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PROVISIONS OF TERMINATION CLAUSES

The standard contract used by the Ordnance Department in 1917 and 1918 to procure steel billets regularly contained two clauses which dealt exclusively with cancelation, namely, “termination" clause and "breach by contractor" clause. These clauses were couched in general terms, enabling termination of the contract by the Government under many conditions. Additional cancelation provisions covering specific situations were inserted into some contracts as amendments to several different clauses such as “price and delivery” and “care of property.” Thus, in actual practice, the regular cancelation clauses in standard contracts for steel billets were supplemented by some amendments to other clauses.

The following detailed discussion of each of these clauses—termination, breach by contractor, and amendments to other clauses-will reveal the conditions under which each could be invoked by the Government and the resulting obligation of the Government or the contractor.

Of the three clauses containing cancelation provisions, the termination clause was the most inclusive in its provisions. The termination clause authorized complete or partial cancelation of the contract under each of three conditions ; (a) if the war ended; (b) if the Chief of Ordnance anticipated the war's end; or (c) if the product specified in the contract became outmoded through a change in the method of warfare.

In event of cancelation under provisions of this clause, specified obligations were laid upon the United States Government, namely:

(a) Acceptance of all completed articles that would meet the specifications set forth in the contract;

(b) Acceptance of all articles that could be completed by the contractor within 30 days after notice to suspend operations ;

(C) Payment for materials and component parts purchased by the contractor solely for completion of the particular contract ;

(d) Payment of all debts necessarily incurred by the contractor for the particular contract;

(e) Compensation to the contractor for work, labor, and services rendered under the contract; and

(f) Acceptance of title to the component parts and materials accepted and paid for. The breach-by-contractor clause, as the name implies, provided for cancelation in case of default by the contractor. The default could take either of two forms: (a) Violation by the contractor of any material provision of the contract, or (6) lack of diligence in filling the contract. If the Government terminated the contract for either of these reasons, the contractor was responsible to the Government "for all loss and damage incurred as a result of such action."

Since both of these clauses were standard provisions of all contracts for steel billets, they are cited in full in exhibits IV and V.

The amendments to other clauses were not standard but instead varied with the particular negotiations. The following two examples illustrate the type of amendment that affected the cancelation provisions of the contract.

Example 1.-An amendment to a clause dealing with "prices and delivery" provided that,

"The above deliveries are subject to such changes as may be necessitated by the compliance by the contractor with the directions of the War Industries Board or other authorities of the United States Government."

An order of the War Industries Board, according to the contractor's correspondence with the War Department, later transferred 1 montli's production under this contract to a different company.

Example 2.-An amendment to a clause dealing with “care of property” referred to a separate definition of the costs which would be paid by the Government in event of cancelation under the termination clause. The bulletin containing the specified definition listed the following reimbursable costs: (a) All direct labor cost; (b) all direct material cost; (c) pro rata share of factory overhead expense; (d) pro rata share of administrative and general expense.

TERMINATION OF CONTRACTS

Although all of the contracts for steel billets contained cancelation clauses, termination resulted only from some extraordinary development. Minor adjustments--such as increases in military requirements, changes in the rate of delivery, or delays in completion of the contract-were secured by mutual agreement of the contracting parties and recorded in supplemental contracts. Final cancelation required a more critical situation. The following examples illustrate three situations that provoked termination, namely, (a) a change in military specifications; (b) the inability of the consignee to use the product; and (c) the end of the war. A typical supplemental contract canceling an original commitment with an unfinished balance of more than $1,000,000 is cited in exhibit VI.

A change in military specifications caused the cancelation of several Ordnance Department contracts with this company. However, because of the nature of the product, a new contract calling for a different size billet was always negotiated the same day that arrangements were made to cancel an existing contract. This enabled the contractor to maintain production. For example, on November 23, 1917, negotiations were completed for a contract to produce 24,000 tons of 155-mm. common shell steel billets. Deliveries were to begin in December at the rate of 3,500 tons per month; the contract was to be completed in June 1918. This contract for billets underwent three modifications by mutual agreement before it was finally canceled in May 1918, and replaced with a new contract.

The first modification, early in December 1917, involved the delivery schedule. As a result of this change, only 1,000 tons were delivered in December, but 4,000 tons were called for each month from January through May. The contract still was to be completed by mid-June.

