companies as the Stutz Motor Car Co.; Dodge Motor Car Co.; Van Dorn Iron Works; and the Holt Manufacturing Co. of Peoria, Ill.

The Ford Motor Co. received four contracts for 3-ton tanks. Two of the contracts called for experimental production of a very few tanks; two required mass production. The history of these contracts is typical of the experience of many war contractors during 1917 and 1918. The negotiations, the terms, the cancelation and claim adjustment under these contracts had few unusual aspects. However, two points deserve special mention.

First, the termination clauses in these contracts underwent substantial evolution. The first Ford contract in April 1918 contained no termination provisions, the second in July 1918 provided in rather general terms for cancelation, and the third and fourth in October 1918 each carried a lengthy cancelation clause with technical definitions of the Government's obligations in event of termination.

Second, the "fixed price" clause in the third contract was the forerunner of the present day renegotiation clauses. Under terms of this clause the price was to be reconsidered after the production of each 1,000 tanks. If the contractor's profit on that production exceeded 10 percent of the actual cost, the price was to be reduced. If the contractor's profit was 10 percent or less, the price was to remain unchanged. Since the war ended before any tanks were produced under this contract it is impossible to evaluate the effect this clause might have had upon war profits.

Only the second Ford tank contract satisfied the requirements of the laws affecting Government contracts. The first, third, and fourth contracts were informal, that is, they did not meet legal requirements. After the armistice, the Comptroller of the Treasury refused to make payments against such contracts. Finally in March 1919 the Congress passed the Dent Act validating informal contracts. Contractors, like Ford, who had written evidence of the War Department's intent to make a contract, were then able to present claims and secure reimbursement for expenditures incurred with a view to production under such a contract.

THE FIRST CONTRACT

The first contract, calling for the production of two special small experimental tractors (tanks) at cost plus 10 percent for profit, was negotiated in April 1918. The War Department allotted $15,000 to cover the cost of the two tractors. This later proved inadequate, and the allotment was increased to $65,000. The new allotment was more than double the amount needed.

Although the contract called for only two experimental tanks, the Ford Co. produced three. The first of these was rejected by the War Department because of some technical shortcomings. The other two were delivered and accepted in July 1918.

Payment for these tanks was delayed until October 1919. The records do not indicate clearly the cause of this delay. There is some evidence that during the war delay resulted from a dispute in the War Department over the division of payments among the various tanks. One group asserted that three tanks were produced and therefore the total payment of $30,000 should be divided three ways; another group claimed that the Department had accepted only two tanks and the payment should be divided only two ways. The evidence does not show definitely that payments were delayed for this reason.

After the war, however, the Government discovered that the contract was improperly executed-Edsel Ford had not designated his title when he signed the contract. This made the contract informal. Payments could not be made until after the passage of the Dent Act in March 1919. In April the Ford Co. filed a claim for expenditures "under performance as originally entered into and as amended by oral or written instructions." As award of $30,000 was allowed and payment made in October 1919, more than a year after production was completed.

THE SECOND CONTRACT

The second contract, negotiated in July 1918, called for 15 tanks modeled after the third experimental tank produced under the first contract. The price specified in the second contract was cost plus a fixed fee of $300 per tank in contrast with the cost plus 10 percent price of the first contract. The total allotment for the 15 tanks was only $69,500 or roughly $4,700 per tank. This contract was executed in strict accordance with the law; it was a so-called formal contract.

*

The cancelation clause of this contract authorized the Government to terminate the contract if the war ended, if the war's end was anticipated, or if the contractor failed to meet the contract's production schedule. In event of cancelation for the first two reasons-the war's end or anticipation thereof-production was to continue for 30 days. When production ceased, the Government was "to protect the contractor on all obligations incurred necessarily and solely for the performance of this contract * * * [plus] such sum as * necessary to fairly and justly compensate the contractor for work, labor, and service rendered under the contract." On the other hand, if the contract was canceled for the third reason-failure to meet production schedule-no compensation was to be given except for acceptable work completed. The terms of this clause were never invoked because the contract was satisfactorily fulfilled before the armistice; however, for its historical interest, a copy of the clause is attached in exhibit X.

