The opinion of the court was delivered by: MURPHY
By this action the Government seeks recovery of some sixty-six million dollars, the amount the Economic Cooperation Administration (ECA) and its successor, the Mutual Security Agency (MSA) expended to finance European purchases of Saudi Arabian crude oil supplied by two of the defendants during the period September 1, 1950 to August 31, 1952.
A better understanding of this claim requires some brief background on a number of subjects. By way of introduction, we will discuss in a general fashion the European Recovery Program (ERP), the ECA statutory and regulatory scheme, the history of the lawsuit, the present complaint, defendants' corporate relationships and Middle Eastern operations, the world crude oil pricing structure, and plaintiff's various theories.
After World War II it became evident to those in authority that if Europe were to recover from the ravages of war the United States would have to take the laboring oar. In June 1947 General Marshall, then Secretary of State, announced that the time had come for the European countries to cooperate with each other to resist the advance of Communism and the corrosion and destruction of the world. If they did so, he said, their efforts would be echoed on our part by moral and financial assistance. Almost immediately the leaders of the European countries answered the cue and the Organization of European Economic Cooperation (OEEC) was formed for the purpose of supplying the European participating countries with the sinews of recovery, largely in the form of materials. It was a program, at great expense to the American taxpayer, to aid in the establishment of a so-called lasting peace. (Parenthetically, it should be noted that the Soviet Union opposed the plan of European recovery and refused not only to participate itself, but prevented its satellites from so doing.)
At that time there was a tremendous dollar gap in the fiscs of Europe, and in order to buy materials in the world market United States dollars were sorely needed. To remedy this, the United States enacted the Foreign Assistance Act of 1948, 22 U.S.C.A. § 1404, 1409, 1410, 1503 et seq., 1651 et seq., 62 Stat. 137, and the Economic Cooperation Administration Act, 22 U.S.C.A. § 1503 et seq., 1651 et seq., 62 Stat. 137. Congress said that its purpose was to 'promote the general welfare and national interest of the United States by furnishing material and financial assistance to European countries; to develop the military strength of those countries; to promote their industrial and agricultural production; and to facilitate and stimulate the growth of international trade thereby achieving for those countries healthy economies, restoration of individual liberties, and genuine independence'.
Under ECA/MSA United States dollars were allocated to the various European nations participating in the foreign aid program by the issuance of 'Procurement Authorizations' which set forth the conditions for the procurement of commodities. Firms in participating countries which desired crude oil and other commodities, after obtaining the approval of their respective governments, contracted to purchase those commodities from various suppliers. Such purchasers made payment to their local governments in local currencies, and the money so paid was placed in a 'counterpart fund' account for use locally in connection with the foreign aid program. Suppliers of crude oil were paid, on presentation of Supplier's Certificates, in United States currency by ECA/MSA out of appropriated funds, either through the participating countries or through designated banks in accordance with the Procurement Authorizations.
So large scale an expenditure of United States dollars evoked concern on the part of Congress respecting the prices at which ECA should properly finance purchases so as to ensure the most advantageous use of its funds. However, the only statutory provision in the various Acts is the following:
'No funds authorized for the purposes of this Act shall be used for the purchase in bulk of any commodities at prices higher than the market price prevailing in the United States at the time of the purchase, adjusted for differences in the cost of transportation to destination, quality, and term of payment.'
This section, 202 of the Foreign Aid Appropriation Act, 1949, 62 Stat. 1059, became sec. 112(l) of the Economic Cooperation Act, by virtue of an amendment in 1949, 63 Stat. 53, 22 U.S.C.A. § 1510(l). At first blush, such provision seems somewhat inadequate for an agency which was to disburse such huge sums of the taxpayers' money. But on closer analysis the reasons for such a general provision become clear. ECA was neither a procurement agency nor a price-fixing agency. Its role was that of an investment banker. All purchases were to be made through ordinary business channels by the individual buyers and sellers with ECA only supplying the dollars to the seller after the buyer had deposited an equal amount of his own currency with his own government. Thus, for policing purposes, ECA relied primarily on the buyer's own self-interest in acquiring his goods as cheaply as possible. It did, however, retain the right to post audit each transaction and to demand reimbursement, in whole or in part, from the buyer's government for any purchases which exceeded the maximum prices.
