1. Pursuant to a program for aiding England and Russia under the
Lend-Lease Act of March 11, 1941, petitioner contracted to supply
to the Federal Surplus Commodities Corporation a quantity of dried
eggs. The contract specified "May 18 [1942] delivery," which
date
"shall be the first day of a 10-day period within which the FSCC
will accept delivery, the particular day within the period being at
the FSCC's option;"
required petitioner to have the eggs inspected and that delivery
be accompanied by inspection and weight certificates, and provided
that "failure to have specified quantities of dried egg products
inspected and ready for delivery by the date specified in the
offer" would make operative a provision for "liquidated damages."
It did not provide for notice to the Government when the shipments
were ready. Inspection and certification, though not completed by
May 18, were completed prior to the dates designated by the FSCC
for deliveries, and petitioner made timely deliveries pursuant to
instructions.
Held: The provision for "liquidated damages"
constituted a penalty, and was not enforceable. Pp.
332 U. S.
408-414.
2. The contract is construed to mean that the time for delivery
by petitioner was not May 18, 1942, but the time or times chosen by
the FSCC within the 10-day period which began on May 18 --
i.e., performance was not due until request was made and
instructions given for delivery. P.
332 U. S.
410.
3. Since the provision in question did not cover delays in
deliveries, it could not possibly be a reasonable forecast of just
compensation for damage caused by breach of contract. P. 412.
4. Congress did not expressly grant the power to impose
penalties as sanctions to the program adopted pursuant to the
Lend-Lease Act, and that power may not be implied. Pp.
332 U. S.
413-414.
106 Ct.Cl. 789, 65 F. Supp. 457, reversed.
The Court of Claims dismissed petitioner's suit to recover sums
alleged to be due upon a contract with the
Page 332 U. S. 408
Government. 106 Ct.Cl. 789, 65 F. Supp. 457. This Court granted
certiorari. 330 U.S. 815.
Reversed, p.
332 U. S.
414.
MR. JUSTICE DOUGLAS delivered the opinion of the Court.
This case, here on certiorari to the Court of Claims, presents
the question whether a provision in a government contract for
"liquidated damages," as construed and applied, should be denied
enforcement on the ground that it constitutes a "penalty."
Shortly after the enactment of the Lend-Lease Act of March 11,
1941, 55 Stat. 31, 22 U.S.C.Supp. V, § 411
et seq., the
United States, acting through agencies of the Department of
Agriculture, embarked on a program of purchasing dried eggs for
shipment to England and Russia. Petitioner agreed to furnish a
quantity of dried eggs under that program to the Federal Surplus
Commodities Corporation (FSCC). The contract called for "May 18
(1942) delivery," which date, according to the contract, "shall be
the first day of a 10-day period within which the FSCC will accept
delivery, the particular day within the period being at the FSCC's
option." Petitioner was also required to have the eggs inspected,
delivery to be accompanied by inspection and weight
certificates.
The contract contained two provisions respecting "liquidated
damages." One, contained in paragraph 9, was
Page 332 U. S. 409
applicable to delays in delivery. [
Footnote 1] It has no application here, for, as we shall
see, deliveries were timely. The provision for "liquidated damages"
with which we are concerned is contained in paragraph 7, and is
applicable to a totally different situation. It provides, with
exceptions not material here, that "failure to have specified
quantities of dried egg products inspected and ready for delivery
by the date specified in the offer" will be cause for payment of
"liquidated damages." [
Footnote
2]
On May 18, 1942, petitioner had not made delivery, nor had the
eggs been inspected. Inspection was, however, completed, and
certificates issued, by May 22, which was prior to the time when
FSCC asked for delivery. For it was not until May 26 that FSCC gave
the first of several written notices for the shipment of eggs
involved in this litigation. Petitioner made timely shipments
pursuant to those instructions. Subsequently, FSCC ascertained
Page 332 U. S. 410
that petitioner's inspection certificates had been issued after
May 18, and accordingly deducted from the price 10 cents per pound
on the theory that the failure to have the eggs inspected and ready
for delivery by May 18 was a default which put into operation the
"liquidated damages" provision of the contract.
