation were subjected to
pressure amounting to duress by the representatives of the company,
so that they accepted the price stipulations against their will, is
without support in the evidence. P.
315 U. S.
300.
(2) The circumstances that the Government stood in great need of
the ships and that it was obliged to rely upon the company's
capacity to produce them could not have coerced the Fleet
Corporation's representatives to make the contracts, since the
Fleet Corporation could have compelled the shipbuilding company to
undertake the work at a price set by the President, with the burden
of going to court, if it considered the compensation unreasonably
low, and since the Fleet Corporation had the power to commandeer
the shipbuilding company's plants and facilities, in accordance
with authority delegated by the President pursuant to the Acts of
Congress, and it is not to be assumed that the company or its
trained organization would have been unwilling to serve the
Government in the plants if the power to take them over were
exercised. P.
315 U. S.
303.
(3) Under its powers to raise and support armies, to provide and
maintain a navy, and to make all laws necessary and proper
Page 315 U. S. 291
to carry these powers into execution, Congress has authority to
draft business organization to support the fighting men in war. P.
315 U. S.
305.
4. A policy of granting the measures of profits common at the
time, adopted by the Fleet Corporation when letting contracts for
the construction of ships under authority delegated by the
President in accordance with an Act of Congress, is not subject to
be, in effect, nullified by the courts by refusal to enforce such
contract on the ground that the profits granted are too high. P.
315 U. S.
308.
113 F.2d 301, affirmed.
Certiorari, 311 U.S. 632, to review judgments affirming two
judgments of the District Court.
See 23 F.
Supp. 676; 26
id. 259.
No. 8 was a suit in equity brought by the United States against
Bethlehem Steel Corporation, Bethlehem Shipbuilding Corporation,
et al., for an accounting and to recover sums paid under
contracts for construction of ships. The District Court dismissed
the bill.
In No. 9, which was an action at law by the Bethlehem
Shipbuilding Corporation against the Fleet Corporation, the former
recovered a balance found due under "bonus for savings" clauses in
the contracts.
Page 315 U. S. 292
MR. JUSTICE BLACK delivered the opinion of the Court.
These two cases arise from a dispute between Bethlehem
Shipbuilding Corporation, Ltd., and the government about the amount
of profits claimed by Bethlehem under thirteen wartime contracts
for building ships. The contracts were negotiated and executed in
1917 and 1918, when Germany's destructive warfare against our ocean
shipping essential to the successful prosecution of the war made it
necessary for the United States to build the greatest possible
number of ships in the shortest possible time. They are typical
products of a system of procurement heavily relied upon by the
United States Shipping Board Emergency Fleet Corporation and other
government purchasing agencies at the time.
On June 15, 1917, Congress gave to the President sweeping war
powers, 40 Stat. 182, including (1) the power to commandeer
shipbuilding plants and facilities, (2) the power to purchase ships
at what he deemed a reasonable price with a provision for
subsequent revision by the courts in the event the seller regarded
the price set as unfair, and (3) the power to purchase or contract
for the building of ships at prices to be established by
negotiation. Acting under authority delegated to it by the
President with Congressional approval, the Fleet Corporation
declined to seek utilization of the first and second methods, but
chose, under the third alternative, to make purchases though
ordinary business bargaining.
The "actual cost" to Bethlehem of building the ships over which
this dispute arises was about $109,000,000. The generously
inclusive formula [
Footnote 1]
for determining "actual
Page 315 U. S. 293
cost," not challenged by the government here, was not peculiar
to these contracts. It was based on the standard formula used by
the Fleet Corporation in its contracts with other shipbuilders.
And, as in practically all contracts of this type, there was no
risk of loss. [
Footnote 2] The
total profits claimed under the contracts by Bethlehem, and
Page 315 U. S. 294
allowed by both courts below, were about $24,000,000, [
Footnote 3] or a little more than 22%
of the computed cost. [
Footnote
4] This figure of $24,000,000 does not include such profits as
may have been made by Bethlehem Steel Company, Bethlehem's parent,
which sold it at the maximum prices established by the War
Industries Board, 43,000 tons of steel used in these ships.
[
Footnote 5] The percentage of
profits in relation to the actual investment and working capital
devoted by Bethlehem to the building of the ships was not found by
either of the courts below. [
Footnote 6]
In No. 8, the government filed a bill in equity against
Bethlehem and others. The bill alleged that the government
Page 315 U. S. 295
had been induced to enter into the contracts by fraudulent
representations of Bethlehem's agents, and as an independent ground
for relief, that it had been the duty of Bethlehem to perform the
contracts fairly, honestly, and economically "in the shortest
practicable time" for no more than "a fair and reasonable profit,"
and that any provisions in the contract for payment of more are
"void and unenforceable." The prayer was for an accounting and a
decree requiring Bethlehem to refund all amounts previously paid to
it by the government in excess of what the court should find to be
just and reasonable compensation for building the ships. Bethlehem
filed an answer and a counterclaim for damages based on alleged
breach of contract by the Fleet Corporation.
In No. 9, Bethlehem brought suit at law against the Fleet
Corporation claiming damages for breach of the same contracts. In
an affidavit of defense and counterclaim, the Fleet Corporation
repeated the allegations made by the government in No. 8 and sought
the same relief.
The two actions were jointly referred by the District Judge to a
Master, who held hearings and made findings. In No. 8, the Master
recommended that the government's bill be dismissed, and, on the
authority of
Nassau Smelting & Refining Works v. United
States, 266 U. S. 101,
further recommended that Bethlehem's counterclaim be dismissed for
want of jurisdiction, the amount claimed being in excess of
$10,000. In No. 9, he recommended that judgment be entered for
Bethlehem for $5,272,075 [
Footnote
7] with interest at 2% from September 1, 1922. The District
Judge declined to allow any interest, applying the law of
Pennsylvania as he thought our decision in
Erie R.
Co. v.
Page 315 U. S. 296
Tompkins, 304 U. S. 64,
required. In all other respects, he followed the Master's
recommendations, and rendered judgment accordingly.
23 F.
Supp. 676; 26 F. Supp. 259. The Circuit Court of Appeals
affirmed. 113 F.2d 301, 305. On application of the United States
and the Fleet Corporation, we granted certiorari. 311 U.S. 632.
As the case reaches us, the controversy revolves primarily
around the section of the contracts which sets out what is to be
paid to Bethlehem. In all the contracts, that section contains
substantially the following provisions:
"The price to be paid for each vessel to be constructed and
furnished in accordance with the terms of this contract . . . shall
be the actual cost, plus the definite sum for profit hereinafter in
this Article provided for, based upon an estimated base cost to the
Contractor. . . . Should the actual cost be less than the estimated
. . . cost . . . , the Contractor shall be allowed as profit on
each vessel in addition to said fixed sum for profit . . . one-half
the amount by which such actual cost of each vessel falls short of
the estimated cost. . . ."
Thus, a high estimated cost would increase the probability of
"savings" to be divided between Bethlehem and the government. And
the more the estimated cost exceeded actual cost, the greater would
be Bethlehem's share. It can be seen, therefore, that the estimated
cost agreed upon by the parties is a pivotal figure.
I
The government charged Bethlehem with fraud in submitting
estimated cost figures which were adopted in the contracts. It was
alleged that Bethlehem's agents made two false representations: (1)
that it was impracticable to estimate closely what the cost would
be, and (2) that the estimates Bethlehem submitted, and which the
Fleet Corporation accepted, were fair and reasonable under the
Page 315 U. S. 297
circumstances. The Master found that there was no evidence to
support this charge of fraud. The District Judge approved this
finding, as did the Circuit Court of Appeals, which said that it
had "carefully considered the record in the light of this
contention [of fraud]," and concluded that
"the estimates submitted by Bethlehem and prepared for it by its
representative Brown were fairly and honestly made and as accurate
as could be expected under the uncertain conditions then
prevailing."
And, in this Court, the petitioner accepts these findings.
Therefore, in considering other attacks upon Bethlehem's right to
recover, we must do so on the assumption that there was no fraud in
Bethlehem's negotiations with the government.
II
The government contends that, even in the absence of fraud,
Bethlehem is entitled to nothing by virtue of the half-savings
clauses.
One argument is that the contracts gave Bethlehem the benefits
of participating in the savings only if Bethlehem, by special
efforts, increased its efficiency and brought actual costs below
the estimates agreed to in the contracts.
Neither the specific language of the half-savings provision nor
its context supports this contention. On its face, the provision
contains an unconditional promise to pay Bethlehem one-half of the
difference between the actual and estimated cost of the ships in
question. That such a method of computation would tend to
discourage careless expenditures and encourage vigorous attempts at
realizing economics in building the ships is hardly debatable. But
the half-savings clause does not impose any positive obligations
upon the builder. The Master found, upon consideration both of the
terms of the contracts and testimony on the understanding of the
parties, that a showing of savings, without more, obligated the
government to share them with Bethlehem. It cannot be
maintained
Page 315 U. S. 298
that this finding, accepted by both courts below, is without
ample support.
Nothing in the negotiations between the parties as revealed in
the record indicates that they had a contrary understanding of the
contracts. Bethlehem held out against the Fleet Corporation's early
insistence upon lump sum contracts. It continually asserted that
uncertainties about final cost due to rapidly rising prices would
require it to protect itself by insisting upon a figure too high
for the Fleet Corporation's acceptance, and therefore itself
proposed the "cost plus fixed fee plus half savings" method of
determining compensation. While there seems to have been
recognition that this method might induce greater efforts at
efficiency, which would be to the advantage of both parties, there
is not the smallest hint that either Bethlehem or the government
regarded the substitution of this method as imposing any positive
obligations upon Bethlehem in addition to those it would have had
under lump sum contracts.
In the alternative, the government urges that the half-savings
clauses are severable, and that, if the contracts imposed upon
Bethlehem no obligation of special effort to effect savings, these
clauses were unsupported by consideration, and are therefore
unenforceable. The Master and the courts below, however, treated
these clauses as nonseverable; to do otherwise would call for
departure from accepted principles of the law of contract. Whether
a number of promises constitute one contract or more than one is to
be determined by inquiring
"whether the parties assented to all the promises as a single
whole, so that there would have been no bargain whatever if any
promise or set of promises were struck out."
Williston on Contracts, Rev.Ed., § 863 and cases there cited.
The record makes it clear that each of the contracts here was
assented to as a single whole, and that consummation of a bargain
between the parties depended upon inclusion of
Page 315 U. S. 299
the half-savings clause. Furthermore, we know of no federal or
state statute or established rule of law in any jurisdiction
inconsistent with the elementary proposition that a promise to
build ships is good consideration for a promise to pay a sum of
money, whether fixed in amount or depending upon the relationship
between actual and estimated cost. [
Footnote 8]
Cf. Dayton Airplane Co. v. United
States, 21 F.2d 673, 682, 683.