The ECA Administrator, by state, was given the authority to promulgate regulations. This he did. The initial regulations restated the statutory test for maximum prices and required a Supplier's Certificate to be signed and filed by each supplier in which he certified, among other things, that upon information and belief and upon such information as was available to him the prices charged were not in excess of the statutory maximum. The supplier also agreed to reimburse the Administrator for any breach of the terms of the Certificate.
This Regulation 1 was amended on May 3, 1949. The statutory maximum price test was again repeated and further language was added to the effect that within that limitation it was ECA's policy to finance only such purchases as were made at prices 'that approximate as nearly as practicable, lowest competitive market prices.' It also expressed the hope that buyers would agree to pay no more than such prices, and stated that its rules were intended as a guide to buyers and sellers. Then followed the sentence 'These rules fix the point beyond which purchases will not be eligible for reimbursement by ECA.' (In November 1949 this sentence was amended to read 'The rules in this part fix the point beyond which purchases will not be eligible for reimbursement by ECA'). The regulations further provided that ECA would take appropriate action to impose additional limitations if it appeared that the objective of lowest competitive market prices was not being met. This was followed by definitions of various terms, not including lowest competitive market price, and a number of more specific price provisions concerning three classes of commodities not here pertinent. But Class IV stated that the Administrator might from time to time establish special rules for certain unspecified commodities. Lastly there appeared another wholly new price provision which we shall refer to as the comparable sales test. This provided that a price would be approved by ECA if (1) it did not exceed any price charged by the supplier in a comparable sale (individual supplier test), (2) it did not exceed the export market price prevailing in comparable sales by the principal suppliers in the source country (principal supplier test), and (3) it did not exceed the statutory test. The Supplier's Certificate was accordingly amended to include a certification that the price charged was no higher than that calculated in accordance with the applicable price provisions of Regulation 1.
With this background we can now turn to a brief history of the lawsuit. The original complaint, filed August 22, 1952, alleged that Bahrein Petroleum Company Limited (Bahrein), California Texas Oil Company, Limited (Caltex), Caltex Oceanic Limited (Oceanic), and Mid-East Crude Sales Company (Mid-East) acted as the alter egos of Standard Oil Company of California (Socal) and The Texas Company (Texas); set forth the statutory and comparable sales tests; and alleged violations of these in that the prices charged were in excess of (a) the prevailing market price in the United States, (b) the prices charged by defendants in comparable export sales, and (c) the export market price prevailing in the Middle East. Damages, equalling the amount of overcharges, were demanded from May 3, 1949. A second count alleged that defendants had promised to sell ECA financed oil at a price which did not exceed any price f.o.b. the Middle East but that they had in fact charged lower prices in other non-ECA financed transactions. The third count made substantially similar allegations and alleged payment by mistake.
Such complaint was amended December 22, 1952. The first count demanded damages for overcharges against Oceanic and Mid-East only based on a violation of each of the three sections of the comparable sales test, alleging that on the basis of information available to them they knew the prices charged exceed the maximum and that consequently the Supplier's Certificate was false. Counts two, three, and four alleged a violation of the statutory test, breach of an agreement not to charge prices on ECA financed transactions higher than those charged on other sales, and payment by mistake. Each was directed only toward Oceanic and Mid-East. The fifth through the eighth counts made the same allegations as the first four counts, but asserted them against all the remaining defendants on the alter ego theory. The 'show cause' letter to Caltex of January 18, 1951 and the March conference which followed it make it clear that the gravamen of the complaint was violation of the first two sections of the comparable sales test resulting from transfers by the producer of the crude oil to the parents of Caltex, which were also parents of the producer, at an artificially determined price lower than ECA financed, which was alleged to be the export market price. This theory has now been abandoned.
