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United States v. Bethlehem Steel Corp.

June 18, 1940

UNITED STATES
v.
BETHLEHEM STEEL CORPORATION ET AL.; BETHLEHEM SHIPBUILDING CORPORATION, LIMITED, V. UNITED STATES SHIPPING BOARD MERCHANT FLEET CORPORATION; UNITED STATES SHIPPING BOARD MERCHANT FLEET CORPORATION V. BETHLEHEM SHIPBUILDING CORPORATION, LIMITED.



Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Oliver B. Dickinson, Judge.

Author: Maris

Before BIGGS, MARIS, and CLARK, Circuit Judges.

MARIS, Circuit Judge.

In 1917 this country was at war. The war emergency made it necessary for the Government to take over all ships suitable for war purposes then under construction at the various shipyards throughout the United States and to arrange with shipbuilders for the construction of as many additional vessels as possible and to construct them with the utmost speed. In the fall of that year the United States Shipping Board Emergency Fleet Corporation (now known as United States Shipping Board Merchant Fleet Corporation and herein referred to as the Fleet Corporation), an agency of the Government, entered into negotiations for the construction of ships by the Bethlehem Shipbuilding Corporation, Ltd., (hereinafter referred to as Bethlehem), a subsidiary of the Bethlehem Steel Corporation, having a number of shipyards and an experienced shipbuilding organization. In these negotiations Bethlehem was represented by two competent shipbuilders, Joseph W. Powell and Harry Brown, and the Fleet Corporation was represented by two equally competent shipbuilding experts, Admiral F. T. Bowles and G. S. Radford, who were advised by and had full opportunity to advise with Daniel H. Cox, a competent naval engineer and estimater, and Chester Cuthell, counsel for the Fleet Corporation. In addition to these representatives the interests of the Fleet Corporation were protected by Charles Piez, its vice president and general manager, who while not previously a shipbuilder was a nationally known business executive of long experience.

Three forms of contract were considered by the negotiators, a "lump sum" contract, a "cost plus" contract and a "cost plus fixed fee" contract with a "bonus for savings." The representatives of the Fleet Corporation endeavored to get Bethlehem to bid on a lump sum basis but it refused, stating in a letter of December 13, 1917, that "Because of the unprecedented conditions surrounding the Labor and Material market, it is impracticable to estimate within a reasonable percentage what will be the actual cost of construction, and it is therefore impossible to submit fixed prices for any of these vessels, except upon a basis so far above estimated cost that any figure acceptable to this company would not be acceptable to the Emergency Fleet Corporation. It is proposed, however, that they be constructed on the basis of actual cost plus a fee, with an agreed upon probable cost, this Company to be paid in addition to the fee one-half of any saving that may be made below this cost figure, and with the further provision that the estimated cost figure will be increased due to any increase in rates of wages that may be approved by the Emergency Fleet Corporation."

On December 19, 1917, Admiral Bowles on behalf of the Fleet Corporation wrote Bethlehem requesting it to submit proposals for the construction of certain ships which he specified. Under the same date Bethlehem submitted a written proposal to construct these ships under the bonus for savings form of contract, setting forth in its proposal the estimated cost of the vessels and the fixed profit to be paid. This proposal was the subject of further conference on January 3, 1918, at which Admiral Bowles unsuccessfully tried to persuade Powell to accept lump sum contracts but was finally persuaded to agree to accept the bonus for savings form of contract in order to reach any agreement at all. On January 5, 1918, Admiral Bowles and Radford transmitted Bethlehem's proposal to Piez with the following memorandum:

"We hand you herewith the Bethlehem Shipbuilding Corporation's proposal dated December 19, for additional construction at their various plants, amounting in all to 19 vessels, exclusive of tugs. It may be noted that, with the exception of three ships, the vessels in question are troop ships and tankers - ships of a type that only real shipbuilders can produce satisfactorily. As is well known, we have been having difficulty in placing such vessels.

"We wish to place on record the fact that the Bethlehem Shipbuilding Corporation's representatives have insisted on comparatively high prices for these vessels; that they have only with difficulty been persuaded to quote us on the types of ships referred to; and, that their attitude has been characterized by an arbitrary refusal to guarantee or stand behind delivery dates. In other words, it was difficult to persuade them to quote even a tentative delivery date, and they refused positively to accede to a bonus and penalty clause for delivery.

"The letter herewith, addressed to the Bethlehem Shipbuilding Corporation, in reply to their proposal, has been prepared for your signature and is now presented with the recommendation that it be signed. While the prices we have agreed to, with representatives of the Bethlehem Shipbuilding Corporation, are not satisfactory to us, nevertheless, they represent a material reduction from the prices quoted by that corporation.Realizing that the Nation will need these vessels, we have been actuated by the belief that further delay in placing the contracts should be eliminated and we believe that we have made the best compromise possible under very difficult conditions."