III
The government further argues that, if the half-savings clauses
must be taken as permitting Bethlehem to participate in savings
however caused, the contracts are invalid because unconscionable.
Without specifying that it relies on the law of any particular
jurisdiction, the petitioner rests its argument on an asserted
general doctrine of unconscionability at common law. Since there is
no governing constitutional or federal statutory provision, if
these were contracts between private individuals, the law of some
locality would be controlling.
Erie R. Co. v. Tompkins,
supra. Whether the same rule would apply to government
contracts in general or to the contracts of the Fleet Corporation
[
Footnote 9] in particular we
need not decide. Nor, assuming the applicability of the
Page 315 U. S. 300
Tompkins case to the contracts before us, would we have
to determine whether the law of the District of Columbia or of some
particular state is decisive. For, in invoking the asserted
doctrine of unconscionability claimed to be applicable here, the
government relies entirely upon the alleged existence of two
elements: duress and profits grossly in excess of customary
standards. And, for reasons we shall set out, neither of these two
elements exists here.
Duress. The word duress implies feebleness on one side,
overpowering strength on the other. Here, it is suggested that
feebleness is on the side of the government of the United States,
overpowering strength on the side of a single private corporation.
Although there are many cases in which an individual has claimed to
be a victim of duress in dealings with government,
e.g., Union
Pac. R. Co. v. Public Service Comm'n, 248 U. S.
67, this, so far as we know, is the first instance in
which government has claimed to be a victim of duress in dealings
with an individual.
The argument by which the petitioner seeks to establish that the
contracts were made under duress is essentially this: Germany's
submarine warfare made it imperative that the government secure the
greatest possible number of ships in the shortest possible time;
there was a scarcity of ships and shipbuilding facilities in the
United States; Bethlehem, the largest shipbuilder in the world, not
only had shipbuilding facilities available, but also a trained
organization; at a time when Bethlehem's facilities and trained
organization were vital to the prosecution of the war, it declined
to accept terms proposed by the government, but insisted upon
prices which some of
Page 315 U. S. 301
the government's representatives thought too high; although
Congress had authorized the Executive to commandeer shipbuilding
facilities if necessary, Bethlehem's organization was also needed,
and the government was without power to compel performance by an
unwilling organization; the government therefore had to accept
contracts on whatever terms Bethlehem proposed or, doing without
the ships which Bethlehem could produce, run the risk of military
defeat.
Two basic propositions underlie this argument: (1) The
government's representatives involuntarily accepted Bethlehem's
terms. (2) The circumstances permitted the government no other
alternative.
Upon reviewing the negotiations between the representatives of
the government and the representatives of Bethlehem, we cannot find
support for the first proposition. The Master found, and the courts
below agreed, that
"the contracts resulted from negotiations in which both parties
were represented by intelligent, well informed, and experienced
officers whose sole object was to make the best trade possible,
under conditions which included the uncertainties of war time
contingencies, the results from which were not and could not have
been known at the time the contracts were made."
Two of the three principal negotiators for the Fleet Corporation
have testified in the proceedings before the Master. It is
abundantly clear from their testimony that, during the course of
the negotiations, they did not consider themselves compelled to
accept whatever terms the other side proposed. In the disposition
of the two main differences between the negotiators, there is no
evidence of that state of overcome will which is the major premise
of the petitioner's argument of duress.
Cf. 81 U.
S. Shoemaker, 14 Wall. 314,
81 U. S.
332.
One of the differences was settled by the government's
abandonment of its earlier insistence upon a lump sum arrangement
together with a guaranteed date of delivery.
Page 315 U. S. 302
In view of the rising prices and unpredictable labor supply of
the time, Bethlehem's reluctance to enter into contracts on such
terms does not seem unreasonable. [
Footnote 10] And if the government's abandonment of its
position is to be regarded as evidence of compulsion, we should
have to find compulsion in every contract in which one of the
parties makes a concession to a demand, however reasonable, of the
other side.
The other major difference between the negotiators was on the
matter of price. There is evidence that some of the Fleet
Corporation's representatives considered Bethlehem's demands high,
but we cannot conclude that the figure finally accepted by the
Fleet Corporation was accepted because its representatives felt
themselves powerless to refuse. On the contrary, Bethlehem, by
letter, voluntarily offered to accept contracts on terms to be
fixed by the Fleet Corporation's general manager. This offer was
rejected, one of the Fleet Corporation's negotiators testifying
that it preferred to make contracts, rather than assume the
attitude of dictating terms. Moreover, the general manager of the
Fleet Corporation, in whom final authority was vested and who
approved these contracts, was of the opinion that high estimated
cost figures would be advantageous to the government because
"care must be exercised that they be not placed at too low a
figure, for if they are, the probabilities are that the contractor
will lose interest in keeping the cost down."
And one of the negotiators for the Fleet Corporation has given
testimony that he was not so much concerned with cost as with speed
of production, since "legislation was already in the offing in the
form of war profit taxes . . . to take care of extreme
Page 315 U. S. 303
cases." We must therefore conclude that the negotiations do not
show that Bethlehem forced the government's representatives to
accept contracts against their will.
If the negotiations do not establish duress, the government
finds it in the circumstances themselves. The petitioner concedes
that the government could have commandeered Bethlehem's plants, but
it contends that, if the plants had been commandeered, Bethlehem's
organization would have been unwilling to serve the government in
them. Heavy reliance is placed on an observation in the Master's
report that "the Government did not have power to compel
performance by an unwilling organization." We shall later consider
the alleged lack of power. We now point out that the alleged
unwillingness is an assumption unsupported by findings of evidence.
Since the possibility of commandeering appears not even to have
been suggested to Bethlehem, we have no basis for knowing what its
reaction would have been. We cannot assume that, if the
negotiations failed to produce contracts acceptable to both sides,
Bethlehem would have refused to contribute to the war effort except
under legal compulsion. We cannot lightly impute to Bethlehem's
whole organization, composed as it was of hundreds of people, such
an attitude of unpatriotic recalcitrance in the face of national
peril.
But even if we were to assume, as we do not, an initial attitude
of unwillingness, we do not think that the government was entirely
without means of overcoming it. For the representatives of the
Fleet Corporation, an agent of the United States, came to Bethlehem
armed with bargaining powers to which those of no ordinary private
corporation can be compared. If it chose to, the Fleet Corporation
could have foregone all negotiation over price, compelling
Bethlehem to undertake the work at a price set by the President
with the burden of going to court if it considered the compensation
unreasonably low. And the
Page 315 U. S. 304
power to commandeer Bethlehem's entire plant and facilities, in
accordance with authority specifically delegated by the President,
provided the Fleet Corporation with an alternative bargaining
weapon difficult for any company to resist.
The government nevertheless urges that the circumstances here
are analogous to those under which courts of admiralty have held
contracts to be unenforceable. In particular, it points to the
principle that courts of admiralty
"will not tolerate the doctrine that a salvor can take the
advantage of his situation, and avail himself of the calamities of
others to drive a bargain; nor will they permit the performance of
a public duty to be turned into a traffic of profit."
Post v. Jones,
19 How. 150,
60 U. S. 160.
We think this principle has no real relevance to the case before
us.
In the first place, if there was a "traffic of profit" here, it
was not the unanticipated result of an accident as in the salvage
cases. When Congress authorized the procurement of ships through
ordinary commercial negotiations, it must have known that the
purchases could not be made in a market of open competition because
existing shipbuilding facilities would be overtaxed by the
construction program.
See Department of Commerce,
Government Aid to Merchant Shipping, Rev.Ed.1923, 433; Hearings
before House Committee on the Merchant Marine and Fisheries on H.R.
10500, 64th Cong., 1st Sess.,
passim. And Congress must
have anticipated that, in the contracts agreed upon, profits would
be expected, and that the self-interest inherent in commercial
transactions would make itself felt. Therefore, in seeking to
establish duress from the circumstances in which these contracts
were made, the government is relying on the identical circumstances
which were in existence at the time Congress chose the policy of
authorizing procurement of ships through commercial
Page 315 U. S. 305
negotiation. We cannot now invalidate contracts made pursuant to
a congressionally selected policy on the sole ground of the
coercive effect of circumstances which Congress clearly
contemplated. To do so, we should have to repudiate legislative
power exercised in proper constitutional sphere.
In the second place, the captain of a ship in distress on the
high seas who is completely at the mercy of his salvor cannot be
likened to a sovereign power dealing with an individual contractor.
We cannot regard the government of the United States at war as so
powerless that it must seek the organization of a private
corporation as a helpless suppliant. The Constitution art. 1, § 8
grants to Congress power "to raise and support Armies," "to provide
and maintain a Navy," and to make all laws necessary and proper to
carry these powers into execution. Under this authority, Congress
can draft men for battle service.
Selective Draft Law
Cases, 245 U. S. 366. Its
power to draft business organizations to support the fighting men
who risk their lives can be no less.
Profits. The general common law rule of
unconscionability on which the petitioner relies is said to deny
enforcement to contracts when the profits provided for are grossly
in excess of a standard established by common practice. Whether
there is such a rule, what is its scope, and whether it is part of
the body of law governing these contracts, we need not decide. For
high as Bethlehem's 22% profit seems to us, we are compelled to
admit that, so far as the record or any other source of which we
can take notice discloses, it is not grossly in excess of the
standard established by common practice in the field in which
Congress authorized the making of these contracts. And, in
particular, it may be added, the Master found that the ships built
by Bethlehem cost the government less than comparable ships built
by other shipbuilders. The government
Page 315 U. S. 306
made no attempt to establish, nor is there any indication in the
record, that the profits realized by other shipbuilders were any
less than Bethlehem's.
To establish a standard of customary profits, the petitioner
points to the experience of the Navy and War Departments and other
branches of the government in connection with straight cost plus
contracts. Because 10% was the profit specified in many such
contracts, the government asserts that it is an appropriate figure
here, and urges that the profits on these contracts, tested by such
a standard, cannot be allowed. The relevance of experience with
cost plus contracts to the contracts here is not clear. The
Shipping Board deliberately chose to avoid cost plus contracts
where possible, having found them unsatisfactory in practice.
Moreover, the record shows that the total cost to the government of
comparable ships under cost plus contracts was higher than the
total cost of the ships Bethlehem built under the contracts here in
question. And experience in many fields has demonstrated that the
percentage of profit actually realized under cost plus contracts is
likely to be far more than the percentage specified. As stated in
1918 by Charles E. Hughes, later Chief Justice, in his report to
the Attorney General on the aircraft industry,
"contracts of this sort lead to waste, foster abuses, and impose
an almost intolerable burden of cost accounting, in itself a
hindrance to rapid production."
Report to the Attorney General on the Aircraft Inquiry (1918)
134.
