Case Name: UNITED STATES v. BETHLEHEM STEEL CORPORATION et al.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1942-02-16
Citations: 315 U.S. 289
Docket Number: No. 8
Parties: UNITED STATES v. BETHLEHEM STEEL CORPORATION et al.
Judges: The Chief Justice and Me. Justice Jackson, who as formei Attorneys General actively participated in the prosecution of these cases, take no part in this decision. Mr. Justice Roberts also takes no part in the decision.
Reporter: United States Reports
Volume: 315
Pages: 289–342

Head Matter:
UNITED STATES v. BETHLEHEM STEEL CORPORATION et al.
No. 8.
Argued December 9, 1941.
Decided February 16, 1942.
Solicitor General Fahy argued the cause (Attorney General Jackson, Solicitor General Biddle, Assistant Attorney General Shea, and Messrs. Warner W. Gardner, Melvin H. Siegel, Frederick Bernays Wiener, Oscar H. Davis, and Paul D. Page, Jr. were on the brief; and Solicitor General Fahy, Assistant Attorney General Shea, and Messrs. Melvin H. Siegel, Robert L. Stern, and Paul D. Page, Jr. were on the reply brief) for petitioners.
Mr. Frederick H. Wood, with whom Mr. Alfred McCormack was on the brief, for respondents.
Together with No. 9, United States Shipping Board Merchant Fleet Corporation v. Bethlehem Shipbuilding Corporation, Ltd., also on writ of certiorari, 311 U. S. 632, to the Circuit Court of Appeals for the Third Circuit.

Opinion:
Mr. Justice Black
delivered the opinion of the Court.
These two cases arise from a dispute between Bethlehem Shipbuilding Corporation, Ltd., and the Government about the amount of profits claimed by Bethlehem under thirteen war-time contracts for building ships. The contracts were negotiated and executed in 1917 and 1918, when Germany's destructive warfare against our ocean shipping essential to the successful prosecution of the war made it necessary for the United States to build the greatest possible number of ships in the shortest possible time. They are typical products of a system of procurement heavily relied upon by the United States Shipping Board Emergency Fleet Corporation and other government purchasing agencies at the time.
On June 15,1917, Congress gave to the President sweeping war powers, 40 Stat. 182, including (1) the power to commandeer shipbuilding plants and facilities, (2) the power to purchase ships at what he deemed a reasonable price with a provision for subsequent revision by the courts in the event the seller regarded the price set as unfair, and (3) the power to purchase or contract for the building of ships at prices to be established by negotiation. Acting under authority delegated to it by the President with Congressional approval, the Fleet Corporation declined to seek utilization of the first and second methods but chose, under the third alternative, to make purchases through ordinary business bargaining.
The "actual cost" to Bethlehem of building the ships over which this dispute arises was about $109,000,000. The generously inclusive formula for determining "ac tual cost/' not challenged by the Government here, was not peculiar to these contracts. It was based on the standard formula used by the Fleet Corporation in its contracts with other shipbuilders. And, as in practically all contracts of this type, there was no risk of loss. The total profits claimed under the contracts by Bethlehem, and allowed by both courts below, were about $24,000,000 or a little more than 22% of the computed cost. This figure of $24,000,000 does not include such profits as may have been made by Bethlehem Steel Company, Bethlehem's parent, which sold it at the maximum prices established by the War Industries Board, 43,000 tons of steel used in these ships. The percentage of profits in relation to the actual investment and working capital devoted by Bethlehem to the building of the ships was not found by either of the courts below.
In No. 8, the Government filed a bill in equity against Bethlehem and others. The bill alleged that the Gov ernment had been induced to enter into the contracts by fraudulent representations of Bethlehem's agents; and as an independent ground for relief, that it had been the duty of Bethlehem to perform the contracts fairly, honestly, and economically "in the shortest practicable time" for no' more than "a fair and reasonable profit" and that any provisions in the contract for payment of more are "void and unenforceable." The prayer was for an accounting and a decree requiring Bethlehem to refund all amounts previously paid to it by the Government in excess of what the court should find to be just and reasonable compensation for building the ships. Bethlehem filed an answer and a counterclaim for damages based on alleged breach of contract by the Fleet Corporation.