The Ford Co. completed all 15 tanks before October 1918. The Army shipped 10 of these tanks to Europe, diverted 4 to training purposes, and designated 1 tank for further experimentation by Government experts. Although this second contract was let when the Germans were making a powerful drive toward Paris, it did not provide for increased plant capacity, nor did it look toward continued production. This contract, like the first one, was considered experimental or educational.

The ease with which this formal contract was fulfilled and settled furnishes a startling contrast with the delays encountered in settling the earlier informal contract. In this case, payments were made as soon after the tanks were delivered as the contractor was able to present adequate cost data. As a result, there was no post-war claim for settlement. Moreover, since all of the tanks were delivered, it was not necessary to terminate this contract after the war.

THIRD AND FOURTH CONTRACTS

The third and fourth contracts were negotiated in October 1918. Before the armistice the Government and the Ford Motor Co. had agreed upon the terms of these two contracts. However, neither agreement was embodied in a contractual instrument executed by the authorized contracting representatives of the Ford Co. and the Government. In other words, these were informal contracts. The third contract called for production of 15,000 tanks, 1.000 to be delivered in December 1918 and 100 to be delivered each day beginning January 1, 1919. The fourth contract called for the manufacture of 1,000 tanks at the rate of 25 per day beginning January 1, 1919. As first negotiated both of these contracts were cost-plus-fixed-fee arrangements. However, additional negotiations led to fixed prices in both contracts before the formal instruments were printed. Three other similarities between these two contracts are listed below and then discussed in greater detail.

First, both contracts specified fixed prices. The fixed prices differed, one being $4,500 per tank and the other $6,500, because of differences in specification. Nor were the provisions of the two price clauses similar. Yet, in contrast with the first two contracts, these were both fixed price agreements.

Second, the cancelation provisions of both contracts were identical. These provisions were quite technical in statement and incorporated by reference a separate 12-page bulletin defining the costs for which the Government would reimburse the contractor. This bulletin defined cost to include direct materials, direct labor, overhead expenses, and administrative and general expenses.

Third, manufacture of tanks under each of these contracts, unlike the first two contracts, was predicated upon the construction of new plant capacity. In spite of this, neither contract specifically provided for the construction of such capacity.

The fixed price clause in the third contract specified $4,500 for each tank delivered to and accepted by the Government. This price was to be reconsidered and revised periodically. After delivery of 1,000 tanks, the contractor was to determine his costs in accordance with the above-mentioned bulletin. If this cost, plus 10 percent for profit, amounted to less than 4.5 million dollars ($4,500 per tank), the price to the Government for the next group of tanks was to be appropriately reduced. However, if the cost plus 10 percent amounted to more than 4.5 million dollars, the price would continue the same. In other words, the price clause was designed to prevent excessive profits on this contract.

The price revision features of the fixed price clause in the third contract were not carried over into the fourth contract. The latter merely specified that $6,500 was to be the price for each of the 1,000 tanks called for by the contract.

The termination clause in both contracts was divided into four subsections: namely, cancelation for contractor's default, termination in public interest, assignment of subcontracts, and taking possession of the contractor's plant. A copy of this clause is attached in exhibit XL.

The negotiated terms of the contract guided the War Department in the adjustment of claims resulting from informal contracts validated by the Dent Act of March 2, 1919. Hence, although the contract was never executed, the terms of the formal instrument are significant. The following brief review of the outstanding provisions of the termination clause may prove useful in understanding the subsequent claim adjustment.

"First, in event of default, the Government could cancel the delivery of all or any part of the articles then in arrears. However, the Government would accept and pay the contract price for tanks completed in accordance with the requirements of the contract at the date of any cancelation.