See also Expenditures in the War Department -- Camps,
House Report No. 816, 66th Cong., 2d Sess., 49-53. The 10% which
the petitioner derives by reference to the cost plus contracts of
certain governmental department cannot be taken as a standard of
common practice. It is in illusory figure without basis in the
realities of business experience.
If profits earned under government contracts in general are
taken as the standard of comparison the 22%
Page 315 U. S. 307
claimed here is overshadowed in too many instances for it to be
regarded as extraordinary. The Hughes report referred to above, for
example, points out (pp. 136-146) that most of the airplane
production during the last war was under contracts providing for
much higher profits. To take an example of the profits made on food
products, the Federal Trade Commission determined that in 1917,
profits on the sales of salmon canneries, a major portion of whose
output was purchased by the government, ranged from 15 to 68% of
cost, averaging 52%. [
Footnote
11] Federal Trade Commission, Report on Canned Salmon (1918)
63. In the shipbuilding industry itself, even in peacetimes,
profits were found by a special committee of the Senate which
investigated the munitions industry to have been from 25% to 37% on
the cruisers built in 1927, about 22% in 1929, and of like range
for other years. Senate Report No. 944, 74th Cong., 1st Sess.,
4.
If the comparison is made with industrial profits, not limited
to profits on government contracts alone, the 22% asked for here
likewise loses all claim to distinction. An exhibit, the accuracy
of which the government has not challenged, incorporated into the
record of this case, indicates that, in terms of profit on gross
sales, the largest American steel company made 49, 58, and 46%
during the years 1916, 1917, and 1918. As computed by the Federal
Trade Commission, net earnings in 1917 of the same company on all
its business were 25% of total investment, and the Commission cites
instances of other steel companies whose earnings thus measured
ranged from 30 to 320%. Federal Trade Commission, Letter on
Profiteering (1918) 9. Profits of lumber producers, again in terms
of return
Page 315 U. S. 308
on investment, ranged as high as 121%, and of producers of
petroleum products, as high as 122%, over half of the industry
earning more than 20%.
Id., 12-13. During the first six
months of 1917, one of the two major sulphur producers in the
country sold its product at an average price of $18.11 per ton,
more than 200% above cost which was $5.73 per ton; the other major
producer earned 236% on its investment during the first eleven
months of the same year.
Id., 11. The Federal Trade
Commission's collection of data for various other industries, a
collection which the Commission stated was "by no means a complete
catalog," affords many additional examples of the same kind. But
further confirmation should be unnecessary for a conclusion no
businessman would question: that the profits claimed here, seen in
their commercial environment, cannot be considered exceptional.
The profits claimed here arise under contracts deliberately let
by the Fleet Corporation under authority delegated by the President
in accordance with an act of Congress. Neither Congress not the
President restricted the freedom of the Fleet Corporation to grant
measures of profits common at the time. And the Fleet Corporation's
chosen policy was to operate in a field where profits for services
are demanded and expected. The futility of subjecting this choice
of policy to judicial review is demonstrated by this case, coming
to this Court as it does more than twenty years after the ships
were completed. In any event, we believe the question of whether or
not this policy was wise is outside our province to decide. Under
our form of government, we do not have the power to nullify it, as
we believe we should necessarily be doing, were we to declare these
contracts unenforceable on the ground that profits granted under
Congressional authority were too high. The profits made in these
and other contracts entered into under the same system may justly
arouse indignation. But indignation based on the notions
Page 315 U. S. 309
of morality of this or any other court cannot be judicially
transmuted into a principle of law of greater force than the
expressed will of Congress. [
Footnote 12]
IV
The problem of war profits is not new. In this country, every
war we have engaged in has provided opportunities for profiteering,
and they have been too often scandalously seized.
See
Hearings before the House Committee on Military Affairs on H.R. 3
and H.R. 5293, 74th Cong., 1st Sess., 590-598. To meet this
recurrent evil, Congress has at times taken various measures. It
has authorized price-fixing. It has placed a fixed limit on
profits, or has recaptured high profits through taxation. It has
expressly reserved for the government the right to cancel contracts
after they have been made. Pursuant to Congressional authority, the
government has requisitioned existing production facilities or
itself built and operated new ones to provide needed war materials.
It may be that one or some or all of these measures should be
utilized more comprehensively, or that still other measures must be
devised. But if the Executive is in need of additional laws by
which to protect the nation against war profiteering, the
Constitution has given to Congress, not to this Court, the power to
make them.
Affirmed.
THE CHIEF JUSTICE and MR. JUSTICE JACKSON, who, as former
Attorneys General, actively participated in the prosecution of
these cases, take no part in this decision. MR. JUSTICE ROBERTS
also takes no part in the decision.
Page 315 U. S. 310
* Together with No. 9,
United States Shipping Board Merchant
Fleet Corp. v. Bethlehem Shipbuilding Corporation, Ltd., also
on writ of certiorari, 311 U.S. 632, to the Circuit Court of
Appeals for the Third Circuit.
[
Footnote 1]
Included in the detailed and comprehensive itemization of
"actual cost" were the following and "items similar thereto in
principle":
"The net costs . . . of labor (including compensation of labor
by way of bonuses) and materials, machinery, equipment, and
supplies . . . , and other direct charges, such as insurance on the
vessels, etc."
"A proper proportion of running expenses, including ordinary
rentals, . . . repairs, and maintenance, light, heat, power,
insurance, management, salaries (including compensation by way of
bonuses), and other indirect charges. . . ."
"A proper proportion of interest accrued . . . on bonds or other
debts or loans existing or contracted for prior to the date of this
contract and the proceeds of which shall be used, or shall have
been or shall be invested in plant, equipment, etc., that shall be
used, in the performance of the work under this contract."
"A proper proportion of taxes of all kinds accrued during the
taxable year with respect to the business or property, except any
Federal taxes."
"A proper proportion of physical losses actually sustained
within the taxable year in connection with the construction of the
vessels under this contract, including losses from fire, flood,
storm, riot, vandalism, any acts of God, acts of war, or other
casualties and not compensated for by insurance or otherwise."
"A reasonable allowance, according to the condition, for
depreciation of values of the property and plant of the Contractor
used in connection with the work under this Contract."
Neither in the contracts nor under any relevant statutory
provision was there any restriction on salaries and bonuses to be
paid to executives of the shipbuilder or its affiliates.
Cf. Sections 505(c) and 805(c) of the Merchant Marine Act
of 1936, 49 Stat. 1985, 1999, 2013.
[
Footnote 2]
Even in the case of lump sum contracts with the government, it
is generally recognized that the real risk of loss is negligible.
It is usual in this kind of contract to set prices high enough to
cover, or otherwise specifically to provide against, unforeseen
contingencies. And where loss does occur contrary to the
expectation of both parties, Congress often passes special bills
making the contractors whole.
[
Footnote 3]
These ships apparently cost the government at least a large part
of still another $4,825,415. The government paid this amount to
Bethlehem to aid in expansion of plant facilities to build the
ships -- facilities which were turned over to Bethlehem after the
war. The government's money was contributed under a contract
commonly in use whereby the contractor was given the option of
purchasing the additional facilities at a depreciated value.
Whether the government, upon conveyance of the property, received
any compensation at all does not clearly appear.
[
Footnote 4]
While profits on individual contracts ranged above and below
22%, both in the proceedings below and in this Court, the whole
series of contracts was regarded as a unit. The government has made
no separate argument with respect to the individual contracts in
which more than the average profit was realized, nor has Bethlehem
with respect to the contracts in which the amount due under the
half-savings clause proved to be small. The only finding of the
Master in which any separation of contracts is made shows that the
profits realized on contracts in which the estimated costs were
checked by the Fleet Corporation were higher than those on
contracts in which the Fleet Corporation accepted Bethlehem's
estimates without check.
[
Footnote 5]
Compare the statutory method of restricting profits of
affiliates embodied in Section 803 of the Merchant Marine Act of
1936, 49 Stat. 1985, 2012.
[
Footnote 6]
The contracts contained a provision, usual in Fleet Corporation
contracts, under which the government agreed "to provide the cash
funds necessary to pay for work already done and materials already
furnished and for carrying on the work under this contract."
[
Footnote 7]
The government concedes "that $1,514,995 of the judgment awarded
. . . in the action at law is . . . due under contracts other than
those now under attack."
[
Footnote 8]
Of the cases called to our attention by the government, only in
Burke & James, Inc. v. United States, 63 Ct.Cls. 36,
was a bonus for savings clause held severable and invalid although
regarded as "part and parcel of the original . . . contract." We
agree, as did both courts below, with the Master's statement that
the
Burke case is not applicable here because "the facts
upon which the decision of that case was based are so
different."
[
Footnote 9]
The District Court treated the contracts as governed by the law
of Pennsylvania. The Circuit Court of Appeals treated them as
governed by the law either of Pennsylvania or the District of
Columbia, but did not decide which. The Fleet Corporation was
organized under the laws of the District of Columbia. Although
wholly owned and controlled by the government, it has been held
subject to suit either in state or federal courts.
Sloan
Shipyards Corp. v. U.S. Fleet Corp., 258 U.
S. 549;
U.S. Shipping Board
Merchant Fleet Corp. v. Harwood, 281 U.
S. 519.
[
Footnote 10]
Cf.:
"Obviously no sane man would bid on a lump-sum contract under
such conditions, unless perchance he should treat the matter as a
pure gamble and include an excessive margin in his proposal for
unforeseen contingencies."
Report of Chief of Construction Division, War Department Annual
Reports (1919) 4147.
[
Footnote 11]
The Federal Trade Commission Report does not give separate
figures on sales to the government, but points out (p. 7) that the
government had announced its intention to purchase 80% of the 1918
pack.
[
Footnote 12]
Cf.:
"It would be very dangerous, indeed, to the best interests of
the government . . . if . . . this [Court] should . . . render
decrees on the crude notions of the judges of what is or would be
morally right between the government and the individual."
Smoot's Case,
15 Wall. 36,
82 U. S.
45-46.
MR. JUSTICE MURPHY, concurring.
I concur in the opinion of the Court insofar as it relates to
duress and coercion and the nonseverability of the "bonus for
savings" clauses, but desire to add a brief further statement of my
views.
In voting for affirmance of the judgment, I do not wish to be
understood as expressing approval of an arrangement like the one
now under review, by which a company engaged in doing work for the
Government in time of grave national peril -- or any other time --
is entitled to a profit of 22 percent. under contracts involving
little or no risk and grossing many millions of dollars. Such an
arrangement not only is incompatible with sound principles of
public management, but is injurious to public confidence and public
morale. The fact that such cases were common during the last war,
as evidenced by the circumstances recited in the opinion of the
Court, provides no justification to my mind for such a practice
then or now. No man or set of men should want to make excessive
profits out of the travail of the nation at war, and government
officials entrusted with contracting authority, and the Congress
bestowing such authority, should be alert to prevent it.