Petitioner brought this suit in the Court of Claims to recover
the amounts withheld plus interest. The Court of Claims, being of
the view that there had been a breach of contract for which the
United States was entitled to "liquidated damages," dismissed the
petition. 65 F. Supp. 457, 460.
We construe the contract to mean that the time for delivery by
petitioner was not May 18, 1942, but the time or times chosen by
the FSCC within the ten-day period which began on May 18. That is
to say, performance by petitioner was not due until request was
made and instructions given for delivery. That interpretation is in
accord with the uncontested finding of the Court of Claims that
petitioner promised delivery "within a ten-day period commencing
May 18, the precise date to be selected" by the FSCC.
The contract was drawn, however, to make the "liquidated
damages" provisions include so-called defaults of petitioner which
antedated the time when delivery was due, but which in no way
interfered with or caused delay in that performance. As noted,
"liquidated damages" became payable on "failure to have specified
quantities of dried egg products inspected and ready for delivery
by the date specified in the offer,"
viz., by May 18,
1942. The Court of Claims held this provision enforceable even
though petitioner had made prompt delivery of the eggs, because it
felt that the provision enabled respondent t carry on its dried-egg
program "with assurance that it could count on the dried-egg
products being ready on the specified date." That position is
amplified by respondent.
Page 332 U. S. 411
The argument, in short, is that liability to pay "liquidated
damages" for failure to have goods ready for delivery even prior to
the time when delivery is due gives assurance against tardy
deliveries; that a prompt timetable of shipments was important here
because of war conditions and the necessity of having goods ready
for loading whenever shipping space was available; that delay in
deliveries would cause unmeasurable damage, and that, even though
no damage were apparent in a particular case, the "liquidated
damages" provision should be enforced as a deterrent of tardy
deliveries in the whole class of contracts relating to this
procurement program.
It is customary, where Congress has not adopted a different
standard, to apply to the construction of government contracts the
principles of general contract law.
United States v. Standard
Rice Co., 323 U. S. 106,
323 U. S. 111, and
cases cited. That has been done in other cases where the Court has
considered the enforceability of "liquidated damages" provisions in
government contracts.
United States v. Bethlehem Steel
Co., 205 U. S. 105,
205 U. S.
120-121;
Wise v. United States, 249 U.
S. 361,
249 U. S.
365-366. We adhere to those decisions, and follow the
same course here.
Today the law does not look with disfavor upon "liquidated
damages" provisions in contracts. When they are fair and reasonable
attempts to fix just compensation for anticipated loss caused by
breach of contract, they are enforced.
Wise v. United States,
supra, p.
249 U. S. 365;
Sun Printing & Publishing Assn. v. Moore, 183 U.
S. 642,
183 U. S.
672-674; Restatement, Contracts § 339;
Dunlop
Pneumatic Tyre Co. v. New Garage & M. Co., [1915] A.C. 79.
And see Kothe v. R. C. Taylor Trust, 280 U.
S. 224,
280 U. S. 226.
They serve a particularly useful function when damages are
uncertain in nature or amount or are unmeasurable, as is the case
in many government contracts.
United States v. Bethlehem Steel
Co., supra, p.
205 U. S. 121.
Clydebank Engineering & Shipbuilding Co. v. Castaneda,
[1905] A.C. 6, 11-13, 20;
Page 332 U. S. 412
United States v. Walkof, 144 F.2d 75, 77. And the fact
that the damages suffered are shown to be less than the damages
contracted for is not fatal. These provisions are to be judged as
of the time of making the contract.
United States v. Bethlehem
Steel Co., supra, p.
205 U. S.
121.