The Second Amended Complaint was filed March 16, 1956. It disavowed any claim for violation of the statutory test, repudiated any allegations of fraud or deceit, and sought damages only from September 1, 1950. The first count, after detailing most of plaintiff's evidence, alleges that ECA regulations required defendants to sell at 'prices that approximated as nearly as practicable, lowest competitive market prices,' and that since defendants had not done so their transactions were not eligible for ECA financing and ECA was entitled to recover the full amount paid. Count three alleges an agreement between plaintiff and defendants not to charge prices in excess of lowest competitive market prices and breach of that agreement. Count four alleges violations of the first two provisions of the comparable sales test. The remaining counts relate to alternative theories respecting the amount of damages. This complaint contains no allegation of the alter ego theory. It merely contains the sentence 'Because of the aforesaid (stock) ownership all defendants will, for convenience, hereinafter be referred to as defendant.'
Defendants' Corporate Relationships
Since these corporate relationships assume considerable importance, we shall review them here briefly. Socal and Texas are Delaware corporations wholly independent of each other. Both are integrated oil companies, that is they are engaged in the discovery, production, transportation, refining and marketing of crude oil and its related products. Both operate through the media of numerous subsidiaries. Bahrein is a Canadian corporation owning the concession on Bahrein Island in the Persian Gulf and engaged in refining crude oil. It is owned 50% by Socal and 50% by Texas. Caltex, a Bahamian corporation, is a service organization wholly owned by Bahrein. Oceanic is a Bahamian corporation engaged in selling crude oil and refined products (principally the latter) to European affiliates and subsidiaries of Caltex. Mid-East, also a Bahamian corporation, is engaged in selling crude oil to non-affiliates in Europe. Both Oceanic and Mid-East are owned 50% by Socal and 50% by Texas Petroleum Company (Texpet), a wholly owned subsidiary of Texas. The arabian American Oil Company (Aramco), a Delaware corporation, owns and operates the concession in Saudi Arabia and is owned 30% each by Socal, Texas, and Standard Oil Company (N.J.) (Jersey), and 10% by Socony-Mobil Oil Company, Inc. (Socony). Trans-Arabian Pipeline Company (Tapline) owns and operates the pipeline between Ras Tanura, Saudi Arabia and Sidon, Lebanon, and is owned in the same manner as Aramco. Defendants' Middle Eastern Operations
Middle Eastern operations were carried on in roughly the following manner. Jersey, Socony, and Oceanic (on behalf of Socal and Texas) entered into an agreement with Aramco whereby the former, called offtakers, agreed to purchase, and Aramco to sell, crude oil. Each was to share in Aramco's total production according to its stockholding interest, i.e. Oceanic 60%, Jersey 30%, and Socony 10%. The offtake price, which during the period involved was $ 1.43 per barrel, was determined by an agreement among Aramco's parents. The crude oil was lifted either at Ras Tanura, or at Sidon after tapline came on stream. Each offtaker was free to dispose of its oil as it saw fit. From time to time Oceanic would nominate certain other corporations to offtake directly from Aramco a portion of its share. These corporations included Mid-East, Texas, Calmara Oil Company (Calmara) and California Transport Corporation (Cal Transport), the latter two being wholly owned subsidiaries of Socal. These assignee offtakers were billed directly by Aramco. After tapline was opened in December 1950 all Aramco billings for oil lifted at Sidon also included tapline costs. Aramco thus operated as a collecteor for Tapline and remitted the amounts so received to it.
During the period of this lawsuit the prices charged by Oceanic and Mid-East in all ECA financed transactions, as well as all non-ECA financed sales, were $ 1.75 per barrel f.o.b. Ras Tanura and $ 2.41 per barrel f.o.b. Sidon.
World Crude Oil Price Structure
In order to properly appreciate plaintiff's theories respecting lowest competitive market prices, we turn now to a short history of the world crude oil price structure and description of the manner in which defendants at one time determined the f.o.b. price of their oil.
