315 U.S. 289 (1942), 8, United States v. Bethlehem Steel Corporation

Docket Nº:No. 8
Citation:315 U.S. 289, 62 S.Ct. 581, 86 L.Ed. 855
Party Name:United States v. Bethlehem Steel Corporation
Case Date:February 16, 1942
Court:United States Supreme Court

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315 U.S. 289 (1942)

62 S.Ct. 581, 86 L.Ed. 855

United States


Bethlehem Steel Corporation

No. 8

United States Supreme Court

Feb. 16, 1942

Argued December 9, 1941




1. Contracts made in the emergency of war between the Fleet Corporation and a shipbuilding company, for the construction of ships for the United States, provided that the price to be paid the builder should include the actual cost of the ships and two elements of profit, (1) a fixed amount calculated on an agreed

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estimate of cost and (2) a "bonus for savings," of one-half the amount by which the actual cost turned out lower than the estimate; but no obligation of the builder to make special effort to effect such savings by increasing its efficiency was expressed in the contracts.


(1) There is no ground to imply such an obligation. P. 297.

(2) The savings clause was a nonseverable part of the contract. P. 298.

2. 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 whole, so that there would have been no bargain whatever if any promise or set of promises were struck out. P. 298.

3. With respect to contracts for the building of ships, entered into by the Fleet Corporation, on behalf of the Government, and a shipbuilding company while the country was at war, and which netted the company a very large profit partly by reason of the clause granting it the right to one-half of the amounts by which the cost of construction should be lower than the liberal estimate provided by the contracts, held:

(1) The Government's present claim that in the negotiations the officials acting for the Fleet Corporation were subjected to pressure amounting to duress by the representatives of the company, so that they accepted the price stipulations against their will, is without support in the evidence. P. 300.

(2) The circumstances that the Government stood in great need of the ships and that it was obliged to rely upon the company's capacity to produce them could not have coerced the Fleet Corporation's representatives to make the contracts, since the Fleet Corporation could have compelled the shipbuilding company 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 since the Fleet Corporation had the power to commandeer the shipbuilding company's plants and facilities, in accordance with authority delegated by the President pursuant to the Acts of Congress, and it is not to be assumed that the company or its trained organization would have been unwilling to serve the Government in the plants if the power to take them over were exercised. P. 303.

(3) Under its powers to raise and support armies, to provide and maintain a navy, and to make all laws necessary and proper

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to carry these powers into execution, Congress has authority to draft business organization to support the fighting men in war. P. 305.

4. A policy of granting the measures of profits common at the time, adopted by the Fleet Corporation when letting contracts for the construction of ships under authority delegated by the President in accordance with an Act of Congress, is not subject to be, in effect, nullified by the courts by refusal to enforce such contract on the ground that the profits granted are too high. P. 308.

113 F.2d 301, affirmed.

Certiorari, 311 U.S. 632, to review judgments affirming two judgments of the District Court. See 23 F.Supp. 676; 26 id. 259.

No. 8 was a suit in equity brought by the United States against Bethlehem Steel Corporation, Bethlehem Shipbuilding Corporation, et al., for an accounting and to recover sums paid under contracts for construction of ships. The District Court dismissed the bill.

In No. 9, which was an action at law by the Bethlehem Shipbuilding Corporation against the Fleet Corporation, the former recovered a balance found due under "bonus for savings" clauses in the contracts.

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BLACK, J., lead 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 wartime 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 [62 S.Ct. 584] 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 though 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 formula1 for determining "actual

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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.2 The total profits claimed under the contracts by Bethlehem, and

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allowed by both courts below, were about $24,000,000,3 or a little more than 22% of the computed cost.4 This figure of $24,000,000 does not include such profits as may have [62 S.Ct. 585] 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.5 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.6

In No. 8, the government filed a bill in equity against Bethlehem and others. The bill alleged that the government

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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 & Refining Works v. United States, 266 U.S. 101, further recommended that 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 $5,272,0757 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.

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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 F.Supp. 259. The Circuit Court of Appeals affirmed. 113 F.2d 301, 305. 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 [62 S.Ct. 586] base 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...

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