In No. 9, Bethlehem brought suit at law against the Fleet Corporation, claiming damages for breach of the same contracts. In an affidavit of defense and counterclaim the Fleet Corporation repeated the allegations made by the Government in No. 8 and sought the same relief.
The two actions were jointly referred by the District Judge to a Master who held hearings and made findings. In No. 8, the Master recommended that the Government's bill be dismissed, and on the authority of Nassau Smelting Works v. United States, 266 U. S. 101, further recommended the Bethlehem's counterclaim be dismissed for want of jurisdiction, the amount claimed being in excess of $10,000. In No. 9, he recommended that judgment be entered for Bethlehem for $5,272,075 with interest at 2% from September 1, 1922. The District Judge declined to allow any interest, applying the law of Pennsylvania as he thought our decision in Erie R. Co. v. Tompkins, 304 U. S. 64, required. In all other respects he followed the Master's recommendations and rendered judgment accordingly. 23 F. Supp. 676; 26 id. 259. The Circuit Court of Appeals affirmed. 113 F. 2d 301. On application of the United States and the Fleet Corporation, we granted certiorari. 311 U. S. 632.
As the case reaches us, the controversy revolves primarily around the section of the contracts which sets out what is to be paid to Bethlehem. In all the contracts, that section contains substantially the following provisions:
"The price to be paid for each vessel to be constructed and furnished in accordance with the terms of this contract . . . shall be the actual cost, plus the definite sum for profit hereinafter in this Article provided for, based upon an estimated actual cost to the Contractor . . . Should the actual cost be less than the estimated . . . cost . . . the Contractor shall be allowed as profit on each vessel in addition to said fixed sum for profit . . . one-half the amount by which such actual cost of each vessel falls short of the estimated cost . . ."
Thus, a high estimated cost would increase the probability of "savings" to be divided between Bethlehem and the Government. And the more the estimated cost exceeded actual cost, the greater would be Bethlehem's share. It can be seen, therefore, that the estimated cost agreed upon by the parties is a pivotal figure.
I
The Government charged Bethlehem with fraud in submitting estimated cost figures which were adopted in the contracts. It was alleged that Bethlehem's agents made two false representations: (1) that it was impracticable to estimate closely what the cost would be and (2) that the estimates Bethlehem submitted, and which the Fleet Corporation accepted, were fair and reasonable under the circumstances. The Master found that there was no evidence to support this charge of fraud. The District Judge approved this finding as did the Circuit Court of Appeals, which said that it had "carefully considered the record in the light of this contention [of fraud]" and concluded that "the estimates submitted by Bethlehem and prepared for it by its representative Brown were fairly and honestly made and as accurate as could be expected under the uncertain conditions then prevailing." And in this Court the petitioner accepts these findings. Therefore, in considering other attacks upon Bethlehem's right to recover, we must do so on the assumption that there was no fraud in Bethlehem's negotiations with the Government.
II
The Government contends that even in the absence of fraud, Bethlehem is entitled to nothing by virtue of the half-savings clauses.
One argument is that the contracts gave Bethlehem the benefits of participating in the savings only if Bethlehem by special efforts increased its efficiency and brought actual costs below the estimates agreed to in the contracts.
Neither the specific language of the half-savings provision nor its context supports this contention. On its face, the provision contains an unconditional promise to pay Bethlehem one-half of the difference between the actual and estimated cost of the ships in question. That such a method of computation would tend to discourage careless expenditures and encourage vigorous attempts at realizing economies in building the ships is hardly debatable. But the half-savings clause does not impose any positive obligations upon the builder. The Master found, upon consideration both of the terms of the contracts and testimony on the understanding of the parties, that a showing of savings, without more, obligated the Government to share them with Bethlehem. It cannot be main tained that this finding, accepted by both courts below, is without ample support.
