#### LANG PRODUCTS COMPANY v. THE UNITED STATES.

[No. 174-A.

Decided March 19, 1923.]

*On the Proofs.*

*Contract, cost plus; legal expenses.*— Where a cost-plus contract expressly excludes “ legal expenses in connection with or adjustment of this contract or any legal expenses of an extraordinary nature ” as part of the cost of the work, and a lawyer is employed by the contractor at a stated yearly salary, a part of whose work is of a legal character, and the pay for that part which is not legal in its nature is not segregated from that which is legal, the contractor is not entitled to reimbursement for the salary paid nor to a percentage on such salary as part of the cost of the work.

*Same; purchase of materials.*— Where a cost-plus contract provides for the purchase of materials to be approved by the Bureau of Steam Engineering and the Paymaster General, and the manufacture of certain articles therefrom, the purchase of such manufactured articles from another firm without the approval of the Paymaster General can not be regarded as a purchase of materials, nor a part of the cost of the work within the meaning of the contract.

*The Reporter's*statement of the case:

*Mr. William, IT.*White, *jr.,*for the plaintiff. Taylor, Jackson, *Brophy <& Ncesh*were on the briefs.

*Mr. Alexander H. McCormick,*with whom was *Mr. Assist-a/nt Attorney General Robert H.*Lovett, for the defendant.

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

I. Under date of April 5, 1918, plaintiff entered into a contract (designated as contract No. 36588) with the United States, by the Paymaster General, United States Navy (Chief of the Bureau of Supplies and Accounts), acting under the direction of the Secretary of the Navy, for the construction of 1,250 aircraft propellers for flying boats, the plaintiff to be paid the cost thereof as defined in the contract, plus a profit of 15 per cent of certain defined costs.

*168A copy of the contract is attached to plaintiff’s petition and made a part thereof, marked “ Exhibit 1,” and is made a part hereof by reference.

. II. For some time prior to April, 1918, the Lang Propeller Co. had been and at that date was engaged in the business of manufacturing aircraft propellers. The Navy Department desired to increase the production of propellers, and it being ascertained that the facilities of the Lang Propeller Co. were not sufficient to supply the demand, it was arranged between representatives of that company and of the Navy Department that another corporation should be formed, to be financed by the Navy Department, and to engage in the manufacture of aircraft propellers for the Navy on a cost-plus basis; and the Lang Products Co., this plaintiff, was incorporated, all the stock thereof being held by the Lang Propeller Co.

This contract was the first one made between the parties, and when it was being negotiated plaintiff’s representative was asked by the Navy Department’s representatives for a statement of the names of the company’s executives and their salaries. A written memorandum was furnished which contained the name of John G. Jackson, chairman executive committee, salary $5,500 a year. No objection was made at that time by the Navy as to the scheme of organization or proposed salaries. About six weeks later the Government’s accountant in charge at the works was supplied with a written memorandum of the company’s executives, their salaries and duties, and no objection was made at that time. The memorandum as to plaintiff’s executives, their salaries and duties, was as follows:

“ Mat 17, 1918.

“ From: Lang Products Company.

“ To: Accountant in charge.

“Subject: List of officers and their duties.

“A. F. D. Lang, president: Salary $7,500 per annum; acts as chief engineer of the company in the designing of propellers and the machinery and devices used in producing the same; the organization of factory work, and all technical matters connected with the company’s production.

“W. F. Ardis, treasurer: Salary $7,500 per annum. All financial matters come under his jurisdiction, including *169accounting methods, the negotiating for, and purchase of, supplies in adequate quantities, disbursement of all moneys; and also as producton manager, to see that the company’s undertakings on contracts are fulfilled promptly, and deliveries made and work supplied and turned out in accordance with requirements.

“'Win. S. McCartney, works manager: Salary $5,500 per annum; has charge of all men in the factory; comes in direct contact with employees, securing additional help when necessary; seeing that the hands employed are competent and perform their work properly; attending to the immediate execution of orders and plans laid out by the president and production manager, to each of whom he acts as a constant assistant.

“ John G. Jackson, chairman executive committee: Salary, $5,500 per annum; has charge of all executive matters, including passing on form and substance of contracts of purchase; company proper performance of its public duties in the way of reports, taxes, municipal requirements; regulating its corporate affairs, including directors’ meetings, and all matters involving the policy of the company.”

John G. Jackson was then a practicing attorney, a member of the firm of Taylor, Jackson, Brophy & Nash, and was not a stockholder in the plaintiff company or in the Lang Propeller Co.

III. Payments of salary had been made to Mr. Jackson by the plaintiff for some months, with the knpwledge of the Navy Department’s representative stationed at the plant, before any intimation had been conveyed to the plaintiff that there was objection to the inclusion of his salary in cost of production under the contract. After such objection wag made known the plaintiff continued to pay Mr. J ackson the stated salary, and paid him in all the sum of $5,418.38.

