#### HYGIENIC FIBRE COMPANY v. THE UNITED STATES

[No. A-287.

Decided April 28, 1924]

*On the Proofs*

*Cost plus contract; reformation; mutual mistake.*— The Government invites plaintiff to submit bid to furnish a stated number of veterinary bandages three yards long on a cost plus ten per cent basis. The plaintiff by mistake of one of its employees estimates the cost of bandages one yard long, and a contract is entered into between the plaintiff and the Government by which the plaintiff agrees to furnish bandages three yards long for the cost of bandages one yard long plus ten per cent added, both parties when the contract is executed believing the contract price is the cost of bandages three yards long plus ten per cent added. *Held,*that the contract was entered into by mutual mistake and should be reformed so as to express the true intent of the parties.

*The Reporter’s*statement of the case:

*Mr. Iienry T. Hu/nt*for the plaintiff. *Messrs. Herbert R. Smith*and *Arlen G. Swiger*were on the briefs.

*Mr. Dwight E.*Rorer, with whom .was *Mr. Assistant Attorney General Robert H.*Lovett, for the defendant.

*599The following are the facte of the case as found by the court:

I. The plaintiff, the Hygienic Fibre Company, is a corporation organized and existing under the laws of the State of Rhode Island. At the time of and previous to the declaration of Avar with Germany it had been engaged in association with the Versailles Sanitary Fibre Mills, Inc., a Connecticut corporation, in the manufacture and sale of absorbent cotton, cotton gauze, surgical dressings, and other cotton products, including surgical bandages, and yet continues, in said business — the manufacturing branch thereof being carried on by the Versailles Sanitary Fibre Mills and the selling branch of the business by the plaintiff company. Prior to the undertaking of the contract herein involved, plaintiff had neA^er handled veterinary bandages.

The plaintiff corporation and its officers are citizens of the' ' United States and have at all times borne true allegiance to the Government of the United States. It is the owner of the claim herein sued on, and no transfer or assignment thereof, or any part thereof or interest therein, has been made.

II. On or about May 1, 1917, the United States being at Avar with the Imperial German Government, the President, pursuant to act of Congress, created the Council of National Defense, among other things, to ascertain for the information of the military authorities what manufacturers were qualified to produce necessary supplies and in what amount; to coordinate purchases; apportion fairly raw materials necessary for the manufacture of such supplies, and devise ivays and means to prevent profiteering. The council’s conclusions with regard to purchases in June and July, 1917, Avere in the form of recommendations to the supply bureau of the Army and Navy. Representatives1 of the chiefs of the supply bureaus in general served on the committees of the council.

The surgical dressings committee of the council, on Avhich Colonel C. R. Darnall was the representative: of the Surgeon General, determined what manufacturers Avere qualified to fabricate the large quantity of surgical dressings1 and sup*600plies estimated by the office of the Surgeon General to be necessary at that time; allotted the several kinds of such supplies among the manufacturers and determined that as to certain classes of bandages new to- all manufacturers that competitive bidding was undesirable and that bandages of such new design should be allotted to specified manufacturers on a basis of cost plus 10 per cent profit. The committee accordingly drafted a new form of contract to be used for the purchase on the said basis of such supplies.

Among the articles of new design not produced at that time by manufacturers were roller veterinary bandages of muslin and canton flannel.

The Surgeon General approved these recommendations, including the said form of contract, and instructed his contracting officers to purchase said bandages on said basis of ' cost plus 10 per cent, and to use the said form for' the purpose. ■

On July 24, 1917, and for some time before and after that date, Thomas IT. Raymond was a colonel of the Medical Corps, U. S. A., stationed at St. Louis, Missouri, in charge of the medical supply depot of the Army at that place and a contracting officer whose duty it was to purchase supplies pursuant to the orders of the Surgeon General of the Army.

