#### SNARE & TRIEST COMPANY v. THE UNITED STATES.

[No. 72-A.

Decided March 13, 1922.]

*On the Proofs.*

*Contract; prime and subcontracts; parol testimony.*— Where two subcontracts contain a provision that the “ principal contract is hereby adopted as a part of this contract and a copy thereof is hereto attached,” the prime contract and subcontracts must be construed together as one contract, and where, in case the subcontracts are terminated before completion, there arises an ambiguity as to whether the fee named in the prime contract or that named in the subcontracts is applicable, parol testimony may be taken to explain the terms of the subcontracts as understood by the parties at the time of their execution.

*The Reporter's*statement of tbe case:

*Mr. Horace S. Whitman*for the plaintiff. *Dulany & Shepard*were on the briefs.

*Mr. Alexander H.*McCormick, with whom was *Mr. Ass’istant Attorney General Robert H.*Lovett, for the defendant.

The following are the facts of the case as found by the court:

I. The Snare & Triest Company is a corporation duly organized and existing under the laws of the State of New York, and has its principal office in the city of New York in that State.

II. On the 22d day of July, 1918, the Snare & Triest Company entered into a written contract with the United States, acting by and through Brigadier General R. C. Marshall, jr., Q. M. C., who had been specifically authorized and designated by the Secretary of War as the contracting officer to execute such contract in defendant’s behalf. Under this contract, which is attached to the plaintiff’s petition herein as Exhibit A and made a part hereof by reference, plaintiff agreed to construct and complete a quartermaster terminal at Philadelphia, Pennsylvania, in consideration of which the defendant agreed to reimburse plaintiff for all labor, *152material, subcontracts made in accordance with the provision of this agreement, machinery, and other specified costs of the work, and further agreed to pay plaintiff a fee to be determined at the time of completion of the work from specified schedules, provided, however, that the total fee should in no event exceed the sum of $250,000.

III. During the progress of the work under the Snare & Triest Company contract, referred to hereafter as the prime contract, Lieutenant Colonel T. B. Morden, Q. M. C., who was in charge of the work as construction quartermaster and was the duly appointed and authorized representative of the contracting officer, negotiated with Lasette & Murphy to do the necessary plumbing work as subcontractor and with Gillis *&*Geoghegan to do the heating and ventilating work, also as subcontractor, and prepared the contracts to be executed by the Snare & Triest Company and these subcontractors. A copy of the contract between the Snare & Triest Company, prime contractors, and Lasette & Murphy, subcontractor, as prepared by Colonel Morden and finally executed, is attached to the petition herein as Exhibit B and is made a part hereof by reference. The contract between the Snare & Triest Company and Gillis & Geoghegan as prepared by Colonel Morden and executed, was in the same form except for appropriate changes of name and description of work to be done.

IY. There were printed forms of contract, both for the prime contract and for subcontracts in such cases, and representatives of Lasette & Murphy and Gillis & Geoghegan had seen and examined these forms. They were so prepared as to operate together and reference from the subcontract form to the prime contract form was necessary to determine certain of the terms thereof.

In the preparation of the subcontracts Colonel Morden struck out of the printed form certain language immediately following the word “be” preceding “5 per cent,” which language referred to Article III of the prime contract as fixing the schedule of fees, and inserted in lieu thereof the language “ 5 per cent of the cost of the work as determined by Art. II of the principal contract ” as appears at *153the conclusion of the first paragraph of Article VI of the subcontract.

When the contracts as thus modified were submitted to Lasette & Murphy and Gillis & Geoghegan they called attention to the change and objected thereto because it provided for a 5 per cent fee, whereas originally reference had been made to the schedule of fees in Article III of the prime contract, which provided for 6-¿ per cent within certain limits. They were told by Colonel Morden that the 5 per cent was only for the purpose of limiting progress payments, that their entire fee would be limited to $25,000 under each contract, and that as the amount of each contract would be $600,000 or more, they would receive the $25,000 fee just the same.

