Court Opinion

ID: 9449880
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:26:40.885545+00
Date Added: 2024-06-11T17:32:02.373114
License: Public Domain

DAVIS, Judge
(concurring in part and dissenting in part).
Affiliated broke the contract when its plant manager and other employees deliberately by-passed the defendant’s inspection system and palmed off rejected shells as though the inferior goods had met the Government’s test. This was a deliberate and serious fraud on the Government, materially breaching the agreement and subjecting Affiliated to cancellation for default. Only in the rarest of cases could a serious fraud fail to be a substantial breach; in this instance the materiality of the breach seems patent.8 Nor is it an excuse that the company’s higher officers were wholly innocent of the misrepresentation and the breach. The contractor is tarred by its operating employees’ conduct under the contract, just as it would be held liable if they had made poor shells or failed to produce the required number. See Gleason v. Seaboard Air Line Ry. Co., 278 U.S. 349, 355-357, 49 S.Ct. 161, 73 L.Ed. 415 (1929); United States v. United States Cartridge Co., 198 F.2d 456, 464 (C.A.8, 1952), cert. denied, 345 U.S. 910, (1953); United States v. George F. Fish, Inc., 154 F.2d 798, 801 (C.A.2), cert. denied, 328 U.S. 869, 66 S.Ct. 1377, 90 L.Ed. 1639, 73 S.Ct. 645, 97 L.Ed. 1345 (1946); Ricketts v. Pennsylvania R. Co., 153 F.2d 757, 759, 164 A.L.R. 387 (C.A.2, 1946).
The central question, to me, is whether the defendant waived the breach. The record suggests that the Ordnance Department, both in the field and in Washington, initially desired to waive the breach and to continue production under the contracts, provided that Affiliated met the conditions stated in finding 22. If Ordnance had the authority to overlook the violation, I would find it hard to deny that it effectively did so through its letter of November 17, 1953, and the ensuing actions between that date and the end of the month (findings 22-24). Ordnance imposed specific conditions for resumption; the contractor agreed without qualification. That may very well have been enough to reinstate the contract — if Ordnance had that power. See Freedman v. United States, Ct.Cl., 1963, 320 F.2d 359, 363-64.9
*340Plaintiff’s theory of a consummated agreement-waiving-the-breach founders, however, on the jagged coast of lack-of-authority. Neither the Ordnance contracting officer nor the Chief of Ordnance was empowered to disregard the breach or to reinstate the contract. At that time, there was in effect within the Department of the Army a procedure under which any situation seeming to involve fraud in connection with an Army contract had to be forwarded by the chief of the technical service (i. e., Ordnance) to the Assistant Secretary of the Army (Materiel), who was vested with final authority to determine the action which should be taken. See finding 18. That rule operated to deprive the Chief of Ordnance of power to make the agreement to which plaintiff refers. Among the most ancient of the principles of federal procurement is that the Government is not bound by the agreement of an agent or officer without actual authority —even though he would be held to have apparent authority if the private law of agency controlled.10 The contractor has the burden of discovering the true extent of the authority of the Government men with whom he deals.
Affiliated did not know (it appears) that final power to reinstate the contract had been withheld from the Ordnance Department, but the rule of actual authority has never been confined to contractors who knowingly make agreements with unauthorized officers. Moreover, the contractor here was not unaware that there was a problem of authority. Its representative was early told that the final decision on whether Affiliated would be permitted to resume production under the contract would be made “in Washington” (finding 21). The matter was plainly beyond the contracting officer’s sphere; and Affiliated so understood. The phrase “in Washington” may have meant the Office of the Chief of Ordnance, but it may also have referred to a higher echelon within the Army or the Defense Department; at the least, Affiliated was put on notice that someone at the Seat of Government would have the final word. So far as we know, the contractor did not seek to discover what officer “in Washington” had that power. Plaintiff assumed, without inquiry, that it was enough to obtain the concurrence of the Office of the Chief of Ordnance. Now that that assumption has turned out to be invalid under the Army’s procedure, plaintiff necessarily finds itself relying on an asserted agreement with a level of the Department of the Army which was not authorized to act where fraud was suspected.
Harsh though the rule of actual authority may sometimes seem, it serves important ends in a ease like this. The Department of the Army evidently thought that fraud in procurement required the attention of the next-to-highest echelon in the agency, on the Secretarial level. The procuring services were not to be free to decide for themselves whether the contract should be reinstated or the breach waived. Those services are often preoccupied with a pressing need for the supplies, and less concerned with the overall considerations of general policy which the Department must have thought should govern fraud cases. Departmental rules and policies are to be vindicated in procurement as in other fields. See G. L. Christian & Associates v. United States, Ct.Cl., 1963, 320 F.2d 345, cert. denied, 84 S.Ct. 444, 1963. It is important that “procurement policies set by higher authority not be avoided or evaded (deliberately or negligently) by lesser officials, or by a concert of contractor and contracting officer.” 320 F.2d at 351. To permit this contractor to stand on an agreement-to-resume made with Ordnance, in the teeth of the requirement that the Assistant Secretary pass upon that very question, would fail “to protect the significant policies of superior *341administrators from sapping by subordinates.” Ibid.
