Option contracts for the purchase of land by the United States
from the petitioners provided for payment by petitioners of a 5%
commission to the Government's optioning agent and stipulated that,
if condemnation proceedings should be instituted, the option price
should constitute just compensation. In subsequent condemnation
proceedings, the Government disaffirmed the contracts. The district
court upheld the contracts; the circuit court of appeals reversed.
On review here, held:
1. The contracts contemplated that the agent's commission should
be added to the vendors' net price. P. 324 U. S.
2. Issues of fraud, misrepresentation, and duress are not before
this Court, since the trial court made findings supported by
substantial evidence against the Government on those issues, the
findings were not reversed by the circuit court of appeals, and the
issues were not argued here. P. 324 U. S.
3. Evidence that the Government's purchasing agent engaged in
questionable conduct in securing options from other vendors was not
relevant to the issue of the validity of the petitioners'
contracts. P. 324 U. S.
Page 324 U. S. 50
4. Mere disparity between the original cost of the lands to the
seller and the sale price to the Government does not gender the
contracts invalid. P. 324 U. S.
5. The provision of § 1 of the Act of July 2, 1940, prohibiting
use of the "cost plus a percentage of cost system of contracting,"
is applicable to purchases of lands. P. 324 U. S.
6. The contracts did not violate the provision of § 1 of the Act
of July 2, 1940, forbidding use (under that section) of the "cost
plus a percentage of cost system of contracting." P. 324 U. S.
7. The contracts were not invalid as contrary to public policy.
P. 324 U. S.
(a) The nature of the agent's interest and the contingent
character of his fee are not such as to vitiate the contracts. P.
324 U. S.
(b) In the absence of a plain indication of public policy
through long governmental practice or statutory enactments, or of
violations of obvious ethical or moral standards, this Court should
not assume to declare Government contracts contrary to public
policy. P. 324 U. S.
(c) The provisions of §§ 41, 112 and 113 of the Criminal Code
and of the Act of March 3, 1917, do not manifest a public policy
against the use of contracts of the type here involved. P.
324 U. S.
(d) Nor does the action of Congress on subsequent legislation
indicate that the contracts are contrary to public policy. P.
324 U. S.
139 F.2d 661 reversed.
Certiorari, 321 U.S. 760, to review the reversal of judgments in
two condemnation proceedings which involved the validity of
contracts of the United States for the purchase of lands.
MR. JUSTICE REED delivered the opinion of the Court.
Writs of certiorari were allowed to petitioners by this Court in
these two cases to review the action of the Circuit
Page 324 U. S. 51
Court of Appeals for the Eighth Circuit. [Footnote 1
] That appellate court reversed the
action of the District Court of the Eastern District of Missouri
which had upheld the validity of contracts between petitioners and
the United States for the purchase of land for the Weldon Springs,
Missouri, ordnance plant. [Footnote
] The contracts were pleaded by petitioners as defendants in
eminent domain suits to establish the proper condemnation
The petitions for certiorari were granted, 321 U.S. 760, because
of asserted conflict with United States v. Grace Evangelical
132 F.2d 460. Jurisdiction of this Court rests on
Section 240 of the Judicial Code.
Under the authority of the Second Supplemental National Defense
Appropriation Act of 1941, 54 Stat. 872, the President approved the
Weldon Springs project on October 17, 1940. Pursuant to this
approval, the War Department claims that it proceeded to acquire
the necessary land under the act of July 2, 1917, 40 Stat. 241, as
restricted by the National Defense Act of July 2, 1940, 54 Stat.
712. The statutory authority of the War Department to proceed as it
did is not questioned except on the issue of whether the purchase
contracts entered into in acquiring the needed land violate the
first section of the act of July 2, 1940, which provides:
That the 'cost plus a percentage of
cost' system of contracting shall not be used under this section,
but this proviso shall not be construed to prohibit the use of the
'cost plus fixed fee' form of contract when such use is deemed
necessary by the Secretary of War."
54 Stat. 713.
The duty to act for the War Department in obtaining the land lay
in the office of the Quartermaster General, and specifically in the
Real Estate Branch of that office. In an effort to expedite the
acquisition of the needed land,
Page 324 U. S. 52
the head of that branch, Colonel R. D. Valliant, contracted with
R. Newton McDowell to act as the agent for the Government in
securing options, on forms approved by the United States and
attached to the employment contract, from the owners for submission
to and acceptance by the United States. Mr. McDowell's compensation
for acting as agent was a "five percent (5%) commission . . . to be
paid by the vendor." [Footnote
The employment of McDowell as agent to secure options for the
United States was confirmed by the War Department to the Citizens
Committee, an informal organization of those who owned property
which was needed for the proposed project. McDowell went to work
Page 324 U. S. 53
carry out his contract. He held meetings at which he explained
to the landowners the plan to secure options and the option form
itself. From his explanation, the landowners must have understood
that their sale price would have deducted from it McDowell's
commission and other expenses. This was also the understanding of
the Government, as is shown not only by the documents themselves
which were approved by the Government, but also specifically by the
testimony of Colonel Valliant. While McDowell was employed and his
commission set by the Government, it was arranged that McDowell
should collect his money from the vendor, so that a single voucher
would cover the purchase price and the expenses.
The approved form of option, which was a part of McDowell's
contract with the Government, was used by McDowell in the
particular transactions which are under examination in these
proceedings. The option accords with the requirements of the
McDowell contract, and in addition provides for an agreed valuation
at the option price in case of condemnation. [Footnote 4
] The offer was accepted by the
Page 324 U. S. 54
There were a large number of landowners in the required area.
Options were obtained from 270, including the petitioners, and,
with one exception, the options were accepted by the Government at
the optioned price. Almost half of the contracts were closed by
acceptance of deeds and payment of the price. Criticism of the
prices and manner of purchase developed, and the War Department
repudiated the remaining contracts and turned to condemnation. The
repudiation followed upon the conclusion, among other things, that
the contracts violated the statutory provision against the "cost
plus a percentage of cost" system of contracting, page 324 U. S. 52
and were contrary to public policy because of the
contingent interest of McDowell, which was antagonistic to the
Petitioners' options were among those accepted, only to be
repudiated later, the Government then instituting condemnation
proceedings to obtain petitioners' lands. In the two condemnation
proceedings instituted against petitioners, judgments were entered
upon a declaration of taking which vested titles in the United
States. 46 Stat. 1421. Thereafter, the petitioners here filed their
answers in which they consented to the condemnation and demanded
that the price which was fixed in the option, accepted by the
Government, be adopted by the trial court as just compensation. In
reply, the Government set up its repudiation of the contracts on
numerous grounds, including fraud, such unfairness to the
Government because of gross overvaluation that the contract should
not be enforced in equity and good conscience, as well as the
disregard of the statutory proscription and public policy, which
was referred to in the preceding paragraph as the ground for
The two cases were decided in favor of the validity of the
contracts, and the compensation was fixed at the price
Page 324 U. S. 55
stated in the contract, without revaluation. Consequently, there
was no occasion for the trial courts to determine whether valuation
measured by just compensation would have varied from the agreed
price. The Government makes no objection to this manner of
determining compensation if the accepted options (contracts) are
valid. Compare Danforth v. United States, 308 U.