Colonel Morden’s attention being then called to the conditions which might result in the event of the abandonment of the work before completion, since there was no specific provision in the subcontracts for such a contingency, he assured them that the work would go ahead and would not be abandoned and they would get their full fee, but that if such a thing should happen they could fall back on the provisions of the prime contract with reference to abandonment of the work.

Upon these assurances and with this mutual understanding on the part of Colonel Morden, Snare & Triest, Lasette & Murphy, and Gillis & Geohegan, the subcontracts were executed by the parties thereto and each was formally approved in writing by Colonel Morden as the representative of the contracting officer.

Y. The subcontractors duly began performance of their respective subcontracts and the costs of their work, which included monthly fee payments, were reported to and paid by defendant to plaintiff, who paid said monthly fee pay- • ments to the subcontractors. Thereafter the work covered by the subcontracts was terminated before completion by defendant through no fault of plaintiff or said subcontractors.

VI. At the time said work ivas terminated as aforesaid, the plaintiff submitted to the defendant a statement showing the amount due by the plaintiff to the subcontractors, *154Gillis & Geoghegan and Lasette & Murphy. The statement showed the actual net expenditures in the work covered by the said subcontract with Gillis & Geoghegan and actually then completed and the commitments made in preparation for the completion of the work. Such calculations were made in accordance with Articles III and VIII of the prime contract. The statement showed the expenditures, as stated above, to be $343,583.40, to which sum plaintiff added the sum of $21,511.13 as subcontractors’ fee, as provided by Article VIII and the percentage schedules of Article III of the said prime contract, viz, 6£ per cent of the said $343,583.40. Credits were shown for the amounts paid on account.

Likewise the actual net expenditures in the work covered by the subcontract, of Lasette & Murphy were shown to be $287,375, calculated in accordance with Articles III and VIII of the prime contract, to which sum the plaintiff added by way of said subcontractors’ fee the sum of $18,679.36, or 6-£ per cent of the said actual net expenditures. Credits were shown for amounts paid on account.

Plaintiff thereupon reported said total amounts to defendant as items of cost of the work and requested payment thereof as provided in its contract. Defendant, however, refused to pay all of said sums to plaintiff, contending that said subcontracts provided only for fees to subcontractors computed on a basis of 5 per cent of the actual net expenditures. Whereupon defendant paid to plaintiff, and plaintiff paid to the subcontractors, sums of money sufficient to make the total amounts paid as subcontractors’ fees equal to 5 per cent of said actual net expenditures; that is to say, the total amount thus paid to Gillis & Geoghegan on fee account was $16,547.03, and to Lasette & Murphy $14,368.75, leaving a balance claimed as justly due to plaintiff by way of fee for Gillis & Geoghegan of $4,964.10, and by way of fee for Lasette & Murphy of $4,310.60.

VII. Thereafter plaintiff and the subcontractors duly filed a joint claim for the above-mentioned sums with the War Department in conformity with the requirements of the regulations promulgated by the Secretary of War *155known as Supply Circular 111, W. D. 1919. The claim was rejected by the Board of Contract Adjustment of the War Department on May 20th, 1920, the board refusing to consider the circumstances as stated in Finding IV, holding that in view of the wording of the contract it could allow a fee of only 5 per cent, though from the standpoint of equity alone it would seem that the contractor was entitled to more. Appeal from this decision was duly made to the Secretary of War, whose special advisers concluded that while the true construction of these two contracts was not free from doubt they were not justified in reversing the decision of the board, whex-eupon, on June 29, 1920, the Secretary of War affirmed the decision of the Board of Contract Adjustment.

Downey, Judge,

delivered the opinion of the coui*t:

The plaintiff was a cost-plus contractor for the erection of a quartermaster terminal at Philadelphia, Pennsylvania. During the progress of the work Lieutenant Colonel E. B. Morden, of the Quartermaster Corps, was in charge as construction quartermaster and was duly authorized as the l-epresentative of the contracting officer.