Prior to the receipt of this memorandum from admiral bowles and Radford, Piez had received a letter from Powell in anticipation of the final conference with Admiral Bowles. in this letter Powell agreed on behalf of Bethlehem "to accept the order to construct these vessels on such terms as may be personally determined by Mr. Charles Piez, the Vice President and General Manager." On January 5, 1918, after receiving from Admiral Sowles and Radford Bethlehem's proposal and their accompanying memorandum reluctantly recommending its acceptance, Piez on behalf of the Fleet Corporation awarded to Bethlehem seven contracts for the construction of a total of 21 tankers, eight cargo ships and 20 tugs upon the terms set forth in Bethlehem's proposal. The contracts, which were dated December 31, 1917, were actually signed and delivered about February 1, 1918. Subsequently in March, April and May six other contracts for the construction of 19 tankers and 18 cargo ships were executed between the parties upon substantially similar terms. All 13 of these contracts are involved in the present controversy. Five other contracts were also executed, one of them on February 1, 1918, and the others later. With them, however, we are not now concerned.

The total estimated cost of the 86 vessels involved, as set out in the contracts, was $119,750,000. The actual base cost of the ships as built was $92,990,520.91 and Bethlehem has been paid under the contracts the actual base cost of the ships, $92,990,520.91, the cost of extras, $16,381,432.15, fixed profits specified in the contracts, $11,962,400, and bonus for savings to the amount of $8,093,156.60. It will be seen that the total bonus for savings payable under the terms of the contracts would exceed $13,000,000, but the Fleet Corporation after paying Bethlehem $8,093,156.60 on this account declined to pay any more. A sum in excess of $5,000,000 is accordingly claimed by Bethlehem to be still due it from the Fleet Corporation.

The controversy with regard to the bonus for savings resulted in the institution of two suits in the District Court for the Eastern District of Pennsylvania. One was a suit in equity brought by the United States against Bethlehem Steel Corporation, Bethlehem Shipbuilding Corporation, Ltd., and certain subsidiary corporations for an accounting and to recover sums paid to the defendants or some of them under the contracts above mentioned. The other was an action at law by Bethlehem against the Fleet Corporation to recover the balance of the bonus for savings claimed by Bethlehem under the contracts. A jury trial was waived in the law action and both suits were referred to a special master and referee for hearing. The special master and referee made findings of fact and conclusions of law and recommended the dismissal of the Government's bill in the euqity case and the entry of judgment in the action at law for Bethlehem against the Fleet Corporation for $5,272,075.10, with interest from specified dates at the rate of 2% per annum.Exceptions having been filed, the district court upon consideration of the report of the special master and referee dismissed the bill in equity, entered judgment in the action at law for Bethlehem in the amount of $5,272,075.10, but without interest. The United States has appealed from the decree dismissing the bill in equity (No. 7045). From the judgment entered against it in the action at law the Fleet Corporation has appealed (No. 7046). Bethlehem has taken a crossappeal in the action at law from the refusal of the district court to allow interest on the judgment entered in its favor (No. 7119).

In the pleadings and in the court below the chief contention of the Government was that Bethlehem was guilty of fraud in the making of the ship construction contracts to which we have referred. Both the master and the court below held that the charge of fraud in the making of the contracts was without foundation. So far as fraud in the ordinary sense is concerned we think that the evidence fully supports these findings. The Government, however, contends in this court that Bethlehem, by misleading statements and by withholding information, induced the Fleet Corporation's representatives to believe that Bethlehem's estimates of the construction cost of the vessels in question were fair and reasonable, and that the Fleet Corporation's representatives relied upon Bethlehem's express and tacit representations, and relying thereon executed the contracts under consideration.Under the circumstances, argues the Government, there was a duty of full disclosure resting on Bethlehem so that not having made such disclosure it must be held guilty of fraud. We have carefully considered the record in the light of this contention and we are compelled to conclude that it is not sustained by the testimony, which in our judgment fully supports the findings of the master and the district court that at the time the contracts were negotiated conditions both as to labor, material and transportation, were such that it was impossible to make an accurate estimate of cost, that the estimates submitted by Bethlehem and prepared for it by its representative Brown were fairly and honestly made and as accurate as could be expected under the uncertain conditions then prevailing, that they were not intended to represent close estimates of actual cost and that they were not so understood, accepted or relied on by the representatives of the Fleet Corporation. On the other hand the evidence supports the finding of the special master that it was understood that Bethlehem intended these estimated cost figures to be sufficiently large to assure a bonus for savings at least large enough to offset all excess profits and war taxes which it might have to pay as a result of the contracts and that the estimated cost figures finally inserted in the contracts were arrived at by a process of barter and trade carried on by experienced and competent shipbuilders on both sides dealing at arm's length.

It is of course obvious that these negotiations took place in time of war when the need of the Government for ships was extremely urgent and the necessity of reaching an agreement with Bethlehem, therefore, vital. It is equally clear that Bethlehem insisted upon assuring itself a margin of profit which in view of the necessities of the Government was so large as to indicate an attitude of commercial greed but little diluted with patriotic feeling. There is no doubt that this attitude on the part of Bethlehem was deeply resented by the Government representatives but he latter were faced with the alternative of either agreeing to Bethlehem's terms or taking possession of its shipyards and having the Government itself construct the vessels. We think the record clearly indicates that the Government representatives felt that the latter course could not have accomplished the shipbuilding program with the speed which was essential.It was Bethlehem's existing shipbuilding organization that was necessary to insure success to the program of the Fleet Corporation. Consequently the Government representatives, feeling as they did that Bethlehem's organization was necessary to their program, were obliged to accept the terms offered by Bethlehem. This they did with full knowledge, as we have said, that the estimated cost figures included in the contracts did not represent close ...


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