#### ORDNANCE ENGINEERING CORPORATION v. THE UNITED STATES

[No. B-5.

Decided May 10, 1926]

*On the Proofs*

*Reformation of eoniraei; overhead, expense; delay in*performance.— (1) Where in the negotiations preliminary to a cost-plus contract for the making of experimental airplanes it is agreed by the parties that certain overhead expenses should be paid for at a specified rate for the contract period which they esti*205mate as six months, and provision tor such payment is omitted from the written contract by mutual mistake, the contract will be reformed so as to express their real intention.

(2) Where, under the circumstances recited, the contractor, solely because of delays and substitutions by the defendant, is obliged to work beyond the estimated contract period, it is entitled to the additional overhead expense thereby incurred.

*The Reporter’s*statement of the case:

*Mr. William B. King*for the plaintiff. *Messrs. George A. King*and *Franklin G. Manley*were on the briefs.

*Mr. Dwight E.*Rarer, with whom was *Mr. Assistant Attorney General Herman J. Galloway,*for the defendant.

The court made special findings of fact, as follows:

I. The Ordnance Engineering Corporation, plaintiff herein, is a corporation. In the latter part of October, 1917, the Signal Corps of the United States Army, acting for the United States Government, sought the development of a special type of airplane and with that end in view entered into negotiations with officers of the plaintiff corporation. The art of aviation being at that time in its comparative infancy, the preliminary arrangements between plaintiff’s officers and the defendant’s officers contemplated the undertaking by plaintiff, in the nature of an experiment, of construction of a special type of airplane. These negotiations also contemplated that changes could be made in the designs or specifications submitted to and approved by the construction officer./

II. The said negotiations had proceeded to the length that justified the plaintiff in making preparations for this experimental work, and plaintiff began the same in the early part of October, 1917, some two or three weeks prior to the decision by the defendant’s officers that the proposed design was acceptable, and by November 17, 1917, the work was substantially under way. The contemplated work involved considerable expenditure for additional equipment necessary at plaintiff’s plant, and this was not acquired until after the receipt of the printed order mentioned in Finding III. The work was to be done under the cost-plus plan, and the several items of cost were discussed during the negotiations and *206were agreed upon except item 10, as stated in Article III of the contract subsequently executed between the parties, a copy of which, marked “Exhibit B,” is attached to the petition and is made a part of these findings by reference.

Upon the question of overhead cost, which was an element of uncertainty, the officers of the plaintiff and the defendant desired to agree upon a definite figure which should cover all other overhead than that specifically provided for. They estimated that the work contemplated by the negotiations and contract would be performed fully within the period of six months from the date of the order, and the agreement between them was that the amount of overhead not otherwise specifically provided for should be paid for at the rate of $1,250 for the first six months for each plane delivered to and accepted by the Government, and it was the intention of both parties to the contract that the rate of $1,250 for each plane should apply during the first six months of the contract period. By mutual mistake this limitation was omitted from the contract.

III. On or about December 18, 1911, order No. 20327 was issued from the office of the Chief Signal Officer, signed by Maj. A. C. Downey, of the Signal Corps, directed to the plaintiff, reading as follows:

“In accordance with cost-plus contract (HSW), I am directed by the Chief Signal Officer of the Army to place order with you for the articles listed below.

“ Inspection. — Goods must be ready for inspection at your factory within * * * see note * * * days after receipt of order. When ready for inspection notify chief inspector, airplanes & airplane engines, Signal Corps, at your factory.

“ Items accepted should be packed for domestic shipment and furnished f. o. b. New York, N. Y.

“Forward on Government bill of lading which will be sent you by the Traffic Branch, Signal Corps, 359 Union Terminal, Washington, D. C. See instructions on reverse side.

“ Immediately after shipment the consignment should be listed in detail, the original copy on Form 27 (shippers’ receipt), and one carbon copy on Form 27A (shipping notice), and these lists forwarded to the Traffic Branch, Sig*207nal Corps, 359 Union Terminal, Washington, D. C., accompanied by memorandum copy of bill of lading.

“Bill upon Forms 330A and 29 inclosed herewith, observing carefully the instructions on the reverse side of Form 330A.

