American Export Isbrandtsen Lines, Inc. v. United States, 402-70.

• Decision Date: 19 June 1974
• Docket Number: No. 402-70.,402-70.
• Citation: 204 Ct. Cl. 424,499 F.2d 552
• Parties: AMERICAN EXPORT ISBRANDTSEN LINES, INC., et al. v. The UNITED STATES.
• Court: U.S. Claims Court

204 Ct. Cl. 424, 499 F.2d 552 (1974)

AMERICAN EXPORT ISBRANDTSEN LINES, INC., et al.^* v. The UNITED STATES.

No. 402-70.

United States Court of Claims.

June 19, 1974.

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T. S. L. Perlman, Washington, D. C., attorney of record, for plaintiffs. Richard S. Salzman, Kominers, Fort, Schlefer & Boyer, Washington, D. C., of counsel.

Edward J. Friedlander, Washington, D. C., with whom was Acting Asst. Atty. Gen. Irving Jaffe, for defendant. Michael J. McMorrow, Arlington, Va., of counsel.

Before COWEN, Chief Judge, and KUNZIG and BENNETT, Judges.

ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT, DISMISSING THE PETITION, OR FOR REMAND, AND PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT

BENNETT, Judge:

Plaintiffs bring this claim for breach of contract and invoke our general jurisdiction. 28 U.S.C. § 1491. Plaintiffs are operators of ships and have contracts with defendant, now represented by the Maritime Administration, Department of Commerce (MARAD).¹ Pursuant to the Merchant Marine Act of 1936, section 603(b),² the contracts provide for operating-differential subsidies (ODS) to reimburse the plaintiff contractors for part of the "fair and reasonable cost of * * * wages * * * of officers and crews."³ The purpose of the subsidies is to put the contractors on a parity of cost with foreign competition which with cheap labor operates for much less. In return for the subsidies the contractors agree to provide, for 20 years, specified services on essential trade routes with named vessels and American crews. None of the contracts contain a disputes clause. For purposes of these motions the contracts are substantially similar.

This particular case arises as a result of the decision on August 8, 1968, by the Maritime Subsidy Board (MSB) of MARAD, which denied Grace Lines, Inc. (predecessor to plaintiff Prudential-Grace Lines, Inc.) ODS reimbursement for severance payments made by Grace to personnel who made up the last permanent crews of the Grace vessels SS Santa Paula and SS Santa Rosa⁴ before those vessels were retired by Grace in 1958. Following this decision and subsequent inquiry by plaintiffs, the MSB issued Accounting Instruction 39 (2d Revision) on July 23, 1969. This document detailed the circumstances in which the MSB would consider severance payments made to Maritime employees by any American ship companies to be qualified for ODS reimbursement under section 603(b), supra, and article I-4, supra, of the ODS agreements between plaintiffs and defendant. The effect of this instruction was to make nonsubsidizable all the severance pay plans arrived at through collective bargaining by plaintiffs in 1958 and 1961.

Plaintiffs contend that their severance pay costs, arrived at by collective bargaining, are entirely fair and reasonable and thus reimbursable under their contracts. Plaintiffs say that the bargaining was at arm's length and in good faith; that defendant had no legal authority to disallow costs so arrived at; that such disallowance was arbitrary, capricious, and not supported by substantial evidence, was an abuse of discretion, and was erroneous in both fact and law.

Defendant, of course, takes the position that MSB had the authority and the duty under the Act and the ODS contracts to determine independently, for ODS purposes, the eligibility and fair and reasonable cost levels of severance pay expenditures notwithstanding that they were required by plaintiffs' collective bargaining agreements and that defendant properly exercised its discretion, which is final and conclusive. Alternatively, the defendant suggests a remand to the board for reconsideration of whatever the court may determine as the appropriate bases for reimbursement of these expenses.