"Second, the Ordnance Department could cancel the contract any time the public interest so demanded. In this case, however, in addition to payment for work completed at the date of cancelation, the Government would pay the contractor for both materials acquired and obligations incurred with a view to continued production. The Government would also reimburse the contractor for depreciation or amortization of plant, facilities, and equipment solely provided by the contractor at its expense for the performance of this contract.' In order to ascertain the amount due under this last provision, a board of appraisers was to be created to determine the fair market value of the plant, facilities, and equipment at the time of cancelation. The Government would pay to the contractor the difference between the contractor's actual investment and the market price determined by the appraisers.

"Third, if the contract was canceled, the contractor was required at the Government's option, to assign to the United States the unperformed portion of any or all contracts and subcontracts entered into with a view to continued production. However, the Government was not to become responsible for any obligation of the contractor arising from such subcontracts prior to assignment. "Fourth, if the contract was canceled for any reason the Government was authorized to take over the contractor's plant in order to complete the contract. In this case, the Government was to pay the contractor such reasonable sum for the use thereof as may be agreed upon between the contracting officer (representing the Government) and the contractor.'

The provisions for new plant capacity were mentioned only in the second section of the termination clause. The contracts contained no other specific mention of new construction. Apparently both the contractor and the Government assumed that new construction was a necessary prelude to manufacturing. As a result, after the contract was canceled, the propriety of the contractor's claim for new buildings was not questioned.

In addition to the above-mentioned implicit permission to construct new building, the third contract was supplemented by a facilities contract. This provided for such "jigs, dies, tools, and fixtures as would be required to produce 3-ton special tractors at the rate of 100 per day." The records do not indicate the reason for segregating the equipment contract from the tank contract when the latter already permitted building construction.

Cancelation and claim settlement.

First deliveries of tanks were to have been made late in December 1918 and early in January 1919. But both the third and fourth contracts were canceled by informal agreement late in November 1918, before production was under way. Thus preparations for mass production of tanks under these contracts ceased within 3 weeks after the armistice.

After termination, the customary difficulties in settling informal contracts were encountered. All payments were postponed until the Dent Act was passed in March 1919. As soon as this act was operative the Ford Co. submitted a formal claim for damages resulting from termination.

In order to clarify items to be considered in adjusting the claim, the Ordnance Department sent to the contractor copies of the contractual instruments. These were the formal documents incorporating the terms agreed upon during the contract negotiations. They had not been executed and under the Dent Act

did not have to be signed by the contracting parties. The terms of these documents, which have already been discussed, guided the subsequent settlement of claims.

The claim for the third contract was promptly considered by the Detroit District Claims Board. By April 2, 1919, the board recognized that the claim involved commitments for machinery, equipment, and material to the value of $1,000,000 and an additional $500,000 for performance of the contract leading to the point of production. Prompt consideration and prompt settlement, however, were two different things. The board's award was not made until December 1919 and not ratified by the War Department Claims Board until February 1920.

The delays of settlement were occasioned at least in part by the inadequacy of the Ford Co.'s records. Almost before consideration began, the Detroit Board asserted, in relation to the cost of the new buildings, that "the accounts are in such shape that we cannot tell what amount was expended before suspension. The Ford Co. have since completed building on the understanding that they would be responsible for any expenses after the date of suspension, and that there would be an adjustment of price, and that Ford would take title to the building." Further difficulties arose in settlement because "many negotiations (for the contract) were carried on in Washington and, in many instances, arrangements made in Washington were apparently not made a matter of record at the offices of the Ford Motor Co."

The size of the award as shown in the following table probably led to greater caution on the part of the district board than would have been exercised had the claim been smaller.

Award-Contract for 15,000 tanks, Ford Motor Co., December 1919

The above table shows that the district board's award was 1.4 million dollars. This was offset by (a) $1,000,000 in payments advanced to the company before construction was terminated, and (b) $200,000 representing the salvage value of work begun and materials purchased. The deductions left a cash balance due the contractor of less than $200,000. Delay in payment of such a small cash award could have had only negligible effects upon the Ford Co.

