
    DRYING SYSTEMS, INC., v. THE UNITED STATES
    [No. C-33.
    Decided March 9, 1925]
    
      On the Proofs
    
    
      Contract; termination clause; agreement of cancellation. — -A supplemental agreement of cancellation by the parties to the original contract, releasing the United States from all claims and demands arising out of said original contract in consideration of a fixed sum and payment for articles already completed, is binding on the United States and the contractor, notwithstanding the failure to incorporate in the original contract the termination clause required of contracting officers by the Quartermaster General, if otherwise regular.
    
      
      The Reporter's statement of the case:
    
      Mr. Ashby Williams for the plaintiff.
    
      Mr. John G. Ewing, with whom was Mr. Assistant Attorney General William J. Donovan, for the defendant.
    The following are the facts as found by the court:
    I. The plaintiff is a corporation organized and existing under the laws of the State of Illinois, with its principal office in the city of Chicago, Ill., and on September 23, 1918, entered into a memorandum agreement with the United States through Capt. Ben Gallagher for the production by the plaintiff of 1,000,000 pounds of dehydrated potatoes at 30 cents per dried pound finished f. o. b. factory, Michigan City, Ind. Prior to the time of entering into this agreement the plaintiff was in possession of certain leased property at Michigan City, Ind., and in the buildings on said property the plaintiff had installed and equipped a plant for the dehydration of vegetables, especially for the dehydration of potatoes. On October 8, 1918, the plaintiff and the United States entered into a written contract, the United States acting through Maj. G. E. McGowan, Quartermaster Corps, United States Army, an officer authorized to make contracts for' the United States. This contract embodied the terms of the memorandum agreement above referred to. A copy of said contract is filed with the petition as Exhibit A, and is made a part hereof by reference.
    On September 7, 1918, there was issued by the authority and direction of the Secretary of War Supply Circular No. 88. This circular was issued to the officers of the department and not to the general public, and pointed out how contracts should be drawn and what provisions contracts should contain. Among other things said circular required that there should be inserted in all formal fixed-price contracts a provision for the termination of such contracts in the public interest. The contract in suit did not ■ contain any such provision. The plaintiff had no notice of this circular, and the contract which it executed was prepared and presented to the plaintiff by a United States officer clothed with authority to make contracts.
    
      II. Upon entering into the contract of .October 18, 1918, it became necessary for the plaintiff to reconstruct and reequip its plant for the manufacture of dehydrated potatoes exclusively. The plaintiff thereupon immediately installed new equipment.
    The plaintiff also, in October, 1918, installed machinery by which it proposed to obtain potato starch from the waste of the process of manufacturing the dehydrated potatoes. The plaintiff in installing this machinery for the purpose of obtaining potato starch was not carrying out any provision of its contract with the United States. Whatever saving or profit was thereby obtained inured entirely to the benefit of the plaintiff. This machinery was not completed and installed at the time of the cancellation of the contract.
    III. Actual production began under the contract on October 31, 1918. From that date until February 8, 1919, the plaintiff produced 285,900 pounds of dehydrated potatoes, and the same were delivered to and paid for by the United States at the contract price of 30 cents per pound.
    IV. On February 8, 1919, the United States requested the plaintiff to suspend all production of dehydrated potatoes under the contract, and on February 10,1919, the United States wrote ,to the plaintiff proposing an • agreement for the cancellation of the contract, and at the same time authorized the plaintiff to complete the manufacture of all raw material in process, and directed the plaintiff to arrange for the cancellation of all undelivered raw material and to dispose of any potatoes not in process of manufacture. At the same time the United States invited the plaintiff to submit a statement looking toward a settlement of the contract upon a fair and equitable basis. The action of the United States in suspending the contract prevented the plaintiff from performing and completing the contract, which the plaintiff was ready, able, and willing to do. Immediately thereupon the plaintiff and the United States began negotiations for the settlement of the damages resulting from the suspension of the contract.
    On Majr 19, 1919, the plaintiff and Oapt. E. A. Hey, an officer of the United States authorized to do so, entered into a contract in writing whereby the United States agreed to pay to the plaintiff the sum of $41,524.01, and the plaintiff agreed to accept the same, and to forever discharge the United States from all claims and demands whatsoever due or to become due in law or equity made or by reason of or arising out of said original contract, except the sum or sums herein agreed to be paid. This contract also contained the following clause: “ 6. This agreement shall not become a valid and binding obligation of the United States unless and until the approval of the board of review of Zone 7, Chicago. Ill., has been noted at the end of this instrument and upon Schedule A thereof.” The contract above referred to reads as follows:
    CANCELLATION AGREEMENT No. 8774-G
    <use this form when payment is made to contractor for cancellation and/or for uncompletel articles or work and further deliveries are to he made)
    Agreement entered into this 19th day of May, 1919, between E. A. Hey, Captain, United States Army (herein called “contracting officer”), acting by authority of Director of Purchase and Storage ox the Army and under direction of the Secretary of War, for and in behalf of the United States of America (herein called “ United States ”), party of the first part, and The Drying Systems, Inc. (herein called “ contractor ”), party of the second part:
    Whereas a certain contract was entered into between the United States and the Contractor, No. 8774 — G, dated October 8, 1918 (herein called “ original contract ”), which term shall also include, wherever used herein, all agreements or orders, if any, supplementary to said contract or purchase, except this agreementand
    Whereas the furnishing and delivery of further articles or work under said original contract, except as herein provided, would exceed the present requirements of the United States; and
    Whereas it is in the public interest to terminate said •original contract as herein provided; and
    Whereas the contractor, in pursuance of the original contract, has incurred expenses and obligations for the purpose of furnishing and delivering articles or work remaining undelivered under said original contract, and is relinquishing prospective profits- on the unexecuted portion thereof;
    Now, therefor, in consideration of the premises and of the mutual covenants herein contained, it is agreed between the parties hereto as follows:
    
