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public interest” are the subject of this discussion. Provisions for cancelation in case of "breach by contractor" are not treated.
The almost universal use of cancelation clauses in ordnance contracts facilitated their termination. During 1917 and 1918, all "continuing process” ordnance contracts—those calling for production of materials similar to the products usually manufactured by the contractor-contained cancelation provisions. "Experimental" contracts—those calling for a product which the contractor was not acustomed to manufacture_frequently omitted termination clauses. When the experimental contract was followed by a mass-production contract, or in some cases when it was followed by a second experimental contract, however, the new contract contained some cancelation provision. Usually the termination provisions in the first contract with such a clause, were repeated without change in subsequent contracts for the particular product with the same contractor.
No termination clause was used widely enough during 1917 and 1918 to be called typical. Instead, termination clauses ranged from the very simple to the complex. Simple clauses merely authorized the Government to cancel"in the public interest" whenever necessary. Complex clauses, in addition to the authorization to cancel, carried intricate definitions of the obligations of both the Government and the contractor in case of cancelation. Both simple and complex clauses required the Government to give the contractor advance notice of intent to cancel. Thirty days' notice was usually specified.
Had the war continued, complex termination provisions would have become more prevalent. A new standard contract to be used for all War Department purchases was developed in September 1918. It contained the most complex termination provisions used during the war. A copy of this clause is attached in exhibit I. Even this clause appears simple, however, when compared with the termination provisions in use today.
As applied by the Ordnance Department, the cancelation provisions of the standard contract of October 1918 can be summarized as follows:
1. The Government could cancel whenever the Chief of Ordnance thought it necessary.
2. In event of cancelation, the Government would pay the contractor for articles delivered, for expenditures incurred toward completion of the contract, for depreciation or amortization of plant and facilities.
3. At the Government's option, the contractor would assign subcontracts to the Government after cancelation.
4. The Government could take over the contractor's plant and complete the contract after either cancelation in the public interest or breach of contract by the manufacturer.
Under the pressure of wartime conditions contractors made little or no objection to cancelation provisions. But they found that conformity with these provisions and with the Government's technical requirements was difficult, delayed settlement, and was expensive. The result was that during the post-armistice period the War
Department found it difficult to let contracts containing cancelation clauses. The Department finally gave procuring officers discretionary authority for “the omisison or modification of the clause relative to cancelation and termination of the contract before completion.” From the Government's viewpoint at that time, such omission was of small moment since the procuring departments had the legal right to cancel contracts whether or not the latter carried a termination clause."
CANCELATION OF CONTRACTS
Immediately after the armistice, the War Department sent out notices to all contractors requesting them to suspend production under their war contracts.8 This was a request for patriotic cooperation; it was not based upon legal authority. Contractors responded promptly. Production ceased. Suspension was tem
4 Relative to Contracts, House Committee on Military Affairs, bearings on H. R. 13274, pp. 11-12.
Supply Circular No. 88, War Department, Purchase, Storage and Traffic Division General Staff, September 7, 1918.
6 National Archives, War Department, Quartermaster Corps, file 160.4, folder : Contracts (Raw Materials). Letter from Award and Contract Branch to Motors and Vehicles Division.
7 National Archives, War Department, Quartermaster Corps, file 164.1, folder : Cancellations or Annulments, November-December 1918.
8 Final Report of the Board of Contract Adjustment, 1920, p. 4.
9 National Archives, War Department, Quartermaster Corps, file 160.4, Laws, Rulings, Opinions, etc., November 1918.
porary, and later nearly all contractors were permitted 30 days' post-Armistice production at the rate of the month ending November 9, 1918. Morever, the War Department allowed those contractors who exercised this option—not all of them did—to extend deliveries over the period to June 30, 1919. By this means, the Department hoped to encourage a tapering of production instead of a sudden cessation. 10
Although all contracts were suspended, not all of them were canceled. Reinstated contracts included those for "stock" materials, and those so near completion that the Government lost less by completion than it would have lost by accepting partially finished products. Instructions, to officers in charge of cancelation, not to terminate any contract if such action would lead to serious labor disturbances established a third small group of reinstated contracts. However, cancelation was ordered for all contracts entered into in October or November 1918, and for all contracts for products of no further use to the Government."
Before cancelation was undertaken, the War Department invited the War Industries Board and the Labor Department to review all proposed cancelations. These agencies were to advise concerning cases wherein cancelation would seriously disrupt industry or cause extensive unemployment.
