Opinion ID: 268421
Heading Depth: 2
Heading Rank: 1

Heading: covenant against contingent fees

Text: 3 The defendant contends that it validly canceled the contract in the summer of 1954 because (1) Acme misrepresented and concealed its employment of a part-time agent to secure government contracts; and (2) such an arrangement violated the covenant against contingent fees. 4 For many years prior to the events with which we are concerned, Acme enjoyed some prestige as a manufacturer of processing tanks, boilers, containers, and related equipment for the distillery, brewery, and sugar industries — a predominantly civilian market. In 1952 it sought to enter the field of government procurement to provide a cushion against the fluctuations of its commercial sales, particularly in periods of war-born material shortages. Lacking expertise in this prospective market, plaintiff engaged, in the early fall of 1952, the services of Harry K. Tucker, Jr., and James S. Norris, who represented accurately that they were experienced in government procurement procedures, but concealed their dishonorable intentions to victimize their employer. At first, the team was paid under an informal arrangement providing for commissions on sales and a minimum salary guarantee. On October 13, 1952, Tucker entered into an express one-year contract with Acme, whereby he and/or his organization agreed to serve as a bona fide sales agent on a part-time basis. 4 Under the agreement, Tucker was to be paid a weekly minimum salary of $150, which would be increased to five percent of his weekly gross sales up to $10,000 ( i. e., sales by Acme under contracts obtained through him), plus three percent of such weekly gross sales in excess of $10,000. Minimum salaries paid prior to any sales by Tucker were to be deducted, later, from the excess of his commissions over his minimum weekly guarantee. The result was that the guaranteed weekly salary was a nonrecoverable advance against commissions; Acme could, however, cancel the contract if commissions failed to cover the minimum salary guarantee. Norris and Tucker also entered into an agreement with each other that Norris would receive fifty percent of any fees paid Tucker by his other clients for enabling them to obtain subcontracts from Acme. Plaintiff was unaware of this latter arrangement. 5 Tucker shortly produced a deluge of inquiries, bid proposals, and invitations from both commercial and government sources. Among these were the invitations to bid on the contract at bar (Contract 1213), as well as the agreement (Contract 8580) which is the subject matter of the other suit, No. 538-59. 6 On October 23, 1952, Acme submitted its original bid for Contract 1213 to the Philadelphia Ordnance District. The bid form contained a provision requiring the contractor to represent whether it had or had not (boxes were supplied after each of the alternatives for inserting a mark to denote the correct fact) employed or retained a company or person (other than a full time employee) to solicit or secure this contract. In its October 23rd bid, James S. Norris, as General Manager of the Defense Work Department, certified that plaintiff had not retained such a person. Under a revised proposal, dated December 10, 1952, and also signed by Norris, plaintiff made a directly contrary representation. On December 18, 1952, however, Acme once again reversed its position. Joshua Epstein, president of Acme, executed a government form entitled Contractor's Statement of Contingent or Other Fees, in which he, either accidentally or deliberately, filled in one of the two alternative boxes to indicate that Acme had not retained a part-time employee to secure the contract. This representation was incorrect, since plaintiff had, in early October, hired Tucker on a part-time basis to solicit government contracts. 7 We assume, for this part of the case, that these misrepresentations, or the substance of the Acme-Tucker contingent fee arrangement, or both, breached the contract. But the crucial point is that the defendant, after obtaining knowledge of the facts, waited until over a year later before canceling the agreement. Could an election to cancel be delayed for such a time? We hold not. In our view, an election to annul the contract had to be made with reasonable promptness after the Government gained knowledge of the facts; by putting off its decision for an inordinately long period, the defendant lost the right it earlier had to terminate the contract without incurring any cost. 5 8 As early as May 1953, the Philadelphia Ordnance District had sufficient information to determine whether Acme had previously made any misrepresentations relating to contingent fees or had violated the covenant. In June 1953, defendant nevertheless issued a supplemental agreement, which increased the number of rifles to be manufactured under the contract from 2,322 to 2,751 (an 18% increment). Despite the production difficulties it encountered, plaintiff continued manufacturing the rifles until Ordnance directed it to suspend all work under the contract on July 22, 1954. Cancellation for unspecified statutory violations followed on August 18, 1954. 9 This phase of the case — as distinguished from the Government's responsibility to reimburse Acme for payments to Tucker in violation of the covenant against contingent fees — is governed by the rule that, [W]here a contract is breached in the course of its performance, the injured party has a choice presented to him of continuing the contract or of refusing to go on. If he chooses to continue performance he has doubtless lost his right to stop performance   . 