Colonel Morden, without consultation with the plaintiff so far as appears, took up with the fii’m of Lasette & Murphy the matter of entering into a subcontract for the plumbing work and likewise with Gillis & Geoghegan the matter of entering into a subcontract for the heating and ventilating work and prepared the contracts afterward executed between these two firms as subcontractors and the Snare & Triest Company.

There had been prepared for use and printed, forms of contract, a form for use in the making of the prime contract and a form for use in the making of subcontracts thereunder and they were so prepared that they operated together and that in some instances reference from one contract to the other was necessary for the determination of terms and conditions. Before entering into these subcontracts a representative of Lasette & Murphy and a representative of Gillis & Geoghegan had seen and examined the printed forms and so far as had been made known to them during *156the preliminary negotiations the terms of their proposed contracts were to be as indicated in the printed form. In the preparation of the subcontracts Colonel Morden eliminated from the conclusion of paragraph six after the word “ be ” preceding “ five per cent,” the words “ taxed according to the schedule, contained in Article III of the principal contract hereto attached and shall not exceed the fee which, under said schedule would be allowed a contractor for the work hereby included, if said work had been done under a direct and separate contract,” and substituted therefor, as appears in the executed contracts, the words “ five per cent of the cost of the work as determined by Article II of the principal contract.” The subcontractors protested against the change made upon the assumption that it might change their compensation as originally provided which, predicated upon Article III of the prime contract, would be six and one-half per cent upon any amount over $125,000 and under $450,000. Colonel Morden stated to them that he had decided to limit their fees in each case to $25,000 and since the estimated amount of work to be done under each contract was $600,000 the change from six and one-half per cent to five per cent would not affect the amount of fee to be received by them since five per cent of the estimated amount of work would be in excess of the maximum fee and that the five per cent was to be used simply as the basis of progress payments. The question was then raised by the subcontractors as to the situation in the event that the work should be suspended before completion and in reply thereto Colonel Morden assured them that the work would be completed and that they would earn the maximum fee but that if it should be suspended before completion they would have recourse to the provisions of the prime contract in case of suspension since there was no specific provision therefor in the subcontracts. Upon this representation and the understanding upon the part of Colonel Morden, the Snare & Triest Company and the subcontractors that this was the construction to be put upon the contracts they were executed by the subcontractors and approved by Colonel Morden acting for the contracting officer. It might well here be stated that there is no room for controversy as to *157the construction put upon the transaction by Colonel Morden as well as the subcontractors, for it appears that after adverse action by the Contract Adjustment Board and the Secretary of War, referred to in the findings, Colonel Mor-den wrote, to the Secretary of War a very strong letter in which he stated that he had represented to the subcontractors that the work would be completed and that they would earn their full maximum fee of $25,000 each and that if the work should be terminated or suspended the rate of compensation would be fixed in accordance with Articles YIII and III of the prime contract, and Colonel Morden in this letter vigorously asserted that the Government should live up to the contract as he had made it and that it had become with him a matter of personal and official honor.

The work was terminated before completion and upon submission of the final statement by the plaintiff it was reported that the amount of work done by Lasette & Murphy was $287,875.00, on which they were entitled to a subcontractor’s fee of six and one-half per cent, or $18,879.36, and that the amount of work done by Gillis & Geoghegan was $343,583.40, on which, at six and one-half per cent, they were entitled to a fee of $21,511.13. Fees were allowed to the plaintiff for the subcontractors on the basis of five per cent upon the amounts of work done instead of six and one-half per cent, a difference in the case of Lasette & Murphy of $4,310.60 and in the case of Gillis & Geoghegan of $4,964.10. The five per cent fees allowed to the plaintiff for the subcontractors were received by the plaintiff and paid over to the subcontractors, and the plaintiff, who had received for itself all that was due it under the prime contract, here sues for the sums stated for the use and benefit of these subcontractors.