      1. The contractor shall furnish and deliver 'to the United States raw materials, partly finished articles or work, and finished articles or work ■ procured, performed, produced, or manufactured for the purposes of said original contract in the quantities and upon the terms and conditions set forth in Schedule “A” hereto annexed and hereby made a part hereof, all of which shall become or remain the property of the United States. The quantities of articles or work herein agreed to be furnished and delivered shall include all deliveries made subsequent to November 27, 1918. Except as herein provided, the United States shall have no right, title, or interest in or to any articles or work procured, performed, produced, or manufactured by the contractor for the purposes of the original contract and not heretofore delivered to the United States.
    2. Except as herein provided, the contractor shall not furnish and deliver and the United States shall not accept or pay for any articles or work agreed to be furnished and delivered under said original contract.
    3. Title to all property sjiecified on said Schedule “A” shall vest in the United States immediately upon execution of this agreement. All such property shall, in so far as practicable, be kept by the contractor separate and apart from property belonging to the contractor, and shall be properly cared for by the contractor and shall be marked by the contractor in such manner as the contracting officer may direct. The contractor shall make such disposition of said property for the account of the United States as the contracting officer may direct unless otherwise provided in Schedule “A.”
    4. The United States shall pay to the contractor the sum of Forty-one Thousand Five Hundred Twenty-four and 1/100 dollars ($41,524.01), upon the terms and conditions set forth in Schedule A, hereto annexed and hereby made a part hereof, which sum, together with payment for the finished articles of work, delivered to the United States on or before November 27th, 1918, and not yet paid for, shall constitute full and final compensation for articles or work delivered, services rendered, and expenditures made under the original contract and this agreement.
    5. The contractor does hereby for himself, his successors, heirs, legal representatives, and assigns, remise, release, and forever discharge the United States of and from all and all manner of debts, dues, sum or sums of money, accounts, reckonings, claims and demands whatsoever, due or to become due in law or in equity under or by reason of or arising out of said original contract, except the- sum or sums
    
      herein agreed to be paid. Upon receipt of said sum or sums the contractor shall execute and deliver to the United States such further or additional instruments of receipts or release as the United States shall demand.
    6. This agreement shall not become a valid and binding obligation of the United States unless and until the approval of the Board of Review of Zone Seven, Chicago, Illinois, has been noted at the end of this instrument and upon Schedule “A” thereof.
    In witness whereof the parties hereto have executed and delivered this agreement in triplicate as of the date first hereinabove written.
    Witnessess:
    A. Weber, as to
    E. A. Hey,
    Captain, Q. M. Corps, V. S. Army.
    