, 308 U. S. 282
In one case, the findings of fact and a comment appear as a
memorandum opinion in United States v. Certain
Land, 46 F. Supp.
. In the other case, the decree was entered without separate
findings of fact or opinion after adoption of the memorandum in the
first case. We perceive nothing in the record to distinguish the
cases here, and shall dispose of them in a single opinion.
The following determination appears in the opinion of the trial
court for these cases, 46 F.Supp. at page 928:
"There is an absence of any showing that facts were concealed,
that misrepresentations were made, or that duress was used. The
price stated in the option contract is not unconscionable. There is
no fraud, actual or constructive, in this case. [Footnote 6
As a result of this conclusion, the issues of corrupt action in
these two instances are decided contrary to the Government's
Page 324 U. S. 56
contention at the trial. No such contention was made by the
Government here. The findings also stated, 46 F.Supp. at 925:
"There is no evidence that the option price of forty-five
hundred dollars included the amount the defendants asked for the
land plus McDowell's fee of 5% of sale price, the Kansas City Title
Insurance Company's fee of 1 1/2% for examining title, the stamp
tax ,or the recording fee."
We treat the finding and determination as applicable to both
On appeal, the Circuit Court of Appeals found, contrary to the
trial court's finding quoted above, that the commission and
expenses were added to the vendors' net price. We agree with the
appellate court. While no direct evidence appears as to the
addition of the expenses to the vendors' net price, it seems clear
from the agreement between the Government and McDowell, the option
contract, the statements of McDowell at public meetings, the advice
given by the citizens' committee, and Colonel Valliant's testimony
that it was generally understood that the option price was to be
calculated in this way. Although Messrs. Muschany and Andrews were
not asked specifically as to how they figured their gross prices
stated in the options, both were present at a meeting at which
McDowell explained his contract. Since the vendors agreed by the
contract to pay all commissions and expenses, they must have added
these expenses to what they expected to receive net for their land.
Whether the addition was by precise arithmetical computation or by
intuitive action is immaterial. The mere fact that no separate
statement of the items appears in the evidence in these cases would
not overturn the force of this general and definite
The Court of Appeals was of the opinion that the contracts with
the landowners were "cost plus a percentage
Page 324 U. S. 57
of cost," and therefore invalid. Any further examination by it
of the Government's contention that the contract was contrary to
public policy was unnecessary. Petitioners here attack the first
conclusion. The Government defends the action of the appellate
court on this ground and also because, independently of the
cost-plus prohibition, the contracts between the landowners and the
Government were contrary to public policy.
Prior to consideration of the two principal issues raised by the
petitioners and respondent in their arguments before this Court, it
seems necessary to refer to the allegations of fraud,
unconscionable dealing, bad faith, and misrepresentation on which
respondent relied in the trial court as invalidating petitioners'
contracts. As is indicated, ante,
pp. 324 U. S. 54
the trial court specifically found against the respondent on these
issues. Nor did the Circuit Court of Appeals reverse the trial
court's findings. Fraud, misrepresentation, and duress were not
argued before this Court. Since the trial court's findings on these
issues are supported by substantial evidence, it is not for this
Court to undertake an independent examination of these issues as
such, or under the guise of determining "just compensation."
] Only recently,
Page 324 U. S. 58
Court restated the rules relating to the weight to be given fact
determinations by inferior judicial or quasi
bodies. United States v. Bethlehem Steel Corp.,
315 U. S. 289
315 U. S.
-298; Dobson v. Commissioner, 320 U.
; 321 U. S. 321
231. Therefore, this case comes before this Court without any
suggestion of fraud or unfairness such as would justify holding the
contracts invalid. Since these matters are not before us, we need
express no opinion on this aspect of the case.
The federal district court admitted evidence which indicated
that McDowell engaged in questionable conduct in securing options
from sellers other than the petitioners in the instant case. Such
evidence is not relevant to the issue of the validity of
petitioners' contracts. The enforceability of petitioners'
contracts is not to be determined or colored by McDowell's alleged
dealings with other parties; these other contracts are not involved
in the instant case, and circumstances which might urge a different
result with respect to them must be carefully eliminated, lest
petitioners be penalized for illegal acts of others.
There remains to be considered the question whether mere
disparity between the original cost of these lands to the seller
and the sale price to the government makes the contracts illegal --
whether a contract with the government is invalid on a mere showing
that it was highly profitable, but not unconscionable. Congress'
adoption of statutes providing for the renegotiation of war
contracts indicates that, in certain instances, the government
seeks to recover abnormally high contract profits. That Congress
Page 324 U. S. 59
have extended the coverage of these provisions to these
contracts is unquestioned; the fact that it did not do so cannot be
disregarded by this Court. [Footnote 8
It goes without saying that, in all dealings with the
government, contractors and agents alike are under an obligation to
deal strictly within the limits of the statutes and with absolute
honesty. Criminal sanctions enforce this rule. Similarly, the
doctrines of fraud, unconscionable dealing, and unjust enrichment
are to be strictly applied to insure fair and honest dealing
between the government and its citizens. These remedies are
available whenever and wherever transgressions take place. However,
the right to determine the policies or methods by which property is
to be acquired rests with Congress.
Applicability of "cost plus a percentage of cost"
Prior to the present war emergency, the Secretary of
War had broad powers to acquire land for military purposes by
purchase at prices deemed reasonable by him or by condemnation.
] There were no
restrictions as to the manner in which he should exercise this
power to purchase, but his power to contract for construction work
was sharply limited by statute. [Footnote 10
] These restrictions, if continued, would have
seriously impeded the War Department's preparation for war.
Thereupon Congress passed the act of July 2, 1940, which removed
certain of these prior statutory restrictions. The act did,
however, restrict the broad powers conferred therein by prohibiting
the use of
Page 324 U. S. 60
"cost plus a percentage of cost" contracts; use of "cost plus a
fixed fee" contracts was expressly approved by the act. [Footnote 11
] The question is raised
as to whether the prohibition of "cost plus a percentage of cost"
contracts applies to the War Department's purchase of these lands
with appropriations for the fiscal year 1941.
We are of the opinion that the first section of the act of July
2, 1940, see footnote
indicates that the purchase of land by the War Department is
subject to the provisions of that section; therefore, the proviso
in the section which
Page 324 U. S. 61
prohibits use of the "cost plus a percentage of cost" system of
contracting must be taken to apply to purchases of land. The act of
July 2, 1917, 40 Stat. 241, 518, authorizing the purchase of land
is limited by the quoted section from 54 Stat. 712.
Our next inquiry is as to whether the contract with the vendors,
note 4 supra,
this prohibition against "cost plus a percentage of cost"
contracts. Evidently the proviso was inserted to avoid the abuses
which were prevalent before and during the first World War from the
Government's guarantee of cost plus a profit to contractors.