Prior to World War II the United States was the major exporter of crude oil, competing in all markets. The United States Gulf was virtually the only location from which importers could obtain supplies sufficient to cover any likely requirements. Importation from this source was the alternative to importation from any other source. Consequently, all crude oil was priced on the basis of U.S. Gulf posted prices plus freight from the Gulf to destination, regardless of where the oil actually originated. Thus the price of foreign source oil was competitive, on a delivered basis, with the landed price of U.S. Gulf oil at the same destination. This resulted in different netbacks to the foreign supplier depending upon the market to which he sold. A netback, about which much will be said later, is a figure obtained by deducting freight, insurance etc. from the laid down price. It is the amount realized by the exporter after deducting all costs save those of production.
After World War II when Middle Eastern oil came into full production, the U.S. Gulf ceased to be the major source of supply. Middle Eastern crude gradually took over the European market. This situation necessitated a corresponding change in the price structure. The first adjustment in Persian Gulf f.o.b. prices was the elimination of the varying netback. In other words, Middle Eastern producers set a flat price f.o.b. the Persian Gulf, and freight was based upon shipment from the Persian Gulf, not the U.S. Gulf, to the point of destination.
In determining what the proper price f.o.b. the Persian Gulf should be, Caltex decided to equate its oil to a comparable crude from Jusepin, Venezuela. It did so at a time when Western Hemisphere crude was still moving to Europe, although in diminishing amounts. The price of Jusepin crude was tied to U.S. Gulf prices since those two crudes were in direct competition. Caltex determined the laid down price of Jusepin crude at the ports of Northwestern Europe, deducted the freight from Ras Tanura to those same ports and fixed the resulting netback as its price f.o.b. Ras Tanura. This figure was $ 2.03 per barrel. However, that price was later reduced to $ 1.75 per barrel to meet the competition of the Gulf Oil Company which cut the price of its Kuwait crude. Theoretically at least, during the entire period of this lawsuit the price f.o.b. Ras Tanura was $ 1.75 regardless of the destination to which the crude oil was shipped.
What, however, should the price structure be once Middle Eastern crude oil is not only sufficient to adequately supply the European market but begins to flow into the Western Hemisphere? That poses an extremely complex question and the parties are in violent disagreement. Defendants seem to argue that the Western Hemisphere and the Middle East would then become wholly independent areas of supply and an entirely new price structure would be necessary. Plaintiff argues that Middle Eastern prices in that event should be determined according to 'the high and the low of the range' theory. This serves as the basis for what will be called plaintiff's formula. In essence it asserts that so long as Western Hemisphere oil flows to Europe Middle Eastern oil should be priced at a figure which just permits Western Hemisphere crude to compete in Europe -- i.e. the posted price of Gulf or Venezuelan crude plus freight to Northwest Europe less freight from Northwest Europe to the Middle East. This was the basis on which the price of $ 2.03 per barrel was determined, and it is known as the high of the range. When, however, Middle Eastern oil flows regularly and in substantial volume to the Western Hemisphere, Middle Eastern crude should be priced at a figure which just permits it to compete on the East coast of the United States -- i.e. the posted price of Gulf or Venezuelan crude plus freight to the Eastern seaboard of the United States less freight from the Eastern seaboard to the Middle East. This is the low of the range.
In order to call this formula into being, plaintiff must prove that the watershed is located in the Northeastern United States, instead of Northwestern Europe. By Watershed is meant the area in which the two crudes compete. To prove this, plaintiff must show a net flow of oil (whether just crude or crude and petroleum products combined will be discussed later) to the Western Hemisphere. And to make this formula workable, some appropriate ocean freight factor must be established. This latter, a most complex matter, is discussed infra, 155 F.Supp. 145.