The Detroit District Board suggested the award, with the deductions noted above, in Decmber 1919. However, until the Ordnance Department Claims Board and the War Department Claims Board approved the award, payments could not be made. These boards gave their approved in February 1920. Final payments were made the following month.

Adjustment of the claim under the fourth contract was less complicatedthe award involved less money, and the settlement of the claim was more rapid. The Detroit District Claims Board proposed an award in May 1919 as outlined in the following table.

Award-Contract for 1,000 tanks Ford Motor Co., May 1919

Salvage value of the property purchased for the fourth contract amounting to $100,000 was deducted from the district boards' $250.000 award, leaving a cash balance due the contractor of approximately $150,000. The Ordnance Department and War Department Claims Boards quickly approved this award. Before June 30, 1919, final payments were rendered. Adjustment and payment were completed less than 3 months after the claim was presented.

Peacetime reconsideration of the awards.

These

In 1923, 3 years after the payment of these awards, the Board of Survey in the Justice Department and the War Transactions Section of the War Department began to review some of the awards made under war contracts. included claims under the Ford Co.'s war contracts. The review was designed to ascertain whether overpayments had been made by the Government to the contractor, and if so, if they could be recovered.

These two Government departments exchanged correspondence with the Ford Co. over a 5-year period. After a thorough survey, the dpartments determined that relatively small overpayments might have been made on the tank contracts and on other contracts for automobiles and trucks. However, a court decision in the Dayton Airplane case, indicated that the Ford Co. probably had had grounds for substantial additional claims under its airplane contracts. The Ford Co. could not reopen its claim because of the statute of limitations, but if the Government reopened the case, a court having full knowledge of these facts would probably have denied the Government recovery of overpayments. Therefore, in April 1928, the Departments decided to consider the Ford Co. contracts closed.

EXHIBIT I

TERMINATION CLAUSE, STANDARD CONTRACT, OCTOBER 1918-CANCELATION AND TERMINATION BEFORE COMPLETION

SECTION 1. CANCELATION FOR CONTRACTOR'S DEFAULT

In the event of the contractor's default in making deliveries at the times and in the quantities herein specified, or in performing the work at the times and in the manner herein provided, the contracting officer may at any time and from time to time, at his option, by giving written notice to the contratcor, cancel on behalf of the United States the delivery or performance of all or any part of the articles or work then in arrears, and such cancelation shall be deemed to be effective from such date as may be specified in said notice.

Articles or work completely manufactured or completely performed in accordance with the requirements of this contract at the date any cancelation above permitted is to become effective shall be accepted, and upon delivery shall be paid for by the United States at the contract price or compensation. Any such cancelation shall be without prejudice to any other rights or remedies or to any claim against the contractor which the United States may have by reason of such default or otherwise.

SECTION 2. TERMINATION IN PUBLIC INTEREST

If, in the opinion of the chief of the bureau, the public interest shall so require, this contract may be terminated by the United States by days' notice in writing from the contracting officer to the contractor, and such termination shall be deemed to be effective upon the expiration of days after the giving of such notice, and shall be without prejudice to any claims which the United States may have against the contractor under this contract. After the receipt of such notice the contractor shall not order any further materials or facilities, or enter into any further subcontracts, or make any further purchases in connection with the performance of this contract, without written consent previously obtained from the contracting officer, but inspection of the completed articles or work and acceptance thereof by the United States in accordance with the terms of this contract shall continue during such period of days as though such notice had not been given.

In the event of and upn such termination of this contract prior to completion as provided in this section 2, for any reason other than the default of the contractor, the United States shall make payments to and protect the contractor as follows:

(a) The United States shall pay to the contractor the contract price or compensation, not previously paid, for all articles or work completely manufactured or completely performed in accordance with the requirements of this contract at the date such termination becomes effective.