The second modification, in mid-December, increased the production under the contract by 41,000 tons from 24,000 to 65,000 tons. Despite this increase in requirements, the completion date continued to be mid-June. Monthly deliveries were stepped up to meet the new demand.

The third and last modification, in January 1918, postponed the completion date from mid-June to mid-July. The consignee to whom the billets were shipped was unable to use immediately the increased quantity of steel to be shipped under the requirements of the second modification. In response to the consignee's pleas for a smaller delivery in January, the contractor was permitted to delay shipments for one month.

Even though the contract was sufficiently flexible to sustain these changes in requirements, rate of delivery and date of completion, it was not able to meet a major change in specification. In May 1918, when 37,000 of the 65,000 tons of billets had been shipped, the Ordnance Department demanded billets for 9.2 inch instead of 155 mm. shell forgings. After an informal conference, the contractor was directed to suspend production under the contract for 155 mm. material and to accept, in lieu of the original commitment, a new contract for shell steel billets for 9.2 inch forgings. Cancelation of the original contract was formally completed with the signing of a supplemental termination contract on June 14, 1918.

Because of the nature of the billet-manufacturing process, it is probable that very little unemployment resulted from cancelation. The machines for making 155-millimeter material could be readily adapted to making billets for 9.2-inch shell forgings. No retooling was necessary.

Inability of the consignee to use the product led to the cancelation of another contract. Negotiations were completed in July 1918 for the production of 64,000 tons of 6716-inch diagonal standard gothic section common shell steel billets. Production was to proceed while the formal contract was being drawn up.

The consignee for this product was a new war plant just being constructed by one of the larger automobile companies. Delays in the completion of the new plant led the consignee to ask the contractor to postpone deliveries. As a result, the contractor did not begin production. Notice of the request for delay and of the postponement of production was furnished to the Chief of Ordnance and to the War Industries Board.

At first, both the War Department and the War Industries Board approved the postponement of production. But it became apparent in October 1918, 3 months after the negotiations, that the new plant would not be able to use the steel for several more months. Then the War Industries Board, because of the pressing demands of other steel consumers, revoked its permission to delay deliveries.

At that time copies of the formal contract were with the contractor for signature. Notice was sent to the contractor by the Chief of Ordnance requesting that the contract be returned unsigned so that recently discussed "amendments" could be inserted. It was evident from other correspondence, but unstated in the notice, that the amendments referred to dealt with postponing the delivery date. When the contract was returned, the War Department, instead of inserting the amendments, recognized the War Industries Board order. The contract was never formally completed. No production under the order was undertaken.

After the war the Ordnance Department Claims Board asked the contractor if he had any claim as a result of the contract. No claim was filed and the Claims Board considered the contract satisfactorily settled.

Cancelation because of the end of the war had, from industry's standpoint, the most disastrous effect. Almost overnight many firms lost millions of dollars worth of booked orders. The following illustration is merely one of several for this particular contractor.

Negotiations had been completed on September 28, 1918, for a contract calling for production of 37,000 tons of 82-mm. diagonal round common shell steel billets. This contract, like those previously mentioned, was amended several times before it was finally canceled.

One amendment, dated October 26, reduced by 2,000 tons the production called for in the contract. Later another amendment was arranged, increasing the unit weight of the billets from 20.5 to 24 pounds. The contractor interpreted this change in unit weight as increasing the tonnage requirements, the number of units remaining the same.

While these amendments were being developed, production was under way. By November 15, less than 2 months after the contract was negotiated, more than 9,000 tons of steel billets had been produced and shipped. Full payment for this production was made before the end of December.

However, the signing of the armistice had put an end to the Government's requirements for shells, and all contractors for shell steel billets were promptly given tentative notice to suspend production. This request to cease production was formally reiterated in a letter dated December 16. The formal request was made "with a view to the negotiation of a supplemental contract providing for the cancelation, settlement, and adjustment of your existing contract in a manner which will permit of a more prompt settlement and payment than will be practicable under the terms of said existing contract."

The supplemental contract was finally arranged late in May 1919 providing that the contractor, in place of the $2,800,000 balance of his contract, accept "$1

in full and final compensation for articles or work delivered, services rendered, and expenditures incurred

The effect of cancelation upon the contractor may be judged from the production record of this contract. The contractor shipped during the week ended November 7, 550 tons of billets and 750 tons in the following week. In the 2 weeks following the armistice, shipments fell off sharply, being only 200 and 100 tons, respectively. All shipment was completed by the end of November. In other words, a weekly production of at least 750 tons was entirely stopped within 3 weeks.

