Acme Process Equipment Co. v. United States

• Decision Date: 11 June 1965
• Docket Number: No. 349-57.,349-57.
• Citation: 347 F.2d 509
• Parties: ACME PROCESS EQUIPMENT CO., to its own Use, and for the Use and Benefit of Nicholson Products Company, Steel Heddle Manufacturing Co., Foley Machine Company, Pattern Machine & Foundry Corporation, Intricate Manufacturing Company, Jaimie Kohan, d/b/a Manalapan Machine & Welding Works, and Pittsburgh National Bank, Successor to People's First National Bank & Trust Company, Assignee of All Metals Industries, Inc. v. The UNITED STATES.
• Court: U.S. Claims Court

347 F.2d 509 (1965)

ACME PROCESS EQUIPMENT CO., to its own Use, and for the Use and Benefit of Nicholson Products Company, Steel Heddle Manufacturing Co., Foley Machine Company, Pattern Machine & Foundry Corporation, Intricate Manufacturing Company, Jaimie Kohan, d/b/a Manalapan Machine & Welding Works, and Pittsburgh National Bank, Successor to People's First National Bank & Trust Company, Assignee of All Metals Industries, Inc. v. The UNITED STATES.

No. 349-57.

United States Court of Claims.

June 11, 1965.

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Jack Rephan, Washington, D. C., for plaintiff. Solomon Dimond, Washington, D. C., George E. Palmer, Ann Arbor, Mich., Danzansky & Dickey, Washington, D. C., of counsel.

James F. Merow, Washington, D. C., with whom was Asst. Atty. Gen., John W. Douglas, for defendant.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS and COLLINS, Judges.

DAVIS, Judge:¹

Plaintiff's first experience as a defense contractor was to bid on and win two negotiated Ordnance Corps contracts, both of which soured into litigation.² In January 1953, Army Ordnance awarded a contract for the manufacture of 75 mm. recoilless rifles. This project was largely subcontracted, leaving for Acme only the final finishing and assembly of components, and the earlier job of fashioning the rifle barrels from rough forgings with machines furnished by the Government under a separate facilities contract. From the start, Acme was beset by serious production delays due to a combination of causes, among them its own inexperience, defaults by subcontractors, and defects in some of the government-furnished machines. Generous time extensions forgave many delinquent deliveries, but liquidated damages were assessed on others. After uncovering alleged violations of statutes relating to kickbacks, contingent fees, and conflicts of interest, Ordnance suspended work under the contract in July 1954 and canceled it two months later in August 1954. The purported infractions involved a clique of unprincipled employees of Acme, aligned with a stockholding minor executive of the corporation. In this suit for breach of contract Acme denies any violations and alleges that the charges of malfeasance were a smokescreen to enable the Government to cancel without cost a contract for the production of obsolete weapons no longer needed. In that manner, it is said, defendant hoped to avoid the heavy cost of a termination for its own convenience. Cancellation left Acme financially crippled, since it was unreimbursed for much of its large investment in contract performance. Plaintiff spent years in fruitless but nearly successful efforts to obtain settlement.

The Government's major defense still is that Acme is entitled to no recovery because it violated certain statutes and covenants (concerning contingent fees, kickbacks, false claims, and conflicts of interest). Should each of these absolute defenses be rejected, the plaintiff has requested us to grant recovery based on the theory of restitution, rather than the traditional remedy of damages usually awarded by this court. In addition to its objection to this form of relief, the Government asserts a partial defense based on plaintiff's lack of standing to sue on behalf of its subcontractors. The defendant also argues that, since plaintiff itself was responsible for delays, it is not entitled to recover delay-damages, and the contracting officer's assessment of liquidated damages was proper. Finally, Acme urges its right to interest on amounts due, on the ground that the Government's actions constituted a taking within the Fifth Amendment. We consider each of these aspects of the case.³

I. CANCELLATION

A. COVENANT AGAINST CONTINGENT FEES

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.

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.

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.

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.

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

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.

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, "Where 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...