The question before the Court for decision, however, is not
whether an arrangement like the one presented for review accords
with our conceptions of business morality or with correct
administration of the public business. Having made a bargain, the
Government should be held to it unless there are valid and
appropriate reasons known to the law for relieving it from its
obligations. It is the duty and responsibility of the courts not to
rewrite contracts according to their own views of what is practical
and fair, but to enforce them in accordance with the evidence and
recognized principles of law.
In my opinion, the elements of duress and coercion have not been
established in this case. The doctrine that
Page 315 U. S. 311
"necessitous men are not free men," a doctrine evolved by the
English courts of chancery in the eighteenth century for the
protection of harassed debtors,* is not applicable to the
Government of the United States, armed as it is with both an actual
and a potential arsenal of powers adequate to protect its interests
in dealings with private persons.
I am also of opinion that the "bonus for savings" clauses are
integral parts of the contracts in question and part of the entire
consideration moving to Bethlehem in exchange for its promise to
build ships. To characterize these clauses as severable and
supported by consideration only if Bethlehem promised to increase
its efficiency is ingenious, but requires us to close our eyes to
the actualities of the record before us and to ignore fundamental
contract law.
Nor can I accept the proposition that the "bonus for savings"
clauses are properly interpreted as meaning that Bethlehem was to
receive one-half of the "savings" only insofar as Bethlehem could
prove that the "savings" were due to its increased efficiency. Such
an interpretation, it is true, would prevent Bethlehem from
benefiting by reason of purely fortuitous "savings." However, in
the absence, as here, of fraud, mistake, or that overreaching which
we label "duress" and "coercion," contracts should be interpreted
as they are written, not as they might or should have been written
in the light of afterthought and subsequent experience. The
language of the "savings" clauses does not limit Bethlehem's
participation in "savings" to those attributable only to its own
efforts. The Master found that "Bethlehem was to participate in
savings however earned." The suggested interpretation, ignoring the
language of the contracts and the expressed
Page 315 U. S. 312
understanding of the parties, gratuitously rewrites the
contracts to accord with notions of fairness acquired in the light
of subsequent developments.
It is understandable that one may be indignant at Bethlehem's
claim, but such indignation does not justify the distortion of
established legal principles to relieve the Government of its
approval of a hard bargain. It cannot be left out of consideration
that the Government entered into the agreements with full
understanding of their terms. Surely there is much to be said in
favor of the Government's standing behind obligations, even though
quite onerous, which it incurred with knowledge of the
circumstances. The possibility that the Government may be relieved
of bargains twenty-four years after agreeing to them is not
conducive to mutual trust and confidence between citizens and their
government.
The judgment should be affirmed.
*
Vernon v. Bethell, 2 Eden 110, 113.
And see Wood
v. Abrey, 3 Madd. 417;
Underhill v. Horwood, 10 Ves.
211.
MR. JUSTICE FRANKFURTER, dissenting.
The Founders divided our government into three branches, partly
to prevent autocratic concentration of power and partly to achieve
appropriate division of labor in the difficult task of government.
The President has his duties, the Congress its duties, and we ours.
What powers the Congress should give the President in order to
obtain the most effective production of war supplies, how the
President should exercise those powers, whether a system of private
contracts for war materials is conducive to unjustifiable waste and
profiteering, or whether government production of necessary war
supplies is a wiser course -- these and like matters are not our
business, and upon them we should neither express nor intimate
views. However circumscribed the judicial area may be, we had best
remain within it. But the function of the judiciary is not so
limited that it must sanction the use of the federal courts as
instruments of injustice in disregard
Page 315 U. S. 313
of moral and equitable principles which have been part of the
law for centuries. I am compelled therefore the dissent from the
judgment of the Court.
In the summer of 1917, the United States was at war with
Germany. The enemy's submarine was taking terrific toll of our
shipping. The immediate threat to our national security had to be
met promptly. Congress enacted the Emergency Shipping Fund Act of
June 15, 1917, 40 Stat. 182, conferring vast powers upon the
President. He was authorized to place orders for such ships or
material as "the necessities of the Government" may require; to
modify, suspend, cancel or requisition contracts for the building,
production, or purchase of ships or material, and to take over any
plants and ships constructed or in the process of construction. If
any person owning any ship, plant, or material refused to build or
sell ships or material ordered by the Government "at such
reasonable price as shall be determined by the President," he was
empowered to take possession of the ships, material, or plant of
such person.
On July 11, 1917, the President delegated all the authority
vested in him by this Act to the United States Shipping Board
Emergency Fleet Corporation. A stupendous task was thereby imposed
upon the Fleet Corporation.
"The program of construction, as well as operation was gigantic.
It involved an expenditure of more than three and a half billion
dollars, a sum greater than any expended by any corporation in a
similar period of time. Many of the officials and board members
were without experience in either shipbuilding or operation. No
adequate organization existed at the beginning. A complete
organization to carry out its large program had to be created.
There was a shortage of shipbuilding skill as well as shipbuilding
facilities. The need for ships was imperative, and constantly
increased during the combat period."
Report of the Select Committee on U.S. Shipping
Page 315 U. S. 314
Board Operations, H.Rep. No. 1399, 66th Cong., 3d Sess., p.
24.
Bethlehem was the largest shipbuilding company in the world. Its
five subsidiaries and their plants were experienced shipbuilders,
with efficient and well equipped organizations. As the Master in
this case found,
"it was understood by all parties concerned that the Fleet
Corporation shipbuilding program would call for capacity production
at each of Bethlehem's shipyards."
Of course, the Government had the power to take over Bethlehem's
shipyards and plants. But the United States was at war. It needed
ships -- and it needed them at once. The shipyards and plants of a
recalcitrant shipbuilder would not produce the necessary tonnage,
at least not in the needed time, without an organization able to
operate them at maximum efficiency. The Master found that
"A failure to induce Bethlehem to undertake the shipbuilding
program covered by these contracts, followed by the taking
possession by the Fleet Corporation of the Bethlehem plants, could
not have accomplished the desired result. It was Bethlehem's
organization that was necessary to insure success to the
shipbuilding program of the Fleet Corporation, and, as the
Government did not have the power to compel performance by an
unwilling organization, if Bethlehem demanded its price on the
basis of substantial commercial profits, rather than contribute
such services on a patriotic basis, the Government was obliged to
take the contracts on such basis or not at all."
Bethlehem does not deny that, in these negotiations, the
Government's legal power to requisition its shipyards was, for
purposes of bargaining, an empty weapon. "It is also true,"
Bethlehem admits,
"that, although the Fleet Corporation had the power to take over
Bethlehem's yards, what it really required for the carrying out of
its program was the use of Bethlehem's organization -- its
knowledge of how to build ships."
The representatives
Page 315 U. S. 315
of both Bethlehem and the Fleet Corporation knew that the
Government did not regard its power to requisition plants and
shipyards as a satisfactory alternative to making contracts with
private shipbuilders for the construction of ships. [
Footnote 2/1] It is not for us to say that
the Government should not have determined upon such a policy. It is
enough that, when these contracts were made, none of the parties
believed that there was open to the Government the feasible
alternative which now, twenty-five years later, this Court says was
open to it.
This was the setting in which the contracts in suit were made.
Bethlehem was represented throughout the negotiations by Joseph W.
Powell, its vice-president and operating manager, and Harry Brown,
its technical manager, described by the Master as "two of the
ablest and most experienced shipbuilders and estimators of
shipbuilding costs in the United States." On behalf of the Fleet
Corporation, the active negotiators were Admiral E. T. Bowles,
manager of its division of steel ship construction, and G. S.
Radford, manager of its contract
Page 315 U. S. 316
division. The Master characterized Bowles and Radford as
"equally competent shipbuilding experts." However, they were not
empowered to conclude contracts on behalf of the Fleet Corporation.
That ultimate authority belonged to Charles Piez, the
vice-president and general manager of the Fleet Corporation. Piez
was a businessman who had had no previous shipbuilding experience,
and the Master found that,
"At the time of the negotiations relating to the contracts in
controversy, the relations between Powell and Piez were very close.
Piez, as Powell knew, had had no shipbuilding experience
whatsoever, had implicit confidence in Powell's integrity and
shipbuilding ability and experience, and was accustomed to look to
him for information and assistance with respect to matters of
shipbuilding."
Following a conference in Washington on June 15, 1917, attended
by Powell and other shipbuilders, the General Manager of the Fleet
Corporation requested Bethlehem to submit formal proposals for the
construction of ships. Throughout the entire negotiations which
followed, the Fleet Corporation tried to persuade Bethlehem to
enter into "lump-sum" contracts. Powell refused, insisting upon the
so-called "half-savings" form of contract which he had originated.
He set forth his proposals in his letter of December 13, 1917, to
the Fleet Corporation:
"Because of the unprecedented conditions surrounding the Labor
and Material market, it is impracticable to estimate within a
reasonable percentage what will be the actual cost of construction,
and it is therefore impossible to submit fixed prices for any of
these vessels except upon a basis so far above estimated cost that
any figure acceptable to this Company would not be acceptable to
the Emergency Fleet Corporation. It is proposed, however, that they
be constructed on the basis of actual cost plus a fee, with an
agreed upon probable cost, this Company to be paid in addition to
the fee one-half of any saving that may be
Page 315 U. S. 317
made below this cost figure, and with the further provision that
the estimated cost figure will be increased due to any increase in
rates of wages that may be approved by the Emergency Fleet
Corporation."
After further conferences, Powell submitted a proposal, dated
December 19, 1917, specifying the estimated costs and fixed fees of
the vessels to be constructed. On the morning of January 3, 1918,
before the Fleet Corporation had expressed any views on the
proposal of December 19, Powell handed Piez a letter, dated January
3, 1918, offering to construct a greater number of vessels than was
specified in his earlier proposal. The letter concluded
"that, while this company cannot undertake any capital
expenditures at its expense, if the terms in our proposal do not
otherwise meet with the Emergency Fleet Corporation's approval, we
are prepared to accept the order to construct these vessels on such
terms as may be personally determined by Mr. Charles Piez, the Vice
President and General Manager, and strongly urge there be no delay
in placing this order, as we are making this offer because of our
knowledge of the vital emergency now confronting this nation in
connection with the requirements for additional merchant
vessels."
Upon receipt of this letter, Piez arranged a conference between
Powell, Brown, Bowles, and Radford, which occurred on the afternoon
of January 3. But Bowles and Radford did not know, and neither was
informed before or during the conference, of the offer made to Piez
in Powell's letter of January 3. It can hardly be said, therefore,
that this letter, neither addressed to nor made known to the real
negotiators for the Government, was a factor in their
negotiations.