Plaintiff has tried its case on two broad theories -- (1) lowest competitive market price, and (2) comparable sales. The formula just referred to forms the basis of the first theory. This theory in turn has three sub-parts. ECA is entitled to the lowest competitive market price determined by applying the formula on the grounds that there existed (a) a rule in Regulation 1 that required pricing at the low of the range to make the transaction eligible for ECA financing, (b) the Administrator was handling the crude oil situation on the basis of a Special Rule and that rule required pricing at the low of the range, or (c) there was an agreement between ECA and the defendants whereby the latter promised not to charge a price in excess of that calculated by the formula.
The second, or comparable sales theory, alleges that certain Western Hemisphere transactions of Socal and Texas were comparable sales at a price lower than that at which ECA was financing, hence ECA according to the regulations should have been given the benefit of the lower price.
Plaintiff alleges that the legal foundation for this lawsuit rests upon the Supplier's Certificate in which the supplier certified that the prices charged were calculated in accordance with the applicable price provisions of Regulation 1, and agreed to reimburse the Administrator for any breach of the Certificate.
Since it is undisputed that only two of these defendants, Oceanic and Mid-East, ever supplied crude oil or signed the Certificates, plaintiff alleged (at the trial but not in its complaint) a joint venture to hold all defendants liable. While this theory of joint venture affects so much of the first cause of action as relates to Socal, Texas, Bahrein, and Caltex, it goes to the very essence of the comparable sales theory of recovery and will be discussed in detail at that point.
The pertinent parts of ECA Regulation 1, as amended May 3, 1949, and published in the Federal Register, 14 F.R. 2166, are as follows:
'Subpart D -- Price Provisions
' § 201.21 Purchase in bulk of commodities -- (a) Definition. The term 'adjusted market price' means the market price prevailing in the United States at the time of the purchase, adjusted for differences in the cost of transportation to destination, quality, and terms of payment, as determined by the Administrator.
'(b) Scope. This section establishes the procedures for compliance with section 112(l) of the act and section 202 of the Foreign Aid Appropriation Act, 1949, which sections apply to all purchases in bulk, except those where, before June 28, 1948, both (1) a binding purchase contract was in effect between the parties in which the price, or the method for determining the price, was established, and (2) the Procurement Authorization was issued. In such excepted cases, any statement in the Supplier's Certificate relating to the provisions of this section shall be deemed to be waived by ECA.
'(c) Determination of adjusted market price. Determination of the adjusted market price may be made by the Administrator in such manner as to reflect commonly accepted trade practices. In the case of purchases in bulk made outside the United States, the Administrator may determine that the purchase price complies with said sections 112(l) and 202 if he determines that such price, plus cost of transportation and related charges from place of purchase to the participating country at established rates, does not exceed the market price prevailing in the United States (adjusted for differences in quality and terms of payment), plus cost of transportation and related charges at established rates to the participating country. If the price of any purchase in bulk exceeds the adjusted market price, the participating country shall pay promptly to the Administrator upon demand the entire amount of the purchase price.
' § 201.22 Purchase prices -- (a) Scope of this section. (1) Section 112(l) of the act and section 202 of the Foreign Aid Appropriation Act of 1949 establish an upper limit to the prices that may be approved by ECA for purchases in bulk of commodities (see § 201.21). Within that limitation, it is the policy of ECA to make payment only for purchases of commodities, whether or not in bulk, which are made at prices that approximate, as nearly as practicable, lowest competitive market prices. It is expected that buyers, exercising prudence in their negotiations, will agree to pay no more than such prices.
'The rules set forth in this section are intended as a guide to buyers and sellers in conducting their negotiations. These rules fix the point beyond which purchase will not be eligible for reimbursement by ECA. Compliance with them will make a purchase eligible for financing, and post-audit will be made by ECA to determine whether there has been compliance. If it appears that the objective of lowest competitive market prices is not being met, ECA will take appropriate action to impose additional limitations.
