decided: August 1, 1955.
UNITED STATES OF AMERICA, PLAINTIFF-APPELLANT,
LENNOX METAL MANUFACTURING COMPANY, INC., AND FRANK MARGIOTTA AND HERBERT B. PEARL, AS CO-TRUSTEES OF THE LENNOX METAL MANUFACTURING COMPANY, INC., DEFENDANTS-APPELLEES.
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.
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.
1. 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.
2. 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."*fn4 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."*fn5 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."*fn6
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 use 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.*fn7 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."*fn8
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,*fn9 that its meaning is "not so clear as to be self-evident",*fn10 that it was "capable of being understood in more senses than one".*fn11
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.*fn12 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.As the government now seeks to construe the contract, it comes close to being "'such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other'"; accordingly, that construction should be rejected if possible. See Hume v. United States, 132 U.S. 406, 415, 10 S. Ct. 134, 137, 33 L. Ed. 393; Scott v. United States, 12 Wall. 443, 445, 20 L. Ed. 438.
But even if "may" is not thus ambiguous, evidence of the negotiations was admissible. The "ambiguity-on-its-face" rule is a vestigial remain of a notion prevailing in "primitive law." "The primitive law," says Wigmore, "looked only at the expression. * * * The mark of primitive legal standards, throughout all, is formalism."*fn13 Plucknett tells us that "until late in the Middle Ages, English lawyers tried to avoid the problem of interpretation. Indeed, even the word [i.e., interpretation] connoted in their minds fraud or evasion."*fn14 Says Paton, in "primitive law," the "binding element is sought in the sacred ritual and not in the intention of the parties."*fn15 With the advent of writing, the written word came to possess a magic potency.*fn16
The "primitive" - ritualistic and magical - attitudes have relaxed their grip. The later rationalization that, to receive extrinsic evidence is to court the danger of perjury, has also been eroding: Such evidence is now everywhere received to show, for instance, (a) fraud or illegality, (b) that an apparent deed is but a mortgage, or (c) that a written contract was not to become operative except upon the happening of an orally agreed-upon condition.*fn17
Even if a word in a written agreement is not ambiguous on its face, the better authorities hold that its context, its "environment," must be taken into account in deciding what the parties mutually had in mind when they used that verbal symbol.
The problem of interpreting a contract is, of course, that of understanding the communication between the parties.*fn18 Like many communication-problems in non-legal fields, it is frequently none too easy of solution.*fn19 Judge Learned Hand has sagely warned that, in attempting a solution, it is "one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary * * *."*fn20 This warning has an ancient lineage. Ihering (in the middle of the 19th century) taught that the Roman jurists had emphasized the "spirit" as against the letter, and noted that, "A close adherence to the letter is a mark of unripeness everywhere, and especially in law."*fn21 In the 14th century, an Italian lawyer, Lucas De Penna, scorned the suggestion that the "dictionary equivalents" of words constitute the sole basis of ascertaining their meaning, and opposed literal interpretation (or "pure verbalism"), since words are but clumsy "vehicles" of expression, and the isolation of words from their context is the mark of an inexperienced interpreter.*fn22 In 1932, it was observed in Hurst v. W. J. Lake & Co., 141 Or. 306, 16 P.2d 627, 629, 89 A.L.R. 1222 that "the language of the dictionaries is not the only language spoken in America." Corbin, in 1951 said, "There is no dictionary on earth * * * that can record all the usages of words or other symbols. * * * There is no law requiring the contractors to express themselves in 'good English'. * * * On the contrary, the law requires the court to put itself as nearly as possible, in the position of the parties, with their knowledge and their ignorance, with their language and their usage. It is the meaning * * * of the parties, thus determined, that must be given legal effect."*fn23
Accordingly, it is regarded by many authorities as a fallacy that, in interpreting contractual language, a court may not consider the surrounding circumstances unless the language is patently ambiguous. Any such rule, like all rules of interpretation, must be taken as a guide, not a dictator.*fn24 The text should always be read in its context. Indeed, text and context necessarily merge to some extent, just as an individual's "inner environment" includes the air in his lungs.*fn25 When the text is in a foreign language, which environs it, resort to a translation becomes necessary;*fn26 when the parties to an American-worded contract employ their own private language, foreign to the judge, he should similarily translate its apparent meaning by resort to their private glossary.*fn27 The parties may use "their own special dictionary" which (when put in evidence) supplies the key to what their words meant to them.*fn28 On this view, the apparent "public" meaning must give way to the parties' "private" meaning, for they have created their own little "public," their own private public.