Judged by these standards, the provision in question may not be
sustained as an agreement for "liquidated damages." It does not
cover delays in deliveries. [
Footnote 3] It can apply only where there was prompt
performance when delivery was requested, but where prompt delivery
could not have been made, due to the absence of the certificates,
had the request come on the first day when delivery could have been
asked. A different situation might be presented had the contract
provided for notice to the Government when the certificates were
ready. Then we might possibly infer that promptness in obtaining
them served an important function in the preparation of timetables
for overseas shipments. But the contract contains no such
provision, and it is shown that FSCC had no knowledge that the
certificates were not ready on May 18 until long after deliveries
had been made. So it is apparent that the certificates were only an
essential of proper delivery under this contract.
It likewise is apparent that the only thing which could possibly
injure the Government would be failure to get prompt performance
when delivery was due. We have no doubt of the validity of the
provision for "liquidated damages" when applied under those
circumstances.
United States v. Bethlehem Steel Co., supra;
Wise v. United States, supra. And see Maryland Dredging
and Contracting Co. v. United States, 241 U.
S. 184;
Robinson v. United States, 261 U.
S. 486. But, under this procurement program, delays of
the contractors which did not interfere with
Page 332 U. S. 413
prompt deliveries plainly would not occasion damage. That was as
certain when the contract was made as it later proved to be. Yet
that was the only situation to which the provision in question
could ever apply. Under these circumstances, this provision for
"liquidated damages" could not possibly be a reasonable forecast of
just compensation for the damage caused by a breach of contract. It
might, as respondent suggests, have an
in terrorem effect
of encouraging prompt preparation for delivery. But the argument is
a tacit admission that the provision was included not to make a
fair estimate of damages to be suffered, but to serve only as an
added spur to performance. It is well settled contract law that
courts do not give their imprimatur to such arrangements.
See
Kothe v. R. C. Taylor Trust, supra; Restatement, Contracts §
339. All provisions for damages are, of course, deterrents of
default. But an exaction of punishment for a breach which could
produce no possible damage has long been deemed oppressive and
unjust.
See Salmond & Williams on Contracts (2d
Ed.1945) § 202.
It is said, however, that a different rule should obtain here
because of the broad procurement powers involved under the
Lend-Lease Act. We are pointed, however, to no provision by which
the Congress authorized the imposition of penalties as sanctions to
that program, nor do we find any. We cannot infer such a power. The
power to purchase on appropriate terms and conditions is, of
course, inferred from every power to purchase. But if that is the
source of Congressional authority to impose penalties, then any
procurement officer, in war or in peace, could impose them. That is
contrary to the premise underlying all our decisions on this
question which involve government contracts. The rule which they
announce has been applied both to the exigencies of war
Page 332 U. S. 414
(
United States v. Bethlehem Steel Co., supra) and of
peace (
Wise v. United States, supra). The other view is
such a radical break with the past, and so counter to the whole
development of the law, as to indicate that the Congressional
purpose should be plain before we take the step.
Reversed.
[
Footnote 1]
That provision of the contract provided:
"Inasmuch as the failure of the vendor to deliver the quantity
of the commodity or commodities specified in the contract in
accordance with the terms of this announcement will, because of the
urgent need for the commodity by the purchaser arising from the
present emergent conditions, cause serious and substantial damages
to the purchaser, and it will be difficult, if not impossible, to
prove the amount of such damages, the vendor agrees to pay to the
FSCC liquidated damages as stated in this paragraph. The sum is
agreed upon as liquidated damages, and not as a penalty, and shall
be in the amount set forth below for each pound of dried egg
product undelivered in accordance with the terms of this
announcement. . . . The parties have computed, estimated, and
agreed upon this sum as an attempt to make a reasonable forecast of
probable actual loss because of the difficulty of estimating with
exactness the damages which result."
The "liquidated damages" ranged from 10 to 30 cents per pound,
dependent upon the elapsed time between the acceptance date and May
18, 1942.
[
Footnote 2]
The measure of "liquidated damages" in this situation was the
same as that for delays in delivery set forth in
note 1 supra.
