United States v. Hanna Nickel Smelting Company, 21232.

• Decision Date: 23 September 1968
• Docket Number: No. 21232.,21232.
• Citation: 400 F.2d 944
• Parties: UNITED STATES of America, Appellant, v. HANNA NICKEL SMELTING COMPANY, a corporation, and the Hanna Mining Company, a corporation, Appellees. HANNA NICKEL SMELTING COMPANY, a corporation, and the Hanna Mining Company, a corporation, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

400 F.2d 944 (1968)

UNITED STATES of America, Appellant, v. HANNA NICKEL SMELTING COMPANY, a corporation, and the Hanna Mining Company, a corporation, Appellees.

HANNA NICKEL SMELTING COMPANY, a corporation, and the Hanna Mining Company, a corporation, Appellants, v. UNITED STATES of America, Appellee.

No. 21232.

United States Court of Appeals Ninth Circuit.

September 23, 1968.

David L. Rose, (argued) Martin Jacobs, Attys., Dept of Justice, Barefoot Sanders, Asst. Atty. Gen., Washington, D. C., Sidney Lezak, U. S. Atty., Portland, Or., for appellant.

James H. Clarke, (argued) of McColloch, Dezendorf & Spears, Portland, Or., H. Chapman Rose and Ellis H. McKay, of Jones, Day, Cockley & Reavis, Cleveland, Ohio, for appellee.

Before MADDEN,^* Senior Judge of the United States Court of Claims, and MERRILL and CARTER, Circuit Judges,

JAMES M. CARTER, Circuit Judge.

The United States filed the action below against the appellees (hereafter referred to as Hanna), to recover $1,738,558 for breach of the accounting provisions of a government contract; and also sought an additional $249,598 based upon a claim for reformation of two subsequent contracts between the parties.

The trial court awarded judgment to the United States in the sum of $560,632.89, made up of the following items:

(1) $231,506 for items which the trial court held represented capital improvements and which were improperly expensed as costs of production;

(2) $241,798.32, resulting from a reformation of the contract as it related to the price to be paid by the government to Hanna for ferronickel;

(3) $87,328.57 allowed as pre-judgment interest on certain amounts of money.

Cross-appeals followed. The United States contends that the contract was not ambiguous and that Hanna wrongfully expensed items which should have been capitalized; that additional amounts on various items should have been allowed the government. The United States also contends that the court's alternate holding of estoppel by acquiescence was erroneous.

Hanna in its cross-appeal contends that the district court erroneously reformed the contract resulting in the portion of the award shown above, and erroneously allowed prejudgment interest as shown above.

The facts are generally contained in the opinion by the district judge in United States v. Hanna Nickel Smelting Company, et al., 253 F.Supp. 784 (D.C. Or. 1966).

The Appeal by the United States

The district court found that the contract was ambiguous and we agree. It took testimony from accounting experts and on conflicting testimony interpreted the contract in favor of Hanna. We are satisfied with the trial court's disposition of this phase of the case as shown in the opinion (253 F.Supp. pp. 787-792).

As to the alternate ground of decision (253 F.Supp. pp. 793-795) under the subtitle "Equitable Issues," and involving estoppel against the United States by acquiescence, we express no opinion.

Hanna's Appeal

We are satisfied with the trial court's disposition of the questions raised by the cross-appeal of Hanna under the subsection "Reformation" (253 F.Supp. at 795). However, the court did not go into detail in connection with the problem of reformation and we therefore consider it briefly hereafter.

We are satisfied with the trial court's disposition of the matter of prejudgment interest (253 F.Supp. at 796).

The Reformation Issue

Hanna's obligation to deliver nickel was to deliver 125,000,000 lbs or deliver until June 30, 1962, whichever occurred first. By early 1961 Hanna had delivered all but 19,500,000 lbs., about a year's production.

The contract before the amendment which is involved in this case, provided as to price, the lower of two figures (1) the cost of production, or (2) the agreed ceiling price.

Amendment No. 5 was negotiated. Dated April 20, 1961, it was effective as of March 31, 1961. It read in part as follows:

"* * * The 19,499,863 pounds of contained nickel shall be produced by the Contractor after March 21, 1961 and shall be delivered to the Government at such time or times after March 31, 1961 and prior to June 30, 1965, as the Contractor in its sole discretion shall determine, at a price per pound of contained nickel which shall be equal to (a) the Contractor\'s average actual cost of production per pound of contained nickel in the calendar year in which such ferronickel is delivered to the Government or (b) $0.5877, whichever is less."

It extended Hanna's time to deliver the balance of the nickel contracted for to June 30, 1965, and relieved Hanna of its contractual obligations to operate the smelter at maximum capacity and to deliver all products to the government.