    Lewis B. Jacobs, as to
    Drying Systems, Inc.,
    By F. A. Lippert, President.
    
    Approved:
    Board op Review,
    By-
    Approved by Board of Contract Review, Zone No. Seven, Chicago, Illinois, May 19th, 1919:
    George F. Unmacht,
    
      Lt. Colonel, Q. M. Corps.
    
    J. M. Grippith,
    Captain, Q. M. Corps.
    
    John A. Bussian,
    Captain, Q. M. Corps.
    
    Frederick C. Hack,
    E. A. Hey,
    Captain, Q. M. Corps.
    
    Schedule A
    1. No. of cancellation agreement: 8774r-G.
    2. No. of contract or purchase order cancelled: 877A-G.
    3. Contractors: The Drying Systems, Inc.
    4. Raw materials to be delivered:
    (al Belonging to United States: None.
    (b) Belonging to contractor: None.
    5. Partly finished articles or work to be delivered:
    (a) Belonging to the United States: None.
    (b) Belonging to the contractor: None.
    
      6. Finished articles or work to bé delivered: 4,400 pounds dehydrated potatoes, at $0.30 per lb., $1,320.00.
    7. Articles or work cancelled: 709,700 lbs., $212,910.00.
    8. Terms of payment: Thirty days net.
    9. Total contract price of articles or work cancelled: $214,230.00.
    10. Time and place of deliveries: As directed by zone supply officer, Chicago.
    11. Shipping instructions: As directed by zone supply officer, Chicago.
    12. Inspections: At destination.
    13. Other terms and conditions: None.
    Approved by Board of Contract Review.
    Zone No. Seven, Chicago, Illinois. May 19th, 1919.
    J. N. Griffith,
    
      Gaptcdn, Q. M. Corps.
    
    E. A. Hey,
    Captain, Q. M. Corps.
    
    George F. Urmacht,
    
      Lt. Colonel, Q. M. Corps.
    
    Frederick C. Hack.
    Must be attached to \ « /Q. M. C. Form 108 D ■Q. M. C. Form 108 C /_schedule. A_^Authorized July 20, 1918.
    1. Date: October 8, 1918.
    2. From: Depot Quartermaster, 1819 West 39th St., Chicago, Ill.
    3. To:
    Name: The Drying Systems, Inc.
    Address: 322 North Michigan Ave., Chicago, Ill.
    Factory name: The Drying Systems, Inc.
    and location: Michigan City, Indiana.
    4. Deliver the following articles: Dehydrated Potatoes. ■Quality to be Govt, and equal to samples to be furnished to Govt, at once. To be packed in standard export cases.
    5. Total quantity: 1,000,000 lb.s.
    6. Unit price: $0.30 per dried pound finished product. Price includes canning, packing, strapping, and marking.
    7. Total price: $300,000.00.
    8. F. O. B. delivery point: Factory, Michigan City, .Indiana.
    9. Schedule of deliveries: To be delivered as called for by this Depot. Deliveries to be completed by July 1st, 1919.
    10. Shipping directions: Shipping instructions will be furnished later by this Depot. Inspection will be made at your factory in Michigan City by the Dehydration Branch, Subsistence Division, Office of the Quartermaster General.
    11. Authorization No.: Q. M. M. 2049 Sub. 356-7-2 Letter O. Q. M. G. Sept. 23, 1918, McIntosh. Subsistence, Gallagher.
    Í2. Inspection:
    13. Remarks: Copy.
    Render bills to the Disbursing Quartermaster at this Depot.
    Recommended:
    Bo Aim op Review.
    Approved:
    G. E. McGowan,
    Major, Q. M, O.,
    
    
      For Director of Quartermaster Purchases.
    
    By Authority of telegram dated Sept. 27, 1918.
    This contract iras approved on May 19, 1919, by the board of contract review, Zone No. 7, Chicago, Ill. Said contract was made in pursuance and on the authority of Supply Circular No. Ill, dated Washington, November 9, 1918, which circular reads as follows:
    Supply Ciroular No. Ill
    WAR DEPARTMENT,
    Purchase, Storage, and Traeeic Division,
    General Stare,
    
      W'ashington, November 9, 1918.
    