It remains to say, on this point, that there is nothing in the record or the recommended findings to indicate that the Assistant Secretary actually knew or approved of any agreement between Ordnance and Affiliated to resume production (or to prepare to resume production). Nor, in view of his manifold duties and responsibilities, is there reason to believe “that the Assistant Secretary was (or should have been) fully cognizant — before he came to consider and decide the matter in the middle of December 1953— •of Ordnance’s dealings with this particular company on this contract from the time the fraud was discovered at the •end of October 1953.11 In any event, the Assistant Secretary certainly cannot be ■said to have ratified any agreement between Ordnance and the contractor in November 1953. It was not until December 1, 1953 that the Chief of Ordnance made his recommendation to the Assistant Secretary to continue the contract under specified conditions; that recommendation evidently assumed that approval had not yet been given.
The Assistant Secretary thereafter .acted with reasonable promptness in a case of this kind. He refused to reinstate the contract and ordered it can-celled for default. He determined, on December 16, 1953, that “the contract will be terminated, for default if the legal basis may be found” and that “Ordnance will take immediate steps to remove the production line from the plant and place it in storage” (finding 30). The formal letter sent to Affiliated on December 29, 1953, stated, after a reference to the fraud, that “by reason of such contract and statutory violations, you are advised that the contract is canceled” (finding 34). It is true that this letter avoided using the term “default,” and that Affiliated was told by Army representatives, shortly thereafter, that the letter “left open for a final determination the default, repudiation, or termination for the convenience of the Government of the contract” (finding 35). But it is clear to me, particularly from the testimony of the Assistant Secretary and the Assistant Judge Advocate General,12 that the former definitely intended to terminate the contract for default — not to reinstate it, or to end it for the defendant’s convenience. Since Affiliated had actually defaulted, the Secretary’s subjective purpose is consistent with his written determination that the contract was to be terminated for default “if the legal basis may be found,” as well as with the formal declaration to Affiliated (on December 29th) that “by reason of such contract [ual] and statutory violations, you are advised that the contract is canceled.” If the contractor was momentarily soothed into giving these words less than their face value, it soon became clear that the defendant deemed the contract ended — and not for the Government’s convenience or because of the Government’s fault.
*342It follows, in my opinion, that plaintiff is entitled to recover nothing on account of the termination of the contract. The agreement was cancelled for a default which had actually occurred. To the extent that the court refuses the recovery plaintiff seeks, I concur in the judgment.13
I do not concur, however, with the majority when it finds a separate, supplemental agreement to reimburse plaintiff for Affiliated’s costs incurred, during December 1953, in meeting the conditions specified by the Ordnance Department in its letter of November 17th. There could be no such supplemental agreement with Ordnance for the same reason there could be no valid agreement to reinstate the main contract; the rule which vested the Assistant Secretary with final authority in fraud cases deprived Ordnance of all power to bind the United States to pay Affiliated for rearranging its plant and operations to accommodate a prospective resumption of operations. There is, in addition, no evidence that either party considered that it was entering into a supplemental pact. No such agreement was formally made and there is no course of dealings from which a contract implied-in-fact could be inferred. It appears, rather, that Affiliated was so certain that the production contract would be reinstated that it undertook these expenses in the confident expectation that they would not be for naught, or Affiliated may well have felt (as it now argues) that it had already obtained an agreement to reinstate the shell contract. Ordnance seems to have been of a similar mind. Both the contractor and the agency failed to take account of the significant role of the Assistant Secretary. Affiliated was probably unaware of his participation; in November and early December, Ordnance apparently anticipated his certain approval of a continuation of the contract. Cf. Congress Constr. Corp. v. United States, Ct.Cl., 1963, 314 F.2d 527, cert. denied, 375 U.S. 817, 84 S.Ct. 53, 11 L.Ed.2d 52.
Perhaps if we could utilize the broad concepts of fairness, grace, and “equity” which have sometimes characterized our Congressional reference cases of the past, we would hold that plaintiff should be compensated for Affiliated’s out-of-pocket expenditures in reliance on what Ordnance told it in November 1953. But this-is a case, presented and tried under our general jurisdiction, in which we can grant judgment only on a claim known to the law. In my view, the demand which the court satisfies with a judgment is not a legal claim which we should recognize as such. I would allow no recovery.