The purpose of Congress was to protect the Government against
the sort of exploitation so easily accomplished under "cost plus a
percentage of cost" contracts, under which the Government contracts
and is bound to pay costs, undetermined at the time the contract is
made and to be incurred in the future, plus a commission based on a
percentage of these future costs. The evil of such contracts is
that the profit of the other party to the contract increases in
proportion to that other party's costs expended in the performance.
The danger guarded against by the Congressional prohibition was the
Page 324 U. S. 62
to a government contractor who already had a binding contract
with the Government for payment of undetermined future costs to pay
liberally for reimbursable items because higher costs meant a
higher fee to him, his profit being determined by a percentage of
cost. Congress certainly did not intend to prevent a party who was
merely submitting a bid to the Government from computing the amount
of his bid by taking into consideration his costs and then adding a
certain percentage of the cost as his profit, the resulting sum bid
being fixed in amount, and not subject to change. Congress, by
changing the original prohibition in the act from one outlawing any
"cost-plus" system of contracting so as to expressly authorize use
of a "cost plus a fixed fee" form of contract, indicated it did not
care how the contractor computed his fee or profit, so long as the
fee or profit was finally and conclusively fixed in amount at the
time when the Government became bound to pay it by its acceptance
of the bid. By eliminating the risk of loss and permitting the
guarantee of a satisfactory but fixed fee, Congress sought prompt
performance and lower over-all expenditures for contracts in a
rising labor and commodity market than would be offered by
contractors who were compelled themselves to assume the risk of
these unpredictable costs.
The vendors' contract, when read with the McDowell contract,
shows that the Government arranged for a fee to its agent based on
a percentage of the purchase price. This does not fall within the
language of "cost plus a percentage of cost." The offer was to sell
to the Government at a fixed, definite price. The Government, when
it accepted this offer, agreed to pay this set amount, and no more.
The contract contains no provision allowing adjustment of price
based on possible future indeterminate expenses. The vice of
cost-plus contracts is not inherent in the vendors' contract. That
vice basically is the incentive
Page 324 U. S. 63
to the contractor to inflate his future costs to increase his
profits, since the Government is already bound to pay any future
undetermined "costs." The amounts to be paid under petitioners'
contracts are not subject to change by future action of the vendor.
The Government knew the total cost when it became bound on the
contract. If we read the vendors' contract as affected by the
McDowell contract, no cost-plus contract emerges. The United States
knew it agent's fee to the penny when it accepted the option. It
was five percent of the gross sale price. Notes 3 and 4 supra.
That is to say, the price
to be paid for the land was subject to the approval of the
Government. The War Department could accept or reject the offers
submitted by McDowell. When the War Department approved each offer,
it fixed the precise fee which McDowell was to receive. The
arrangement may have been improvident from the point of view of the
Government. But that question goes to the quality of management by
its procurement officers. The fact that the procurement system is
improvident obviously does not make it illegal. Illegality does not
emerge from inadequate supervision of prices by the Real Estate
Branch. Such official failures are not chargeable to a third party
dealing with the Government in good faith. It may be unwise for the
Government to pay its purchasing agent a commission which is
figured on cost of purchases to the Government, but there is no
statutory prohibition. Since the United States is the purchaser of
the land at the option price, no one can receive cost plus
anything. Neither the vendors nor McDowell agrees to buy from a
third party and sell to the Government at an advance. The vendors'
contract has neither the form nor the vice of a cost-plus contract.
Page 324 U. S. 64
The Government advances a further and
distinct argument for affirming the judgment of the Circuit Court
of Appeals that the vendors' contract is invalid. This is that the
contracts of Muschany and Andrews are invalid as against public
policy because of the interest of McDowell, which is antagonistic
to the United States, and because of the contingent character of
the McDowell fee, which, it is asserted, is paid by the vendors for
the procurement of the contract of sale. We think that it is
inadmissible to view the McDowell contract and the vendors'
contracts as unrelated. On account of the vendors' thorough
understanding of McDowell's agency, as discussed in the preceding
division of this opinion, their contracts must be read as though
the McDowell contract was written into them to show his agency for
When this is done, it is clear that the objection to the
vendors' paying a fee contingent on the securing of a Government
contract disappears. While, in form, the McDowell fee and other
expenses are paid by the vendors, it was so handled, as is shown by
the finding of the trial court, that "the several transactions
[might be] closed with the issuance of one, instead of several
vouchers, for each tract." 46 F. Supp. at 925, 926. The evidence
indicates that, in reality, McDowell was the Government's agent,
and that his commission, although nominally paid by the vendor,
amounted to a payment by the Government to him as its agent.
Contingent fee contracts to secure Government business for the
employer of the recipient have been held invalid because of their
tendency to induce improper solicitation of public officers and the
exercise of political pressure. Steele v. Drummond,
275 U. S. 199
275 U. S. 206
Page 324 U. S. 65
the most part, these cases have involved situations where a
would-be contractor has hired a third person on a contingent fee
basis to procure for the former a contract with the Government. But
neither the language of these cases nor the policy behind them
applies to the situation involved in this case, where the
Government, not the would-be contractor, hires an agent for the
purpose of soliciting offers from owners of needed land, the
agent's compensation to be contingent on submission of offers
acceptable to the Government. We have here a contingent fee
contract of an entirely different type. It is the Government here
who pays the contingent fee, and pays it not for securing a
contract from the Government, but a contract for the Government.
The agent acts under the highest legal and moral responsibilities
to his principal, the Government. There is no place for financial
temptation or political pressure to influence public officials.
Tendentious fraud does not exist in such a contingent contract. It
may be most desirable to pay agents only in the event that they are
successful in accomplishing their purpose. We are dealing here with
public policy. Congress may think that it is wise to outlaw
contingent contracts such as this, but, until it does, we cannot
say that they are contrary to public policy any more than we could
say cost-plus contracts are contrary to public policy in the
absence of legislation to that effect.
In reaching the foregoing conclusion on the contingent fee
aspect of the problem, we laid aside consideration, from the
standpoint of public policy, of the fact that the contingent fee is
to be measured by a certain percentage of the purchase price. We
now consider that. The record gives no satisfactory explanation for
the apparently ingenuous action of the Real Estate Branch of the
War Department in paying a commission on the purchase price to its
soliciting agent. Certainly the officers realized the possibility
of and temptation to price inflation.
Page 324 U. S. 66
Necessity for speedy acquisition could not have been their
motive, in view of the possibilities of a declaration of taking. 46
Stat. 1421. It well may be that experience with condemnation awards
and the cost of acquisition by salaried government servants
appeared to foreshadow more expense than the plan adopted.
It may have been the Department's conclusion that its officers
could regulate the offer of prices above the market by a refusal to
accept the options. Colonel Valliant visited the area to gather
information during the purchases. Our inquiry at this point, since
corruption is not shown, is as to whether the likelihood of
disadvantage to the Government is so menacing as to prohibit such
contracts regardless of the effect in a particular case.
No other case has come to our attention which has declared that
a commission or purchase contract is invalid on the ground of
public policy. Public policy is to be ascertained by reference to
the laws and legal precedents, and not from general considerations
of supposed public interests. Vidal v.
