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Hill v. Sharples Corp.

decided: August 8, 1957.


Author: Waterman

Before MEDINA, LUMBARD and WATERMAN, Circuit Judges.

WATERMAN, Circuit Judge.

The plaintiff-appellant, George H. Hill, appeals from a judgment in favor of the defendant, The Sharples Corporation, dismissing the plaintiff's complaint after trial before a judge and jury. The complaint contained three counts: first, for contract damages resulting from the failure of the defendant to pay Hill, who had been employed by Sharples, $177,000 in substitution for commissions allegedly earned by Hill in 1942 but retained by the defendant; second, for damages in fraud for actionable misrepresentations by which Sharples' officers allegedly induced Hill to consent to retroactive cancellation of the written employment agreement under which he had earned the claimed commissions; and third, for equitable rescission and an accounting on the same grounds of fraud as set forth in the second count.Federal jurisdiction was based on diversity of citizenship.

The defendant manufactures purifying machinery used on ships and submarines to clean the oil in both the lubricating and fuel systems. Hill began working for Sharples in 1925 and remained in its employ until his retirement in 1951. Throughout his employment he was a "sales engineer," whose duties included selling and servicing centrifugal purifying equipment to naval architects, marine engineers, shipowners, and shipbuilders.

In January 1940, the plaintiff and the defendant executed a written contract covering Hill's employment. It provided for a monthly salary of $400, and stated that the "salary shall be subject to change by" the defendant alone. Further provision was made for a "yearly bonus" consisting of commissions to be computed according to the amount by which orders for sales and service from Hill's territory exceeded a specified quota based upon expenses. The contract also contained the following clause:

"Cancellation of this agreement by either party shall not affect the compensation due Hill under this agreement for business done prior to the effective date of cancellation."

In 1940 and 1941, the sudden increase in shipbuilding created a fast-rising demand for the defendant's products. As a result, in 1940 the plaintiff's total compensation was $29,286.49, almost treble his compensation for 1939. Of this amount only $4800 represented salary. Hill's contract was renewed for the year 1941, and in that year his total income was $82,598.77 - the highest in Sharples' organization, except for Mr. Sharples himself, the defendant's president. In the first two months of 1942 sales orders in Hill's territory continued to rise in volume. Nevertheless, in March Hill's contract was renewed for the year 1942 without any change in its existing terms.

On April 28, 1942, the Renegotiation Act of 1942, 50 U.S.C.A.Appendix, ยง 1191, was approved by the President, and became effective. That statute required the renegotiation of the contract price in all war contracts in order to eliminate "excessive profits." The determination of "excessive profits" was to be made by the Secretary of each Department. Contractors were required to disclose to the Secretary "actual costs of production and such other financial statements * * * as such Secretary may require." No "excessive profits" could be paid and, if any had already been paid, an action for recovery was authorized. The Renegotiation Act contained a specific direction that, in determining "excessive profits," no allowance should be made for "any salaries, bonuses, or other compensation paid by a contractor to its officers or employees in excess of a reasonable amount."

Sometime after the enactment of the Renegotiation Act, the War Department and the Navy Department jointly published an official booklet (colloquially called the "Green Book") setting forth the "Principles For Determination of Costs Under Government Contracts." That publication provided, inter alia, that "the total compensation paid to individual officers and employees of the contractor may be open to question and subject to limitation when the circumstances warrant * * *" Illustrative circumstances included total compensation to any individual "in excess of $25,000 per annum," particularly "when such compensation has been increased disproportionately or unreasonably since June 30, 1940." Among the items designated as "inadmissible costs" were "commissions, bonuses, and special premiums under whatever name, paid in connection with negotiations for or procurement of a Government contract."

The issuance of this publication was reported by the New York Times on June 21, 1942, in an article captioned "War Contracts get $25,000 Salary Limit." The text of the article contained a condensed, but generally accurate description of the contents of the "Green Book." At the trial below, G. Joseph Keady, who was Executive Vice President of Sharples in 1942, testified that he read this article in the Times at the time of its appearance. He also testified that during the preceding months he had read several articles in that newspaper reporting attempts by the President and several committees of Congress seeking to impose restraints upon war-stimulated incomes. The witness then testified that he became disturbed about the defendant's contract with Hill and the possibility of commissions accruing under it far in excess of the general limits of reasonable compensation prescribed by the Renegotiation Act and the "Green Book." Of course, under the directions of the latter no commissions whatsoever "paid in connection with negotiations for or procurement of a Government contract" were allowable as cost items in the computation of a contractor's costs under a Government "cost-plus" contract.

Sometime during the latter part of June or early July, 1942, Keady, by prearrangement, met Hill at the Biltmore Hotel in New York City. Attempts by counsel to establish the precise content of their ensuing conversation consumed the bulk of the trial proceedings, inasmuch as that conversation comprised the principal basis of the plaintiff's claims for relief both at trial and on appeal.

Keady testified that at this meeting he told Hill that the Sharples' management had decided "to pay [Hill] the maximum amount that we could under the Renegotiation Act, which was $25,000 a year. Anything in excess of that would be looked at askance by the Renegotiation Board." The plaintiff's recollection of Keady's remarks, made fourteen years before the trial, was as follows:

"Well, the conversation was to the effect that Mr. Sharples was acquainted of an [imminent Government] investigation and he did not want the company hurt * * * then he [Keady] told me that it [the investigation] had something to do with my commissions and that the law would not allow them [the defendant] to pay me more than $25,000 a year, therefore they were going to cancel my 1942 contract and * * * put me on a $25,000 a year salary for that year of 1942 * * *"

Hill, according to his testimony, then replied that he "didn't want to have Mr. Sharples embarrassed by any Government investigation and if the law wouldn't allow me to be paid more than $25,000 * * * I guessed I would have to accept it." The plaintiff also testified that he mentioned the "commissions that the company owed ...

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