The preliminary negotiations often function as a most important part of the "contractual history" of the words employed. Our courts have come to rely on the "history" of a statute in construing its literal verbiage.*fn29 Many of those judges who, through scepticism about that technique, have developed a sort of context-phobia with reference to statutes,*fn30 have no doubts about judicial reliance on a contract's history. For, as Professor Richard Powell points out,*fn31 the words of a statute are usually chosen by but a portion of the legislature, and the purposes of that small portion "are often wholly unknown and unapproved" in actuality by most members of that body, while the words of a contract are selected by the parties whose purpose is far more readily ascertainable by consulting their negotiations.*fn32
To shut out the light furnished by the parties themselves - to read their words not as they meant them but as they appear when denuded of that meaning - is to decide an unreal, fictitious, hypothetical case. To reject the insights derived from their previous negotiations, which reveal their actual purposes, is to create a narrow rule of relevance which artificializes the facts.*fn33 Doubtless on that account, even those courts which still say ambiguity is a necessary condition of considering such extrinsic evidence are quick to find such ambiguity, on slight grounds, when the extrinsic evidence is convincing.
Our court has taken the broader view. In Nicoll v. Pittsvein Coal Co., 2 Cir., 269 F. 968, 971-972, this court (per Hough, J.) said, "[We] think that there is no reason in the nature of things why the individual parties to a transaction may not employ words or whole phrases in a particular sense irrespective of the ordinary sense. * * * In sound theory there is in each case only a question of fact, viz.: Were the parties using words in a special mutual sense? * * * [There] is no doubt at all that ambiguity in phrase is not necessary to let in evidence of usage." In Rotberg v. Dodwell & Co., 2 Cir., 152 F.2d 100, 101, we said: "[The] intent is made clear by the affidavit of defendant's attorney which, after reciting this background, states that he explicitly told plaintiffs' attorney that he would require a general release so as to terminate all possible claims by plaintiffs in the future, as well as in the present. Plaintiffs insist that this statement cannot be considered under the parol evidence rule. But that rule does not exclude evidence to interpret, explain, or clarify (rather than contradict) the written document."
Writes Corbin: "Words have no meaning; it is users of words who give them meaning.*fn34 * * * It is sometimes said that if the words of a contract are plain and clear, evidence of surrounding circumstances to aid interpretation is not admissible. But some of the surrounding circumstances always must be known before the meaning of the words can be plain and clear; and proof of the circumstances may make a meaning plain and clear when in the absence of such proof some other meaning may also have seemed plain and clear.*fn35 * * * It is not necessary that words should be unusual words or words that are 'ambiguous on their face' in order to admit evidence of special usage. And evidence often establishes a special and unusual meaning definitely in conflict with the more common and ordinary usage.*fn36 * * * Among the surrounding circumstances that are admissible for purposes of interpretation are included many acts and statements of the parties antecedent to and contemporaneous with the making of the contract. But, it may be asked, does not the 'parol evidence rule' exclude evidence of such antecedent statements and understandings? The answer to this question is No. That supposed rule of evidence purports to exclude testimony only when it is offered for the purpose of 'varying or contradicting' the terms of an 'integrated' contract; it does not purport to exclude evidence offered for the purpose of interpreting and giving a meaning to those terms. The terms of any contract must be given a meaning by interpretation before it can be determined whether an attempt is being made to 'vary or contradict' them. The question in any particular case, therefore, may become this: When does interpretation cease and when does variance begin?So far as this question is concerned, any and all surrounding circumstances may be proved so long as they are material and relevant on the issue of what the contract is and what meaning should be given to its words.*fn37 * * * The court will give legal effect to the words of a contract in accordance with the meaning actually given to them by one of the parties, if the other knew or had reason to know that he did so.In determining the meaning so given by the one and the fact of knowledge or reason to know by the other, the court will hear all relevant evidence of the surrounding circumstances, including the admissions of the parties, the negotiations and antecedent communications between them, and all current usages that might have affected their choice of the words. In the process of interpretation, it is the court and not the parties who should be reasonably, or even remarkably, intelligent.*fn38 * * * In determining whether the two parties gave the same meaning to their express words and what that meaning was, or in determining whether one party gave a particular meaning to the words and the other knew or had reason to know that he did, the court will need to know the preliminary negotiations and communications between the parties to the contract. These are among the relevant surrounding circumstances; and evidence of what they were is admissible. This is true, even though the words of the contract seem to the judge to have a 'plain and clear' meaning for him. A reasonably intelligent judge will not try to force his meaning upon the parties, when relevant and trustworthy evidence may convince him that one or both of them had another meaning.