Nothing in the negotiations between the parties as revealed in the record indicates that they had a contrary understanding of the contracts. Bethlehem held out against the Fleet Corporation's early insistence upon lump sum contracts. It continually asserted that uncertainties about final cost due to rapidly rising prices would require it to protect itself by insisting upon a figure too high for the Fleet Corporation's acceptance and therefore itself proposed the cost-plus-fixed-fee-plus-half-savings method of determining compensation. While there seems to have been recognition that this method might induce greater efforts at efficiency, which would be to the advantage of both parties, there is not the smallest hint that either Bethlehem or the Government regarded the substitution of this method as imposing any positive obligations upon Bethlehem in addition to those it would have had under lump sum contracts.
In the alternative, the Government urges that the half-savings clauses are severable, and that if the contracts imposed upon Bethlehem no obligation of special effort to effect savings, these clauses were unsupported by consideration, and are therefore unenforceable. The Master and the courts below, however, treated these clauses as non-severable; to do otherwise would call for departure from accepted principles of the law of contract. Whether a number of promises constitute one contract or more than one is to be determined by inquiring "whether the parties assented to all the promises as a single whole, so that there would have been no bargain whatever, if any promise or set of promises were struck out." Williston on Contracts (rev. ed.) § 863 and cases there cited. The record makes it clear that each of the contracts here was assented to as a single whole, and that consummation of a bargain between the parties depended upon inclusion of the half-savings clause. Furthermore, we know of no federal or state statute or established rule of law in any jurisdiction inconsistent with the elementary proposition that a promise to build ships is good consideration for a promise to pay a sum of money whether fixed in amount or depending upon the relationship between actual and estimated cost. Cf. Dayton Airplane Co. v. United States, 21 F. 2d 673, 682-683.
Ill
The Government further argues that if the half-savings clauses must be taken as permitting Bethlehem to participate in savings however caused, the contracts are invalid because unconscionable. Without specifying that it relies on the law of any particular jurisdiction, the petitioner rests its argument on an asserted general doctrine of uneonscionability at common law. Since there is no governing constitutional or federal statutory provision, if these were contracts between private individuals, the law of some locality would be controlling. Erie R. Co. v. Tompkins, supra. Whether the same rule would apply to government contracts in general or to the contracts of the Fleet Corporation8 in particular, we need not decide. Nor, assuming the applicability of the Tompkins case to the contracts before us, would we have to determine whether the law of the District of Columbia or of some particular state is decisive. For, in invoking the asserted doctrine of unconscionability claimed to be applicable here, the Government relies entirely upon the alleged existence of two elements: duress, and profits grossly in excess of customary standards. And for reasons we shall set out, neither of these two elements exists here.
Duress. The word duress implies feebleness on one side, overpowering strength on the other. Here it is suggested that feebleness is on the side of the Government of the United States, overpowering strength on the side of a single private corporation. Although there are many cases in which an individual has claimed to be a victim of duress in dealings with government, e. g., Union Pacific R. Co. v. Public Service Comm'n, 248 U. S. 67, this, so far as we know, is the first instance in which government has claimed to be a victim of duress in dealings with an individual.
The argument by which the petitioner seeks to establish that the contracts were made under duress is essentially this: Germany's submarine warfare made it imperative that the Government secure the greatest possible number of ships in .the shortest possible time; there was a scarcity of ships and shipbuilding facilities in the United States; Bethlehem, the largest shipbuilder in the world, not only had shipbuilding facilities available, but also a trained organization; at a time when Bethlehem's facilities and trained organization were vital to the prosecution of the war, it declined to accept terms proposed by the Government, but insisted upon prices which some of the Government's representatives thought too high; although Congress had authorized the Executive to commandeer shipbuilding facilities if necessary, Bethlehem's organization was also needed and the Government was without power to compel performance by an unwilling organization; the Government therefore had to accept contracts on whatever terms Bethlehem proposed or, doing without the ships which Bethlehem could produce, run the risk of military defeat.
Two basic propositions underlie this argument: (1) The Government's representatives involuntarily accepted Bethlehem's terms. (2) The circumstances permitted the Government no other alternative.