“ Shipping instructions and marking. — Marked £ Order 20327 Aero.’

“ Shipping instructions will be furnished you later.

“ Item 1. — 6 airplanes, mode ‘B ’ O. E. C. single-seated scout, complete with instruments and propeller, constructed to mount 150 h. p. Hispano-Suiza engine, which will be furnished by the Signal Corps and installed by the manufacturer, at $-each-$-.

“ Note. — The above airplaues to be constructed under the direction of Ool. V. E. Clark, who will furnish specifications.

“ The first plane to be delivered in seventy (70) days, the balance to fie delivered as soon as possible.

“ The above airplanes to be serially numbered 33763 to 33768, inclusive, the serial numbers to appear on the forward side of the front board of the frame for the top cover of the rear part of the fuselage. This board is just on the rear of the pilot’s shoulder. The numbers shall be painted under the varnish in such a way as to be clearly visible through the varnish, and shall be put on at the earliest possible moment during assembly of the airplane. The serial numbers for airplanes shall also be shown, and the airplane marked with star and colored bands, as specified by drawing 24102-A. Except for the numbers specified, none shall be painted in the airplane while at the factory.

“ Contract No. 2390 will follow.”

Plaintiff continued with the work it had begun, and the contract No. 2390, which the order stated would follow, was sent to plaintiff on or about the 19th day of February, 1918, and was duly executed, as shown by said Exhibit B to the petition. The said order called for a 150 horsepower His-pano-Suiza engine, but when the contract was written this type of engine was changed to the “ Gnome.” The insertion of the name in the order was a clerical mistake.

IY. A difference of opinion arose as to the accounting method to be applied, and on or about March 14, 1918, the plaintiff addressed a letter to the Chief Signal Officer referring to the said contract and order, in which suggestions as to the change of language in the contract should be made *208so as to more accurately determine the cost features that were to be paid for under subdivision 1, 2, and 4 of the contract, and suggesting that the situation might be cleared “ by a letter of instruction or a rider attached to the contract reciting that as long as this was not a production matter but experimental work purely that it was the intention of the contract to recompense the contractor for all expense incurred in or about the production of the articles, whether of a direct or indirect character.” This communication was replied to under date of March 20, 1918, by the contracting officer by direction of the Chief Signal Officer, in which was confirmed the interpretation of the contract No. 2390 made and suggested by the plaintiff. In this connection it was stated that it was both the plaintiff’s expectation and the Government’s intention to reimburse plaintiff for all material and labor costs incurred in connection with the] production of the articles contracted for.

Y. The plaintiff was proceeding with the experimental construction work under the order and contract, and about March 8, 1918, received the first of the Gnome, motors, and that was the only one of that kind of motor that was furnished by the Government. At that time jilane No. 1 was prepared to receive this Gnome motor. Prior to its arrival the plaintiff had been furnished with what purported to be descriptive drawings of the motors. The Gnome motor, however, did not correspond in dimensions and in other substantial particulars with the drawings, and the part of the plane designed to receive it had to be redesigned. These variations caused delay, but by May 36, 1918, the necessary changes had been made in plane No. 1, and it was completed and ready for tests on May 20, 1918. At this time also plane No. 2, built according to the original specifications, was completed, No. 3 was 90 per cent complete, No. 4 was 85 per cent complete, No. 5 was 15 per cent complete, and No. 6 was 50 per cent complete. Shipping instructions for plane No. 1 were received by plaintiff May 29, which were latér changed so that the plane was not shipped until sometime in the early part of June. Plane No. 2, which was likewise built to accommodate the other *209Gnome motor, was finally shipped motorless on July 9 because the second Gnome motor was never received by the plaintiff.