    Supply Circular No. 111.
    Subject: Termination of contracts and orders in public interest.
    1. Whenever the appropriate officers of the Government determine that it is necessary in the public inter st to terminate, in whole or in part, a contract or a purchase or procurement order for materials or supplies, such termination shall be effected as herein directed.
    2. Whenever such contract or order expressly provides that it may be terminated in the public interest, termination may be effected only in accordance with such provisions, unless it shall be in the public interest to terminate it in accordance with the provisions of this circular and the parties shall agree thereto.
    3. Whenever such contract or order does not expressly provide that it may be terminated in the public interest, the contractor, if the public interest so requires, shall be requested to suspend work thereunder, in whole or in part, and to supply promptly a report under oath, showing in detail the following information in so far as applicable:
    
      (1) Raw materials on hand. — Cost pins inward handling charges, plus such portion of overhead as is directly applicable.
    (2) Partly -finished products on hand. — Cost of raw material and labor, plus such portion of overhead as is directly applicable.
    
      (3) Finished produets on hand. — Contract price, less freight charges if the contract or order specifies delivery at point other than factory.
    (4) Special facilities. — Cost of facilities specially provided and paid for by the contractor for the performance of the contract, the necessity of which was contemplated at the time the bargain was made and the cost of which was included in the contractor’s original estimate. From the cost of such facilities deduct their fair value at the time the contract or order is terminated and state such portion of the remainder as is represented by the ratio of the uncompleted portion to the whole contract or order.
    (5) Commitments. — The contractor’s commitments to suppliers, subcontractors, and others for contributing materials or work, to be determined, in so far as applicable, in the same manner as indicated in (1), (2), (3), and (4).
    If the contractor claims additional compensation by reason of any other item or items, he may add such item or items, together with a detailed statement of the facts on which his claim is based.
    4. Unless otherwise directed by the chief of the bureau, the contractor shall be requested to suspend work and shall not be given notice of cancellation. If a notice of cancellation is given, the contracting officer of the Government loses his power to enter into a supplemental agreement with the contractor.
    o. No allowance will be made for prospective profits; provided, however, that with the consent of the chief of the bureau an allowance of not more than 10 per cent of the cost of partly finished products on hand may be allowed.
    6. If agreement is reached on a just and reasonable compensation to be paid to the contractor by reason of the suspension and termination of the contract or order, such agreement shall be embodied in a supplemental contract which shall set forth the agreed compensation and shall provide in specific terms that it constitutes full and final settlement of all questions and claims growing out of the original contract or order. Such supplemental contract shall also provide that all raw materials, partly finished products, and finished products on hand shall become the property of the United States, unless and to the extent that the parties agree that such materials and products shall remain the property of the contractor, in which event the Government shall be credited with the agreed value of the same.
    7. Each such supplemental contract shall provide that it shall not become a valid and binding obligation of the United States until it has first been approved by the board of contract review of the supply bureau affected.
    8. The chief of the bureau may direct that no such supplemental contract, or no such supplemental contract providing for payment in excess of a specified sum, shall be executed by the contracting officer unless first approved by the chief of th,e bureau.
    9. Attention is directed to General Order No. 103, November 6, 1918, creating the board of contract adjustment and empowering such board to hear and determine all claims, doubts, and disputes, including all questions of performance and nonperformance which may arise under any contract made by the War Department in instances in which the contractor and the contracting officer have been unable to agree.
    10. This circular applies solely to the termination of contracts or orders, in whole or in part, in the public interest, and does not affect the right of the Government to cancel a contract or order by reason of the contractor’s default, which subject is left to be determined by the provisions, if any, of the contract or order and the principles of law applicable thereto.
    By authority of the Secretary of War.
    Geo. W. Goethals,
    
      Major General, Assistant Chief of Staff,
    
    
      Director of Purchase, Storage, and Traffic.
    