Upon reviewing the negotiations between the representatives of the Government and the representatives of Bethlehem, we cannot find support for the first proposition. The Master found, and the courts below agreed, that "the contracts resulted from negotiations in which both parties were represented by intelligent, well informed and experienced officers whose sole object was to make the best trade possible, under conditions which included the uncertainties of war-time contingencies, the results from which were not and could not have been known at the time the contracts were made.' ' Two of the three principal negotiators for the Fleet Corporation have testified in the proceedings before the Master. It is abundantly clear from their testimony that, during the course of the negotiations, they did not consider themselves compelled to accept whatever terms the other side proposed. In the disposition of the two main differences between the negotiators, there is no evidence of that state of overcome will which is the major premise of the petitioner's argument of duress. Cf. French v. Shoemaker, 14 Wall. 314, 332.
One of the differences was settled by the Government's abandonment of its earlier insistence upon a lump sum arrangement together with a guaranteed date of delivery. In view of the rising prices and unpredictable labor supply of the time, Bethlehem's reluctance to enter into contracts on such terms does not seem unreasonable. And if the Government's abandonment of its position is to be regarded as evidence of compulsion, we should have to find compulsion in every .contract in which one of the parties makes a concession to a demand, however reasonable, of the other side.
The other major difference between the negotiators was on the matter of price. There is evidence that some of the Fleet Corporation's representatives considered Bethlehem's demands high, but we cannot conclude that the figure finally accepted by the Fleet Corporation was accepted because its representatives felt themselves powerless to refuse. On the contrary, Bethlehem by letter voluntarily offered to accept contracts on terms to be fixed by the Fleet Corporation's general manager. This offer was rejected, one of the Fleet Corporation's negotiators testifying that it preferred to'make contracts rather than assume the attitude of dictating terms. Moreover, the general manager of the Fleet Corporation, in whom final authority was vested and who approved these contracts, was of the opinion that high estimated cost figures would be advantageous to the Government because "care must be exercised that they be not placed at too low a figure, for if they are, the probabilities are that the contractor will lose interest in keeping the cost down." And one of the negotiators for the Fleet Corporation has given testimony that he was not so much concerned with cost as with speed of production, since "legislation was already in the offing in the form of war profit taxes . to take care of extreme cases." We must therefore conclude that the negotiations do not show that Bethlehem forced the Government's representatives.to accept contracts against their will.
If the negotiations do not establish duress, the Government finds it in the circumstances themselves. The petitioner concedes that the Government could have commandeered Bethlehem's plants, but it contends that, if the plants had been commandeered, Bethlehem's organization would have been unwilling to serve the Government in them. Heavy reliance is placed on an observation in the Master's report that "the Government did not have power to compel performance by an unwilling organization." We shall later consider the alleged lack of power. We now point out that the alleged unwillingness is an assumption unsupported by findings or evidence. Since the possibility of commandeering appears not even to have been suggested to Bethlehem, we have no basis for knowing what its reaction would have been. We cannot assume that, if the negotiations failed to produce contracts acceptable to both sides, Bethlehem would have refused to contribute to the war effort except under legal compulsion. We cannot lightly impute to Bethlehem's whole organization, composed as it was of hundreds of people, such an attitude of unpatriotic recalcitrance in the face of national peril.
But even if we were to assume, as we do not, an initial attitude of unwillingness, we do not think that the Government was entirely without means of overcoming it. For, the representatives of the Fleet Corporation, an agent of the United States, came to Bethlehem armed with bargaining powers to which those of no ordinary private corporation can be compared. If it chose to, the Fleet Corporation could have foregone all negotiation over price, compelling Bethlehem to undertake the work at a price set by the President, with the burden of going to court if it considered the compensation unreasonably low. And the power to commandeer Bethlehem's entire plant and facilities, in accordance with authority specifically delegated by the President, provided the Fleet Corporation with an alternative bargaining weapon difficult for any company to resist.
The Government nevertheless urges that the circumstances here are analogous to those under which courts of admiralty have held contracts to be unenforceable. In particular, it points to the principle that courts of admiralty "will not tolerate the doctrine that a salvor can take the advantage of his situation, and avail himself of the calamities of others to drive a bargain; nor will they permit the performance of a public duty to be turned into a traffic of profit." Post v. Jones, 19 How. 150, 160. We think this principle has no real relevance to the case before us.