VI. On June 3,1918, a letter was addressed to the plaintiff by the airplane engineering department referring to said Signal Corps order No. 20327, which called attention to a letter of May 27 from Lieutenant Emmons relative to the 160 horsepoiver Gnome engine for airplanes and suggesting the substitution of LeRhone engine for the Gnome motor to fill the balance of the order. Enclosed in this letter to plaintiff was the said letter of Lieutenant Emmons and attention was called to the statement of the latter that in Signal Corps order No. 20327 they were designing sis planes and stating, ‘‘ Please be advised that we have only two 160-horsepower Gnome engines, one of which was delivered on your instruction to the Ordnance Engineering Corporation and one to Heinrich,” and further stating that they did not intend to build any more 160-horsepower Gnome engines and would not, therefore, have any more than the two mentioned ones unless the same were purchased and shipped from France. It was therefore suggested that the plaintiff design its planes for some other type of engine. It was in accordance with this suggestion that the letter to plaintiff above mentioned suggested the substitution of the LeRhone engine.

VII. Drawings of the LeRhone motor were sent to plaintiff on June 4, and on June 18 plaintiff received word from the defendant’s officers that two of these motors were on the way. Plaintiff answered on June 20 that the change in motors would mean a complete change in the design of the plane. These motors were received by plaintiff in July and put in condition for use by a Government representative by July 29. The LeRhone motor was about one-half the weight of the Gnome and of less horsepower. This difference in weight and horsepower necessitated the change in the bed for the motor and the scrapping of certain of the completed parts. The front of the plane had to be redesigned because of the difference in dimensions. The longerons and the stream lining had to be changed, as did also the center of *210gravity, which in turn necessitated changing the position and angle of the wings.

. VIII. Because of the difference in the dimensions of the two kinds of motors and the substitution of the LeKhone motor for the Gnome in the last four planes, and also because of the defendant’s delay in arranging for tests, the time for the estimated completion of the contract, being six months, as already stated, expired without the fault or negligence of the plaintiff. Plane No. 3 was ready July 20, No. 4 on August 15, and both of these were shipped on August 20. By October 5 planes No. 5 and No. 6 were completed, but were not shipped until November 18, together with spare parts which had also been manufactured. Complete working drawings of the final plane and accompanying bill of materials were required and furnished to the Government in order to form the basis for subsequent production contracts, and the work of these continued until the middle of November, 1918, at which time all of the work contemplated by the contract was performed. From that time on the parties were engaged in attempting settlements of accounts, both of money and of property, and on May 26, 1919, the Government property, then in the hands of plaintiff, was receipted for.

IX. No further contracts for the production in quantity of the type of plane built under contract No. 2390, Exhibit B, above mentioned, were entered into between the Government and the plaintiff. Following the completion of the work under that contract plaintiff was awarded three separate contracts for the manufacture in the aggregate of eight planes of a different type by the engineering division of the Air Service, which extended over a period of divers times up to 1922. These contracts do not appear in the record.

X. During the period of the plaintiff’s performance of the contract, Exhibit B, it was engaged in other lines of work of manufacturing. Its plant was located at Baldwin, Long Island, and its office in New York City. The proportionate share of the general overhead that is chargeable to the work under the contract in question is $7,500 for the first six months and $8,900 for the next 4.6 months, the balance of the contract period, together aggregating $16,400.00.

*211XI. The cost of mechanical and plant equipment, less its salvage value at the termination of the contract, was $17,310.00. It took 10.6 months for the performance of the contract. Plaintiff has been paid the sum of $9,854.95 on account of the items in dispute in this cause.

The court ordered that the contract be reformed in subdivision 10 of Article III thereof so that the same should read:

“ Art. 10. An amount for all other overhead not otherwise specifically provided for at the rate of $1,250 for the first six months for each plane delivered to and accepted by the Government,”

and gave judgment for plaintiff in the sums of $16,400.00 (Finding X) and $17,310.00 (Finding XI), less $9,854.95 (Finding XI) already paid.

