United States v. Bethlehem Steel Corporation, 3315

• Decision Date: 03 June 1938
• Docket Number: 11970.,No. 3315,3315
• Parties: UNITED STATES v. BETHLEHEM STEEL CORPORATION et al. BETHLEHEM SHIPBUILDING CORPORATION, LIMITED, v. UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION.
• Court: U.S. District Court — Western District of Pennsylvania

23 F. Supp. 676

UNITED STATES v. BETHLEHEM STEEL CORPORATION et al.

BETHLEHEM SHIPBUILDING CORPORATION, LIMITED, v. UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION.

Nos. 3315, 11970.

District Court, E. D. Pennsylvania.

June 3, 1938.

J. Cullen Ganey, U. S. Atty., of Bethlehem, Pa., Max O'Rell Truitt, General Counsel, U. S. Maritime Commission, of St. Louis, Mo., and Paul D. Page, Jr., Ralph H. Hallett, Hardin B. Price, and Francis S. Walker, all of Washington, D. C., for the United States and the U. S. Shipping Board Emergency Fleet Corporation.

Evans, Bayard & Frick, of Philadelphia, Pa., and Frederick H. Wood and William W. Robison, both of New York City, for Bethlehem Shipbuilding Corp., Ltd., et al.

DICKINSON, District Judge.

There will be no charge made of undue haste in the disposition of these cases. The contract with which they concern themselves was signed in 1918. The Bill in Equity was filed to March Term 1925 and the actions at law are entitled as of December Term 1925.

The Master was appointed in 1931, and made his report in the sense of having prepared it, February 19th, 1932, but withheld it at the request of the United States and agreement of the Steel Company, until the filing date of February 7th, 1936.

The cause was not set down for hearing upon the exceptions until May 16th, 1938. It is the due of the Master to state that no part of this "lapse of time" is chargeable to him but has been to him "a matter of regret and concern".

There are two cases before us, the other actions brought having been disposed of. Of the remaining cases one is a Bill in Equity and the other an action at law. The litigation began with the filing of the Bill. This was one to compel the defendant to disgorge averred unconscionable profits which it had received on a contract for the building of ships by the defendant for the United States Merchant Marine. This was promptly followed by the action at law in which the plaintiff seeks to recover from the Shipping Board Corporation a claimed unpaid balance due it for performance of the same contract. Each controversy is thus over the same contract and the proceeding and action may be discussed as one claim and defense. The threatened length of the inquiry induced the parties to agree upon a procedural arrangement to shorten it so far as possible. This was to have the proceeding in Equity referred to a Special Master and for the parties to the action at law to waive a jury trial and refer the cause to a Referee under the Pennsylvania practice — the same person to act as Special Master and also as Referee.

The then Owen J. Roberts, Esq. (now Mr. Justice Roberts of the Supreme Court), was appointed by the Court as Special Master and agreed upon as Referee. Upon the retirement of Mr. Roberts, William Clarke Mason, Esq., succeeded him, and it is his report which is before the Court with exceptions. He will be referred to as Special Master. 379 Requests for Findings of Facts and Conclusions of Law were submitted to the Master and answered by him. The Exceptions to his report number 153. A detailed discussion of all the points thus raised is impracticable within the limits of a judicial opinion nor is it necessary. The various contentions of the parties may be grouped and formulated in a few general questions.

The complaint and defense of the United States may be voiced in the statement that the contract in question called for the construction of 66 ships constructed at a total cost price of about $122,000,000, from which the contractor has received a profit of nearly $20,000,000, and is claiming the legal right to over $5,000,000 more, in addition to whatever profits its subsidiaries may have made on the supply of materials to the contractor. This (without the latter if any) makes up the portentous total of about $25,000,000. Even the part of it which the contractor has received is characterized by the United States as exorbitant, unconscionable and as the fruit of fraud, because of which the United States, as a defrauded party, is seeking to have restored to it the unjust sums exacted.

The answer and demand of the contractor is that it has asked and is asking for no more than the moneys due it under the contract entered into by the parties and that so far from what it has received being excessive that there is still an unpaid balance due it for the payment of which the action in assumpsit has been instituted. This brings the question before the Master and this Court to that of to how much has the contractor a right under the dealings and contract between the parties? It must be borne in mind that we are concerned with the legal justice of the cause and cannot, except so far as the law directs, give weight to other considerations.

Among the horrors of war a not inconsiderable one is the way and extent to which Army contractors profit by the needs of government. It may be that this in case of most contracts is necessarily true. Prices at such times are upset. Some one must take a real and great risk and a contractor cannot be expected to take it. It is proverbial that war profits from Government contracts are far beyond what in peace time would be deemed fair and reasonable.

It is pointed out by the United States that, in the instant case, the contractor had no reason to bargain for large profits to off-set a risk of loss because this contractor under this contract took no risk whatever. The exaction of inordinate profits is thus viewed by the United States as an advantage taken of the pressing needs of the Government. As war time is to other citizens a time of sacrifice, it seems unholy and sinful to make of the calamity of the people a source of inordinate gain. As before stated, however, we are dealing with a matter of contract and not sentiment, patriotic or otherwise.

There have come into use three types of Government war time contracts, each designed for the protection of the Government but each proving to be to the advantage of the contractor. Perhaps the only remedy — aside from refraining from war — is to bear with the evil as uncontrollable. One is the flat sum price of peace time contracts. The risk of higher prices is always assumed by the Government, and if the higher prices are not paid by the contractor, they go into his profits. Another is the cost plus price. Theoretically this is just to both contractor and Government. In practice it however very much inflames the cost of performance of the contract and the general judgment pronounces it to fail of its purposes. A third is that made here, which is a cost plus contract with the added feature of giving to the contractor an inducement to hold down the cost to the lowest figure by giving him a percentage of any saving effected. The success of this type of contract in benefiting the Government depends upon the estimate of what the cost of construction should be. The United States avers that the contractor here fraudulently made this estimate so high as to make this part of the profit to the contractor inordinate.

The United States stands upon three propositions: One turns upon the interpretation given to the contract; the second upon a fact finding, and the third upon a conclusion of law. These three propositions are:

1. The percentage of saving which the contractor is to receive is not based upon the difference between the estimated cost and the actual cost but upon that part of this difference which was due to the services rendered by the contractor.

It is not altogether clear whether the United States is relying upon this as a construction of the contract as made or whether upon the doctrine of unconscionable contracts, invoked in the third position of the Government, later discussed. As a method of treatment, we limit it at present to the proper interpretation of the contract. It need only to be said that the Master has not so construed the contract, and we are constrained by its wording to agree with the Master. The contract gives to the contractor one-half of the difference between the estimated cost and the actual cost of the ships. The Government's criticism of the contract is based upon this interpretation of its meaning.

2. The estimated cost of construction, inserted in the contract as one basis for the determination of the bonus profit to the contractor, was fraudulently overstated by the contractor so as to make this part of the contractor's profits inordinately large and exorbitant.

This is a charge of actual fraud perpetrated by deception. The Master has found against this charge of actual fraud and under all the evidence he could not have found otherwise. The managers for the contractor adopted the famous Rob Roy distinction who...