The foregoing and subsidiary issues will be dealt with hereinafter. However, to set the stage for our legal conclusions which are in favor of plaintiffs, it is first necessary to make a regrettably, but unavoidably, detailed exposition of the basic factual circumstances from which this controversy arose and which point the way to its resolution. The essential facts are not in dispute and are all before the court in affidavits and exhibits submitted by the parties and consisting of approximately 3,000 pages which we have examined with care. To the extent necessary for resolution of the issue of liability in the case, the facts are as follows:⁵

Pre-1936

The problem of shipping has been a perennial one for Americans. From at least the time of the Civil War, this country, the world's largest industrial nation and exporter, has experienced a shortage of American-flag vessels necessary for the commercial and military requirements of this nation. For many years after the United States had embarked on an ambitious naval shipbuilding program, it did almost nothing to develop an adequate merchant marine auxiliary. This shortcoming was ludicrously evidenced in 1908 when President Theodore Roosevelt sent the Great White Fleet around the world to demonstrate this nation's eminence as a naval power. His gesture, however, lost much of its lustre since it was humiliatingly necessary for a stream of foreign-flag tender vessels to accompany the fleet in order to service it on its voyage.⁶ Such a merchant marine as we have been able to develop is regarded as an instrument of national policy but is operated by private enterprise at considerable cost to the taxpayers for subsidies to keep it going. The effort though large has not been noted for its success.

In 1914 only 19 American-flag vessels operated over trade routes to foreign countries and American possessions.⁷ This near total reliance of foreign-flag vessels had an enormous impact on this country when World War I (WWI) broke out. Only by confiscating German ships originally interned in what were neutral United States harbors, and by embarking on a 3-billion-dollar crash building program, was this nation able to meet the transportation requirements brought on by the war. By the time WWI ended, our United States-flag merchant marine was approximately five times the size of our pre-war fleet.

After the war, however, the Government found it difficult to remove itself from the merchant marine business. Ships which had been constructed for the Government-owned merchant marine could not be sold by the Government to private operators because of the post-war decline in the shipping business. Additionally, these vessels had not been constructed to compete efficiently on post-war international trade routes. It was out of this background that Congress passed the Merchant Marine Act of 1928, 46 U.S.C. § 891, et seq., 45 Stat. 689. Congress in this and prior acts demonstrated its belief that it was necessary for the United States to develop a private merchant marine fleet so that it would never again be forced to rely on the ships of other nations to move its commerce in war or peace.

The Merchant Marine Act of 1928, however, fell far short of the hopes of its sponsors. Though it indirectly provided for the payment of subsidies to American-flag shippers through mail contracts, the 1928 Act engendered its share of abuses. When the first mail contracts were negotiated under the 1928 Act, the United States was nearing the tip of its dizzy 1920's economic ascendancy. Contractors awarded themselves large salaries and expense accounts and failed to safeguard themselves against periods of less prosperity and depression. Public opinion against such indirect subsidies quickly grew. Indeed, in 1933 Congress enacted legislation barring the Postmaster General from awarding mail subsidy contracts to any individual, company or corporation "which singly or in combination with others * * * pay any salary or salary combined with bonus, to any officer, agent, or employee in excess of $17,500." June 16, 1933, ch. 101, § 6, 48 Stat. 305; 46 U.S.C. § 891y (1934).

Aside from problems created by the form of the subsidy payments, the 1928 legislation had little apparent effect on United States shipbuilding. The construction loan fund provided for by the 1928 Act was not advantageous enough to encourage the building of many American ships. Only 30 were built in 7 years. A February 24, 1936 Senate report indicated that "for more than 3 years not a single merchant ship for our foreign commerce has been started in American shipyards."⁸

The Merchant Marine Act of 1936

It was in this factual framework that President Franklin D. Roosevelt sent a message to Congress on March 4, 1935, concerning "whether or not the United States should have an adequate merchant marine." The President gave cogent reasons in the affirmative. He also charged that the mail contract subsidy program was a failure and called it "an unsatisfactory and not an honest way of providing the aid that Government ought to give to shipping."⁹ He suggested that Congress end the mail contract subsidy subterfuge and honestly call a subsidy by its right name. Most importantly, he detailed just what the new subsidy plan should cover¹⁰ —

* * * It must be based upon providing for American shipping Government aid to make up the differential between American and foreign shipping costs. It should cover first, the difference in the cost of building ships; second, the difference in the cost of operating ships; and finally, it should take into consideration the liberal subsidies that many foreign governments provide for their shipping. * * *.

In its report to the Congress, following the President's message, the Committee on Commerce noted that the reasons given by President Roosevelt for the development of a strong and independent merchant marine were "accentuated by the disturbed economic and political conditions existing in Europe and Asia today."¹¹ The committee warned that if hostilities were to break out, the foreign merchant fleet upon which the United States was dependent for the transportation of two-thirds of its foreign commerce would be...