United States v. Lennox Metal Manufacturing Co.

Citation225 F.2d 302
Decision Date01 August 1955
Docket NumberDocket 23451.,No. 280,280
PartiesUNITED STATES of America, Plaintiff-Appellant, v. LENNOX METAL MANUFACTURING COMPANY, Inc., and Frank Margiotta and Herbert B. Pearl, as Co-Trustees of the Lennox Metal Manufacturing Company, Inc., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

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Leonard P. Moore, Brooklyn, N. Y. (William C. Gordon, New York City, of counsel), for appellant.

Timen & Waters, Kadel, Wilson & Potts, New York City, Nathan Korn, Brooklyn, Edwin Slote, New York City (Lawrence S. Timen, New York City, and W. Philip Van Kirk, Tuckahoe, of counsel), for appellee.

Before FRANK, MEDINA and HINCKS, Circuit Judges.

FRANK, Circuit Judge.

The trial judge found that, when the government notified defendant of the termination of the contract, defendant was not in default. The evidence amply supports that finding.

The original contract set forth no delivery schedule. Supplemental Agreement No. 1 provided for deliveries starting on or before July 31, 1951. Supplemental Agreement No. 2 dated January 31, 1952, states that "it has been administratively determined that the Contractor was excusably delayed from 1 September 1951, by reason of unforeseeable delays in delivery of materiel and by reason of acts of the Government." And Supplemental Agreement No. 4, signed July 17, 1952, stated that "it has been administratively determined that the Contractor has been excusably delayed in the performance of the contract," and substituted a delivery schedule, "subject to delay in receipt of steel" as a result of the strike. From July 17 to August 20, Lennox received no mill steel because of the strike, and on August 20 the Government issued Change Order "I," which, the trial judge found, required retooling for some sixty to ninety days, during which there could be no production. Before that period had expired, the contract had been terminated.

Even without the administrative determinations of justifiable delay contained in the supplemental agreements, the record shows that Lennox was not in default. Because of discrepancies in the specifications and the change orders necessary to correct them, the trial judge found, on evidence which fully supports him, that the lack of production up to March 3, 1952, was entirely the fault of the government; that Lennox produced substantially in accordance with delivery schedules between March 3, 1952 and June 2, 1952; and that delays after that date were due, first to the steel strike, and then to Change Order "I."

A majority of the court — Judges MEDINA and HINCKS — think that the government was not in default. Their views — in which the writer of this opinion concurs as an alternative basis of affirmance — are set forth in Point II of this opinion.

I.

The separate views of the writer of this opinion are as follows:

The trial judge found that, at the time of the contract's termination, the government was itself seriously in default, in that it had fallen very substantially short in discharging its obligation to make partial payments in accordance with the Partial Payments Clause — that, indeed, it was solely because of that default that defendant could not thereafter have performed. If the judge was correct in that respect, he was also correct in holding that the government wrongfully terminated the contract and therefore cannot ground its action on the title provision of that clause.

This conclusion turns on the meaning of the Partial Payments Clause. The problem may be approached from two angles: (a) the interpretation of the contract; (b) reformation of the contract.

It should be noted at the outset that, as the contract was one with a federal agency, the doctrine of Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, does not apply. See, e. g., Clearfield Trust Company v. United States, 318 U.S. 363, 366-367, 63 S.Ct. 573, 87 L.Ed. 838; Phelan v. Middle States Oil Corporation, 2 Cir., 220 F.2d 593, 617.

The Partial Payments Clause was added on March 31, 1952 by Supplemental Agreement No. 3. Colonel Walker, the principal contracting officer of the New York Ordnance District, testified that, if, when Supplemental Agreement No. 3 was made, the defendants' incurred costs were $437,283.39, and if defendants were not then in default or likely to be, the government would then have paid defendants 75% of that amount as a partial payment. Answering a question put by the judge, Walker added: "We are doing it every day with hundreds of other contracts."4 He had previously testified, in answer to the judge's questions, that it was the "practice" to pay "75 percent of allowable substantial costs," and that what the Partial Payments Clause "really meant" was that a payment of 75% of such cost would be made if the contractor was a "good risk."5 Subsequently, the following colloquy occurred:

"The Court: Colonel Walker said that it was the pattern and common knowledge and the practice among all the contractors to pay them 75% so it was well known that that was what the Government did; is that right?
"Mr. Flagg (government counsel): I will accept that."6

Walker further testified that Mr. Stadler, a government employee, had been authorized — that it was his "duty" — to negotiate Supplemental Agreement No. 3, and the duty of Kelly — Chief of the Legal Section of the New York Ordnance District — to draft it. In the light of Walker's testimony, as construed by the judge with the acquiescence at the trial of government counsel, we turn to the testimony of Pearl, defendant's president. He testified as follows:

He was told that Stadler was to negotiate with him "toward working up a partial payment clause to be inserted in our contract so that money could be made available to us under that clause." Pearl informed Stadler that defendant's incurred costs as of January 1932 were some $437,000. Stadler told Pearl that defendant "could get 75%, which was * * * $327,964.04." Stadler stated that, in order to justify the addition of the Partial Payments Clause, defendant would have to give consideration to the government and that a sufficient consideration would be "one percent of the 75% of our incurred costs, in other words, of $327,964.04. * * * That was the understanding; he stated to me that we were going to get $327,000 and we were going to pay the Government $3200, and that was the understanding and the arrangement we had at that time, on or about February 19, 1952." Stadler took Pearl to Kelly; Stadler told Kelly, in Pearl's presence, that "he had just completed the negotiations of a partial payment arrangement which called for the payment of $327,000, and he asked him to prepare the proper legal papers which would make it possible for that to be part of the contract." Supplemental Agreement No. 3 resulted.

The foregoing has marked significance in several respects:

(a) The uniform conduct of the government in paying other contractors 75%, pursuant to the Partial Payments Clause, serves as an administrative interpretation of that clause and of the Regulation.7 Since such was the uniform practice of the New York Ordnance District, it is proper to infer, absent contrary evidence, that, on the basis of the so-called "presumption" of regularity, the Department of the Army had approved and adopted this interpretation, i. e., one which left no room for the exercise of discretion when the contractor was not in default (or a "bad risk").

(b) The uniform governmental practice fully supports Pearl's testimony that, in agreeing to that clause, and in agreeing to pay as a consideration 1% of the 75% of defendant's incurred costs, defendant was advised by the government's representatives that the clause meant that the government would surely pay defendant 75% (less 1% of 75%). Thus both parties intended that clause to be so understood.

Especially because of Walker's testimony concerning the government's uniform practice, the evidence of surrounding circumstances, including the negotiations, becomes markedly important in determining what the parties meant by the word "may" in the Partial Payments Clause. For, in appropriate circumstances, the word "may" has often been construed as "shall."8

Some authorities hold that such extrinsic evidence may be considered, only if the language of the contract is ambiguous. The government contends that "may" confers unrestricted discretion. We think that, in its context, "may" sufficiently lacks clarity to satisfy the "ambiguity" test,9 that its meaning is "not so clear as to be self-evident",10 that it was "capable of being understood in more senses than one".11

It bears on the meaning of "may" in this contract that, if that word is construed as wholly permissive, unreasonable consequences would ensue: (a) On that interpretation, defendant paid $3,200 for the addition of a clause which would yield defendant nothing unless the Contracting Officer, governed by mere whim, chose to direct a payment. (b) At the trial, government counsel conceded that, under the interpretation for which the government then contended, the clause would give the government, upon termination of the contract, title to thousands of dollars of property even if the government had made a partial payment of but $50.12 If this interpretation were correct, then the clause "set a skillful trap" for the "unwary" defendant, and "No such purpose should be attributed to the government. * * * In construing the document the presumption should be indulged that both parties were acting in good faith." Sylvan Crest Sand & Gravel Co. v. United States, 2 Cir., 150 F.2d 642, 643. It "is not out of place to say that the government should be animated by a justice as anxious to consider the rights of the bidder as to insist upon its own." United States v. Purcell Envelope Company, 249 U.S. 313, 318, 39 S.Ct. 300, 301, 63 L.Ed. 620. A...

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