*fn39 * * * As long as the court is aware that there may be doubt and ambiguity and uncertainty in the meaning and application of agreed language, it will welcome testimony as to antecedent agreements, communications, and other factors that may help to decide the issue. Such testimony does not vary or contradict the written words; it determines that which cannot be varied or contradicted.*fn40 * * * A contractor is bound in accordance with the meaning that he induces another to understand and act upon, if he knows or has reason to know that the other will so understand and act. And in determining whether or not he has reason to know, the court should be advised of all the surrounding circumstances; of the meaning that is given to the language of the agreement by common usage, by usage in the trade or business or profession of the parties; of communications between the parties during preliminary negotiations and during the execution of the writing; and of subsequent interpretations and practical application by either party that is assented to or acted upon by the other."*fn41
For authorities supporting Corbin, see, e.g., United States v. Bethlehem Steel Co., 205 U.S. 105, 117-118, 27 S. Ct. 450, 51 L. Ed. 731; Nicoll v. Pittsvein Coal Co., 2 Cir., 269 F. 968; U.S. Navigation Co. v. Black Diamond Lines, 2 Cir., 147 F.2d 958, 961; Rotberg v. Dodwell & Co., 2 Cir., 152 F.2d 100, 101; Franklin Sugar Refining Co. v. Wm. D. Mullen Co., 3 Cir., 12 F.2d 885; American Lithographic Co. v. Commercial Cas. Ins. Co., 81 N.J.L. 271, 80 A. 25; Right Printing Co. v. Stevens, 107 Vt. 359, 365, 179 A. 209, 100 A.L.R. 528; Atlantic Northern Airlines v. Schwimmer, 12 N.J. 293, 96 A.2d 652, 656; concurring opinion in Universal Sales Corp. v. California, 20 Cal.2d 751, 776, 128 P.2d 665; Kessler & Sharp, Contracts (1953) 80-81, 96-97; 9 Wigmore, Evidence (3d ed.) Sections 2461ff; Wigmore, Evidence, Students' Textbook (1935), 521, 522, 524-525.
These rulings deserve peculiar emphasis when, as here, one of the parties drafted the contract, couching it in complicated terms set forth in crowded print; for then the court should follow the contra proferentum rule, i.e., should adopt that interpretation, the legal effect of which bears most strongly against the one who chose the words.*fn42 And where, as here, the government official in charge has given the other party an interpretation of the "verbose and complicated Government writings," that party may properly rely upon that interpretation.*fn43
3. Even were we constrained by the "ambiguity-on-the-face" rule, we should, on the facts here, hold that the contract must be reformed so that "may" is not permissive, as the government contends. That is, if "may" on its face means unregulated discretion, the contract must be rectified because it mistakenly reflects the actual intention. It matters not here whether we call this a case of mutual mistake*fn44 or one of mistake by defendant which plaintiff knew and induced.*fn45 The evidence of mistake amply justifies such relief: It is most clear and convincing. Under the federal merged procedure, the court can grant such equitable relief and then treat the contract as thus reformed.*fn46 As here there was no jury, the judge could perform both those functions. It is of no moment that defendant did not formally ask such relief, for we may regard its pleading as amended to conform to the proof.*fn47
4. Colonel Walker testified that the reason for the government's termination of the contract was that defendant at that time was in default on deliveries under the original contract and under the supplemental agreements. But, as shown above, defendant was not then in default.
The government, then, wrongfully terminated the contract. The title provision of the Partial Payments Clause did not entitle the government to assert that title and to seek delivery of the property when defendant was not in default but when the government had substantially breached its contractual obligation and in such a way as to prevent defendant's performance.*fn48
5. Plaintiff points to the clause providing that if, after notice of termination for cause, it is determined that defendant's failure to perform "is due to causes beyond the control and without the fault or negligence" of defendant, the notice shall be deemed to have been issued pursuant to the clause entitled "Termination for Convenience of the Government." The latter clause provides that the contract may be terminated "whenever the contracting officer shall determine that such termination is in the best interests of the government," and that, in such event, the defendant shall "transfer title and deliver to the government * * * the fabricated or unfabricated parts, work in process, completed work, supplies, and other material produced as a part of, or acquired in connection with the performance of, the work terminated by the Notice of Termination, and * * * the completed or partially completed plans, drawings, information, and other property which, if the contract had been completed, would have been required to be furnished to the Government."
For the reasons above noted, the government, because of its breach which prevented performance by defendant, is in no position to ask enforcement of the title provision of the "Convenience" clause.