5 Williston, Contracts § 683 (3d ed. 1961) (footnotes omitted); e. g., Lummus Co. v. Commonwealth Oil Refining Co., 280 F.2d 915, 929-930, 91 A.L.R.2d 912 (C.A. 1), cert. denied, 364 U.S. 911, 81 S.Ct. 274, 5 L. Ed.2d 225 (1960); Lichter v. Goss, 232 F.2d 715, 720 (C.A. 7, 1956). After discovering the contingent-fee violations, defendant could not wait for over a year to decide whether it wished to annul the contract as a whole, on that basis. The sanction of contract cancellation is too drastic to permit a long delay. Beyond the time reasonably necessary to determine if there has been a misrepresentation or a violation of the covenant, 6 the defendant cannot allow an unwary contractor to continue performance and thus incur large expenses, all of which the Government will refuse to reimburse if and when it decides to cancel the contract on the ground of the violation. As this court said in Companhia Atlantica v. United States, 180 F.Supp. 342, 347, 148 Ct.Cl. 71, 78, cert. denied, 364 U.S. 862, 81 S.Ct. 103, 5 L.Ed.2d 85 (1960), it would be a great wrong to permit the Government to awaken such a `sleeper' to justify its cancellation   . In that case, the plaintiff had fully apprised the defendant of the contingent fee arrangement at the outset of negotiations, which lasted over a year. The Government then canceled its contract for the purchase of tungsten from the plaintiff less than two months after the agreement had been signed, and later sought to defend its action on the grounds that the covenant against contingent fees had been violated. Although the court found that there was no violation, it also based its decision on the alternative ground that the defendant had waited too long before annulling the contract. Here, too, we refuse to awaken such a `sleeper'. 10 The severity of contract cancellation makes the present case, in this aspect, wholly unlike one in which the Government simply attempts to recover or withhold funds paid in violation of the covenant against contingent fees. That type of action is governed by the principle that, where government officials have erroneously or illegally paid out money, mere delay in seeking its recovery will not preclude a suit by the United States. See Acme Process Equipment Co. v. United States, Ct.Cl., No. 538-59, 347 F.2d 538, decided this day. But when the Government cancels an entire contract because of a breach of the covenant, it can refuse to reimburse the contractor, not only for wrongful or illegal expenditures, but also for amounts to which the contractor would otherwise be legally entitled. To avert extreme hardship, we think that the Government is obliged to take such a course within a reasonable time after it has discovered the breach. 7 11 The defendant does not seem to question that an unconscionable delay in raising a misrepresentation or a violation of the covenant against contingent fees as a ground for annulment will preclude the Government from thereafter urging that defense. It contends instead that there was no unreasonable delay, because the Government did not discover all the material facts until shortly before the actual cancellation. The evidence fails to bear out this argument. 12 In connection with its other major government contract (8580), Acme correctly represented, on November 4, 1952, in the bid which it submitted to Rock Island Arsenal that it had employed a part-time agent to obtain the contract. On or about December 12, 1952, Rock Island received from plaintiff a formal Contractor's Statement of Contingent or Other Fees, to which was attached a copy of Acme's employment contract with Tucker dated October 13, 1952. Contract 8580 was awarded to plaintiff by Rock Island on January 8, 1953, but was administered by the Philadelphia Ordnance District, the same agency which handled present Contract 1213 from its inception. Thus, even prior to the award of Contract 1213 to Acme on January 27, 1953, the contracting Ordnance District had access to the Tucker employment agreement, which was physically incorporated in the Contract 8580 file, although the District had no particular reason to refer to that part of the file. 8 13 On May 18, 1953, the Ordnance District was again told of the agreement between Acme and Tucker. Plaintiff informed representatives of the Ordnance District that Tucker had been a full-time employee since January 1953, that his original part-time contract on a commission basis had been ended, and that he had received no commissions under the prior agreement. The letter also referred to the contingent-fee statement previously filed with the Rock Island Arsenal and asked that it be withdrawn. 9 See finding 8(f). The defendant was thus told that (1) at the time that the plaintiff made its bid and negotiated for Contract 1213, it had in its employ a part-time agent whom it had hired to solicit government contracts; and (2) that agent was Harry K. Tucker, Jr., who, along with his father, had been under surveillance by the Government for suspected statutory violations in connection with prior contingent fee arrangements. Finding 3. Furthermore, by referring back to the bid and the related forms which Acme submitted to Ordnance in connection with Contract 1213 (and to which Acme specifically referred), the Philadelphia Ordnance District could easily have discovered the prior misrepresentations. Yet the defendant waited for fourteen months before canceling the contract. During this period the plaintiff continued to perform and to incur expense. 14 The Government seeks also to justify the delay on the ground that it was not told all the relevant facts until shortly before it canceled. It emphasizes an alleged informal agreement between Tucker and plaintiff's president, entered into when he first began working for Acme in the fall of 1952. Under that agreement, Tucker was to receive a three percent commission, which he agreed to share equally with Norris. But the only evidence in the record of this arrangement is a written statement made by a General Accounting Office investigator in June 1955, on the basis of an interview with Joshua Epstein, Acme's president. Even if we accept at full value this second-hand statement made three years after the events, there is no way of knowing whether the alleged informal agreement was superseded by Tucker's written contract. If that was the case — which it might well have been — this commission-splitting agreement lasted no more than two weeks. In this state of the proof we cannot give any significance to this alleged side-agreement. Other than the information referred to in footnote 9, supra, this is the only fact which the Government can point to as remaining undisclosed after May 1953. We do not hesitate, therefore, to conclude that the defendant had sufficiently full knowledge of the contingent-fee arrangement as of May 1953, and could not delay until July 1954 to elect on that ground to exercise the drastic remedy of complete cancellation. 10