[
Footnote 3]
They are covered, as we have already noted, by the provision set
forth in
note 1
supra.
MR. JUSTICE BLACK, with whom MR. JUSTICE MURPHY agrees,
dissenting.
The Court today invokes elusive and uncertain principles of
"general contract law" to strike down a clause in a Government
contract executed under the recognized congressional authority of
the Lend-Lease Act. Without reliance upon any indication of
congressional policy, the Court assumes that it can discover
somewhere a "general contract law," and that it is empowered to
apply this law to wartime contracts of the Federal Government. I
regard the decisions of this Court since
Erie R. Co. v.
Tompkins, 304 U. S. 64, as
having established that the construction and validity of all
Government contracts are governed by federal law, whether executed
under authority of the Lend-Lease Act or any other.
National
Metropolitan Bank v. United States, 323 U.
S. 454,
323 U. S. 456;
see United States v. Allegheny County, 322 U.
S. 174,
322 U. S. 183;
Clearfield Trust Co. v. United States, 318 U.
S. 363. And Congress has enacted many laws, both general
and specific in nature, to guide all contracting agents of the
Federal Government, 41 U.S.C. § 1
et seq., as well as many
detailed rules applicable solely to certain categories of
contracts.
See, e.g., Merchant Marine Act of 1936, 49
Stat. 1985, Tits. V, VII, VIII. But I can find no act of Congress
which expressly or impliedly prohibits such generally authorized
agents from making a contract containing a liquidated damage
provision such as here involved.
Page 332 U. S. 415
Nor has Congress ever intimated that contracts within the
general powers of Government agents should be invalidated by this
Court's invocation of a nebulous "general contract law," or because
such contracts failed to harmonize with this Court's views of what
is "fair and reasonable." I had not supposed that the federal
courts were vested with such supervisory and revisory powers over
the terms of contracts voluntarily and advisedly entered into by
business groups with congressionally authorized Government
agents.
The available indications of congressional policy point to the
very opposite conclusion. Far from indicating a hostility to
liquidated damage clauses, Congress has made it mandatory that such
clauses to protect against delay in performance be inserted in all
Government building contracts, and it has provided that such
clauses "shall be conclusive and binding upon all parties" without
the necessity for the Government to prove "actual or specific
damages sustained . . . by reason of delays." 32 Stat. 326, 40
U.S.C. § 269. Surely this provision would not permit federal judges
to ignore liquidated damage clauses in building contracts because
actual damages were not proved and could not have been reasonably
forecast. And in no other act of Congress is there a suggestion
that liquidated damage provisions in other Government contracts are
unenforceable because the courts believe no actual damages could be
sustained from a breach. Yet the majority adopts such a principle
today to invalidate a clause in this contract, and thereby, as I
see it, embarks upon the very undesirable practice of supervising
and revising the congressionally authorized conduct of federal
contracting agents. This Court has previously refused to initiate
such a practice in a case where the Government on most appealing
grounds urged us to revise its agent's contract.
United States
v. Bethlehem Steel Corp., 315 U. S. 289,
315 U. S.
308-309.
Page 332 U. S. 416
In this case, procurement officers of the Federal Government,
admittedly acting within their authority, advertised for bids for
the sale of dried eggs which the advertisement provided were to be
ready for delivery to the Government on a date to be chosen by the
bidder. Actual delivery of the eggs was to be made on the
Government's demand any time within a ten-day period following the
ready date named by the bidder. The advertisement also contained a
provision for the assessment of liquidated damages for delay in
delivering the eggs or in having them inspected, certified, and
ready for delivery by the bidder's chosen date.
The efficient integration of a large scale procurement program,
such as was here involved, made it highly advisable for the
Government to exact assurances that goods would be ready for
delivery in advance of selection of the date for actual delivery.