IV. The services rendered by Mr. J ackson were those set out as his duties in the memorandum quoted in Finding II. There is no showing in the record otherwise than in the general form above stated as to the particular things done by him in the discharge of his duties or as to the extent of the service rendered by him within any of the specifications thereof.

He addressed the Secretary of the Navy during the prosecution of his claim before the Navy Department “ in behalf *170of the Lang Propeller Company of America, a New York corporation, and of the Lang Products Company, a Maryland corporation,” signing himself as “Attorney ,for the above-named companies.”

V. About June of 1918 the Lang Propeller Co. was practically out of work, and it was told by an officer in the Bureau of Steam Engineering, Navy Department, that the Navy would require a greater number of propellers than those then being manufactured by the Lang Products Co., and that.while a contract could not then be placed it was given assurance that if it manufactured propellers of the type then being made by the Products Co. the Navy would use them and a contract would be made before production was completed. Production of 100 propellers was then commenced by the Lang Propeller Co.

Thereafter the Bureau of Steam Engineering, Aeronautical Division, was notified that these propellers were approaching completion and an order therefor was requested, and thereafter, at the request of the Lang Products Co. for authority to buy these propellers from the Lang Propeller Co. and apply them on its contract, it was, on October 19, 1918, authorized by the Bureau of Steam Engineering to do so, that bureau stating in its communication on the subject that the Bureau of Supplies and Accounts had been “ notified to this effect.”

On December 7, 1918, the Bureau of Supplies and Accounts, referring to contract 36538, notified the Lang Products Co. that—

“ In view of the fact that 100 HS-1 propellers, design LP-401-E, which were to be purchased from the Lang Propeller Company, are no longer needed, it is requested that this order be disregarded.”

On December 11 the Lang Products Co. addressed the Bureau of Supplies and Accounts, in reply, as follows:

“ We are just in receipt of your letter of 7th December, signed Parson, by Direction of Paymaster General, in relation to our order #1960 for 100 I-IS-1 propellers, design 401, placed with the Lang Propeller Company in October.

“We have to advise you that this order was accepted by the Lang Propeller Company in October and delivery of the *171propellers was nearly completed, so that we fear there is no way of disregarding the order, as you suggested.

“ It does develop, however, that of the 100 propellers which the Lang Propeller Company report to us as having been put in process of manufacture, only about 90 will be completed, owing to rejections during the Navy inspection. They have asked us if we wish to have these possible 10 rejected propellers replaced in order to round out the full quantity ordered. We are notifying them to-day to do nothing further in the matter until we hear from you.”

YI. On February 26, 1919, the Bureau of Supplies and Accounts authorized the Lang Products Co. as follows:

“ Your company is authorized to purchase from the Lang Propeller Company, New York City, 28 HS-1 propellers, design LP-401-E, at a price not greater than the manufacturing cost of these same design propellers manufactured by your company on requisition Steam Engineering 511, contract 36538.

*“*These 28 propellers are to be applied on requisition Steam Engineering 511-1918 and contract 36538, and their shipment will complete the shipment of propellers design LP-401-E authorized on this contract.

“ This transfer of propellers from the Lang Propeller Company to your company is authorized by recommendation of the Bureau of Steam Engineering in the above reference.”

The Navy Department accepted the 28 propellers but paid the plaintiff for only 21 of them, making payment to the Lang Propeller Co. for 7. They were paid for at $190.41 each, plus 15 per cent profit. The cost of manufacture of this type of propeller under the contract of the Lang Products Co. was determined to be $248 each.

The Lang Propeller Co. delivered to the Lang Products Co., the time of delivery not being definitely shown, 94 propellers, for which the latter company paid the former. The United States declined to accept 66 thereof which had passed inspection and delivery of which had been tendered.

DowNey, Judge,

delivered the opinion of the court:

The plaintiff’s cause of action is predicated on a Navy cost-plus contract for the manufacture of aircraft propellers and consists of two items.

It first seeks to recover for salary paid to John G. Jackson in the sum of $5,418.38, with 15 per cent of profit thereon, *172which was disallowed as a part of the cost of production under the contract, on the ground that the services were legal in their character and barred from inclusion in authorized “ overhead ” by a provision in the contract.

A memorandum furnished by the plaintiff to the Government accountant in charge, entitled “ List of officers and their duties,” is set out in Finding II, in which the fourth paragraph is as follows:

> “John G. Jackson, chairman executive committee: Salary $5,500 per annum; has charge of all executive matters, including passing on form and substance of contracts of purchase; company proper performance of its public duties in the way of reports, taxes, municipal requirements; regulating its corporate affairs, including directors’ meetings, and all matters involving the policy of the company.”

The contract provides for the inclusion in cost of production of “ a proper proportion of overhead expenses,” which is defined as “ the indirect labor and other manufacturing expenses and the general and administrative expense of the contractors,” but excludes “ legal expenses incurred in connection with or adjustment of this contract or any legal expenses of an extraordinary nature.”