At the conference, which lasted about five hours, Bowles again
attempted to persuade Powell to undertake the construction upon a
lump-sum basis. Powell was adamant, however, and Bowles had to
acquiesce in the half-savings
Page 315 U. S. 318
form of contract in order to reach any agreement. Powell
insisted that the estimates previously submitted by Bethlehem were
fair and reasonable. Neither Bowles nor Radford submitted any
estimates or counterproposals, "their criticism being limited to
the opinion expressed by Bowles that the original and reduced
estimates submitted by Powell were too high." Powell made several
reductions in the estimates, and in response to Bowles' inquiry,
Brown assured him that the estimates were about as accurate as
could be made under the circumstances. Bowles and Radford thereupon
agreed to the prices, subject to confirmation by Piez. On the same
day they handed Piez the following memorandum:
"We hand you herewith the Bethlehem Shipbuilding Corporation's
proposal dated December 19, for additional construction at their
various plants, amounting in all to 19 vessels, exclusive of tugs.
It may be noted that, with the exception of three ships, the
vessels in question are troop ships and tankers-ships of a type
that only real shipbuilders can produce satisfactorily. As is well
known, we have been having difficulty in placing such vessels."
"We wish to place on record the fact that the Bethlehem
Shipbuilding Corporation's representatives have insisted on
comparatively high prices for these vessels; that they have only
with difficulty been persuaded to quote us on the types of ships
referred to; and, that their attitude has been characterized by an
arbitrary refusal to guarantee or stand behind delivery dates. In
other words, it was difficult to persuade them to quote even a
tentative delivery date, and they refused positively to accede to a
bonus and penalty clause for delivery."
"The letter herewith, addressed to the Bethlehem Shipbuilding
Corporation, in reply to their proposal, has been prepared for your
signature, and is now presented with the recommendation that it be
signed. While the prices we have agreed to with representatives of
the Bethlehem
Page 315 U. S. 319
Shipbuilding Corporation are not satisfactory to us,
nevertheless they represent a material reduction from the prices
quoted by that Corporation. Realizing that the Nation will need
these vessels, we have been actuated by the belief that further
delay in placing the contracts should be eliminated, and we believe
we have made the best compromise possible under very difficult
conditions."
As a consequence of these negotiations, the thirteen contracts
here in controversy were executed, seven on February 1, 1918, and
six thereafter.
The provisions of these contracts demand careful analysis. The
contract marked No. 183, calling for the construction by Bethlehem
of three steel tank vessels each weighing about 9,100 tons, is
typical.
In order to provide the sums necessary for carrying on the work
under the contract, the Fleet Corporation agreed to deposit in
advance
"such sums as may be necessary to constitute and keep
constituted a fund from which to finance the work, to provide for
payments to be made for materials, and for wages and salaries of
persons employed upon the work hereunder."
The Fleet Corporation agreed also to assist Bethlehem
"to secure with the utmost practicable expedition and at the
minimum cost consistent with the existing conditions, the
facilities, utilities, parts, materials and supplies required for
the work under this contract."
The price to be paid for each vessel was defined to include (a)
the "actual cost," plus (b) a fixed fee of $185,000, plus (c)
one-half the amount by which the actual cost of each vessel should
fall short of an estimated cost of $1,865,000.
It would be difficult to draft a more inclusive definition of
"cost" than that contained in this contract. "Actual cost" was
defined to include the following items, as well as "items similar
thereto in principle": (a) the net costs of labor (including
bonuses), materials, machinery, equipment, and supplies furnished
by Bethlehem, and all other
Page 315 U. S. 320
direct charges, such as insurance on the vessels, etc.; (b) a
"proper proportion" of running expenses, including rentals, cost of
repairs and maintenance, light, heat, power, insurance, management,
salaries (including bonuses), and all other indirect charges; (c) a
"proper proportion" of interest accrued on bonds, loans, or other
debts existing or previously made, the proceeds of which "shall be
used, or shall have been or shall be invested in plant, equipment,
etc., that shall be used" in the performance of the contract; (d) a
"proper proportion" of taxes of all kinds, except federal taxes,
with respect to the business or property; (e) a "proper proportion"
of physical losses sustained in connection with the construction of
the vessels under the contract, including losses from fire, flood,
storm, riot, vandalism, acts of God, acts of war, or other
casualties, and (f) a "reasonable" allowance for depreciation of
property and plants used in connection with the construction under
the contract.
The Master found that, under the "half-savings" clause Bethlehem
was entitled to receive one-half the difference between the
estimated cost and the actual cost, regardless of how this
difference was achieved. Bethlehem was therefore not required to
show that the "savings" were attributable to its efforts to
increase efficiency.
Since the estimated costs of construction specified in the
contracts are crucial in fixing the extent of Bethlehem's profits,
it is necessary to consider how they were determined. According to
the explanation furnished by Bethlehem, Brown prepared the
estimated costs specified in Bethlehem's letter of December 19,
1917, as follows: as the basis of his estimate, he took the cost of
constructing Hull 253, a 9,100 ton tanker which had recently been
completed at the Fore River yard. The cost of the material in Hull
253 was about $389,000, consisting of $150,000 for the steel
structure and $239,000 for the remaining material. Brown estimated
that the cost of the material
Page 315 U. S. 321
in a similar tanker to be constructed in 1918 would be $817,000,
including $399,000 for the steel structure and $418,000 for the
remainder. His estimate assumed an increase in freight rates and
costs of delivery of 42%. The next item was the cost of labor,
which on Hull 253 amounted to 38.75 cents per hour. Brown assumed
that wage scales would rise to 50 cents per hour, an increase of
29%, and that efficiency would decrease about 30%. Therefore, he
estimated a total labor cost of $548,000, as compared with the
actual labor cost upon Hull 253 of.$326,000. Similarly, the
estimates of plant operating expenses were computed on the basis of
equally large assumed increases. The total estimated cost of
material, labor, operating expenses, and overhead amounted to
$1,694,000, to which Brown added a flat 10% allowance to cover
items such as armed guard equipment and "to make allowance for
other contingencies," making a total estimated cost of $1,863,000,
or approximately $205 per ton. To this figure, Powell added an
additional $10 per ton because, as he testified,
"there was an item of increased cost of steel, which represented
a contract for very high-priced steel that we had to use in
connection with this program, and which amounted to about $2.50 a
ton spread over the program that we expected to undertake. That was
a very rough figure. Whatever else I put on, I put on because I
knew I was going to have to trade the final contract out with
Admiral Bowles, and I knew I would not get what I asked for, and if
I did not ask for more than I expected, I would not get out where I
wanted to be."
Brown testified that "He [Powell] took the figures that I gave
him and added $10 a ton to it" for some reason which he could not
recall.
The estimated cost finally specified in the contract for the
construction of the three vessels was $1,865,000; the estimated
cost of such vessels proposed in Powell's letter of December 19,
1917, was $1,983,800, a difference of $118,800, or less than 6% of
the proposed estimate.
Page 315 U. S. 322
The Master found that, during the negotiations, the Fleet
Corporation was uninformed as to the probable cost of materials and
labor, Bethlehem's overhead and operating expenses, and
depreciation and similar charges. Consequently, at the conference
of January 3, 1918, from which emerged the contracts in
controversy, the representatives of the Fleet Corporation did not
submit any counteroffers to Bethlehem; they merely insisted that
Bethlehem's estimates were too high. Brown's testimony is
illuminating as to the nature of the bargaining at the
conference:
"Q. Now I am asking you whether with respect to these vessels,
Admiral Bowles submitted any price of his own?"
"A. No, sir."
"Q. Did he ask you how your estimates were made up?"
"A. No, sir."
"Q. Did he ask you to justify your estimates in any way?"
"A. No, sir."
"Q. He just objected to them repeatedly and said they were too
high?"
"A. Yes, sir."
"Q. But did not ask you to justify them?"
"A. No, sir."
"Q. Until Powell finally came down to a figure which Bowles was
willing to accept?"
"A. Well, I should put it this way; to a figure which Mr. Powell
refused to go below."
The total estimated costs of construction in the thirteen
contracts in controversy amounted to $119,750,000. The total actual
costs, as defined in the contracts, were $92,990,521. The estimated
costs therefore exceeded the actual costs by $26,759,479, or, to
put it another way, the estimated costs were almost 29% greater
than actual costs. Nowhere in the long record, as the Master found,
is there any explanation or justification for the tremendous
disparity
Page 315 U. S. 323
between the estimated costs submitted by Bethlehem, or those
specified in the contracts, and the actual costs.
Bethlehem's profits under these contracts amount to
approximately $24,000,000, or about 22% of actual costs including
extra work. In two of these contracts, Nos.191 and 226, its profits
exceed 34% and 32%, respectively. Moreover, these figures do not
include the profits made by Bethlehem Steel Company, an affiliate,
on the sales to Bethlehem at the maximum prices permitted by the
War Industries Board of 43,000 tons of steel used in the
construction of ships under these contracts.
To speak of Bethlehem's profits as only 22% is, in any event,
misleading. The profits are 22% of "cost," and not 22% of what
might fairly be described as Bethlehem's capital investment in
these contracts. For, under these contracts, Bethlehem took
absolutely no risk of loss; in addition, the Government agreed to
advance all sums necessary to finance the construction of the
vessels. Even in usurious transactions, the lender takes the risk
of the borrower's insolvency. Here, Bethlehem took no risks at
all.
Bethlehem has already received from the Government the total
costs of construction (including items for wage increases and extra
work), plus fixed profits of $11,962,400 (representing about 11% of
the actual costs including extra charges), plus bonuses of
$8,093,157 under the half-savings clause (over 7% of costs). It has
thus received total profits of more than $20,000,000 under these
contracts. In the present suits, it is seeking additional sums of
more than $7,500,000, of which about $3,800,000 represents bonuses
under the contracts in question. In sustaining the judgments of the
lower courts, this Court is awarding Bethlehem further profits of
about 4% on these contracts.
The Master expressly found that it was essential that Bethlehem
undertake to build the vessels provided for in
Page 315 U. S. 324
the contracts, and that, since the Government needed Bethlehem's
organization, it had no satisfactory alternative. It had to make
the contracts on Bethlehem's terms or not at all. He concluded,
nevertheless, that, since
"the Fleet Corporation made the contracts with open eyes,
although resenting the commercial attitude of Bethlehem and
condemning Bethlehem for demanding its 'pound of flesh,'"
the contracts were enforceable by Bethlehem in the absence of
any proof of fraud.
The District Court concurred in the proposition that the absence
of fraud made the contracts invulnerable. But its conclusion is
contradicted by its findings:
"The managers for the contractor adopted the famous Rob Roy
distinction, who admitted he was a robber, but proudly proclaimed
that he was no thief. The contractor boldly and openly fixed the
figures in the estimated cost so high as to give them the promise
of large bonus profits. The managers for the Fleet Corporation knew
that the estimate was high and why it was made high, and so
protested it. The reply of the contractor's managers was, 'We will
take the contract with this promise of bonus profits incorporated
in it, but not otherwise. You take it or leave it.' Whatever wrong
there was in this may have been the wrong in a daylight robbery,
but there was no element of deception in it."