2 How. 127, 43 U. S.
-198. As the term "public policy" is vague, there
must be found definite indications in the law of the sovereignty to
justify the invalidation of a contract as contrary to that policy.
Twin City Pipe Line Co. v. Harding Glass Co., 283 U.
; Frost & Co. v. Coeur D'Alene Mines
Corp., 312 U. S. 38
. It is
a matter of public importance that good faith contracts of the
United States should not be lightly invalidated. Only dominant
public policy would justify such action. In the absence of a plain
indication of that policy through long governmental practice or
statutory enactments, or of violations of obvious ethical or
Page 324 U. S. 67
standards, this Court should not assume to declare contracts of
the War Department contrary to public policy. [Footnote 16
] The courts must be content to await
The Government calls attention to Criminal Code, sections 41,
112 and 113, and the act of March 3, 1917, 39 Stat. 1106, [Footnote 17
] as indicative of a
declared public policy against an agent of the United States being
permitted to have a pecuniary interest in a contract when that
interest would be enhanced in value at an expense to the United
States. But these sections relate to a Government official's
representation of the Government in matters involving a private
corporation or firm in which the Government agent has an interest,
or a Government official's receipt of consideration for procuring a
contract from the Government for any person or for any service
rendered in relation to any such contract, or receipt of any salary
or supplement to salary in connection with his government services
from any source other than the Government of the United States.
Thus, these sections manifest a legislative intention to bar a
government agent from receiving pay from a third party for
assisting that third party to secure a government contract.
Here, the pay was for services rendered to the Government. In
form, the vendors agreed to pay the compensation, but actually the
United States was the payor. As stated above, it was merely a
convenient way in which the Government's promise to pay its agent
could be met.
Page 324 U. S. 68
It is quite clear that these prohibitions against receipt of
compensation from third parties for securing contracts were
directed at the crime of bribery in its open or subtle form. We do
not see that these statutes manifest a public policy against the
use of a commission system for public purchases. The change after
experience, from the commission system of land purchases to the
solicitation of options by salaried employees of the Government or
fixed fee contractors, indicates administrative judgment of
desirability, not administrative condemnation of the legality of
the method. [Footnote
Since it is Congressional enactments which determine public
policy, any doubt which might exist as to the legality of such an
arrangement as was adopted by the War Department for this and a few
other projects is dissipated by the action of Congress on the
Military Establishment Appropriation bill for 1942. Apparently a
limitation of commissions on land purchases was omitted from the
bill in accordance with suggestions of the War Department.
] The commission
type of contract was recognized as appropriate in certain
circumstances by the Naval Appropriation Act of 1942, 55 Stat. 151,
177. [Footnote 20
] A similar
provision appears in the Military Appropriation Act of 1944, Sec.
12, 57 Stat. 347, 369. [Footnote
Page 324 U. S. 69
We have considered the Government's contention that the two
percent limitation means that not more than two percent of the
estimated price may be paid as a fixed fee. [Footnote 22
] There is nothing that indicates to
us that the provision is not intended to apply to the contracts for
commission on the purchase price of land. This was the system which
the witnesses considered dangerous.
MR. JUSTICE JACKSON took no part in the consideration or
decision of this case.
* Together with No. 32, Andrews et al. v. United
also on writ of certiorari to the Circuit Court of
Appeals for the Eighth Circuit.
United States v. Muschany,
139 F.2d 661.
United States v. Certain Land, 46 F. Supp.
The pertinent parts of the McDowell agency contract are:
"3. The Optioner shall diligently endeavor to acquire such
options not only within such time, but at the reasonable value of
the land to be acquired, and subject at all time to the directions
of the Government. The form of option contracted to be executed,
and all terms, covenants and conditions thereof, shall be on the
form approved by the Government, and a copy of which is to be
attached hereto and made a part hereof. It is understood that the
Government is to have the exclusive right to take up or reject any
option to any parcel of land optioned by said Optioner hereunder,
except as hereinafter provided."
"4. . . . The Optioner shall procure from the vendors in all
cases where options are accepted on behalf of the United States, an
order to the Kansas City Title and Insurance Company to prepare
certificates of title and deeds, and it shall be his responsibility
to see that said certificates of title and deeds are transmitted to
the proper Government official for examination. The certificates of
title to be furnished by The Kansas City Title and Insurance
Company will be on forms similar to the one attached hereto and
made a part hereof, and funds to effect closing of purchases by the
Title Company will be furnished by the Government to the Title
Company in form of checks payable to each vendor in the amount of
the purchase price set forth in the accepted options."
"* * * *"
"8. For all services hereunder, the compensation of the Optioner
shall consist solely of the five percent (5%) commission in each
purchase, to be paid by the vendor as more specifically set forth
in the form of option attached hereto and made a part hereof."
"Upon exercise of this option by the Government, the undersigned
agrees to pay to R. Newton McDowell a commission of five percent
(5%) of the gross sales price as full payment for the services of
said R. Newton McDowell in procuring such sale, preparing the deed
or deeds for the conveyance of said land and arranging for
settlement and closing of the transaction."
"Upon furnishing of final certificate of title as above showing
title to be vested in the United States of America, the agreed
purchase price above mentioned will be paid by the Government to
"If for any reason the title to the land is not approved by the
Attorney General, the Government will proceed to acquire the land
by condemnation proceedings instituted in the District Court of the
United States in which said property is located, under a consent
verdict fixing the award at the agreed valuation and in accordance
with all the terms and provisions of this option and will upon
filing its petition in such proceedings deposit said agreed
purchase price with the clerk of said court, same to be disbursed
by said officer pursuant to the decree entered in such condemnation
A stipulation consolidates the record of the two cases before us
and a third case, not here involved, United States v. 94.68
Acres of Land,
45 F. Supp. 1016, and authorizes its use "as a
part of the record in each of the two" cases here on review. While
the cases have not been consolidated, one was set on our docket for
hearing following the other, the United States has filed a single
brief, and petitioners a joint reply brief.
In the Muschany
case, the average valuation of eight
Government witnesses, for land upon which the option was taken at
$4,500, was $1,972. The average valuation of seven of respondent's
witnesses was $4,546. 46 F. Supp. 925.
No finding of value appears for the Andrews
the evidence shows an average valuation by Government witnesses of
$3,114, and by the vendor and one of his witnesses of $12,000.
Petitioners in No. 31 contracted to sell the government certain
land for $4,500 which they had purchased in 1939 for $1,000. The
record indicates that, since purchasing this land in 1939, various
improvements had been made. At the time of purchase, there was no
highway leading from the main road to the property; a thicket was
cleared and a road constructed which passed over an adjoining piece
of property. The cultivable area of the land was increased by
clearing timber thickets from part of the property. A local
drainage district surfaced with rock the river frontage of the
property, presumably to stop erosion. There is also evidence
indicating that petitioners in No. 31 made a very good buy when
they purchased this land for $1,000. It was in the hands of prior
owners who had allowed $800 in back taxes to accumulate on the
property. As to petitioners in No. 32, they sold land to the
government in 1940 at a price of $12,000 for which they paid $2,250
in 1934. The lapse of a six-year period of time, the change in
economic conditions from those of a severe agricultural depression
to one of wartime agricultural prosperity, furnish some explanation
for the disparity between the price paid for the land in 1934 and
the price at which it was valued in 1940.