Essential to the program was the coordinated movement of boxcars
and ships, both of which were then scarce and in great demand. Each
day's idleness of cars and ships might mean injuries to the
Government of large but uncertain amounts. Under such
circumstances, it would have been a serious omission for Government
agents to fail to check and double check, contract and double
contract, in order to have goods ready for delivery to cars and
ships with the least possible lost time in the use of transport
facilities. And the Government had a right to depend on its
contractors' living up to their promise to have goods ready on the
date they said they would, so that the Government might thereafter
select a delivery date with certainty that no transportation delays
would occur. Failure to do so might well disrupt the Government's
prearranged train and ship schedules, causing it cumulative
difficulties not easily translated into money damages. And all of
these damages might result from failure to have the goods ready as
promised, even
Page 332 U. S. 417
though the contractor might later be able to deliver when called
for, and thus escape the delivery liquidated damage provision.
This contract was made at arms' length. The petitioner knew of
the necessity for faithful performance of its obligations. It
undoubtedly gave consideration to this fact and fixed its price
high enough to satisfy itself of its profits. I can think of no
persuasive reason why it should now be relieved of the obligation
it advisedly assumed which was, in effect, to charge less for its
goods if they were not ready for delivery on the date it promised.
I do not deny that this Court can fill gaps in statutes so as to
execute broad congressional purposes, and that courts generally
have made large contributions to laws governing contracts. But I
think that the Court here makes a law which frustrates
congressional purposes and tends most unwisely to handicap
Government purchasing agents in the performance of their authorized
duties. I adhere to the belief that it is unwise for the courts to
interfere with the making of contracts by Government agents in
harmony with valid congressional authority.
Perkins v. Lukens
Steel Co., 310 U. S. 113,
310 U. S.
127-128,
310 U. S.
131-132. I would affirm this judgment.
MR. JUSTICE FRANKFURTER, whom THE CHIEF JUSTICE joins,
dissenting.
Upon failure to perform the undertaking of a contract the law
secures the money equivalent for the loss thereby incurred. In
order to avoid the waste of controversy as to the extent of a loss,
should it occur, and to save judges and juries from having to guess
about it, parties naturally enough, often stipulate in advance the
compensation for such loss, and courts in appropriate situations
will enforce such a provision for liquidated damages. But exactions
for a breach of contract not giving
Page 332 U. S. 418
rise to damages and merely serving as added pressure to carry
out punctiliously the terms of a contract are not enforced by
courts. In familiar language, penal provisions in a contract --
those that concern defaults that bring no loss in their train --
are not enforceable. I assume that the basic reason for this
doctrine is that the infliction of punishment through courts is a
function of society, and should not insure to the benefit of
individuals. So-called
qui tam actions, suits for treble
damages, and the like stand on a different footing. In such
situations, society makes individuals the representatives of the
public for the purpose of enforcing a policy explicitly formulated
by legislation. The essence of the law's remedy for breach of
contract is that he who has suffered from a breach should be duly
compensated for the loss incurred by nonperformance. But one man's
default should not lead to another man's unjust enrichment.
If the contract in controversy is to be treated as an ordinary
commercial transaction, to be governed by the ordinary rules
applicable also to Government contracts in ordinary times, I could
not escape the conclusion that the provision for "damages" merely
for failure to secure inspection certificates without failure of
delivery operates as a penalty to deter nonobservance of this
requirement. It is not a determination in advance of the money lost
to the Government due to default. The Government wanted delivery of
eggs. But failure of delivery or inability to deliver for want of
certificates brings into operation the provisions for liquidated
damages of paragraph 9. There is no money loss to the Government
through failure of any of the intervening preparatory steps in the
process leading to delivery. Of course, a contractor is interested
in having the steps leading to performance duly carried out.
Exactions for any of the intervening steps would undoubtedly have a
coercive influence in securing performance
Page 332 U. S. 419
of that which is the real object of a contract. But if a
contract is performed, the promisee has suffered no loss even
though some intervening step by the promisor has been delayed. And
so, such a provision for default of an intervening step, when due
delivery has been made, is plainly exaction of an amount for which
the promisee has not been out of pocket. Accordingly, if this
contract were an ordinary commercial contract subject to the
ordinary rules of the law of contract, I should have to find
against the Government.