6. The "Changes" clause provides that "failure to agree to any adjustment shall be a dispute concerning a question of fact within the meaning of the clause entitled 'Disputes.'" The "Disputes" clause provides that a dispute "shall be decided by the Contracting Officer"; that within 30 days the contractor may appeal to the Secretary of the Army or his duly authorized representative; that if no appeal is taken, "the decision of the Contracting Officer shall be final and conclusive"; that the Contractor is entitled to be heard and offer evidence in support of its appeal."
Defendant did whatever was necessary to protect its right of appeal to the Secretary of the Army: A week after termination of the contract by the Contracting Officer, it served upon the New York Ordnance District and upon the Secretary of the Army a notice of appeal from the decision of the Contracting Officer, pursuant to the "Disputes" clause. As the trial judge found: "It is not disputed that this appeal was served and that it was timely. Rule 4(c), promulgated by the Board of Contract Appeals, provides:
"'c. Trial briefs. Counsel for the government shall thereafter file with the Board a memorandum asserting the factual and legal issues which counsel for the government considers may be involved in a hearing upon the appeal. A copy of the memorandum shall be forwarded by counsel for the government to the contractor, who shall twenty days, or such longer time as the Board may allow in which to submit a reply memorandum. The case will thereafter be in order for hearing.'
The evidence before me indicates clearly and is not disputed by the plaintiff that Lennox sought a review of the Contracting Officer's termination. The evidence further indicates and is not disputed by the plaintiff that nothing was done with respect to Rule 4(c). * * * The Contracting Officer, as Lennox aptly points out, made it impossible for the attorney for Lennox to prepare a memorandum asserting the factual and legal issues to be considered upon appeal and, this being so, if this constitutes the sole appeal procedure, then obviously in the instant action the appeal procedure was not only grossly inadequate but unavailable to the defendant because the Contracting Officer refused to make a record and simply sat and let time tick away."
7. Because of the nature of the government's breach, the trial judge correctly rejected the government's claim for money damages.
8. The following is the moral of this case: A Colonel may not deal with civilians as if they were soldiers subject to his command. In military service, subordinates must (within wide limits) obey the orders of their superiors, even if the orders be arbitrary. But when a military officer represents the government in carrying out a contract, he must recognize the restrainsts imposed by civil legal rules as to private dealings. If that were often forgotten, we would be on the way to militarizing civilian life, to the rule of the Commissars. Early in the 19th century, Tocqueville wrote: "I have often asked myself what would happen if, amid the relaxation of democratic manners, and as a consequence of the restless spirit of the army, a military government were ever to be founded among any of the nations of the present age. I think that even such a government would * * * retain none of the fierce characteristics of a military oligarchy. I am persuaded that, in such a case, a sort of fusion would take place between the habits of official men, and those of the military service. The administration would assume something of a military character, and the army some of the usages of the civil administration. The result would be a regular, clear, exact, and absolute system of government: the people would become the reflection of the army, and the community be drilled like a garrison."*fn49
Judges MEDINA and HINCKS would decide this case solely on another ground which we all agree is valid and dispositive.
We all think that the evidence fails to show a breach by the defendant. The defendant's non-performance was due to the action of the Government's contracting officer in issuing a notice of termination. No breach by the defendant having been shown, the Government may not recover damages. The only other relief sought is, essentially, the enforcement of an equitable lien on the defendant's property. Its right to enforce concededly depends upon a termination of the main contract. Clearly, as a suitor in equity the Government would be precluded from asserting a termination resulting from its own wrongful breach. But for purposes of this ground of affirmance we do not base our decision upon a breach of contract by the Government. Our disposition turns on the validity of the plaintiff's contention that by invoking the "termination for convenience" clause of the contract it has brought about a "termination" upon which its right to relief sought may be based.