23 F. Supp.
676, 679.
Similarly, the affirmance of the Circuit Court of Appeals
appears to have been based upon the assumption that the
government's failure to show fraud was fatal:
"It is, of course, obvious that these negotiations took place in
time of war, when the need of the Government for ships was
extremely urgent and the necessity of reaching an agreement with
Bethlehem therefore vital. It is equally clear that Bethlehem
insisted upon assuring itself a margin of profit which, in view of
the necessities of the Government, was so large as to indicate an
attitude of commercial greed but little diluted with patriotic
feeling. There is no doubt
Page 315 U. S. 325
that this attitude on the part of Bethlehem was deeply resented
by the Government representatives, but the latter were faced with
the alternative of either agreeing to Bethlehem's terms or taking
possession of its shipyards and having the Government itself
construct the vessels. We think the record clearly indicates that
the Government representatives felt that the latter course could
not have accomplished the shipbuilding program with the speed which
was essential. It was Bethlehem's existing shipbuilding
organization that was necessary to insure success to the program of
the Fleet Corporation. Consequently, the Government
representatives, feeling as they did that Bethlehem's organization
was necessary to their program, were obliged to accept the terms
offered by Bethlehem. This they did with full knowledge, as we have
said, that the estimated cost figures included in the contracts did
not represent close approximations, but were so prepared as to
assure to Bethlehem substantial additional profits by way of the
bonus of savings. It follows that, while Bethlehem may be condemned
for having taken advantage of the Nation's necessities to secure
inordinate profits, it cannot be charged with having misrepresented
the facts to the Government's representatives."
113 F.2d 301, 305-306.
Thus, not less than six times did the Circuit Court of Appeals
declare that the unconscionable terms of this contract were forced
upon the Government by the dire necessities of national
self-preservation. Nevertheless the Court found itself impotent to
resist the demand that the courts themselves become the means of
realizing these "inordinate profits." But law does not subject
courts to such impotence. Courts need not be the agents of a wrong
that offends their conscience if they heed the commands of law.
In England prior to 1285 (Statute of Westminster II, 13 Edw. I,
c. 50) suitors were frequently
"obliged to depart from the Chancery without getting writs,
because there are none which will exactly fit their cases, although
these cases
Page 315 U. S. 326
fall within admitted principles."
Maitland, Forms of Action at Common Law, Lect. IV (1936 ed.) p.
51. Today it is held that, because the circumstances of this case
cannot be fitted into a neatly carved pigeonhole in the law of
contracts, "daylight robbery," exploitation of the "necessities" of
the country at war, must be consummated by this Court. It is said
that familiar principles would be outraged if Bethlehem were denied
recovery on these contracts. But is there any principle which is
more familiar or more firmly embedded in the history of
Anglo-American law than the basic doctrine that the courts will not
permit themselves to be used as instruments of inequity and
injustice? Does any principle in our law have more universal
application than the doctrine that courts will not enforce
transactions in which the relative positions of the parties are
such that one has unconscionably taken advantage of the necessities
of the other?
These principles are not foreign to the law of contracts. Fraud
and physical duress are not the only grounds upon which courts
refuse to enforce contracts. The law is not so primitive that it
sanctions every injustice except brute force and downright fraud.
More specifically, the courts generally refuse to lend themselves
to the enforcement of a "bargain" in which one party has unjustly
taken advantage of the economic necessities of the other.
"And there is great reason and justice in this rule, for
necessitous men are not, truly speaking, free men, but, to answer a
present exigency, will submit to any terms that the crafty may
impose upon them."
Vernon v. Bethell, 2 Eden 110, 113. So wrote Lord
Chancellor Northington in 1761.
The fact that the representative of the Government entered into
the contracts "with their eyes wide open" does not mean that they
were not acting under compulsion.
"It always is for the interest of a party under duress to choose
the lesser of two evils. But the fact that a
Page 315 U. S. 327
choice was made according to interest does not exclude duress.
It is the characteristic of duress properly so called."
Holmes, J., in
Union Pac. R. Co. v. Public Service
Comm'n, 248 U. S. 67,
248 U. S. 70. In
that case, a state unconstitutionally exacted a fee for a
certificate of authority to issue railroad bonds. A railroad which
had paid the fee and obtained a certificate, rather than run the
risk of subsequent invalidation of its bonds and imposition of
serious penalties, was held to have been coerced into making the
payments. In
Swift Company v. United States, 111 U. S.
22,
111 U. S. 29,
the taxpayer's only alternatives were "to submit to an illegal
exaction or discontinue its business." The payment of the tax in
these circumstances was held to be under duress.
See also Ward
v. Love County, 253 U. S. 17,
253 U. S. 23.
The courts generally regard the dilemma of the taxpayer who must
either pay the taxes or incur serious business losses as a species
of duress.
E.g., Morgan v. Palmer, 2 Barn. & C. 729;
Ripley v. Gelston, 9 Johns. 201;
Scottish U. & N.
Ins. Co. v. Herriott, 109 Iowa 606, 80 N.W. 665.
Underlying all these cases is the law's recognition of a basic
psychological truth. In
Atkinson v. Denby, 7 Hurlst. &
N. 934, 936, Cockburn, C.J., said that "[w]here the one person can
dictate, and the other has no alternative but to submit, it is
coercion."
See also Abbott, C.J., in
Morgan v.
Palmer, 2 Barn. & C. 729, 735:
"But if one party has the power of saying to the other, 'that
which you require shall not be done except upon the conditions
which I choose to impose,' no person can contend that they stand
upon anything like an equal footing."
And these were decisions in days when law was supposed to be
much more rigid and more respectful of forms than we now ordinarily
deem just.
The fundamental principle of law that the courts will not
enforce a bargain where one party has unconscionably
Page 315 U. S. 328
taken advantage of the necessities and distress of the other has
found expression in an almost infinite variety of cases.
See
Lonergan v. Buford, 148 U. S. 581,
148 U. S.
589-591;
Snyder v. Rosenbaum, 215 U.
S. 261,
215 U. S.
265-266. Perhaps the most familiar is the situation of
the mortgagor who, under the pressure of financial distress,
conveys his equity of redemption to the mortgagee. The courts will
scrutinize the transaction very carefully,
Villa v.
Rodriguez, 12 Wall. 323,
79 U. S. 339,
and if it appears that the mortgagee has taken unfair advantage of
the other's position, the conveyance will not be enforced.
Compare Vernon v. Bethell, 2 Eden 110;
Close v.
Phipps, 7 M. & G. 586;
Richardson v. Barrick, 16
Iowa 407.
Similarly, an heir or remainderman who is compelled by financial
circumstances to sell his expectancy for a song may recover it if
the vendee has unduly exploited the other's distress.
Wood v.
Abrey, 3 Madd. 216, 219 (where the Vice-Chancellor, Sir John
Leach, said: "If a man who meets his purchaser on equal terms,
negligently sells his estate at an under value, he has no title to
relief in equity. But a Court of Equity will inquire whether the
parties really did meet on equal terms, and if it be found that the
vendor was in distressed circumstances, and that advantage was
taken of that distress, it will avoid the contract.");
Underhill v. Harwood, 10 Ves.Jr. 209;
McKinney v.
Pinckard's Ex'r, 2 Leigh 149, 29 Va. 149;
Butler v.
Duncan, 47 Mich. 94, 10 N.W. 123;
Brown v. Hall, 14
R.I. 249. In
Administrators of Hough v. Hunt, 2 Ohio 495,
502, a person heavily in debt, in order to obtain a further loan
with which to meet debts falling due, agreed to buy land at more
than double its value. The court found that the lender had unjustly
taken advantage of the borrower's necessities, and therefore
rescinded the contract:
"The rule in chancery is well established. When a person is
incumbered with debts, and that fact is known to a person with whom
he contracts, who avails himself of it to exact an
Page 315 U. S. 329
unconscionable bargain, equity will relieve upon account of the
advantage and hardship."
This was written in 1826. To the same effect are
Vyne v.
Glenn, 41 Mich. 112, 1 N.W. 997, and
Bither v.
Packard, 115 Me. 306, 98 A. 929.
Another class of cases in which this principle has been applied
arises where a customer of a gas or electric company pays charges
which he asserts he is not obligated to pay, rather than have his
service disconnected. Payments made in such circumstances are
regarded as coerced.
See Boston v. Edison Electric Illuminating
Co., 242 Mass. 305, 310, 136 N.E. 113;
Westlake &
Button v. St. Louis, 77 Mo. 47.
Cobb v. Charter, 32 Conn. 358, illustrates another type
of controversy in which the courts have given effect to the
historic principle of duress which is now seemingly rejected as an
innovation. The defendant there had possession of a chest of tools
belonging to the plaintiff, a mechanic. He refused to give up the
chest, which the plaintiff needed in order to ply his trade, unless
the latter would pay a bill for which he denied responsibility. The
plaintiff's payment of the bill in these circumstances was held to
have been made under duress.
Accord: Lonergan v. Buford,
148 U. S. 581,
148 U. S.
589-591;
Fenwick Shipping Co. v. Clarke Bros.,
133 Ga. 43;
Stenton v. Jerome, 54 N.Y. 480;
Harmony v.
Bingham, 12 N.Y. 99.
In
Stiefler v. McCullough, 97 Ind.App. 123, 174 N.E.
823, a merchant who had to obtain a loan in order to remain in
business agreed to pay the president of a bank an exorbitant sum in
consideration for his services in procuring a loan. The court
refused to enforce this agreement as unconscionable. Similarly, in
Niedermeyer v. Curators of State University, 61 Mo.App.
654, a student paid tuition fees which he regarded as excessive,
and which he did not believe he was required to pay under his
contract with the university, only because he feared expulsion for
nonpayment. This payment was held to have been made
Page 315 U. S. 330
under duress, and hence recoverable.
Cf. Baldwin v. Sullivan
Timber Co., 65 Hun 625, 20 N.Y.S. 496;
Kelley v.
Caplice, 23 Kan. 474.
Strikingly analogous to the case at bar are the decisions that a
salvor who takes advantage of the helplessness of the ship in
distress to drive an unconscionable bargain will not be aided by
the courts in his attempts to enforce the bargain.
Post v.
Jones, 19 How. 150,
60 U. S. 160;
The Tornado, 109 U. S. 110,
109 U. S. 117;
The Elfrida, 172 U. S. 186,
172 U. S. 193.
In
Post v. Jones, supra, it was said that the courts
"will not tolerate the doctrine that a salvor can take the
advantage of his situation, and avail himself of the calamities of
others to drive a bargain; nor will they permit the performance of
a public duty to be turned into a traffic of profit."