Legislation in regard to the renegotiation of war contracts is
not applicable to either of the contracts involved in this case.
Revenue Act of 1942, ch. 619, 56 Stat. 798, Title
VIII-Renegotiation of War Contracts -- Sec. 801(c)(6); Revenue Act
of 1943, ch. 63, p.L. 235, 78th Cong., 2d Sess., Title VII, Sec.
701(b), amending Sixth Supplemental National Defense Appropriation
Act 1942, Sec. 403(c)(6).
Act of July 2, 1917, 40 Stat. 241; Act of April 11, 1918, 40
R.S. § 1136; R.S. § 3734; 10 U.S.C. § 1336; The Walsh-Healey or
Prevailing Minimum Wage Act, 49 Stat. 2036.
54 Stat. 712:
"That (a) in order to expedite the building up of the national
defense, the Secretary of War is authorized, out of the moneys
appropriated for the War Department for national defense purposes
for the fiscal year ending June 30, 1941, with or without
advertising, (1) to provide for the necessary construction,
rehabilitation, conversion, and installation at military posts,
depots, stations, or other localities, of plants, buildings,
facilities, utilities, and appurtenances thereto (including
Government-owned facilities at privately owned plants and the
expansion of such plants, and the acquisition of such land, and the
purchase or lease of such structures, as may be necessary), for the
development, manufacture, maintenance, and storage of military
equipment, munitions, and supplies, and for shelter; . . .
the limitations contained in sections 1136
and 3734 of the Revised Statutes, as amended, and any statutory
limitation with respect to the cost of any individual project of
construction, shall be suspended until and including June 30, 1942,
with respect to any construction authorized by this Act:
That no contract entered into pursuant
to the provisions of this section which would otherwise be subject
to the provisions of the Act entitled 'An Act to provide conditions
for the purchase of supplies and the making of contracts by the
United States, and for other purposes,' approved June 30, 1936 (49
Stat. 2036; U.S.C. Supp. V, Title 41, secs. 35-45), shall be exempt
from the provisions of such Act solely because of being entered
into without advertising pursuant to the provisions of this
section: Provided further,
That the 'cost plus a
percentage of cost' system of contracting shall not be used under
this section; but this proviso shall not be construed to prohibit
the use of the 'cost plus a fixed fee' form of contract when such
use is deemed necessary by the Secretary of War."
86 Cong.Rec. 7839, 7841, 7843. The proviso as adopted by the
Senate read: "That what is known as the cost-plus system of
contracting shall not be used under this section." We do not know
the precise reason for the change from this language to the
present, as it took place in conference.
The statement from the managers on the part of the House
"[The conference bill] substitutes for the limitation upon the
use of the cost-plus system of contracting a provision which bars
the use of the 'cost plus a percentage of cost' system, but allows
the Secretary of War, when he deems it necessary, to use the 'cost
plus a fixed fee' form of contract."
H.Rep. No. 2578, 76th Cong., 3d Sess., p. 6. It might be
inferred that the change was made to accord with the clause
allowing cost plus a fixed fee. Whatever the reason for the change,
the final form is less restrictive on the War Department than the
"cost-plus" system which was first forbidden.
But see United States v. Two Acres of Land,
Cf. 69 U. S.
2 Wall. 45; Trist v.
21 Wall. 441, 21 U. S.
-452; Hazelton v. Sheckels, 202 U. S.
, 202 U. S. 78
Crocker v. United States, 240 U. S.
, 240 U. S.
Testimony of Under Secretary Patterson, April 29, 1941, before
the subcommittee of the Committee on Appropriations, House of
Representatives, on the Military Establishment Appropriation Bill
for 1942, 77th Cong., 1st Sess., p. 106.
Cf. Chicago St.L. & N.O. Railroad Co. v. Pullman
Southern Car Co., 139 U. S. 79
139 U. S. 89
Baltimore & Ohio S.W. R. Co. v. Voigt, 176 U.
, 176 U. S.
As examples of contracts which have been held invalid as acts or
contracts against public policy, See
Sprott v. United
20 Wall. 459; McMullen v. Hoffman,
174 U. S. 639
Burt v. Union Central Life Insurance Co., 187 U.
Executive Order 9001, Title I, § 1, Title II,
§§ 5, 6, 6 Fed.Reg. 6787, 50 U.S.C. § 611, n. (appendix).
the testimony of Under Secretary Patterson,
Hearings before the subcommittee of the Committee on
Appropriations, House of Representatives, on the Military
Establishment Appropriation Bill for 1942, 77th Cong., 1st Sess.,
Hearings, supra, n
18, p. 106; Hearings before the subcommittee of the
Committee on Appropriations, United States Senate, 77th Cong., 1st
Sess., on H.R. 4965, pp. 47, 48.
55 Stat. 177:
"SEC. 7. No part of any money appropriated herein or included
under any contract authority herein granted shall be expended for
the payment of any commission on any land purchase contract in
excess of 2 percentum of the purchase price."
Executive Order No. 9001, Title I, 6 Fed.Reg.
6787, 50 U.S.C. § 611, n. (appendix).
Hearings before the subcommittee of the Committee
on Appropriations, House of Representatives, 77th Cong., 1st Sess.,
on the Navy Department Appropriation Bill for 1942, pp. 502-504,
505-509; Hearings before the subcommittee of the Committee on
Appropriations, U.S. Senate, 77th Cong., 1st Sess., on the Military
Establishment Appropriation Bill for 1942, pp. 46-50, 53.
MR. JUSTICE BLACK, dissenting.
The Constitution provides that the government shall not take
private property for a public purpose without payment of just
compensation. The problem here is whether the arrangements now
before us give rise to enforceable agreements, or whether the
rights of the parties are to be governed by the constitutional
requirement for "just compensation" for the land needed by the
government. More specifically, the question is whether, in the
situation revealed by this record the law demands that certain
property holders shall receive in payment for their properties
amounts which, even in the absence of a finding of fraud, may well
be far in excess of what is "just compensation," thereby imposing
an unjust burden on the public. The Court says "Yes;" I say
The agreements were executed under the following circumstances.
A War Department representative agreed that one McDowell should
undertake to secure options to buy 18,000 acres of land at Weldon
Page 324 U. S. 70
where the government was about to build a war munitions plant.
Under the original agreement, McDowell was to receive from the
government a commission of 5% of the gross sale price of each
parcel of land. Later, McDowell, presumably with the acquiescence
of the contracting officer, adopted a plan under which the
landowners executed options for a price which included the 5%
commission. Thus, the less the cost of the lands the less McDonald
would make; the greater the cost, the greater his commission.