But this is not an ordinary peacetime Government contract. The
Government may certainly assure performance of contracts upon which
the effective conduct of the war depended by tightening the
consequence of nonperformance of each stage in the ultimate process
of delivery of essential goods to the extent of having a tariff of
deductions for nonperformance of each step in the ultimate goal of
the contract. Congress certainly could specifically authorize such
pressures on each step in the sequence of a contract -- performance
by provisions like that of paragraph 7. Congress did not do this.
Instead of particularizing to that extent, such a provision would,
as a matter of fair construction, also be authorized by Congress if
it empowered an agency to procure "under appropriate terms and
conditions" essential war goods. I could not hold that an authority
by Congress to a procurement agency to make contracts for carrying
out the food program for the successful conduct of the war could
not appropriately require of those who voluntarily enter into such
contracts with the Government to incur a reasonable penalty for
default for necessary certificates upon which delivery depended.
And this would be so even though, for reasons themselves relating
to the war effort, the Government reserved a necessary margin of
time within which to call for delivery and by a delayed
Page 332 U. S. 420
call obtained delivery when required, though, if the call had
been previously made, the failure of certification might have been
serious. Congress did not add to its authorization for entering
into the making of these war contracts the assumed provision "with
appropriate terms and conditions." But I find the distinction
between what Congress did and the indicated addition too thin for
denying to the contracting officers of the Government the implied
right, under the circumstances of the times. Congress authorized
the President, through appropriate delegation, to "procure . . .
any defense article" deemed "vital to the defense of the United
States." Section 3(a) of the Lend-Lease Act of 1941, 55 Stat. 31.
And so I conclude that the provisions of paragraph 7 were, on a
fair reading of Congressional legislation, within the contracting
powers of the President -- as much so as if Congress had in terms
authorized such a provision.
It hardly needs to be added that neither formal logic nor
practical judgment requires that authority to impose safeguards for
preventing breaches short of ultimate default, similar to those
contained in paragraph 7 of this contract for vital war products,
be inferred from the ordinary implied powers of Government
contracting officers in making ordinary contracts for the
Government.
If one starts with the assumption that, in the absence of
specific Congressional authority, a fixed rule of law precludes
contracting officers from providing in a Government contract terms
reasonably calculated to assure its performance even though there
be no money loss through a particular default, there is no problem.
But answers are not obtained by putting the wrong question, and
thereby begging the real one. It is misleading to ask: "What
remedies has Congress provided for breaches of contract?" The
answer to that depends on the answer to the true question: "With
what scope has Congress presumably
Page 332 U. S. 421
invested the Executive in order to carry out the duty, not
defined with particularity, of assuring the necessary war
supplies?"
The enforceability of a clause like that now in controversy,
regardless of whether it is fairly to be regarded as one for
"liquidated damages" or for a "penalty," is a matter of appropriate
implications drawn from a total absence of expressed Congressional
desire. Such implications do not rest on dogma. They derive from
the considerations of policy underlying them. It is one thing to
attribute to Congress the desire to confine the Government's
remedies for breaches of its ordinary procurement contracts to the
rules of law governing ordinary commercial contracts. It is quite
another thing to infer that when, in March, 1941, Congress gave the
President, through the Lend-Lease Act, unrestricted power to
"procure" essential war materials, it meant to fetter the
procurement agencies selected by the President by forbidding them
to include, among the terms of bids to be voluntarily accepted,
conditions reasonably calculated to secure performance.
While Congress presumably wishes the ordinary rules of contract
law to apply in ordinary times, the Lend-Lease Act was the most
potent proof that the times were far from ordinary. The inclusion
of paragraph 7 in contracts such as this was an appropriate regard
by the Executive for the very emergency which impelled Congress to
act and to give its agencies power to act.