Some time prior to July 24, 1917, Colonel Raymond was instructed by the Surgeon General to purchase 5,600 dozen roller veterinary muslin and 6,600 dozen canton-flannel bandages and was informed that these bandages had been allotted to the plaintiff company. He had been instructed as to the adopted method of purchasing this class of supplies.

III. Colonel Raymond, by letter, informed the plaintiff that these supplies had been awarded to it, asked to be^ advised as to price and time of delivery, and in a later letter before any prices had been submitted, directed the plaintiff to advise him whether the prices stated by it “ are equal to and no greater than,”

1. Cost of material.

Plus 2. The cost of direct labor applied to said articles,

Plus 3. 3% of the sum of items one and two, this item 3 being indirect cost, overhead burdens, etc.

*601Plus 4. 10% of the sum of item one, plus item two, plus item three.

IV. On August 13, 1017, plaintiff wired to Colonel Bay-mond a price of 45 cents per dozen for muslin bandages and 68 cents per dozen for canton flannel bandages and, confirming this wire by letter, stated therein that “ all of these prices conform with the regulations of the Government.”

Y. On the 22d day of August, 1917, the plaintiff company and the United States, represented by Thomas U. Baymond, Medical Corps, U. S. Army, entered into a contract in writing for the delivery f. o. b. contractor’s works, of 20,000 dozen Canton-flannel bandages, 4 inches wide by 3 yards long, at 68 cents per dozen, and for 20,000 dozen muslin bandages of the same dimensions at 45 cents per dozen, deliveries to commence, within 15 days after the date of the contract and to be completed within 60 days. Said contract also covered 100,000 yards of gauze, not herein involved.

In said contract the contractor guaranteed that the prices fixed did not exceed the sum of the four following items:

(1) Cost of material definitely ascertainable as devoted exclusively to said articles.

(2) Cost of direct labor applied to said articles by the contractor, meaning thereby cost of labor definitely ascertainable as devoted exclusively to said articles.

(3) _per cent of the sum of (1) plus (2) to cover indirect costs, overhead and burdens, such as rent, interest, and other enumerated items of overhead.

(4) Ten per cent of the sum of (1) plus (2) plus (3).

It was provided in said contract, among other things, that:

“ It is understood that the contracting officer has the right, at any time, to ascertain if the per cent to cover indirect costs, overhead and burdens, is correct, and if it is not he ma3 readjust the same, and it is also understood that the contracting officer has the right to ascertain whether the correct elements have entered into the basis of computing indirect costs, overhead and burdens.

“In making any investigation or verification as to costs, overhead expenses, outlays, or profits, the Surgeon General of the United States Army may employ a public accountant or accountants to be designated by him. The fees, if any, of such accountants sliall, at the option of the contracting *602officer, be paid by the contractor and reimbused to him as an extra charge.

“ (3) A fair proportion of overhead expenses. By the term ‘ overhead expenses ’ is meant the indirect labor and other manufacturing expenses, and the general and administrative expenses of the contractor. It includes among other items, rent actually paid, interest on plant, equipment, and inventories, and a proper alio Avance for depreciation and amortization, but does not include the following: Advertising, selling, and collection expenses; credit losses and customers’ discounts; income, profits, and capital stock taxes imposed by the Government, and franchise taxes. The profits set forth in paragraph (4) of this article shall be the sole profit of the contractor under this contract, and the inclusion of all or any part af the expenses embraced in this paragraph (3) shall not operate to yield any additional profit to the contractor. The overhead expenses shall be computed OA^er a fiscal period beginning on January 1, 1917, and ending on the inventory or- closing date next subsequent to the conclusion of the manufacture of the articles to be furnished under this contract.

“ The prices aforesaid, all and singular, Avill be revised everjr three months, at the request of either party (the first revision, if any, to be made on or about Oct.T, 1917), and in the event of such revision said prices shall be decreased or increased for the three months next ensuing, by subtracting therefrom or adding thereto the decrease or increase, if any, in the cost of such material and/or of such labor as defined in paragraphs 1 and 2 hereunder.