The ensuing results were, if not inevitable, at least not
surprising. With phenomenal speed, McDowell obtained 270 separate
options, and promptly recommended their purchase to the Department
at the stipulated prices. On what appears to have been no more than
an inescapably formal examination of these recommendations,
] 129 options were
accepted, and contracts of purchase were executed at an expense of
approximately a million dollars to the government. After an
investigation of the whole affair by the Department of Justice, the
remaining 149 contracts were repudiated by the government,
Page 324 U. S. 71
were filed, and immediate possession of the land was awarded the
46 Stat. 1421. In the condemnation
proceedings, the government sought, as to the uncompleted McDowell
transactions, to pay no more than just compensation for the
This Court now holds that the government is irrevocably bound by
the contracting officer's "acceptance" of the McDowell options. And
while the immediate judgment directly affects only the two pieces
of property here involved, the principles announced uphold the
validity of all the McDowell-procured agreements, even though the
agreed cost stipulated in those agreements might, in condemnation
proceedings, be judicially determined to exceed just compensation.
The District Court in these two cases did not determine what would
be just compensation. It found no more than that the option agreed
price of these particular lands was not "unreasonably excessive."
The District Court did not find that the agreed prices represent a
fair market value; the opinion of the Circuit Court of Appeals
makes it clear beyond doubt that it was impossible to make such a
finding. The record shows that the government will now be required
to pay the petitioners in No. 31 a value, as of 1940, of $4,500.00,
or $165.00 per acre, for land which petitioners bought in 1939
for.$1,000.00, or $33.33 per acre. The other petitioners are to be
the beneficiaries of a similar "contract" bounty. For lands and
improvements which cost them $2,250.00 in 1934, or about $24.00 per
acre, the government must pay $12,000.00 or $127.00 per acre.
Page 324 U. S. 72
The details of the negotiations between McDowell and the
landowners are set out in the opinion of the Circuit Court of
Appeals, and need not be repeated at length here. Reference is
there made to successive recommendations by McDowell on the same
parcel of land for purchase at $4,500.00, $10,000.00 and $4,900.00.
In another instance, a landowner refused the request of one of
McDowell's representatives to up the price of his property $50.00
per acre. Still other illustrative items included in agreed prices,
such as those which the Court today holds invulnerable, are "one
year's loss in salary of each partner" and $6,500.00 for "loss of
Nothing but the clearest and most unequivocal Congressional
enactment could, in my judgment, bind the government to such
arrangements. There is no such enactment. And even if Congress had
not itself condemned such contracts as these, conceivably they are
within the ban of principles previously enunciated by this Court.
] For the terms of
McDowell's contract, which was an integral part of the purchasing
system here involved, were such that the harder he worked to reduce
the price of the land he bought, the less he made. He could not
possibly serve most profitably his own interest and that of the
government at the same time. Only by acting to the financial
disadvantage of the government could he act for the financial
advantage of himself.
It was to protect the public from the dangerous tendency of the
excesses of just such contracts that Congress
Page 324 U. S. 73
has repeatedly prohibited [Footnote
] the War Department from using "the cost plus a
percentage of cost' system of contracting." Congress had, in 1936,
received a report from a special Senate Committee investigating the
munitions industry pointing out the evils of that contracting
system. That report said:
"It is generally admitted that exorbitant profits were made
under cost plus a percentage of cost contracts in the World War. .
. . The profiteering under cost plus a percentage of cost contracts
in the last war was so flagrant that Congress has expressly
disapproved of their use for Government procurement. [Footnote 2/5
The same Senator who made this report initiated a Senate
discussion which led to the immediate adoption of the prohibition
of "cost plus a percentage of cost" contracting in the Act here
involved. He excoriated the "cost plus a percentage" system as a
"vicious" one. [Footnote 2/6
Page 324 U. S. 74
"system of contracting" which Congress forbade, a system which
from its very nature keeps constantly dangling before the eyes of
the government's contractual agent hope of a progressingly
increasing reward for himself for every added dollar of cost he can
get the government to pay. This system of contracting was not
deemed "vicious" for lack of "certainty" as to costs, but because
of the "certainty" of its inexorable tendency to elevate those
costs to heights which would impose unfair burdens on the public
That this was the moving purpose in prohibiting such a contract
system is further shown by the fact that Congress at the same time
permitted a "cost plus a fixed fee' form of contract."
Certainly Congress could not thereby have intended to reduce the
scope of its sweeping condemnation of "`cost plus a percentage of
cost' system." On the contrary, permission to use the fixed fee
contract but underlines the Congressional intent absolutely to
prohibit any War Department agent from using a system of
contracting which would impose upon the government inflated costs
by providing an incentive to pad costs or to take too rosy a view
of value. Whatever other disadvantages the "cost plus a fixed fee"
system may have, no
Page 324 U. S.
incentive to raise the cost arises from the fixed fee. But
when a percentage fee or compensation is provided for which
diminishes or increases in proportion to costs, there is ample
motive, or at least tendency, to increase such costs. [Footnote 2/7]
That incentive looms large in the contracts here involved.
] It matters not into
what form the arrangement is cast. It is conceded that, had this
contract required McDowell himself to buy and take title to the
lands, the arrangement with him would have been within the
Congressional prohibition as a "cost plus a percentage of cost"
contract. But the fact that he did not take title himself did not
lessen the tendency of the contractual arrangement to invite him to
increase his reward by inducing the government to pay a high price
for the land. The difference created by this slight deviation in
the structure of the arrangements did not alter their effect. The
"vicious" tendency at which Congress hit was still present. The
government was still obligated to pay the
Page 324 U. S. 76
landowner's price -- the land's cost plus a percentage to
McDowell of that cost. Furthermore, the effect, if any, of
McDowell's not taking title himself was to aggravate the
government's peril, for McDowell did not take any risks of
purchase. To hold that these arrangements are legal is to leave
unchecked a system of government purchasing which Congress has
declared to be incompatible with the public interest.
It is said that statutes providing for the renegotiation of war
contracts indicate that, in "certain instances, the government
seeks to recover abnormally high contract profits." These efforts
of Congress to safeguard the public interest against unjust
exactions provide no excuse for the narrow construction the Court
today gives the "cost plus a percentage of cost" prohibition. They
but emphasize the intention of Congress to devise many safeguards
against unfair procurement prices which might unjustly enrich some
few people at the expense of the many. I should think that, if
these statutes could be given any effect, under the circumstances
of these cases, they would but provide an added reason why the
government should not be required to pay these landowners more than
"just compensation." Certainly, in the light of the legislative
policy articulated in the renegotiation statutes, I can see no
reason why this Court should work overtime to shrink the scope of
the "cost plus a percentage of cost" statutory prohibition.
The Court's judgment in effect upholds McDowell's percentage
agreement with the government and the option agreements with the
landowners made pursuant thereto. It requires full payment not only
of the stipulated land prices, but of McDowell's commissions as
well. This is so because the $4,500.00 and $12,000.00 included the
cost of the land plus the percentage of that cost which was
McDowell's commission. Thus, affirmance of the District Court
judgments necessarily must imply that
Page 324 U. S. 77
McDowell's commission agreements with the government are
The landowners' rights are indissolubly intertwined with
McDowell's. [Footnote 2/9
must stand or fall together on the validity of McDowell's and the
landowners' arrangements with the government. And, under those
arrangements, the government was to pay cost of the lands for which
McDowell negotiated plus five percent of that cost. This was a
"cost plus a percentage of costs system of contracting." Such an
integrated scheme of illegal arrangements should not be permitted
to support these judgments. The government should be required to
pay no more than just compensation for the lands it has condemned.