' § 201.22(e) (2) Unlisted commodities. A price for a purchase outside the United States of a commodity which is not listed in Class I above or subject to special rules under Class IV above will be approved for reimbursement if:
'(i) It does not exceed any price charged by the supplier at the time of purchase in a comparable export sale of the same or a similar commodity; and
'(ii) It does not exceed the export market price prevailing at the time of purchase in comparable sales of the same or a similar commodity by the 'principal suppliers' in the source country, determined by applying to that country as nearly as may be, the rules set forth in paragraph (d)(2) of this section; and
'(iii) It results in a delivered cost to the port of entry in the participating country no higher than the delivered cost which would have been incurred in a purchase for export of the same or a similar commodity from one of the 'principal suppliers' in the United States.
'For the purposes of this subparagraph (2), a supplier shall be deemed a 'principal supplier,' if he is one of the group of the largest volume suppliers responsible for 50 percent of the export sales of the commodity from the United States, or source country, whichever is applicable.'
Summary of Plaintiff's Theories
The original theory of an actionable wrong advanced by the government was set forth in its 'Show Cause Letter' to Caltex in January 1951, and in its first complaint filed August 22, 1952, viz., that the price which should have been charged, and that ECA should have financed, was the price of $ 1.43 a barrel f.o.b. Ras Tanura. This was the 'offtake' price at which Aramco billed its stockholders or nominees when they lifted oil pursuant to offtake agreements. This theory, as indicated above, has been abandoned.
Plaintiff's present claim is based on a number of alternate theories: First: That there was a rule in the above quoted regulations which required that the prices eligible for ECA financing were only those that approximated as nearly as practicable the lowest competitive market prices. Second: If this was not a rule but merely an expression of ECA policy then, the government argues, there was a 'Special Rule' adopted by the Administrator to the same effect, viz., that ECA was entitled to a price on crude oil that it financed that approximated as nearly as practicable the lowest competitive market price, and in either event such lowest competitive market price was determinable by a formula known as the 'high and low of the range' which was a netback or realized price theory. Third: Defendants agreed with ECA to charge no more than a price determined by this formula. Such formula, which underlies all three alternatives, takes into consideration the flow of oil between the two hemispheres, assumes that the watershed of competition is the Eastern seaboard of the United States and that tanker rates are determinable and well-known. For the time being we shall lay aside these latter considerations and enquire solely whether or not there is any basis for the formula. As an alternate theory plaintiff secondarily relies on the comparable sales provisions of Regulation 1, viz., that application of this test shows that the prices financed by ECA were nor eligible since Texas and Socal in a great many commercial transactions sold arabian crude in this country and Canada at prices that were much less than the prices ECA was financing at the same time.
Under all theories it is plaintiff's position that the Ras Tanura price it was financing should have been $ 1.43 and the Sidon price it was financing should have been $ 1.66.
Was Lowest Competitive Market Price a Price Fixing rule?
Assuming that there was a joint venture and all defendants may be treated as one, an assay will be made of the various theories upon which plaintiff relies. In order that the aforementioned formula apply, there must be some authority for it in the Statute, the Regulations, a Special Rule, or an agreement with the defendants. The Government concedes that the formula does not exist in the Statute, and that it was not explicitly written into Regulation 1. Defendants deny that there was any such rule, 'Special Rule', agreement or formula but, claim nevertheless, that the prices charged were in fact the lowest competitive market prices, inasmuch as no one in Europe could buy crude oil for less than they sold it.
We shall concern ourselves with three issues. One -- Does the language relating to lowest competitive market price in § 201.22(a)(1) constitute a rule requiring defendants to price their oil according to the formula at the low of the range, or was it only a statement of general policy? Two -- Did ECA adopt a Special Rule pursuant to § 201.22(d)(4) which required the use of such a formula? Three -- did the defendants agree with ECA not to charge a price in excess of that calculated in accordance with the formula?