*“Article VIII.*Payments under this contract shall be made to the contractor as soon as practicable after the delivery and acceptance of the article aforesaid; but at least as frequently as once a month, and not later than ten days after statements shall have been rendered by the contractor covering the articles delivered and acceptecl during the preceding calendar month and the price thereof as hereinbefore provided,- and any extra charges applicable thereto. And no payment under this contract shall be delayed or deferred pending any investigation or verification of any guarantee or representation of the contractor herein, any difference dis*603closed by sucli investigation or verification to be adjusted on subsquent payments which may become due hereunder.”

It was further provided that “ This contract shall be subject to the approval of the Surgeon General, U. S. Army,” and it was approved by Colonel, C.. It. Darnall, Medical Corps, U. S. Army, acting for the Surgeon General, on September 1, 1917.

VI. On or about September 25, 1917, discoveries were made in plaintiff’s plant by employees thereof creating a suspicion that a mistake had been made in estimating the cost of the bandages and an investigation w'as immediately instituted which confirmed said suspicion. . Before the prices were submitted, which were finally written into the contract, the sales manager of the plaintiff company had directed its superintendent to make an estimate of the cost' of s'aid bandages. The superintendent in making his estimate of the cost thereof had figured upon the basis of bandages 1 yard long and the sales manager in making the final computation had not observed that the superintendent’s figures were on the basis of 1 yard rather than 3 yards in length, as required, and had submitted by his wire and the letter here-inbefore set out the figures 'arising from computation on the basis of 1 yard rather than 3 yards. Corrected computations as to the cost of 3-yard bandages were made and on September 27 the plaintiff company wrote Colonel Raymond informing him of the mistake, stating th'at prices for canton flannel bandages should have been $1.75% per dozen and for muslin bandages 85% cents per dozen, requesting rectification of the error and stating that goods would then be shipped.

VII. Personal interview's and correspondence followed but no adjustment of the matter w'as then- accomplished. The Government needed the supplies and insisted that plaintiff should ship them. It made one shipment, which it billed at its corrected imces, but the bills were returned with directions that they be restated at prices named in the contract.

Plaintiff was urged thereafter to complete deliveries on the ground that it was obligated by its contract so to do, and it finally consented to and did do so, stating that it would *604bill at the contract prices, as directed, but when deliveries were completed it would file an additional claim.

Colonel Raymond expressed his gratification at this conclusion by the plaintiff and stated that he had little doubt that an ultimate adjustment would be made if it was shown that a definite error in pricing the supplies had occurred.

VIII. Plaintiff made final shipment of these bandages on December 31, 1917, and corrected bills were rendered for all shipments in accordance with the prices stated in the contract of August 22. All such bills were paid in full by the United States and payment was accepted without protest other than that herein appearing.

IX. In March, 1918, the Surgeon General employed a firm of certified public accountants to verify the cost to the plaintiff of the bandages in question and report to him, and said accountants, after investigation, reported that the cost to plaintiff of said bandages, with 10% of profit added, was $23,598 in excess of the total amount it had received.

Thereafter plaintiff’s auditor made a detailed investigation of such costs and determined the excess over the amount paid to be $21,040.20. The plaintiff’s claim herein is for the latter amount.

X. The plaintiff filed a claim with the Auditor for the War Department, and on June 17, 1918, during the pendency of the claim the Surgeon General, by Colonel Dar nail, the officer who had approved the contract in question, wrote the auditor a lengthy letter, in which he reviewed the situation with reference to plaintiff’s contract, recited the employment of Gunn, Richards & Co., to determine costs, submitted a statement as to the report m'ade by those accountants showing a difference of $23,598 between the determined cost of the bandages and the amount received, and said:

“ 8. It will be observed from the above recital that the contractor gave timely notice of its error by its letter of September 27 before the performance of the contract has been begun. Failure to follow the matter up effectively was in part no doubt due to- the contractor’s unfamiliarity with the technicalities of Government procedure, and in part perhaps to the great pressure of business upon the agencies of the Government which precluded them from giving closer attention to the claim of error with a view to adjustment *605thereof before performance. However that may be, the contractor manifested its good faith in performing the contract without any assurance that its prices would be readjusted, and in the face of the possibility of loss thereunder.