It is true that the Government had a legal right to invoke that clause: it was not invalid. Doubtless it might be invoked to prevent accrual of further liabilities or as a valid defense to an action at law, - as, for instance, where the Government sued for damages consisting of costs of manufacture unnecessarily incurred after a notice of termination given because of a changed condition obviating the need for goods contracted for. But granted that the Government had a legal right to invoke the clause as a shield, it does not follow that by using the termination thus created as a sword it is entitled to enforce an equitable right. Its right to equitable relief may not be left to depend upon its own inequitable conduct. Here the notice of termination was expressly predicated upon the defendant's alleged inability to perform. In view of the fact that the "research team" of Government experts sent to investigate the defendant's ability to perform had shortly before made a report favorable to the defendant, we think the good faith of the contracting officer in terminating on the ground of inability was questionable. But that aside, if inability to perform existed when the notice of termination issued, the evidence makes it clear that it resulted in substantial part from the contracting officer's refusal at an earlier stage to use his conceded discretion to make larger partial payments. Even if the contract should not be so interpreted as to give the defendant a legal right to larger partial payments, we think that on the relevant evidence it was arbitrary and inequitable to refuse to make them especially since the defendant's need therefor was in substantial part atrributable to successive change orders made by the Government. And so by reason of its own earlier inequitable conduct the Government is disentitled to the equitable relief which it now seeks. Especially is this so since to grant the relief here sought would be to enforce specific performance of a penalty clause in the contract. Moreover, although the Government has made partial payments in excess of the aggregate amount which it has already recouped, it is not entitled to the relief sought on the ground of unjust enrichment. This is so because (1) of its own inequitable conduct, and (2) it has not proved that the defendant will be enriched, unjustly or otherwise, if it is allowed to keep the property which the Government seeks to take. The defendant should not be so penalized merely because its opportunity to perform was prevented by circumstances beyond its control and by the manifest unfairness of the plaintiff. Such a penalty is repugnant to equity. See, e.g. Precision Instrument Mfg. Co. v. Automatic Co., 324 U.S. 806, 814-815, 65 S. Ct. 993, 89 L. Ed. 1381; United States v. Forness, 2 Cir., 125 F.2d 928, 940; Twyford v. Whitchurch, 10 Cir., 132 F.2d 819, 822; Frad v. Columbian National Life Ins. Co., 2 Cir., 191 F.2d 22, 26; Galvin v. Southern Hotel Corp., 4 Cir., 154 F.2d 970, 973.
We think that the proviso in the following recent enactment of Congress - 68 Stat. 81, 41 U.S.C.A. § 321 - though not directly involved here, lends further support to our position:
"Sec. 1. No provision of any contract entered into by the United States, relating to the finality or conclusiveness of any decision of the head of any department or agency or his duly authorized representative or board in a dispute involving a question arising under such contract, shall be pleaded in any suit now filed or to be filed as limiting judicial review of any such decision to cases where fraud by such official or his said representative or board is alleged: Provided, however, That any such decision shall be final and conclusive unless the same is fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence."
The Senate Report discloses that the Congressional purpose was to wipe out the ruling in United States v. Wunderlich, 342 U.S. 98, 72 S. Ct. 154, 96 L. Ed. 113, and to restore the views expressed in Ripley v. U.S., 223 U.S. 695, 701-702, 32 S. Ct. 352, 56 L. Ed. 614, i.e., that where the power of the government under a contract is complete and its agent's decision conclusive, then the government owes a corresponding duty to have its agent's judgment exercised reasonably, and not capriciously or in bad faith. In effect, Congress adopted the views of Justices Douglas and Jackson in their dissenting opinions in Wunderlich, 342 U.S. at pages 101-103, 72 S. Ct. 156-157.
True, the new statute, literally read, applies only to the "disputes" clause of a contract like that before us here. Congress, however, stated a general policy forbidding a government official to act capriciously in the exercise of a power of decision under such a contract. Such a policy should not be interpreted in a niggardly manner. See Van Beeck v. Sabine Towing Co., 300 U.S. 342, 350-351, 57 S. Ct. 452, 456, 81 L. Ed. 394; "It would be a misfortune if a narrow or grudging process of construction were to exemplify and perpetuate the very evils to be remedied. There are times when uncertain words are to be wrought into consistency and unity with a legislative policy which is itself a source of law, a new generative impulse transmitted to the legal system." In Gooch v. Oregon Short Line R. Co., 258 U.S. 22, 24, 42 S. Ct. 192, 193, 66 L. Ed. 443, the Court said: "For although courts sometimes have been slow to extend the effect of statutes modifying the common law beyond the direct operation of the words, it is obvious that a statute may indicate a change in the policy of the law, although it expresses that change only in the specific cases most likely to occur to the mind. Johnson v. U.S., 1 Cir., 163 F. 30, 32, 18 L.R.A.,N.S., 1194." See also Keifer & Keifer v. R.F.C., 306 U.S. 381, 391 and note 4, 59 S. Ct. 516, 83 L. Ed. 784; U.S. v. Hutcheson, 312 U.S. 219, 235, 61 S. Ct. 463, 85 L. Ed. 788; South & Central American Commercial Co. v. Panama R. Co., 237 N.Y. 287, 291, 142 N.E. 666; The Arizona v. Anelich, 298 U.S. 110, 123, 56 S. Ct. 707, 80 L. Ed. 1075; Warner v. Goltra, 293 U.S. 155, 157-159, 55 S. Ct. 46, 79 L. Ed. 254; Slifka v. Johnson, 2 Cir., 161 F.2d 467, 470; Stone, The Common Law in the United States, 50 Harv. Law Review 4, 13-14.