    The items making up the sum of $41,524.01 agreed to be paid by the United States to plaintiff are as follows:
    Cost of equipment of the Michigan City plant from the beginning of April, 1918, to the date of termination of the contract_^_$55,160. 96
    Estimated salvage value_ 7, 809.10
    Net cost_^_1_ 47,351.86
    Less 29.03% (being percentage of production delivered)_ 13,746.23
    70.97% (being percentage of contract poundage undelivered) of net cost of special facilities_ 33, 605. 63
    Loss on boxes, labels, and other supplies on hand_ 3,127. 81
    Cost of cancelling outstanding obligations_ 4, 790. 57
    Total_ 41,524. 01
    Y. The cancellation agreement was disapproved by the claims board, office of director of purchase at Washington, but how the'contract got to that board, and what jurisdiction that board had in the premises does not appear. The board of contract adjustment also undertook to pass upon the contract, and approved of the action of the claims board, director of purchase. The decision of the board of contract adjustment was referred to the War Department claims board, and by that board to the Quartermaster General. No action was taken upon the matter by the Quartermaster General until April 4, 1922, when the Quartermaster General sent the papers to the depot quartermaster at Chicago with directions to effect, if possible, a settlement with the plaintiff in accordance vsdth decision of the board of contract adjustment. The depot quartermaster at Chicago requested the plaintiff to file an amended claim, which was not done, and the depot quartermaster on September 27, 1922, advised the plaintiff that the appropriations available for payment of such claims had been1 exhausted, and that any claim must be filed with the War Department. On November 22, 1922, the plaintiff appealed to the Secretary of War from the decision of the board of contract adjustment. The Secretary of War on January 9, 1923, denied the appeal. The plaintiff has not received the $41,524.01 agreed to be paid by the cancellation contract, or any part of the same.
    VI. The potatoes in process of manufacture at the time of the suspension of the contract resulted in the production of 4,400 pounds of dehydrated potatoes. These potatoes were not called for by the United States, nor were they paid for. These potatoes were sold by the plaintiff for the net sum of $1,103.44, showing a net loss to the plaintiff of $216.56, by reason of-the failure of the United States to receive and pay for the same at the contract price.
    VII. The total cost of all ‘special facilities, including the cost of the starch-recovery machinery,' was $57,348.06. The actual salvage value of this equipment was $3,547.66 making the net cost of all special facilities $53,800.40. Of this sum $27,381.41 was spent for special facilities after entering into the contract of October 8, 1918; 29.03 per cent (that being the percentage of the contract completed) of that sum having been absorbed in the poundage delivered and paid for by the United States, there remains $19,431'.98, spent by the plaintiff on the faith of the contract. Of the sum of $27,-381.41 expended for special facilities, $6,296.19 was expended for the purchase and installation of starch-recovery machinery, which sum deducted from the sum of $19,431.98 leaves the sum of $13,135.79.
    VIII. The sum of $4,790.57 was spent in discharging commitments made before the suspension of the contract and which it Was compelled to pay, and the sum of $3,127.81 was lost on supplies on hand at the time of the suspension of the contract, making together the sum of $7,918.38.
    IX. The plaintiff, had it been permitted to perform the contract, would have made a profit. The reasonable profit to which the plaintiff would have been entitled under the evidence in the case is the sum of $25,400.
    .The court decided that plaintiff: was entitled to recover, in part.
   Hay, Judge,

delivered the opinion of the court:

The essential facts in this case are these:

On October 8, 1918, the plaintiff entered into a contract in writing with the United States to manufacture and deliver 1,000,000 pounds of dehydrated potatoes at 30 cents a pound; the potatoes were to be delivered by July 1, 1919. The contract was entered into on behalf of the United States by an officer clothed with authority to make the contract, and was in all respects a formal fixed-price contract.

■ The defendant contends that it was not a valid contract, because it did not contain a clause or provision providing for its cancellation or termination in the public interest, and cites a circular No. 88 issued'by the Quartermaster General of the United States Army, under the authority of the Secretary of War, to the officers under him prescribing what contract provisions should be inserted in all formal fixed-price contract's made after the date of said circular, thé date thereof being September 7, 1918, and the date of the contract in suit being October 8, 1918. The'circular provided among other things that there should be a provision in formal fixed-price contracts providing for their termination and cancellation in the public interest, and the contract did not contain such a provision. This circular was issued to the officers of the Quartermaster Corps for their information and guidance in,the preparation of contracts. The public had no notice of it, nor did the plaintiff in this case. The contract in suit was prepared by an officer of the United States who had authority to enter into contracts of this character, and was presented to the plaintiff for its signature by said officer. The circular did not have the force and effect of law; there was no statute authorizing it; it was merely a direction to the officers of the Quartermaster Corps telling them how contracts were to be prepared. The circular is not a regulation prescribed by the Secretary of War; it is a circular issued by the Quartermaster General for the purpose of instruction to the officers of his corps, and can not be held to bind the plaintiff or to invalidate the contract entered into by it with an officer fully authorized to make it.