Campbell, *Chief*Justice,

delivered the opinion of the court:

The plaintiff entered into a “ cost-plus ” contract for the construction of airplanes, which were in the nature of experiments. The contract had a provision requiring the contractor to conform to all directions issued and changes in specifications ordered by Colonel Y. E. Clark of the United States Signal Corps. The planes were to be constructed under his direction and in accordance with drawings and specifications approved by him. Changes were ordered, some of them of a substantial nature, and the contractor observed the directions given. There can be no question that the Government had the right to order these changes. There were not only stipulations relative to them, but the making of these experimental planes contemplated alterations in detail. By the terms of the contract, the Government was to pay the cost of direct materials and of direct labor and management and of certain tools and other items of cost, together with a profit equal to 25 per cent on the sum of designated items. The items of cost are set forth in Article III of the contract under twelve separate divisions, and were to be determined on an accrual basis, *212most of them being payable monthly. After many changes and considerable delays the six airplanes were completed. Payments were made from time to time as the work proceeded, and the differences between the parties may be reduced to two heads — the cost and salvage value of certain plant equipment provided for in subdivisions 5 and 6 of Article III of the contract and the overhead expense contemplated by subdivision 10 of Article III.

Early in the progress of the case there was filed on behalf of the Government a counterclaim for a large amount alleged as overpayment to the plaintiff under the contract and based upon a report of an accountant acting for a division of the Signal Corps. Later an expert accountant was designated by the Bureau of Investigation, Department of Justice, who made another and substantially different report from that made by the former accountant, with the result that instead of furnishing a basis for the counterclaim it shows a liability to plaintiff and practically eliminates the earlier report. Accordingly, it is stated upon the Government’s brief: “ The defendant has abandoned the Kaufman report and in lieu thereof has adopted the Jones report which shows that if any sum is due plaintiff in this case it should not be in excess of $11,263.43.” We need not discuss in *detail the*accountant’s conclusions. The evidence does not sustain many of them. The findings of fact show the cost of the applicable mechanical and plant equipment and the principal difficulty with this phase of the case arises from the unsatisfactory evidence as to the salvage value with which the Government was to be credited. The Government’s contention that the salvage value should be ascertained under the proviso of subdivision 5 of Article III is not sustained by proof that further contracts of a kind or character contemplated by the provision were awarded plaintiff. It does appear, and the amended petition states, that three contracts involving eight airplanes of an experimental character were awarded by the engineering division of the Air Service, but what the terms of these contracts were, the amounts and time involved, and the parts of the plant to be used in their performance are mt sufficiently shown. We do not *213think it is necessary to hold that the further contracts were to be awarded by the “ Signal Corps,” but we think the evidence sustains the statement by the Government’s expert accountant that they were to be “ for production in quantity.” We have accordingly found the plant and mechanical cost less salvage at the termination of the contract, and the amounts are stated in Finding XI.

The item of overhead provided for in subdivision 10 of Article III is the basis of much controversy. To a proper understanding of it recourse must be had to the situation of the parties at and before the contract was actually signed. It bears date as of February 19, 1918, but the order in writing for the airplanes was issued two months before this date, and plaintiff had been at work upon them under preliminary negotiations which occurred prior to this written order. In these preliminary negotiations the questions of compensation and the several items of cost were under consideration. The contracting officer, Col. A. C. Downey, makes it quite plain that the “ amount of all other overhead ” at the stated rate for each plane delivered, mentioned in subdivision 10, was an estimate based upon delivery within six months. And the intention of both parties was to limit the stated sum to that estimated period. Manifestly the amount of this overhead could only be an estimate, and because of its uncertainty it was properly enough deemed best to state an amount to cover “ all other ” charges on this account. Upon the basis that 6 months would be sufficient time the amount fixed per plane was agreed upon. The Government had the right to. order changes and under the cost-plus contract the proper items of expense incident to them would be met. When, by reason of these changes or alterations ordered and made, delays were caused and a longer time taken without any fault of the contractor than it was estimated would be taken there is no good reason for imposing the overhead cost for the additional time upon the contractor unless the contract requires it. When it is made to express the real intention of the parties the provision in question becomes clear and in keeping with the general tenor of the contract that the Government would pay the several *214elements of cost and a profit to the contractor. The contract in the provision stated will be reformed accordingly and the rate of $1,250 per plane limited to six months, while the contractor is allowed an additional sum for the remaining period, about five months, beyond the originally estimated six months’ period.

Plaintiff should have judgment for the amounts mentioned. And it is so ordered.

Graham, *Judge;*Hat, *Judge;*and Booth, Judge, concur.

Judge Downey took no part in the consideration of this case.