These cases are not unlike the familiar example of the drowning
man who agrees to pay an exorbitant sum to a rescuer who would
otherwise permit him to drown. No court would enforce a contract
made under such circumstances. [
Footnote 2/2]
To deny the existence of duress in a Government contract by
ironic reference to the feebleness of the United States as against
the overpowering strength of a single private corporation is an
indulgence of rhetoric in disregard of fact. The United States,
with all its might and majesty, never makes a contract. To speak of
a contract by the United States is to employ an abstraction. We
must not allow it to become a blinding abstraction. Contracts are
made not by 130 million Americans, but by some official on their
behalf. Because the national interest is represented
Page 315 U. S. 331
not by the power of the nation, but by an individual professing
to exercise authority of vast consequence to the nation, action by
Government officials is often not binding against the Government in
situations where private parties would be bound. [
Footnote 2/3] The contracts here were not made by
an abstraction known as the United States or by the millions of its
citizens. For all practical purposes, the arrangement was entered
into by two persons, Bowles and Radford. And it was entered into by
them against their better judgment, because they had only Hobson's
choice -- which is no choice. They had no choice in view of the
circumstances which subordinated them and by which they were
governed -- namely, that ships were needed, and needed quickly, and
Bethlehem was needed to construct them quickly. The legal
alternative -- that the Government take over Bethlehem -- was not
an actual alternative, and Bethlehem knew this as well as the
representatives of the Government.
The suggestion is made that Bethlehem's profits under these
contracts were not exceptional when compared with the profits made
under similar contracts, and that the enormous profits claimed by
Bethlehem under these contracts cannot be regarded as supporting
the inference that Bethlehem took advantage of the Government's
distress. But the only contracts before us are those involved in
this litigation. There is nothing in this record which enables us
to say that, although these contracts are unconscionable, all
contracts made by the Government during the same period were no
less unconscionable. And
Page 315 U. S. 332
even if this were so, it would be no argument that this Court
should give its sanction to these contracts by making itself the
instrument for realizing the unconscionable profits. What little
light the record does cast upon contemporary contracts gives no
justification for regarding these contracts as typical. The policy
of Charles M. Schwab, Director General of the Fleet Corporation,
was to make contracts providing for a maximum profit of 10%, out of
which all federal taxes would have to be paid.
See Letter
of Oct. 2, 1918, to Edward N. Hurley, Chairman of the Shipping
Board, relating to contracts with the American Shipbuilding
Company.
If we are to go outside the record, the evidence is confusing
and unreliable. It must be borne in mind that Bethlehem took no
risk of loss, that, under the contracts, it was protected from the
risks of rising costs of labor, materials, transportation, etc.,
that, under the contracts it was not required to make any capital
expenditures, that the Government agreed to advance all sums that
should be necessary for the performance of the contracts. It is
idle to compare the profits made by Bethlehem under these contracts
with profits made by industrial concerns of various types under
different types of contracts. Such figures are statistical
quicksand unless we are told also that, in each case, the
contractor was not required to make any capital investment, that he
was insured against normal business risks, and that he was
guaranteed a profit regardless of any change in circumstances.
We know that the policy of the Navy Department with respect to
so-called straight cost-plus shipbuilding contracts was to allow
profits of 10% of actual cost.
See Annual Report of the
Secretary of the Navy (1917) p. 33; Annual Report (1918) p. 685;
Annual Report (1919) pp. 572-76; Annual Report (1920) pp. 147-48.
We know that, similarly, the policy of the War Department with
respect to cost-plus contracts for the construction of
cantonments
Page 315 U. S. 333
was to allow profits not exceeding 10% of cost.
See
Annual Report of the Secretary of War (1917) vol. 1, p. 28; Annual
Report (1918) vol. 1, p. 1319; Annual Report (1919) pp. 4138-42.
See also Crowell, Government War Contracts, p. 85 (in
"emergency building contracts," a sliding scale of profits was
employed, ranging from cost plus 7% on contracts less than $100,000
to cost plus 2 1/2% on contracts more than $10,000,000). Similarly,
contracts for the construction of buildings to house war workers
were let on the basis of cost plus 2 1/2% on contracts over
$1,000,000, and 3 1/2% on contracts under $1,000,000.
See
testimony of Otto M. Eidlitz, President of the U.S. Housing
Corporation, Hearings before the subcommittee of the Senate
Committee on Public Buildings and Grounds pursuant to S.Res. 371,
65th Cong., 3d Sess., p. 35.
These statistics obviously do not tell the whole story of
Government contracts in the last war. But they indicate plainly
enough that this Court should not accept, as a basis for decision
in this case, the premise that Bethlehem's profits were
conventional when compared with profits made in comparable
transactions.
It is said, further, that, even if these contracts are
unenforceable when measured by standards of justice and equity
enforced by the courts for centuries, nevertheless this Court must
enforce the contracts now before us because Congress and the
President specifically authorized such a traffic in profits. The
suggestion is not consistent with historical fact.
The legislative history of the Emergency Shipping Fund Act
furnishes no support for the contention that, in conferring upon
the President authority to enter into contracts for the
construction of ships, Congress thereby commanded the courts to
enforce all contracts that were made, without regard to their
provisions and the circumstances under which they were negotiated.
On the contrary, the
Page 315 U. S. 334
debates contain many indications that Congress expected that the
shipbuilders of the nation would provide their services for a
reasonable compensation, and that the power conferred upon the
President to take over shipyards would not be exercised.
See remarks of Senator Knox, 55 Cong.Rec. 2518; Senator
Calder, 55
id. 2529; Rep. Fitzgerald, 55
id.
3018. Indeed, the Act itself specified that ships should be built
"at such reasonable price as shall be determined by the President."
40 Stat. 182, 183.
The National Defense Act, 39 Stat. 166, 213, specifically
provided that
"The compensation to be paid to any individual, firm, . . . for
its products or material, or as rental for use of any manufacturing
plant while used by the United States, shall be fair and just."
There can be no clearer indication that Congress did not
authorize or approve any policy of trafficking in profits. The fact
that Congress took care to ascertain whether the war agencies were
letting contracts under which excessive profits were being made,
see Hearings before subcommittee of the House Committee on
Appropriations on H.R. 3971, 65th Cong., 1st Sess., especially pp.
15-17, shows very plainly that Congress in no way countenanced
exploitation for exorbitant private profit of the necessities of
the Government.
Authority given to make contracts does not imply authority to
make unconscionable contracts. Suppose that Congress, in
authorizing the contracts in question, had written into its
legislation: "Provided, that no agency of government shall be
authorized to enter into unconscionable contracts." Can it be that,
because Congress did not expressly provide that "unconscionable
contracts" are unauthorized, it impliedly sanctioned the making of
"unconscionable contracts"? Or suppose the estimated costs in the
contracts were so inflated by Bethlehem that its profits were 200%,
rather than 22%. Would this Court still be bound to enforce these
contracts on the ground that
Page 315 U. S. 335
Congress had commanded their enforcement? Surely Congress did
not impliedly repeal historic legal principles and prohibit this
Court from exercising its duty to withhold relief when the
particular circumstances disclose an unconscionable arrangement in
the making of which the Government's contracting officers had no
practical choice.
The suggestion that President Wilson authorized a "traffic in
profit" is refuted, if explicit proof be needed, by his utterances.
For example, addressing a meeting of mine operators and
manufacturers on July 12, 1917, he spoke as follows:
"I hear it insisted that more than a just price, more than a
price that will sustain our industries, must be paid; that it is
necessary to pay very liberal and unusual profits in order to
'stimulate production;' that nothing but pecuniary rewards will do
it -- rewards paid in money, not in the mere liberation of the
world."
"I take it for granted that those who argue thus do not stop to
think what that means. Do they mean that you must be paid, must be
bribed, to make your contribution, a contribution that costs you
neither a drop of blood nor a tear, when the whole world is in
travail and men everywhere depend upon and call to you to bring
them out of bondage and make the world a fit place to live in
again, amidst peace and justice?"
"Do they mean that you will exact a price, drive a bargain, with
the men who are enduring the agony of this war on the battlefield,
in the trenches, amidst the lurking dangers of the sea, or with the
bereaved women and the pitiful children, before you will come
forward to do your duty and give some part of your life, in easy,
peaceful fashion, for the things we are fighting for, the things we
have pledged our fortunes, our lives, our sacred honor to vindicate
and defend -- liberty and justice and fair dealing and the peace of
nations? Of course you will not. "
Page 315 U. S. 336
"It is inconceivable. Your patriotism is of the same
self-denying stuff as the patriotism of the men dead or maimed on
the fields of France, or else it is no patriotism at all."
"Let us never speak, then, of profits and of patriotism in the
same sentence, but face facts and meet them."
"Let us do sound business, but not in the midst of a mist. Many
a grievous burden of taxation will be laid on this Nation, in this
generation and in the next, to pay for this war. Let us see to it
that, for every dollar that is taken from the people's pockets, it
shall be possible to obtain a dollar's worth of the sound stuffs
they need."
Public Papers of Woodrow Wilson, Vol. 3, pp. 75-6; 55 Cong.Rec.
4995.
Mr. Justice Holmes has said that "Men must turn square corners
when they deal with the Government."
Rock Island, A. & L.
R. Co. v. United States, 254 U. S. 141,
254 U. S. 143. His
admonition has particular relevance when this Court is called upon
to enforce agreements made with the Government at war for the
production of supplies essential to the prosecution of the war.
During wartime, the bargaining position of Government contracting
officers is inherently weak, no matter how conscientious they may
be. If they are to deal on equal terms with private contractors,
particularly where the subject matter of contracts is so intricate
and so specialized as the building of ships, they must have
available to them not only detailed information, but also the time
within which to study the data and the freedom to exercise a real
choice. In the last war, at least, this was not generally true.
See Sen.Rep. No. 944, 74th Cong., 1st Sess., pt. 4, p. 30.
It is not difficult in these days to appreciate the position of
negotiators for the Government in time of war, and to realize how
much the pressures of war deprive them of equality of bargaining
power in situations where bargaining with private contractors is
the only practicable means of securing necessary war supplies.
Page 315 U. S. 337
Because the Government is in such a dependent position, and
because those who deal with it on a cost-plus arrangement or some
similar basis are assured of a profit, it is wholly consistent with
practicalities, and makes no unduly idealistic demand for the law,
to judge the arrangements of such wartime contractors by standards
not unlike those by which a fiduciary's conduct is judged. Those
upon whom the nation is dependent for its supplies in the defense
of its life would hardly wish to be judged by lower standards.
The modes are vast and varied by which the nation obtains its
war supplies. What will best supply war needs in amplest measure in
the quickest time and least wastefully whether by private letting
and, if so, under what restrictions and safeguards; under what
circumstances the Government should do its own supplying either by
taking over old plants or building new ones or a combination of the
two; to what extent and through what means peacetime habits and
traditions may be displaced and disregarded -- these are questions
of policy for the wisdom and responsibility of the Congress and the
Executive. The very limited scope of inquiry to which a litigation
on a particular transaction is confined is hardly the basis for
judgment on such far-flung issues. If the history of this Court
permits one generalization above all others, it is the unwisdom of
entering the domain of policy outside the very narrow legal limits
presented by the record of a particular litigation. Such intrusion
into the executive and legislative domains is not conducive to the
just disposition of the immediate controversy. We are much less
likely to go wrong if we do not depart from the well grooved path
of judicial competence.