. Plaintiff paid the defendant a settlement of $127,283, including $G0,000 under the False Claims Act as “damages for breach of contract and for damages and forfeitures under the False Claims Act.” The parties agreed, however, that the settlement should be without prejudice to plaintiff’s claims with respect to the caneellation of the contract for cause. See finding 39.

. Later, Ordnance seems to have considered it unnecessary to resume operations in view of the decrease in. the need for the shells.

. Federal Crop Ins. Corp. v. Merrill, 332 U.S. 380, 68 S.Ct. 1, 92 L.Ed. 10 (1947); United States v. Stewart, 311 U.S. 60, 70, 61 S.Ct. 102, 85 L.Ed. 40 (1940); Sutton v. United States, 256 U.S. 575, 41 S.Ct. 563, 65 L.Ed. 1099 (1921); Whiteside v. United States, 93 U.S. 247, 256-257, 23 L.Ed. 882 (1876).

. The findings make it deal- that there was to be an investigation by Ordnance and consultations with the Department of Justice before any final decision was made. There is no adequate ground for saying that the Assistant Secretary followed, or should have followed, all these various steps until the time came for liis determination. It is normal for an official of his echelon to await the presentation of all the data and recommendations before undertaking his own consideration. In the light of all the circumstances, there is likewise no adequate ground for saying that the consideration of what should be done with Affiliated’s contract, after the fraud was discovered, was unduly delayed by Ordnance. Almost immediately after the Assistant Secretary’s decision of December 16, Ordnance withdrew its conditional offer of November 17 (see finding 31).

. As defendant requests, the findings should contain the substance of the testimony of the Assistant Judge Advocate General and the stipulation that the Assistant Secretary would give essentially the same testimony. This evidence was that the Assistant Secretary put aside all considerations relating to increased capacity or reduced requirements for the shells and directed that the contract be ended on the basis of the contractor’s contractual violations and fraudulent actions.

. Since I believe that Affiliated materially breached its contract which was then properly terminated for default, I do not reach the independent question of whether plaintiff is also barred from recovery by 28 U.S.C. § 2514. But it is implicit in my position that Affiliated should have pursued its administrative remedy, before the Board of Contract Appeals, to have the default termination set aside. Its failure in this respect is a further bar to recovery. United States v. Blair, 321 U.S. 730, 64 S.Ct. 820, 88 L.Ed. 1039 (1944); United States v. Joseph A. Holpuch Co., 328 U.S. 234, 66 S.Ct. 1000, 90 L.Ed. 1192 (1946).