Prior to May 3, 1949, Regulation 1 contained (insofar as prices are concerned) only the Statutory Test for maximum price. In May 1949, Regulation 1 was amended and for the first time contained the phrase 'lowest competitive market price' in subparagraph § 201.22(a)(1) and the comparable sales provisions, ( § 201.22(e)(2)). Section 201.22, quoted above, sets forth in its first sentence the statutory maximum price by making reference to the enabling statutes and by giving notice that that statutory test establishes the upper limit to the prices that may be approved. Next comes the questioned phrase, 'within that limitation it is the policy of ECA to make payment only for purchases of commodities * * * which are made at prices that approximate as nearly as practicable lowest competitive market prices.' The last sentence expresses the hope that buyers will comply with that policy for it states, 'It is expected that buyers, exercising prudence in their negotiations, will agree to pay no more than such prices.' Note that there is no corresponding admonition that sellers should not charge more. This is in line with ECA's policy of not interfering directly in negotiations between buyers and sellers since it was neither a procurement nor a purchasing agency.
This paragraph is then immediately followed by a paragraph that reads, 'The rules set forth in this section are intended as a guide to buyers and sellers in conducting their negotiations. The rules in this part fix the point beyond which purchases will not be eligible for reimbursement by ECA.' (Before an amendment in November 1949 this sentence read, 'These rules fix the point beyond which purchases will not be eligible for reimbursement by ECA'). 'Compliance with them will make a purchase eligible for financing, and post audit will be made by ECA to determine whether there has been compliance. If it appears that the objective of lowest competitive market prices is not being met, ECA will take appropriate action to impose additional limitations.'
The argument in support of plaintiff's theory that the above two paragraphs establish a price fixing rule runs like this, and we quote from its brief:
'Plaintiff's position is that the provision contained in Section 201.22 of Regulation 1 that 'it is the policy of ECA to make payment only for purchases of commodities (such as crude oil) which are made at prices that approximate, as nearly as practicable, lowest competitive market prices' is a rule of Regulation 1, because it is contained under Subpart D, which subpart is entitled 'Price Provisions' and said Subpart D is a portion of Part 201, and, therefore falls within the description of 'The rules in this part fix the point beyond which purchases will not be eligible for reimbursement by ECA'.'
This is a tortuous construction of a plain and unambiguous sentence. In clear, concise language the regulation states, 'It is the policy * * *.' If this sentence needed any explanation the next paragraph supplies it because there the Administrator uses the word 'rules' when he is speaking about 'rules' and the word 'objective' when he is speaking about policy. By no gymnastics in construction or semantics can such a clear unambiguous sentence be construed as a price fixing rule unless we abandon completely the ordinary meaning of words. In addition, ECA's own Associate General Counsel at a conference with some of the defendants' representatives in March 1951, when referring to such sentence, stated 'That is the statement of general policy which is more or less introductory to the specific rules.'
ECA's 'Manual of Operations' on the subject of 'Pricing Policies and Controls' is a most enlightening document deserving of great weight. Section II is entitled 'Legislative and Administrative Basis of ECA Price Policy.' Subdivision A restates the statutory test. Subdivision B sets forth ECA's policy with respect in lowest competitive market prices in language almost identical to that contained in 201.22(a)(1) of the Regulations. It concludes with the statement that 'To aid in carrying out this policy, ECA has adopted certain rules which are incorporated in ECA Regulation 1. These rules, generally stated, are: * * *.' Then follow five rules, the first four of which are not here pertinent, and the fifth simply restates the statutory test. Section III is entitled 'Price Analyses and Standards -- Responsibilities of Suppliers and Importers.' The first paragraph is significant. 'ECA's system for determining acceptable prices requires importers to buy at the lowest possible price without benefit of having ECA pre-determine specific acceptable prices. This is in keeping with ECA's policy of maintaining normal private trade relationships, whereby buyers and sellers negotiate prices and terms in accordance with customary trade practices.' Subdivision A relates to 'Supplier's Responsibility -- Price Certification.' This deals with the Supplier's Certificate which 'attests to the fact that: 1. The purchase price meets the provisions of Section 201.22 of ECA Regulation 1, as amended, which among other things, requires * * *.' The first requirement is that the price charged be no higher than that charged by the supplier to customers similarly situated; the second, third and fourth pertain to discounts, 'kickbacks' and cost-plus contracts; the fifth is the supplier's agreement to reimburse ECA for any breach of the certificate. The balance of the Manual relates to internal ECA procedure. Nowhere in this official handbook on pricing policies and controls is there the faintest suggestion of any rule embodying plaintiff's formula. If such a rule ever existed, this is the one place one would expect to find it.