“ 9. I am convinced from the evidence herewith that the contract prices were in fact, as alleged by the contractor, based upon error in calculation, and that there is justice in its claim for additional compensation. As to the amount of such additional compensation, I am satisfied to be guided by the findings of Gunn, Fichareis & Company, who seem to have conducted their inquiry in a careful painstaking way. I recommend accordingly that Hygienic Fibre Company be now allowed, on its claim of $29,600 herewith, the sum of $23,590 in full settlement of the alleged errors, and that the same be paid from the appropriation ‘ Medical and Hospital Department, 1918.’ ”

On August 6, 1918, the.auditor disallowed the claim, and on appeal the comptroller, on April 5, 1919, affirmed the disallowance.

On May 22, 1920, the plaintiff filed its claim with the Board of Contract Adjustment, War Department, which board held, after reviewing the facts, that it had no jurisdiction.

On July 20, 1920-, the Secretary of War requested the comptroller to consider whether the evidence submitted to the Board of Contract Adjustment might not justify a reconsideration of his decision of April 5, 1919.

The comptroller refused to reconsider said decision and on August 6, 1920, the Secretary of War affirmed the action of the Board of Contract Adjustment on the ground that he had no jurisdiction to reform the contract.

VI. It was the intention of the parties to this contract that it should provide for the payment to the plaintiff of the cost of production on the basis stipulated by the Government, with 10% of profit added, and the contracting officer was so instructed. The specific figures submitted by the plaintiff and written into the contract were the result of an error in calculating costs and did not express the intention of the parties.

DowNet, Judge,

delivered the opinion of the court.

The plaintiff, alleging mutual intent on the part of both parties in the making, during the war, of a contract between *606it and the United States for certain bandages, to make such, contract on a cost plus 10 per cent profit basis, the elements of cost being defined by the Government, asserts a mistake on its part in submitting its requested statement as to cost, carried into the formal contract as the contract price, and seeks reformation or cancellation of the contract and a recovery of the amount by which the cost to it of the bandages, with 10 per cent profit, exceeds the amount actually paid it therefor at the prices stated in the contract.

The record leaves no room for doubt that the bandages actually cost the plaintiff more than it was paid; that the excess of cost over the amount received, with stated profit added, is at least the amount sued for (Government accountants make it more) ; and the equities of the case are apparent. The question is whether the plaintiff may in this action, recover an amount which it seems in justice and fairness it should have received.

The adverse contention is in substance that the plaintiff is bound by the specific prices fixed in the contract; that there are no facts justifying reformation; that the plaintiff is precluded from seeking reformation by its own negligence; and that by accepting payment at the price fixed m the contract it is estopped from claiming any further compensation.

There is but little room for dispute as to- material facts and it is not difficult to derive from the findings the .outstanding features of the case upon which the conclusion to be reached must, for the most part at least, be predicated. It may be said:

1. That it was determined by the surgical dressing committee of the Council of National Defense, on which the Surgeon General was represented, and of which plaintiff’s sales manager was a member, that the supplies here in question, with other surgical supplies within the jurisdiction of the office of the Surgeon General, should be bought on the basis of cost, the elements of which were also determined, with 10% of profit thereon added, and a form of contract to that end was prepared.

*6072. That the furnishing of the bandages here in question was, by tbe committee in charge, allotted to the plaintiff company, of which the contracting officer was informed, that officer being also informed as to the basis upon which the contract was to be let, as stated above.