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CANCELATION AND INFLATION PROVISIONS IN CONTRACTS FOR RIFLES

INTRODUCTION

Actual participation in the World War by the United States after April 1917 necessitated a greatly increased Army. This, in turn, led to a rapid expansion of demand for rifles. When the United States entered the war, the Army was using Springfield rifles, model 1903. However, the supply of these rifles was inadequate to meet the new demand. The Army faced a choice between rapid production of mediocre rifles and delayed production of high-quality rifles. An examination of the three available types of rifles will show the difficulty of the choice. Final selection was based upon the merits of the rifles, the availability of the ammunition each required, and the manufacturing capacity for each rifle.

First, the Springfield rifle was skillfully tooled, well balanced, and very accurate. It used the .30-caliber ammunition which had been adopted as standard for the United States rifles. However, all of the manufacturing capacity for this rifle was located in the Government's Springfield and Rock Island Arsenals. Production during preceding years had been at low levels, and, correspondingly, productive capacity was very small.

Second, the Lee-Enfield rifle, model 1914, modified, was the standard British rifle at that time. It was neither as accurate nor as well balanced as the Springfield, in the opinion of Army Ordnance Department experts. It used a .303-calibre ammunition, not standard in the United States and produced here only in very limited quantities. Although ammunition was scarce, these rifles had been produced in this country on a large scale by private manufacturers holding British contracts during 1915 and 1916. In 1917 Britain's own rifleproducing capacity was becoming adequate to meet her needs, and British rifle contracts with United States manufacturers were expiring. Therefore, the private rifle manufacturers were willing and anxious to receive United States contracts.

Third, Ordnance Department officials thought it possible to adapt the LeeEnfield to .30-caliber ammunition and to develop certain changes in parts so that the Lee-Enfield would become an acceptable weapon. Such a rifle could be produced in great quantity with only minor retooling. For this reason, and because it was an acceptable weapon, the Ordnance Department determined to use an adapted Enfield rifle.

Most of the American rifle capacity, built in response to British demands, was centered in three companies, namely, Winchester Repeating Arms Co., Remington Arms-Union Metallic Co. (the well-known Remington company), and the Remington Arms Co. of Delaware. The Remington Arms Co. of Delaware, whose rifle contracts with the Government are to be discussed in this paper, was a subsidiary of the Midvale Steel & Ordnance Co. Early in the war the Remington Arms Co. of Delaware contracted directly with the Government. Later it was absorbed by the Midvale Steel & Ordnance Co., and the contract was transferred from Remington to Midvale.

The decision to use an adapted Enfield rifle was made in July 1917. Contracts: were immediately let with each of the big private rifle manufacturers. Altered specifications for the Enfield rifle were completed in August and production at all three plants began immediately. The first shipments of the adapted Enfield rifles-called United States, model 1917, caliber .30—were delivered by Winchester in August and by the other two companies in September 1917. In the course of the war the Eddystone rifle plant, operated by the Remington Arms Co. of Delaware, on property leased from the Baldwin Locomotive Works, manufactured 47 percent of the rifles purchased by the Government in the United States. The following discussion deals with the Government's rifle contracts for the product of the Eddystone plant.

There was basically only one contract, negotiated in July 1917 and repeated in January 1918 when management of the Eddystone plant was changed. Later during the war amendments to the terms of the January contract provided for increased production and new facilities to permit that increased production. These amendments were accomplished by the World War I equivalent of a "letter of intent.” They were cumulated at irregular intervals into supplemental contracts to the January agreement. However, except for the increased facilities and production requirements, there were no changes in the basic terms of the original contract.

The rifle contract had two other interesting features. First, it provided that specifications could be changed at any time by the Ordnance Department. This provision was necessary because specifications had not been completed when the contract was negotiated. The specific permission to change specifications removed, for this contract, a cause leading to the wartime cancelation of many other contracts. In contrast, specifications in many contracts without this clause could be changed only by termination and negotiation of a new agreement. Second, the whole contract was of questionable legality. The original contract and the January version were both legal under the laws governing War Department contracts at that time. The first and second supplements, however, did not conform with the law because they were improperly signed. The third supplement, like the original contract, thus, was legal, while the fourth supplement was never formally completed. Because some of the supplements failed to conform with the law, the whole contract was rendered illegal. Final payments could not be made until after March 1919, when the Dent law validated "informal” contracts. Actually, final payments were delayed until February 1921.