Such contemporaneous construction is entitled to great weight. See Tobin v. Edward S. Wagner Co., 2 Cir., 1951, 187 F.2d 977. A general statement of policy cannot serve as a price test or even as a modification of a price test specifically provided in the regulations. Cf. Bowles v. 870 Seventh Avenue Corporation, 2 Cir., 1945, 150 F.2d 819, 821, certiorari denied 1946, 326 U.S. 780, 66 S. Ct. 336, 90 L. Ed. 472; Federal Housing Administration v. Morris Plan Co. of California, 9 Cir., 1954, 211 F.2d 756, 758, modified 9 Cir., 1954, 214 F.2d 821.
Was There a Special Rule?
Plaintiff argues, however, that even if this was merely a statement of policy it nevertheless became a Special Rule by reason of Class IV of Regulation 1 (Sec. 201.22(d)(4)).
Class IV reads, 'Class IV -- Special rules for certain commodities may be established, from time to time, by the Administrator.' The government concedes that at no time did the Administrator ever publish in regulation form and cause to be printed in the Federal Register any such Class IV rule relating to crude oil. See: Administrative Procedure Act, Sec. 3, 60 Stat. 238 (1946), 5 U.S.C.A. § 1002; Federal Register Act, Sec. 5(a), 49 Stat. 501 (1935), 44 U.S.C.A. § 305(a). Plaintiff argues, nevertheless, that such 'Special Rule,' viz., that ECA will make payment only for purchases which are made at prices that approximate as nearly as practicable the lowest competitive market prices, was established by various statements made by the Administrator or his associates to the Congress; by the defendants themselves; by correspondence and other documents in the government's and defendants' files. Since the cumulative effect of such proof is relied upon, an extended description of these statements and documents is necessary.
On December 3, 1948, the Administrator wrote to the chairman of the board of Caltex saying that it was of the utmost importance that ECA should have the benefit of the lowest competitive market price for shipments of crude oil financed through ECA, and since Caltex was one of the largest participators in the ECA oil program he asked for an understanding as to the prices which at that time appeared to be proper for ECA financing.
On February 14, 1949, the Administrator again wrote the chairman of the board of Caltex, and to other oil companies (but not any of the other defendants), stating that it was the settled policy of the administration that prices charged for crude oil in all ECA financed transactions should fully reflect competitive market conditions. He also stated that it was his understanding that Caltex was in agreement with this principle and that he was seriously concerned with the movement of Middle East crude oil into the United States and whether such movement could be regarded as temporary or sporadic. He stated as a fact that the imports of Middle East crude oil into the Western Hemisphere exceeded Western Hemisphere exports of crude oil to the Eastern Hemisphere. Consequently, he said, 'the prices charged on such sales have an important bearing on the determination of the competitive market price at Middle East shipping points', and that the shippers reported value of shipments at point of origin from the Middle East (Iran, Kuwait and Saudi Arabia) to the United States has ranged from about $ 1 to $ 1.75 a barrel, which prices were considerably lower than the price of $ 2.03 a barrel f.o.b. Ras Tanura charged to ECA, and asked for explanation and comments.
On February 24, 1949, the chairman of the board of Caltex acknowledged the Administrator's letter of February 14th, and since it is claimed by the government to be of major significance it is quoted at length.
'I have your letter of February 14th in which you raise certain questions regarding present prices of Middle East crude oil shipped to ECA destinations and I am pleased to provide ...