In the first place, if there was a "traffic of profit" here, it was not the unanticipated result of an accident as in the salvage cases. When Congress authorized the procurement of ships through ordinary commercial negotiations, it must have known that the purchases could not be made in a market of open competition, because existing shipbuilding facilities would be overtaxed by the construction program. See Department of Commerce, Government Aid to Merchant Shipping (rev. ed. 1923) 433; Hearings before House Committee on the Merchant Marine and Fisheries on H. R. 10500, 64th Cong., 1st Sess., passim. And Congress must have anticipated that, in the contracts agreed upon, profits would be expected, and that the self-interest inherent in commercial transactions would make itself felt. Therefore, in seeking to establish duress from the circumstances in which these contracts were made, the Government is relying on the identical circumstances which were in existence at the time Congress chose the policy of authorizing procurement of ships through com mercial negotiation. We cannot now invalidate contracts made pursuant to a Congressionally selected policy, on the sole ground of the coercive effect of circumstances which Congress clearly contemplated. To do so we should have to repudiate legislative power exercised in proper constitutional sphere.
In the second place, the captain of a ship in distress on the high seas who is completely at the mercy of his salvor cannot be likened to a sovereign power dealing with an individual contractor. We cannot regard the Government of the United States at war as so powerless that it must seek the organization of a private corporation as a helpless suppliant. The Constitution grants to Congress power "to raise and support Armies," "to provide and maintain a Navy," and to make all laws necessary and proper to carry these powers into execution. Under this authority Congress can draft men for battle service. Selective Draft Law Cases, 245 U. S. 366. Its power to draft business organizations to support the fighting men who risk their lives can be no less.
Profits. The general common law rule of unconscionability on which the petitioner relies is said to deny enforcement to contracts when the profits provided for are grossly in excess of a standard established by common practice. Whether there is such a rule, what is its scope, and whether it is part of the body of law governing these contracts, we need not decide. For, high as Bethlehem's 22% profit seems to us, we are compelled to admit that so far as the record or any other source of which we can take notice discloses, it is not grossly in excess of the standard established by common practice in the field in which Congress authorized the making of these contracts. And in particular, it may be added, the Master found that the ships built by Bethlehem cost the Government less than comparable ships built by other shipbuilders. The Gov ernment made no attempt to establish, nor is there any indication in the record, that the profits realized by other shipbuilders were any less than Bethlehem's.
To establish a standard of customary profits, the petitioner points to the experience of the Navy and War Departments and other branches of the Government in connection with straight cost-plus contracts. Because 10% was the profit specified in many such contracts, the Government asserts that it is an appropriate figure here, and urges that the profits on these contracts, tested by such a standard, cannot be allowed. The relevance of experience with cost-plus contracts to the contracts here is not clear. The Shipping Board deliberately chose to avoid cost-plus contracts where possible, having found them unsatisfactory in practice. Moreover, the record shows that the total cost to the Government of comparable ships under cost-plus contracts was higher than the total cost of the ships Bethlehem built under the contracts here in question. And experience in many fields has demonstrated that the percentage of profit actually realized under cost-plus contracts is likely to be far more than the percentage specified. As stated in 1918by Charles E. Hughes, later Chief Justice, in his report to the Attorney General on the aircraft industry, "contracts of this sort lead to waste, foster abuses, and impose an almost intolerable burden of cost accounting, in itself a hindrance to rapid production." Report to the Attorney General on the Aircraft Inquiry (1918) 134. See also, Expenditures in the War Department — Camps, House Report No. 816, 66th Cong., 2d Sess., 49-53. The 10% which the petitioner derives by reference to the cost-plus contracts of certain governmental departments cannot be taken as a standard of common practice. It is an illusory figure without basis in the realities of business experience.
If profits earned under Government contracts in general are taken as the standard of comparison, the 22% claimed here is overshadowed in too many instances for it to be regarded as extraordinary. The Hughes report referred to above, for example, points out (pp. 136-146) that most of the airplane production during the last war was under contracts providing for much higher profits. To take an example of the profits made on food products, the Federal Trade Commission determined that, in 1917, profits on the sales of salmon canneries, a major portion of whose output was purchased by the Government, ranged from 15 to 68% of cost, averaging 52%. Federal Trade Commission, Report on Canned Salmon (1918) 63. In the shipbuilding industry itself, even in peace times, profits were found by a special committee of the Senate, which investigated the munitions industry, to have been from 25% to 37% on the cruisers built in 1927, about 22% in 1929, and of like range for other years. Senate Report No. 944, 74th Cong., 1st Sess., 4.