The plaintiff began performance of the contract on October 31, 1918, and by February 10, 1919, had partly performed the same by manufacturing and delivering to the United States 285,900 pounds of dehydrated potatoes for which the United States paid the plaintiff the contract price.

On February 8,1919, the United States asked the plaintiff to suspend operations under the contract, and on February 10, 1919, wrote to the plaintiff proposing an agreement for the cancellation of the contract. From that date up to May 19, 1919, negotiations were had between the plaintiff and an officer of the United States with authority to contract looking to a settlement between the parties as to the damages which the plaintiff had incurred by reason of the suspension of the contract. These negotiations were authorized by the United States under the terms of a circular issued by General Goethals, director of purchase, storage, and traffic. This circular was dated November 9, 1918, and was numbered 111. An agreement was reached on May 19, 1919, for a full and final settlement of all questions and claims growing out of the contract of October 8, 1918, and on May 19, 1919, a cancellation agreement in writing was entered into by the parties.

Tinder this agreement the United States agreed to pay to the plaintiff the sum of $41,524.01, and the contract price for articles in process of manufacture at the time of the cancellation, the plaintiff to complete the manufacture of the same. These articles amounted at that time to 4,400 pounds of potatoes which were manufactured by the plaintiff, the contract price of which was the sum of $1,320. The United States refused to take these articles which were afterwards sold by the plaintiff for $1,103.44, showing a net loss to the plaintiff of the sum of $216.56. The plaintiff on its part in said cancellation agreement discharged the United States from all claims and demands whatsoever by reason of or arising out of the original contract.

This cancellation agreement also contained the following-provision :

“This agreement shall not become a valid' and binding obligation of the United States unless and until the approval of the board of review of Zone 7, Chicago, Ill., has been noted at the end of this instrument and upon Schedule A thereof.” Afterwards on May 19, 1919, there was noted, at the end of this instrument and upon Schedule A thereof the following: “Approved by board of contract- review, Zone No. 7, Chicago, Ill., May 19, 1919,” followed by the. signatures of the members of said board. Thus the aforesaid agreement became a valid and binding obligation of the United States, and was also, of course, a valid and binding obligation of the plaintiff.

For some reason this contract was sent for approval to the claims board, office of director of purchase, Washington, D. C., which board disapproved it. What jurisdiction this last-named board had in the premises does not appear. The agreement was complete in all its parts, conformed to the instructions in Circular 111, was executed by an officer of the United States having authority to act, and was as between the plaintiff and the United States a valid and binding obligation, which the claims board office of director of purchase has no power or authority to set aside. The matter was aftenvards taken up with the board of contract adjustment, which board affirmed the action of the claims board, and the Secretary of War affirmed tire decision of the board of contract adjustment. But neither of these boards, nor the Secretary of War, had any authority or jurisdiction to pass upon the validity or invalidity of this agreement. The parties having entered into a valid and binding agreement, it closed the transaction. The United States was just as much bound by it as was the plaintiff, and no agency of the United States- had the authority to set it aside after it had been duly executed. " If the plaintiff had set out some other and larger claim under the original contract, it would not, in the face of this cancellation agreement, have been heard in this court, and the United States is equally bound. We are therefore of the opinion that the parties must stand by their contract, and under it the plaintiff is entitled to recover the sums set out in the conclusion of law:

The plaintiff in this suit claims that it - is entitled to damage for the suspension of the contract, and if it had not entered into the cancellation agreement we are of opinion that it would be entitled to the sums set out in Findings YI, VII, VIII, and IX, amounting in all to. the sum of $46,670.73, but the plaintiff is bound by the cancellation agreement, and judgment will be entered in its favor for' the sum of $41,740.57.

It is so ordered.

Geah:am, Judge; DowNey, Judge; Booth, Judge; and Campbell, Ghief Justice, concur.  