It is quite apparent that had the work contemplated by the subcontracts been fully performed there could have been no room for dispute, since whether the pi’ogress payments were made upon a basis of six and one-half per cent or five per cent the maximum fee in either event would have been attained, and in this connection it is apparent that, without intending thereby to affect the ultimate amount of compensation, there may have been a reason for the changing of the progress payments from a six and one-half per cent to a five *158per cent basis to be found in the desirability of so limiting the progress payments that the maximum fee would not be attained long before completion of the work. In view of this situation as to the results had the work been completed, it is apparent that the question involved arises only because of the suspension of the work before completion.

It is desirable to note the interlocking character of the prime and the subcontracts requiring, so far, at least, as the subcontracts are concerned, that they and the prime contract be construed together, practically as one contract. For the purposes of the present case it is to be noted that the subcontracts contained the provision that “ said principal contract is hereby adopted and made a part of this contract and a copy thereof is hereto attached,” and that by virtue of the provisions of Article III of the subcontracts the pi*ime contractor thereunder is placed in the position occupied by the United States under the prime contract and the subcontractors are placed in the position of the contractor under the prime contract. Article III of the prime contract contains a schedule of fees and that schedule of fees is referred to in the subcontracts. It is to be noted further that the subcontracts contain no specific, provision authorizing the abandonment of the contracts and prescribing the basis of settlement in such a contingency, but that provision therefor is made in Article VIII of the prime contract.

There are two possible views of the situation presented each, however, resulting in the same conclusion. First, in view of what has been said with reference to the interlocking character of the two contracts, the provision specifically making the prime contract a part of the subcontracts, and the absence from the subcontracts of any specific provision for the abandonment of the work and the settlement with the subcontractors in that event, it seems clear that upon abandonment of the work reference for the authority therefor, as well as for the basis of settlement in that event, must be found in Article VIII of the prime contract. Under this provision each of the subcontractors here involved were entitled to a fee of six and one-half per cent upon the ascertained amount of work done by them under their subcontracts. Second, there is inconsistency, such *159perhaps as might be denominated a conflict in the provisions of Article VI of the subcontract with reference to the fees of the subcontractor. There was no inconsistency in this article as originally appealing in the printed form since it referred to Article III of the prime contract as the only basis for the determination of the subcontractor’s fees. As modified, that article provides that “the contractor shall pay to the subcontractor such sum as the contracting officer may approve and allow the contractor according to the schedule of fees contained in the principal contract for a feo upon the work hereby included,” followed by the provision, after the amendment by Colonel Morden, that “the amount of fees to be paid by the contractor to the subcontractor shall be five per cent of the cost of the work as determined by Article II of the principal contract.” These two provisions .in the subcontracts as executed are so in conflict that it seems that there can be no doubt of the application of the rule that in the event of ambiguity in the provisions of a contract or, as here, conflicting provisions in a contract, parol testimony is admissible for the purpose of explaining the terms of the contract as understood by the parties at the time of its execution. It is not deemed -worth while to cite any of the many authorities in support of this rule. So far as the facts of the case are concerned there is no room for doubt. As already stated, it was the clear intent of the parties that the five per cent provision should be applicable only as a measure of progress payments, immaterial otherwise because upon completion of the work the five per cent would exceed the maximum fee to be allowed, and that in the event of a suspension of the work before completion the provisions of Article VIII of the prime contract should apply.

No question is made in the case of the right of the plaintiff herein to sue for the use and benefit of these subcontractors and there would seem to be room for no question as to that right. The contracts read together indicate clearly that the rights of the subcontractors, both as to reimbursement of expenditures and payment of fees, were necessarily to be worked out through the prime contractor.

*160We conclude that for the use and benefit of Lasette & Murphy the plaintiff is entitled to recover $4,310.60, and for the use and benefit of Gillis & Geoghegan $4,964.10, and we have directed judgment accordingly.

Graham, *Judy a;*Hat, *Judge;*Booth, *Judge;*and Campbell, *Chief*Justice, concur.