If the comparison is made with industrial profits, not limited to profits on Government contracts alone, the 22% asked for here likewise loses all claim to distinction. An exhibit, the accuracy of which the Government has not challenged, incorporated into the record of this case, indicates that in terms of profit on gross sales, the largest American steel company made 49, 58, and 46% during the years 1916, 1917, and 1918. As computed by the Federal Trade Commission, net earnings in 1917 of the same company on all its business were 25% of total investment, and the Commission cites instances of other steel companies whose earnings thus measured ranged from 30 to 320%. Federal Trade Commission, Letter on Profiteering (1918) 9. Profits of lumber producers, again in terms of return on investment, ranged as high as 121%; and of producers of petroleum products, as high as 122%, over half of the industry earning more than 20%. Id. 12, 13. During the first six months of 1917, one of the two major sulphur producers in the country sold its product at an average price of $18.11 per ton, more than 200% above cost, which was $5.73 per ton; the other major producer earned 236% on its investment during the first eleven months of the same year. Id. 11. The Federal Trade Commission's collection of data for various other industries, a collection which the Commission stated was "by no means a complete catalog," affords many additional examples of the same kind. But further confirmation should be unnecessary for a conclusion no businessman would question: that the profits claimed here, seen in their commercial environment, cannot be considered exceptional.
The profits claimed here arise under contracts deliberately let by the Fleet Corporation under authority delegated by the President in accordance with an act of Congress. Neither Congress nor the President restricted the freedom of the Fleet Corporation to grant measures of profits common at the time. And the Fleet Corporation's chosen policy was to operate in a field where profits for services are demanded and expected. The futility of subjecting this choice of policy to judicial review is demonstrated by this case, coming to this Court as it does more than twenty years after the ships were completed. In any event, we believe the question of whether or not this policy was wise is outside our province to decide. Under our form of government we do not have the power to nullify it, as we believe we should necessarily be doing, were we to declare these contracts unenforceable on the ground that profits granted under Congressional authority were too high. The profits made in these and other contracts entered into under the same system may justly arouse indignation. But indignation based on the no tions of morality of this or any other court cannot be judicially transmuted into a principle of law of greater force than the expressed will of Congress.
IV
The problem of war profits is not new. In this country, every war we have engaged in has provided opportunities for profiteering and they have been too often scandalously seized. See Hearings before the House Committee on Military Affairs on H. R. 3 and H. R. 5293, 74th Cong., 1st Sess., 590-598. To meet this recurrent evil, Congress has at times taken various measures. It has authorized price fixing. It has placed a fixed limit on profits, or has recaptured high profits through taxation. It has expressly reserved for the Government the right to cancel contracts after they have been made. Pursuant to Congressional authority, the Government has requisitioned existing production facilities or itself built and operated new ones to provide needed war materials. It may be that one or some or all of. these measures should be utilized more comprehensively, or that still other measures must be devised. But if the Executive is in need of additional laws by which to protect the nation against war profiteering, the Constitution has given to Congress, not to this Court, the power to make them.
Affirmed.
The Chief Justice and Me. Justice Jackson, who as formei Attorneys General actively participated in the prosecution of these cases, take no part in this decision. Mr. Justice Roberts also takes no part in the decision.
Included in the detailed and comprehensive itemization of "actual cost" were the following and "items similar thereto in principle":
"The net costs . of labor (including compensation of labor by way of bonuses), and materials, machinery, equipment, and sup plies . . . and other direct charges, such as insurance on the vessels, etc.
"A proper proportion of running expenses, including ordinary rentals, . . . repairs, and maintenance, light, heat, power, insurance, management, salaries (including compensation by way of bonuses), and other indirect charges . . .