Page 324 U. S. 78
Finally, I cannot agree to the Court's statement that this case
comes to us "without any suggestion of fraud or unfairness such as
would justify holding the contract invalid." The Court's opinion
states that those who deal with the government must do so "with
absolute honesty," and that
"the doctrines of fraud, unconscionable dealing, and unjust
enrichment are to be strictly applied to insure fair and honest
dealings between the government and its citizens."
In my judgment, we are squarely confronted with the issues of
fraud, unconscionable dealing, and unjust enrichment. I think we
should remand the case to the Circuit Court so that it can pass
upon those questions.
We are not faced here with a situation in which findings, upon
"ample evidence," have been clearly made by a master and
unequivocally and jointly affirmed by both a District Court and
Circuit Court of Appeals -- as in United States v. Bethlehem
Steel Co., 315 U. S. 289
315 U. S.
] The District Court and the Circuit Court of Appeals did
Page 324 U. S. 79
in the instant case, both concurrently find an absence of fraud,
unconscionableness, and unjust enrichment.
The District Court did state in its opinion that there was "no
fraud," and that the option prices were "not unconscionable." This
finding of the absence of fraud was, however, unsupported by the
primary findings of fact made by it, and that court's conclusion
rested upon legal assumptions which I think contrary to many
decisions of this Court. The same is true of the finding of
unconscionability. As to "unjust enrichment," the District Court
made no finding at all, and I believe that its primary findings of
fact are inconsistent with any holding that these landholders would
not be "unjustly enriched" if the government is forced to pay the
The Circuit Court of Appeals found it unnecessary to pass upon
either of these questions. It refused to indulge in what it termed
a "judicial paring" of the "cost plus a percentage of cost"
statutory prohibition, and held the contracts void under that
The District Court considered that the government's argument
required it affirmatively to find the following three facts in
order to hold that there was fraud:
"(1) The agent's commission was added to the purchase price, (2)
the price did not represent the reasonable market value of the
land, and (3) McDowell misrepresented the value of the land to Col.
As to the latter point, the District Court, in its opinion,
stated that there was no misrepresentation by McDowell. The Circuit
Court of Appeals did not affirm this finding. It did say that the
record and findings of the trial court left no question "as to the
actual good faith of the Quartermaster Department in the matter."
But, after narrating certain activities of McDowell, it observed
"These inconsistencies and disguising can hardly be commended as
desirable methods of handling expenditures of public funds. The
excuse made by the Quartermaster Department
Page 324 U. S. 80
on the trial was its desire to get the job done as speedily as
possible, and 'because, in one single voucher, we could provide for
the payment of a number of different services.' The result reached
in the opinion requires no further pursuit here of these particular
The Circuit Court's opinion, taken in its entirety, shows beyond
doubt that it did not approve the District Court's findings as to
The District Court further based its conclusion that there was
no fraud on a finding that the agent's commission was not added to
the purchase price. This finding, the Circuit Court of Appeals
expressly rejected. This Court has done likewise.
The third and last element which the District Court had posed
concerning the presence of fraud was whether "the price did not
represent the reasonable market value of the land." Neither the
District Court nor the Circuit Court of Appeals found that the
price did represent such a value. If such a holding has been made
at all, it is by this Court, and I cannot agree to it. The District
Court escaped the necessity of making a finding as to market value
by holding that market value was immaterial, since
"The circumstances of this case show that other considerations
were in the minds of the parties when the option was taken. The
necessity of national defense had flashed upon the country. The
imminence of the peril was impressive. The land must be acquired at
once, without the delay incident to condemnation. . . . The land
was sought, but more was demanded; immediate possession was
essential to its undertaking."
I can accept neither the court's conclusion nor its reasoning.
In the first place, this Court has long held "market value" to be
the proper standard of value in eminent domain proceedings, and, in
considering market value, it has consistently been held that
landowners are not entitled
Page 324 U. S. 81
to increased amounts because the government announces that it
needs property in a vicinity. United States v. Miller,
317 U. S. 369
317 U. S. 374
317 U. S.
-377. Secondly, it is novel doctrine that, when
national peril requires the government to acquire property, the
owners are, as a matter of law, entitled to get more than market
value, because more is "demanded." Furthermore, the court's
assumption that the government was without power to get immediate
possession of the land by condemnation proceedings was wholly
erroneous. Declaration of Taking Act, 46 Stat. 1421.
Having thus put aside consideration of the fair or market value
of the property, the court limited itself to finding that the
option prices did not represent an "unreasonably excessive value."
What line marks the distinction between reasonable excess and
unreasonable excess does not appear from the District Court's
opinion, nor from this Court's opinion today. An examination of the
particular facts in No. 31 suggests the difficulty of ever
ascertaining what would be an unreasonably excessive value. In
1939, $800 back taxes had accumulated on 33 acres of land. The
Muschanys bought it, paying the $800 taxes, $100 to the owners, and
approximately $100 was allegedly expended for attorney's fee,
abstract of title, etc. In 1940, the "necessity of national defense
had flashed upon the country." The finding of the District Court,
which was not approved by the Circuit Court of Appeals, is
apparently approved by this Court today, to the effect that 350%
profit on this purchase of land is not "unreasonably excessive,"
even though the purchaser has held it for only one year. The only
subsidiary finding of fact which the District Court made to support
this phenomenal rise in value was that, in 1937, a road had been
built which shortened the distance to St. Louis by about 15 miles.
But this road had been built two years before the Muschanys
Page 324 U. S. 82
off the back taxes and took the property into their possession.
The Court today, however, refers to certain other events which had
occurred, and which are evidently relied upon as justifying this
increase in value from $1,000 to $4,500 in the short span of a
single year. It is clear that there was one reason, and one reason
only, for the $4,500 price. That reason was that the government
needed the land to help win the war, and McDowell had a "cost plus
a percentage of cost" contract.
The Circuit Court of Appeals, in discussing this question of
"There is, however, no occasion for us here to review either the
government's or the landowner's evidence as to value in the two
cases. If the value of the land were the issue to be determined, we
might hesitate to reject the trial court's findings in either case,
under Rule 52(a), Federal Rules of Civil Procedure. But the
findings referred to are not determinative of the issue here being
The Circuit Court of Appeals then went on to decide the only
question that it did decide, which was whether McDowell's contract
with the government violated the "cost plus a percentage of cost"
At the very least, I think the government is entitled to have
the Circuit Court of Appeals pass on the questions of fraud,
unconscionability, and unjust enrichment which this Court says "are
available whenever and wherever transgressions take place."