The following discussion of the cancelation and depreciation provisions of the contract first states the provisions in the July 1917 agreement; second, notes any changes in the contract'as renegotiated in January 1918 and supplemented in May, June, September, and November 1918; and, third, considers briefly the actual termination of the contract.

PROVISIONS OF THE FIRST CONTRACT

The United States Government first contracted for the rifles produced at the Eddystone rifle plant in July 1917. The first contract was a negotiated cost-plus

agreement calling for 475,000 rifles complete in all respects. The rifles were to be produced within a year after the contract was negotiated.

This contract was simply a typed statement, not a standard or form contract. It was written in two parts—the contractual agreement and the execution agreement--separately signed and approved. The contractual agreement simply called for the production of 475,000 rifles and stipulated certain definitions to be used in the execution agreement. For example, the sixth clause stipulated that the costs to be paid to the contractor by the Federal Government should not include any franchise tax or Federal income, capital stock, profits, and munitions or manufacturing taxes. On the other hand, the execution agreement made performance of the contract conditional upon the conclusion of an arrangement between the Ordnance Department and the British Government permitting the continued use by the contractor of certain machinery and tools then being used for British rifle contracts. Thus, the two parts of the contract—the contractual agreement and the execution agreement-were interdependent even though they were separately stated.

The two parts, taken as a unit, have several interesting features related to cancelation, depreciation, and amortization.

Cancelation was provided for in article 19 of the execution agreement and only in that article. The customary “breach by contractor" clause and the other termination provisions in standard contracts were rendered unnecessary by the very general authorization for cancelation by the contracting officer representing the Government. Termination was permitted “at any time” with no limitations as to the cause or causes provoking it. This is clearly revealed in the wording of the clause:

“The contracting officer may cancel this contract at any time in respect of further performance thereof, by notice in writing to the contractor, but in case of cancelation the contractor shall receive full reimbursement on account of all expenditures therefore made, or liabilities incurred up to date of such cancelation to make up the 'actual cost' and [sic] defined in article 12 of this contract, to such 'actual cost,' then shall be added ten (10) percent for profit.”

Article 12 enumerated six constituents of actual cost, namely:

(1) Direct charges including materials, supplies, labor, special appliance, and insurance upon the rifles.

(2) Proportionate share of the running expenses.

(3) Reasonable rate of interest upon proportionate share of investment not provided by the Government.

(4) Proportionate share of taxes.

(5) Proper proportion of physical losses actually sustained in connection with the business.

(6) Reasonable allowance for depreciation of value of plant and property.

Although all provisions for termination by the Government were centralized in one clause, there was a novel additional provision which specifically permitted the contractor “to discontinue the manufacture of rifies under the contract if for no fault of his own the Government failed to forward the partial payments

*” provided in the execution agreement. Each month within 15 days after submission of bills, the contractor was to receive payments to cover the approved actual cost for the previous month. If these payments were delayed, the contractor of his own volition could cease work upon the contract.

Depreciation was covered in the article defining "actual cost.” The Government was to make “reasonable" allowance for depreciation.

Amortization was involved in other clauses; for example the contractor was "permitted” at the option of the Government to supply his own materials, tools, equipment, and other personal property, but the Government was equally authorized at its own option to provide those materials. Incidentally, later negotiation of amortization arrangements was complicated by the fact that the physical building and property in which these rities were being manufactured was under lease by Remington Arins of Delaware from the Baldwin Locomotive Works for a rental of $25,000 per month. The lease could be canceled at any time on 30 days' notice by the Remington Co.

There was only one change in the terms of this contract before it was transferred to the Midvale Steel & Ordnance Co. as described below. This was an increase of 250,000 in the number of rifles to be produced, making the total of 725,000. By the end of December, 173,000 rifles were produced. This left a balance of 552,000 rifles on January 2, 1918.

The Remington Arms Co. of Delaware, the contractor for the July rifle contract, was a wholly owned subsidiary of the Midvale Steel & Ordnance Co. The

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