"A proper proportion of interest accrued . on bonds or other debts or loans existing or contracted for prior to the díate of this contract and the proceeds of which shall be used, or shall have been or shall be invested in plant, equipment, etc., that shall be used, in the performance of the work under this contract.
"A proper proportion of taxes of all kinds accrued during the taxable year with respect to the business or property, except any Federal taxes.
"A proper proportion of physical losses actually sustained within the taxable year in connection with the construction of the vessels under this contract, including losses from fire, flood, storm, riot, vandalism, any acts of God, acts of war, or other casualties and not compensated for by insurance or otherwise.
"A reasonable allowance, according to the condition, for depreciation of values of the property and plant of the Contractor usekl in connection with the work under this Contract."
Neither in the contracts nor under any relevant statutory provision was there any restriction on salaries and bonuses to be paid to executives of the shipbuilder or its affiliates. Cf. Sections 505 (c) and 805 (c) of the Merchant Marine Act of 1936, 49 Stat. 1985, 1999, 2013.
Even in the case of lump sum contracts with the Government, it is generally recognized that the real risk of loss is negligible. It is usual in this kind of contract to set prices high enough to cover, or otherwise specifically to provide against, unforeseen contingencies. And where loss does occur contrary to the expectation of both parties, Congress often passes special bills making the contractors whole.
These ships apparently cost the Government at least a large part of still another $4,825,415. The Government paid this amount to Bethlehem to aid in expansion of plant facilities to build the ships— facilities which were turned over to Bethlehem after the war. The Government's money was contributed under a contract commonly in use whereby the contractor was given the option of purchasing the additional facilities at a depreciated value. Whether the Government, upon conveyance of the property, received any compensation at all does not clearly appear.
While profits on individual contracts ranged above and below 22%, both in the proceedings below and in this Court the whole series of contracts was regarded as a unit. The Government has made no separate argument with respect to the individual contracts in which more than the average profit was realized, nor has Bethlehem with respect to the contracts in which the amount due under the half-savings clause proved to be small. The only finding of the Master in which any separation of contracts is made shows that the profits realized on contracts in which the. estimated costs were checked by the Fleet Corporation were higher than those on contracts in which the Fleet Corporation accepted Bethlehem's estimates without check.
Compare the statutory method of restricting profits of affiliates embodied in § 803 of the Merchant Marine Act of 1936, 49 Stat. 1985, 2012.
The contracts contained a provision, usual in Fleet Corporation contracts, under which the Government agreed "to provide the cash funds necessary to pay for work already done and materials already furnished and for carrying on the work under this contract."
The Government concedes "that $1,514,995 of the judgment awarded . in the action at law is . . . due under contracts other than those now under attack."
Of the cases called to our attention by the Government, only in Burke & James, Inc. v. United States, 63 Ct. Cls. 36, was a bonus for savings clause held severable and invalid although regarded as "part and parcel of the original. . contract." We agree, as did both courts below, with the Master's statement that the Burke case is not ap^ plicable here because "the facts upon which the decision of that case was based are so different."
The District Court treated the contracts as governed by the law of Pennsylvania. The Circuit Court of Appeals treated them as governed by the law either of Pennsylvania or the District of Columbia, but did not decide whieh. The Fleet Corporation was organized under the laws of the District of Columbia. Although wholly owned and controlled by the Government it has been held subject to suit, in either state or federal courts. Sloan Shipyards Corp. v. U. S. Fleet Corp., 258 U. S. 549; U. S. Shipping Board Merchant Fleet Corp. v. Harwood, 281 U. S. 519.
Cf.: "Obviously no sane man would bid on a lump-sum contract under such conditions, unless perchance he should treat the matter as a pure gamble and include an excessive margin in his proposal for unforeseen contingencies." Report of Chief of Construction Division, War Department Annual Reports (1919) 4147.
The Federal Trade Commission Report does not give separate figures on sales to the Government, but points out (p. 7) that the Government had announced its intention to purchase 80% of the 1918 pack.
Cf.: "It would be very dangerous, indeed, to tbe best interests of the government . . . if . . . this [Court] should . . . render decrees on the crude notions of the judges of what is or would be morally right between the government and the individual." Smoot's Case, 15 Wall. 36, 45-46.