3. That the contracting officer notified the plaintiff of this allotment, requested to be advised whether it could furnish the bandages, the price and when it could deliver, and in a later communication informed the plaintiff further that he desired to be advised whether the prices submitted “ are equal to and no greater than ” certain stated elements of cost with 10% added.

1. That thereafter plaintiff quoted prices by wire without stating anything as to their basis, but in confirming the wire by letter stated that “ all of these prices conform with the regulations of the Government.”

5. That the Surgeon General’s office had not theretofore bought this character of bandages (veterinary) and' the plaintiff had never before made such bandages.

6. That in estimating the cost of the bandages' at the request of plaintiff’s sales manager, its superintendent estimated and submitted figures on the cost of bandages 1 yard in length, instead of 3 yards, as required, and the sales manager, in completing the estimate and submitting prices, overlooked this basis of calculation on the part of the superintendent and submitted figures for 3-yard bandages, finally written into the contract, on the basis of estimates' as to 1-yard bandages.

7. Attention of the contracting officer and of the Surgeon General’s office was immediately called to the error by the plaintiff and correction solicited. Further facts with reference thereto and final action taken appear in detail in the findings, and need not be summarized here.

The prices submitted were written into the contract as submitted and in that respect the contract is in form a contract at specific prices, but the whole contract is for consideration and other provisions therein, set out in the findings, are applicable only to a cost-plus contract. And more than that, it appears from contract provisions that the prices stipulated therein were not intended to be con-*608elusive. At least so far as the United States is concerned this is apparent from the quoted provisions authorizing investigation and verification as to cost and readjusment accordingly. The Government’s contention must therefore mean that although not conclusive as against the United States, but subject to readjustment upon examination into questions of cost, it is nevertheless conclusive, at stated prices, against the plaintiff; that the Government may readjust the figures if the plaintiff has erred as against it, but no readjxistment is permissible if the plaintiff’s error' is against itself. The purpose of the contract is better served if it be conceived that readjustment were for the purpose of correcting any errors as to costs to the end that it might speak its true purpose.

In this connection a word is not inappropriate as to the contention that while the communication of the contracting officer to the plaintiff upon the subject of costs stated that he must be advised by the plaintiff that the prices submitted were “ equal to and no greater than ” stated elements of cost, with 10% added, the contract stipulated simply that thej^ *“*did not exceed ” such costs and that therefore there was no stipulation that they were equal thereto and the contractor might, within the terms of the contract, agree and bind itself to prices much below costs. Such reasoning does not commend itself. Its import is that contractors, instead of conforming to the Government’s cost-plus plan, involving a small profit to them, are going to avail themselves of a possible opportunity to contract at less than cost, a rather unreasonable assumption. Indeed, the Government was not interested in fostering such a plan if contractors had been so improvident. The Government had developed a very extensive program of needs as to surgical supplies, etc. Representatives of the houses able to furnish such supplies were in conference, as a committee of the Council of National Defense, as to methods. The problem was to supply the needs and necessarily in that connection to foster, not destroy, those able so to do. Some of the needs, as in this case, were out of the ordinary. It was the part of wisdom to say to those undertaking to supply them that they should have the cost to them upon a stipulated basis Avith a very *609modest profit of 10% added, and thus keep alive these agencies for the supplying of future needs, rather than to destroy the producing power of the smaller concerns such as this plaintiff by indicting a serious loss for the sake of an advantage in price in one particular instance. Indeed, it is not going too far to say that the quoted provisions of the contract authorizing the contracting officer to examine as to percentage of overhead and as to the elements of cost to ascertain if they are “ correct ” and authorizing the Surgeon General to employ accountants to verify costs, impliedly, at least, required the United States to adjust ascertained errors in its favor as well as against it.

The first remedy sought is reformation of the contract, and for the purposes of this case it is perhaps sufficient, without detailed consideration of the numerous authorities on the subject, to suggest the fundamental rule that mutual mistake, a mistake participated in by both parties resulting in something else being written than was mutually intended, will generally justify reformation to make the contract speak the common intent.