Such testimony .as there is on the subject shows simply that Mr. Jackson performed the duties defined above without particularizing as to any of the services rendered, in connection with which it is testified that “ Mr. Jackson’s salary was not in any sense for legal services,” but to accept that statement as competent would be but to permit a substitution of the witness’s judgment for that of the court.

In view of the fact that Mr. Jackson was appearing in this matter before the Navy Department as plaintiff’s attorney, and of the further fact that the firm of which he is a member are of plaintiff’s counsel in this case, it would seem that the court might easily have been informed as to the particular services rendered by him, but the record is silent in that respect, and we are left to reach a conclusion predicated on the general statement as to the performance of assigned duties as stated in the memorandum quoted from.

We can not escape the conclusion that a part, at least, of these duties were legal in their nature, and the extent to *173which ne performed such duties as were nonlegal does not appear. That he had “ charge of all executive matters ” is stated, but, without referring to or quoting from the lexicon as to the meaning of “ executive,” we can not escape consideration of the duties assigned to and presumably performed by other officers whose duties are also set out in the memorandum referred to, and such consideration must lead to the conclusion that the defined duties left for Mr. J ackson were likely such as follow the word “ including.” And first of these is “ passing on form and substance of contracts of purchase.”

In this connection it is to be noted that another of the officers named was charged with the “ negotiating for and purchase of supplies in adequate quantities,” following which the passing on forms of contracts of purchase came in natural sequence with the inescapable inference to follow that that service was a service invoking Mr. Jackson’s legal knowledge and training and was a legal service. What was meant by the words “ and substance ” following “ form ” we do not know.

But we need not analyze further. The conclusion is forced that the calling of Mr. Jackson to the performance of these duties was largely, at least, invoking his legal talents in the performance of a legal service, and if, perchance, it be true that services of value were performed by him not legal in their character, the plaintiff has failed to furnish any basis upon which there might be a segregation and an award on account thereof.

We have seen fit to express our views of the matter, but do not omit to suggest that it is provided by section 17 of the contract that “ if any dispute or doubt arise as to the meaning of anything in the contract * * * the matter shall be referred at once to the Secretary of the Navy for determination, and his decision in the premises shall be conclusive and binding upon the parties hereto.”

It is contended that by reason of the apparent acquiescence of representatives of the United States in payments made by plaintiff to Mr. Jackson in that such payments were made for a time with knowledge and without objection, the United States is estopped and can not now assert the im*174propriety of including such payment in cost of production. We can not assent to such a view. However strongly such facts may be asserted, they can not fasten on the United States an obligation not only not within the terms of the contract but expressly excluded.

Plaintiff’s second claim is based on the purchase by it from the Lang Propeller Co. of 94 propellers manufactured by the latter company under authority given by the Bureau of Steam Engineering to purchase and apply on its contract. The circumstances of the transaction appear in the findings and need not be repeated.

It is apparent that to deny the plaintiff’s claim on this account works a hardship, and it seems upon a general view of the matter that the Navy Department might well have taken a different course, but these considerations are not sufficient to justify a recovery, for the action is predicated on the contract, and unless there may be recovery thereunder there is no remedy, at least so far as this case is concerned.

The nature of the contract as well as its specific provisions must be borne in mind. It contemplated the purchase of materials by the plaintiff/the manufacture therefrom by the plaintiff of the propellers involved, with reimbursement to the plaintiff of the cost of materials, labor applied thereto in the production of the propellers, a proper overhead, etc., and compensation to the plaintiff of 15 per cent of the ascertained cost to it of production.

The departure from the purposes of the contract by the purchase of propellers to apply thereon from another company was probably not detrimental in this case, so far as the character of the product was concerned, because of the close relations between the two companies and the fact that the technical direction of production in both plants was practically the same, but the corporations were distinct and the transaction must be treated under the contract as if they were strangers to each other.

The contract clearly, as suggested, did not contemplate the purchase by the plaintiff from another of a manufactured product. As to the orders, prices, and awards for materials to be charged to the Grovernment, it provided that *175they should be subject to the approval of the Chief of the Bureau of Steam Engineering and the Paymaster General. As to changes in the provisions of the contract it provided that “ no such change shall be made except on written order of the Secretary of the Navy.”

If this transaction could be regarded as an order for materials, it is not shown to have had the approval of the Paymaster General. It was authorized by the Bureau of Steam Engineering, which stated simply that the Bureau of Supplies and Accounts (of which the Paymaster General was the head) had been “notified to this effect,” a procedure certainly not equivalent to an approval by the Paymaster General. But to that we do not attach primary importance. Rather is the material infirmity in the transaction found in the fact that the purchase of propellers from another concern was a clear departure from the procedure contemplated by the contract, a material change in the provisions of the contract and, so far as appears, an unauthorized change.

This conclusion renders unnecessary any consideration of subsequent action in the taking over by the department of a part of these propellers and the payment therefor on a lower basis than obtained.

We find in the record no proper basis for a recovery in this action, and the plaintiff’s petition must be dismissed.

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