This Court should not permit Bethlehem to recover these
unconscionable profits, and thereby "make the court the instrument
of this injustice."
Thomas v. Brownville, Ft. K. & P. R.
Co., 109 U. S. 522,
109 U. S.
526.
Page 315 U. S. 338
[
Footnote 2/1]
Whatever the scope and importance of the Government's
requisitioning power in other situations (
compare Baruch,
American Industry in War, p. 77,
with Sen.Rep. No. 944,
74th Cong., 1st Sess., pt. 2, pp. 4-5, 111-15), it was without
significance in the Fleet Corporation's shipbuilding program. The
reports of the Shipping Board show that the exercise of the power
was limited to the acquisition of vessels which had been built or
were being constructed; the power does not seem to have been
employed to take over the shipyards of recalcitrant private
contractors. Indeed, the policy of the Government, based upon its
wartime needs, was to encourage, financially and otherwise, the
construction and maintenance of shipyards by private interests.
See 1st Annual Report of the U.S. Shipping Board (1917)
pp. 12-15;2d Annual Report (1918) pp. 33-36, 120-22; Report of
Director General Charles Piez to the Board of Trustees of the U.S.
Shipping Board Emergency Fleet Corporation (April 30, 1919) pp.
13-14, 78, 123; Report of the President of the U.S. Shipping Board
Emergency Fleet Corporation to the Board of Trustees (August 1,
1919) pp. 25-26.
[
Footnote 2/2]
The books are full of cases in which courts have refused to lend
themselves as collecting agencies of contracts made under
circumstances offensive to the conscience.
See, for
example, in addition to the cases cited in the text,
Johnson v. Ford, 147 Tenn. 63, 245 S.W. 531;
Harris v.
Cary, 112 Va. 362, 71 S.E. 551;
Northwestern Mut. Life
Ins. Co. v. Barker's Ex'x, 241 Ky. 490, 497, 44 S.E.2d 292;
Caivano v. Brill, 171 Misc. 298, 11 N.Y.S.2d 498.
[
Footnote 2/3]
E.g., the right to recover money paid under mistake of
law,
Wisconsin Central R. Co. v. United States,
164 U. S. 190,
164 U. S. 212,
and the unavailability against the Government of the defenses of
laches or neglect of duty,
United States v.
Kirkpatrick, 9 Wheat. 720,
22 U. S. 735,,
and estoppel based on unauthorized acts of its agents,
Lee v. Munroe,
7 Cranch 366;
Utah Power & Light Co. v. United States,
243 U. S. 389,
243 U. S.
408-409.
MR. JUSTICE DOUGLAS.
On the point of duress and coercion, I thoroughly agree with the
views expressed by MR. JUSTICE BLACK, and join in the opinion of
the Court. For the reasons stated by MR. JUSTICE BLACK, the claim
that Bethlehem's profits were unconscionable in the legal sense
would likewise fail.
There is, however, one aspect of the case on which I take a
somewhat different view.
The United States does not contest here the right of Bethlehem
to retain its "fixed fee" of approximately $12,000,000 for the
construction of the ships. The dispute revolves around an
additional sum of $12,000,000 which Bethlehem claims under the
so-called "bonus for savings" provision of the contracts. That
provision in the several contracts was the same except for the
amount of the fixed fee. Thus, a typical contract provided:
"Should the actual cost be less than the estimated . . . cost .
. . , the Contractor shall be allowed as profit on each vessel in
addition to said fixed sum for profit of . . . $210,000 one-half
the amount by which such actual cost of each vessel falls short of
the estimated cost. . . ."
I agree that the consummation of the bargain depended upon the
inclusion of this "savings" clause, and that, in each instance,
there was but one contract, not several. My view, however, is that
each contract was divisible or severable.
". . . [T]he essential feature of such a contract is that a
portion of the price is by the terms of the agreement set off
against a portion of the performance and made payable for that
portion, so that, when an apportioned part of the performance has
been rendered, a debt for that part immediately arises."
Williston on Contracts, § 861 (Rev.Ed.). In other words, the
whole performance of each contract was divided
"into two sets of partial performances, each part of each set
being the agreed exchange
Page 315 U. S. 339
for a corresponding part of the set of performances to be
rendered by the other promisor."
Id., § 860A. (1) The promise of the Fleet Corporation
to pay the actual cost plus the fixed fee was exchanged for
Bethlehem's undertaking to construct the ships. (2) The promise of
the Fleet Corporation to pay one-half the amount by which the
actual cost fell short of the estimated cost was exchanged for
Bethlehem's promise (which is implied) to effect the savings by
increasing efficiency.
Although I am clear that the contracts would not have been made
but for the inclusion of the "savings" provision, I do not believe
that there is a "necessary dependency" between these two sets of
promises within the rule of
Philadelphia, W. & B.R.
Co. v. Howard, 13 How. 307,
54 U. S. 339.
And see Pollak v. Brush Electric Assn., 128 U.
S. 446,
128 U. S. 455;
Fullmer v. Poust, 155 Pa. 275, 278, 26 A. 543;
Restatement, Contracts, § 266(3). Precedents, to be sure, are of
little aid, since each case turns on its special circumstances. But
the construction of divisibility seems warranted by the facts,
though here, as in other cases, considerable reliance must be
placed on implications.
Bethlehem's argument against divisibility rests on such
testimony of Piez, who represented the Fleet Corporation, as
follows:
"The price had to be placed for actual cost, if we knew the
cost, plus an allowance for contingencies, plus an allowance for
incentive, plus the fee. So we start out with the bare cost; then,
in order to meet any contingencies that may happen, add some
allowance for contingencies; in order to give a proper incentive,
add an incentive allowance, and then add the fee."
That is to say, the "savings" clause was deemed to be valuable
from the Fleet Corporation's viewpoint as an "incentive" to keep
the costs down and to expedite the work. And Powell, the author of
the "savings" clause in this case and the representative of
Bethlehem, testified that the savings to be obtained would
Page 315 U. S. 340
be sufficient to "wipe out the excess profits taxes," so that
the fixed fee would be "net" to Bethlehem.
But Powell's testimony also indicated that, while the "savings"
clause was an "incentive," Bethlehem was to earn the "savings":
"Q. Then I take it that one of your great problems, as the
driving force of this organization, was to improve your labor
conditions, or first to prevent labor conditions from getting worse
and then to try to improve them?"
"A. Yes."
"Q. Over what they were in December of 1917?"
"A. Yes."
"Q. And if you were able to do that, then there was a
possibility of some profit in these contracts under the half
savings clause?"
"A. Yes."
"Q. Was there any likelihood, or did you at that time foresee
any likelihood, of any substantial saving in your material
items?"
"A. No, I should not have expected at that time to make any
saving of any amount in the materials."
"Q. So that, if Bethlehem was to make any money out of these
contracts in excess of the fixed fee, it was your judgment that the
only way to do it was by increasing the efficiency of the
yards?"
"A. Exactly."
Powell also testified:
"The estimate was a figure which we had to shoot at that, in my
judgment, gave us a reasonable profit or a chance of making a
substantial saving. To make that saving, we had to operate more
efficiently than what we might say was average efficiency under
conditions that then existed. If we were going to make that saving,
we had to overcome any increased cost due to decreased efficiency,
and increase efficiency beyond what it was at that time. "
Page 315 U. S. 341
And Piez testified that the provision was to give the
shipbuilders an "incentive" to "use their ingenuity to make a
larger profit."
The Special Master found that the estimates designated as "base
prices" in the contracts
"would afford Bethlehem a reasonable opportunity to effect
'savings' as a result of its efforts and ability to increase
efficiency of management and labor as compared with average
efficiency then existing."
He also found that
"it was understood that participation in 'savings' was supposed
to represent a bonus or additional compensation to be earned by
Bethlehem as consideration for its special efforts and ability to
reduce cost by increasing efficiency of management and labor as
compared with efficiency then existing."
Yet he further found that "Bethlehem was to participate in
savings however earned, but expected to produce savings by
increased efficiency."
My difficulty is with that last finding. If Bethlehem was to
share half of the savings "however earned," then its right to
receive the bonus might well depend on a wholly fortuitous
circumstance, or it might accrue, as petitioner suggests, "simply
as a reward for the inaccuracy of its estimate of actual costs."
Under that view, Bethlehem would be entitled to $12,000,000
additional compensation merely because the wholesale price index
fell. Yet that would be tantamount to a gift by public officers of
property of the United States. The same result would follow if the
clause be read as containing merely a "best efforts" provision. The
contract already provided that Bethlehem "in all its acts
hereunder, shall use its best efforts to protect and subserve the
interest of the Owner." Even if the absence of such a provision,
one would be implied.
United States v. A. Bentley & Sons
Co., 293 F. 229, 235;
United States v. George A. Fuller
Co., 296 F. 178, 180. Hence, it is difficult for me to imply
that this additional $12,000,000 was offered as a reward for
performing an obligation which the
Page 315 U. S. 342
law would impose on the contractor in any event.
Burke &
James, Inc. v. United States, 63 Ct.Cls. 36, 57. That, too,
would be a grant of public funds for which the United States would
receive no
quid pro quo.
Hence, it seems more reasonable to imply that Bethlehem was to
render an additional performance for the additional compensation of
$12,000,000. Such a construction of the contracts avoids the
difficulties I have mentioned, as it gives the United States a
quid pro quo for its promise to pay an additional
$12,000,000.
Cf. Dayton Airplane Co. v. United States, 21
F.2d 673, 682, 683. And it is supported by the testimony of the
representatives of the two contracting parties who negotiated the
contracts.
In that view of the matter, Bethlehem would be put to its proof
that it effected the savings which it now claims. Mere guesswork
would not be enough.
J. J. Preis & Co. v. United
States, 58 Ct.Cls. 81, 86. Precise proof of each dollar saved
might not be possible. But a reasonable approximation of
Bethlehem's contribution to the savings would be necessary. Such
burden of proof has been sustained in other cases involving similar
contracts.
Cohen, Endel & Co. v. United States, 60
Ct.Cls. 513;
F. Jacobson & Sons v. United States, 61
Ct.Cls. 420. The Circuit Court of Appeals stated that there was
"some evidence tending to show that the savings resulted, in part
at least, from increased efficiency." 113 F.2d 301, 307. But there
was no clear showing that special efforts were made to reduce costs
and that the savings which resulted were traceable to such efforts.
The necessary findings on that issue were not made.