MR. JUSTICE FRANKFURTER and MR. JUSTICE RUTLEDGE join in this
At the time of these purchases, the Real Estate Section of the
Quartermaster Corps was in charge of land procurement. Because of
intensive National Defense activity, this section had under way
purchase of lands for one hundred and eight separate projects,
involving between twelve and fifteen thousand individual parcels,
with an estimated value of about fifty million dollars. The Colonel
in charge of the section had at his disposal a staff of three
commissioned officers and about forty-one civilian employees. This
Army office, in charge of nationwide land purchases, was therefore
compelled to rely chiefly upon McDowell's valuations.
The Muschany transaction is a typical one. November 29, 1940,
McDowell sent the option agreement to the Washington purchasing
office recommending its "acceptance as a fair value to the United
States." Four days later, December 3, without separate appraisal of
any kind, the Washington contracting officer marked it "accepted."
This was the only contract executed with the landowner by the
government, if such an action can be called a contract at all.
In referring to the District Court's finding that $12,000.00 was
"not an unreasonably excessive valuation of the land in question,"
the Circuit Court of Appeals (139 F.2d 661, 666) made this
"The latter finding is perhaps a bit strained, since the
substance of the evidence on behalf of the landowners was simply
that the land had a farm value of only $50 an acre (a total of
$4,725), but, as the landowners' only value witness put it, 'I
think someone from St. Louis that wants a site would pay as high as
$125 an acre (a total of $11,800) for that ground.'"
21 Wall. 178; Michoud v.
4 How. 503; Tool Co. v.
2 Wall. 45; Hume v. United States,
132 U. S. 406
United States v. Carter, 217 U. S. 286
Crocker v. United States, 240 U. S.
; see also
the opinion of District Judge
Collet in 45 F. Supp. 1016.
"As a result of experiences with 'cost plus a percentage of
cost' contracts during the first World War and the early part of
this war, use of this type of contract is now almost without
exception prohibited by statute."
C.C.H. War Law Service, Government Contracts, Par. 1015.
Act of June 28, 1940, sec. 2(a), 54 Stat. 676, 677;
Act of May 2, 1941, sec. 2(c), 55 Stat. 148; Act of December 18,
1941, Title II, sec. 201, 55 Stat. 839. See also
June 30, 1941, sec. 9, 55 Stat. 393, and Act of June 5, 1942, sec.
13, 56 Stat. 317. The regulations issued by the President under the
First War Powers Act of 1941, applicable to the War Department, the
Navy Department, and the United States Maritime Commission,
likewise expressly prohibit "cost plus a percentage of cost"
contracting. Executive Order No. 9001, December 27, 1941, as
amended, Title II, sec. 6.
Senate Report No. 944, 74th Cong., 2d Sess., Special Committee
Investigating the Munitions Industry, Part 4 at 22.
"So there is nothing to hinder the present Secretary of War, or
any other Secretary of War, if he desires to do so, from going back
to the old, vicious cost-plus system which we had during the World
War, when, in one instance which fell under my observation -- not
in the War Department, but in the Navy Department -- in the
construction of naval vessels on a cost-plus 10 percent basis, in
making up the cost base on which the people of the United States
were required not only to pay cost, but to pay 10 percent
additional, one great shipbuilding company in this country added in
the cost of wines, liquors, and cigars used on the trial trip, and
the cost of the prize given to the lady who christened the ship.
They even added in the cost of representatives maintained by the
company in China and in Japan for the purpose of promoting other
business of the company on the theory that, if they secured any
outside business, it would reduce the overhead chargeable to the
Cong. Record, Vol. 86, Part 7, p. 7839, 76th Cong., 3rd Sess.
Another Senator, in the same discussion, said with reference to
this system of contracting, "A man will say,
have a return of 10 percent of the contract price, and I will get
what I can under it, pile up expenses, and so forth.'" Cong.
Record, Vol. 86, Part 7, p. 7841, 76th Cong., 3rd Sess.
"There are two general classes of 'cost-plus' contracts. One
class is generally known as 'cost-plus-a-percentage' contracts, and
the other as 'cost plus a fixed fee' contracts. They are materially
different. Under those in the first class, the fee or profit of the
contractor is made dependent on the cost of the work, with the idea
that the amount of the fee will automatically adjust itself to the
variations in the cost of the work resulting from changing
conditions and requirements during the life of the job. It is
self-evident that, under this class of contract, it is to the
financial interest of the contractor to have the cost of work run
high. Under the second class, the fee is not affected by variations
in costs, but only by changes in the scope of the work. From this
it follows that it is to the advantage of the contractor to
accomplish the work at as low costs as possible."
The Law of Government Contracts, Graske (1941) pp. 122-3.
The Circuit Court of Appeals, in discussing the general tendency
of this system of contracting to increase costs to the government
"The probability of that general result in the Weldon Springs
transactions is, as we have indicated, quite cogently suggested
(and indeed demonstrated) by the record."
The difficulty of an attempt to segregate McDowell's commissions
from the land costs is indicated by the manner in which the Circuit
Court of Appeals found he computed his commissions. It said that
the option agreements included
"commissions upon his own commissions, commissions upon the
commissions of the Kansas City Title Insurance Company for closing
the transactions, and commissions upon the amounts included in the
contracts for revenue stamps and recording fees. . . . What
particular elements McDowell had fused into the real estate values
recommended by him in any specific transaction were apparently not
known to the Quartermaster Department at the time the contracts
The Muschany's option agreement in Case No. 31, which the
government contracting officer marked "accepted," did not show the
amount of McDowell's commission; it showed only that the purchase
price was $4,500.00. There is neither finding nor evidence from
which it can be determined what part of this purchase price, if
any, represents McDowell's commission. In fact, petitioners,
strangely enough, contend that there is no evidence to show that
McDowell is to get any part of the $4,500.00 as a commission. The
same situation exists in No. 32.
Were this contract not invalid as violating the Congressional
prohibition against the "cost plus a percentage of cost" system,
there would still remain the question as to whether the government
was compelled to pay more than "just compensation" in these
condemnation proceedings. We have never decided that there may not
be circumstances short of those necessary to hold private contracts
illegal, under which the government may in condemnation
proceedings, obtain judicial ascertainment of just compensation,
despite a single contracting officer's agreement to pay more, and
despite his attempted waiver of the Constitutional provision that
the government need only pay "just compensation" for land it takes
for public use. Danforth v. United States, 308 U.
, actually decided quite different questions under
a different statute, different pleadings, and quite different
circumstances. In condemnation proceedings, Danforth filed a
counterclaim seeking judgment against the government for a price
stipulated in an agreement. The government attacked the
counterclaim, and it was stricken in District Court on two grounds
only: (1) the government had not consented to the suit; (2) the
District Court was without jurisdiction because more than $10,000
Even if the Circuit Court of Appeals and the District Court had
both passed upon these questions -- and I do not think they did --
it does not necessarily follow that we would not review them.
See City Bank Farmers Trust Company v. McGowan,
323 U. S. 594
cf. City Bank Farmers Trust Company v. McGowan,
599, 601, and 43 F. Supp. 790, 795, 796.