The court found that the ceiling price of 58.77 cents "was computed by an agreed formula which was based upon the difference between the company's cost of production in 1959 and 1960." The court found that Hanna had improperly included in its 1959 and 1960 cost figure, as expense, over $215,000 of capital expenditures, the effect of which was to raise the ceiling price.

The court reformed the contract so as to compute a ceiling price by applying the true cost figures. This meant a reduction of 1.24 cents per lb. and a ceiling of 57.53 cents per lb. The award in the judgment was computed on this ceiling.

This part of the judgment in favor of the government amounted to $241,798.32 plus interest of $87,328.57, a total of $329,126.89. It was computed on a difference of 1.24 cents per lb. on 2,186,409 lbs delivered under the amended agreement and 1.24 cents per lb. on an additional 17,313,454 lbs. covered by a final termination agreement.

After the amendment and on March 5, 1964, the contract was terminated. Hanna as part of termination, paid the government the difference between the 58.77 ceiling price and the market price of nickel and was relieved of the obligation to deliver the 17,313,454 lbs. This action was then on file and the parties agreed that if the prayer for reformation was granted, Hanna would pay the price reduction, times the number of undelivered lbs. The reformed price thus applied to the last 17,513,454 lbs. There is no dispute as to the computations.

Lengthy negotiations were had and correspondence exchanged between Hanna and GSA, which by this time was the government agency handling the contract.

As Hanna had continued with its production, its operation had become more efficient. The government had agreed to purchase all salable ferronickel produced for ore up to 125,000,000 lbs of contained nickel at a price equal to the cost of production plus an amount (payable over the first 95,000,000 lbs only) sufficient to amortize the advance of capital and interest. By the end of September 1960, the advances had been paid and no further amortization payments were required.

Between March 31, 1961, and January 1, 1962, Hanna delivered 2,186,409 lbs of nickel. Production costs for the period were 61.95 cents per lb., the ceiling was 58.77 cents per lb. Hanna was paid at the 58.77 rate.

During the negotiations Hanna had suggested a figure of 60 cents per lb or its cost of production, whichever was lower. Hanna had advised the government that 60 cents was its "approximate" 1960 production cost. The record shows that both parties knew it was a tentative figure, subject to later audit and confirmation.

After conferences and letters exchanged, GSA, acting for the United States, wrote its letter of March 9, 1961. In it GSA set forth calculations of Hanna's production costs for 1959 and 1960, showing a decrease of 1.2 cents per lb in 1960 over 1959, and calling attention to non-recurring charges in 1959 and 1960. Although these calculations were neither called or designated "a formula," this is what they were.

The GSA letter continued, "We think it is reasonable to project a production cost for 1961 at $.5877 per lb * * *" Emphasis added. The letter speaks of Hanna's earlier "proposal" but nowhere in the letter does GSA term its letter of March 9, 1961, a "proposal."

Hanna replied by its letter of March 14, 1961, stating "* * * that Hanna Nickel Smelting Company accepts the proposal set forth in your letter of March 9, 1961, in regard to terminating Contracts DMP-49, DMP-50, and DMP-51, and substituting provisions to extend to June 30, 1965, the balance of deliveries under present Contract DMP-50 at a price of $.5877 per lb of contained nickel or our average cost of production per year whichever is lower * * *". Emphasis added.

The United States contends that the "formula" was part of the agreement. Hanna says No, it was a flat agreement to buy and sell at 58.77 cents per lb. The trial court found the "formula" was part of the agreement and reformed the contract and the price to 57.53 cents per lb.

The case was fully pretried. A mass of documentary material was assembled. On the issue we are considering, depositions were before the court.

O'Dwyer for GSA testified by way of deposition. As contended by Hanna, he was generally stating his view and his intentions. However, in the deposition he testified without objection, "Well, we decided the best way to approach it was to take the actual difference between the 1959-60 costs and deduct that as represented by cost per pound of nickel from the 60 cents figure, after certain adjustments were made, with respect to non-recurring costs such as the paving for the stockpile area." Emphasis added. The record is uncertain as to whether "we" meant GSA or the negotiating parties. It was not later cleared up on direct or cross. In fact there was no cross-examination by Hanna.

We cannot say it was absolutely certain what Hanna meant when it wrote accepting "your proposal." The formula was included in GSA's letter. Moreover, the GSA letter, following figures on the formula, stated, "We think it reasonable to project a production cost for 1961 at .5877 per lb * * *".

"Project" means to "* * * to contrive, devise; scheme; as to project a plan." Webster New International...