This contract, in the light of its terms and of facts' determined by both parties as to cost, speaks an irreconcilable inconsistency. There is no room for question that it was intended to be a cost-plus contract on a basis determined by the Government. The plaintiff so understood it and it was not only determined by those representing the Government that it should be so, but the contracting officer who,acted for the Government in making the contract was instructed by his superior that it should be so made, and, it may be added, he had, under the circumstances, no authority to cbn-tract otherwise.

The testimony of the contracting officer is not in the record. It is due the plaintiff to say that it made every effort to get it but was prevented from so doing by the fact that he has retired from the Army and was traveling extensively abroad, and the court has not seen fit to admit the testimony of this officer taken before the Contract Adjustment Board. The record shows that he required the plaintiff to state that its submitted prices were “ equal to and no greater than “ the *610cost on the determined basis, and the plaintiff, ip connection with the figures submitted, stated that “ these prices conform with the regulations of the Government.” It was a new product for which the Surgeon General’s office had never before contracted or the plaintiff made, that was one of the reasons, in fairness to both parties for contracting on the cost-plus basis, and it is'but reasonable to assume, in the absence of anything indicating otherwise, that the contracting officer simply accepted the plaintiff’s statement as a correct statement of the prescribed costs and wrote the contract accordingly. In the face of his instructions and his requirements of the plaintiff it is unreasonable to assume otherwise than that he was intending to write and execute a cost-plus contract on the prescribed basis. With the same mutual intent as to the basis of the contract, it was otherwise written, and we see no reason why it should be made to speak the mutual intention of the parties. The prices as submitted were necessarily estimated without the guide of experience, the Government’s representatives did not know what they should be, provisions for investigation and readjustment were therefore inserted in the contract, and costs have, since the performance of the contract, been determined to the satisfaction of both contracting parties.

Some point is made on the fact that the plaintiff, after learning of its mistake, did not make application for the three months’ revision of prices provided for in a quoted clause of the contract. That clause clearly had no application to a condition such as this and the mistake could not properly have been rectified thereunder. That clause contemplated revision of prices, applicable for the succeeding three months, by addition or deduction of the increase or decrease in the costs of materials and labor. There was no basis for such a revision.

It is also contended that the plaintiff should be denied any relief because of its own negligence. Perhaps to a degree it was negligent. Possibly it may be said that mistakes generally are the fruit of negligence. But the circumstances are for consideration. The product called for was new. Experience as a guide was absent. War work was pressing. The mistake as explained by submitted *611computations was a natural one. There is no fixed rule by which negligence or its effect may be measured, but it seems to us an unjustified defense under the circumstances.

It is also contended that the plaintiff has precluded itself by accepting payments made to it without protest. But such a contention is not well taken. It was not necessary that it should protest at the time payments were made to it if it had otherwise asserted its rights and disclaimed acquiescence in the settlements made as in full. After repeated assertion of its claimed right, even to the extent of withholding deliveries until its mistake was recognized and corrected, it notified the contracting officer, when yielding to importunities for delivery, that it would complete deliveries and bill at the price stated in the contract, but when deliveries were completed it would make an additional claim for the further sum claimed to be due it.' It sufficiently indicated its nonacceptance of payments made as in full. The contracting officer expressed gratification at its decision to complete deliveries and bill as provided for in the contract, “ leaving the question of adjusting prices to be taken up at a later date.”

We are of the opinion that the plaintiff is entitled to have the contract reformed so as to make it speak the intention of the parties to contract on the basis of cost, as prescribed by the Government, with 10% added, and that upon such reformation the plaintiff is entitled to recover the amount claimed, and we have so ordered.

Judgment for plaintiff in the sum of $20,040.20.

Hay, *Judge;*Booth, Judge, and Campbell, *Chief Jus*tice, concur.