Restrictions upon the operation of this plan were apparent even in November 1918. The Secretary of War in a memorandum to the Chief of Staff noted that “by arrangement with such Board and Department, you are not submiting all suspensions, reductions, and cancelations to them; for instance those relating to contracts or orders after October 1, 1918, or those which do not involve any dis turbance of labor, etc.” The War Department itself, therefore, made the first estimate of the effects of cancelation upon industry and labor.11
Early in December the War Industries Board withdrew from active participation in contract cancelation. In a letter to the chamber of commerce the Board carefully defined its function with respect to contracts. It would act in a consultative way if the contract negotiating departments asked for advice. But the Board repeated its wartime assertion, “the responsibility
and the authority for negotiating reductions rests with the bureau or department which negotiated the contract." 12
Meantime the War Department was becoming more and more unwilling to accept advice from the Department of Labor. In late November the War Department submitted to the United States Employment Service of the Labor Department a plan for the cancelation of a contract with the E. I. du Pont Co. In reply, the Employment Service advised :
“The plan outlined for the reduction of production of the above explosives and ingredients seems reasonable taken in and of itself; but considering the very large number of laborers employed particularly in the smokeless powder plants we do not agree in such rapid closing down, unless there is some slowing down of the demobilization of men from camps. It is impossible for the country to absorb the amount of labor that is being displaced and at the same time take back the men that are being discharged from the Army at the present rate
Nevertheless, the War Department canceled the contract for smokeless powder according to its proposed plan. The available file of correspondence does not reveal the nature of the reply to the Employment Service explaining the disregard of the advice by the War Department. The du Pont Co. did not wait for orders from the War Department but proceeded to terminate production on its own initiative.
Early in December the United States Employment Service protested to the War Department that the cancelation schedules provided by the Department did not indicate the way in which termination would affect labor. The protest con
groups of schedules regarding the same class of commodity are not accompanied by any statement of the labor conditions either in the particular plants, in the industry as a whole, nor in communities.” 1 The Employment Serv. ice then suggested its review of cancelation schedules be discontinued. It submitted a set of instructions for carrying out cancelation and suggested that they be used as a guide by the Department's agents. The gist of the instructions was contained in the second point, viz
10 Relative to Contracts, op. cit., p. 12.
11 National Archives, War Department, Quartermaster Corps, file 164.1, Cancellations or Annulments, November December 1918.
12 War Service Bulletin No. 38, United States Chamber of Commerce, December 10, 1918. 18 National Archives, War Denartment, Ordnance Contract file G674-314E.
14 National Archives, Navy Department, Supplies and Accounts, file 312.6, NovemberDecember 1918.
"That all contracts, cancelation, or curtailment of which will cause displacement of labor, be so terminated or curtailed that the release of labor be gradual, taking into consideration the ability of the particular community to absorb the number and kind of laborers that will be released." 14
The War Department quickly accepted this proposal. By December 5, 1918, the Department had determined to handle contract termination without the advice of other agencies." Thus a plan for interdepartmental cooperation in the cancelation of contracts was abandoned before it really had a chance to operate. Instead, cancelation was a strictly War Department operation handled by that Department through its contract-making departments, such as Ordnance.
The Ordnance Department asked each contractor whether or not cancelation of his contracts would lead to labor disturbances. If the contractor replied that no labor troubles would occur, the contract was promptly canceled. On the other hand, if he stated that such disturbances would ensue, the Department determined how serious the labor trouble would be. Usually it was not considered sufficiently significant to delay cancelation.16
After cancelation, no further action was taken by the Ordnance Department until the contractor presented a claim. Each claim covered only one contract. Many contractors, in spite of actual financial loss, accepted $1 in full and final settlement of the unfinished portions of their contracts. Such settlements were incorporated into cancelation agreements without the presentation of a formal claim. In 1921 Assistant Secretary of War Benedict Crowell praised the thousands of subcontractors who “forgave prime contractors their legal obligation without the transfer of a penny.” He also lauded prime contractors who "cleared up thousands of subcontracts and said nothing about them. These instances of generosity,” he explained, “were discovered only when the Ordnance Department checked up to find out why the final settlement costs were so much lower than the preliminary estimate of these costs made in the first hurried days after the armistice.17
SETTLEMENT OF CLAIMS
Ordinarily the settlement of contractor's claims uld have fal to th United States Court of Claims. However, the magnitude of the problem and desire for speed in settlement led the War Department to discard the usual claim-adjustment machinery and to develop its own temporary claim organization,
The technique of contract settlement evolved by the War Department was based upon local administration. Zone or district offices which had been developed during the war to facilitate the letting of contracts conducted preliminary investigations of contractor's post-war claims and determined tentative awards. Findings of the district offices were reviewed first by the Ordnance Claims Board and then by the War Department Claims Board. Usually the latter Board concurred in the findings of the Ordnance Board; its approval, therefore, being a formality. While this review progressed, contractors could appeal from the tentative awards. After War Department Claims Board approval, however, the tentative awards became final awards. The latter were incorporated into cancelation agreements replacing the original contracts. When the cancelation agreements were signed, the contractor no longer had any recourse against the Government. But the Government could reopen the claim in order to recover overpayments whenever they were discovered.19 A more extensive review of this settlement procedure, presented to Secretary of War Baker by Assistant Secretary Crowell on May 24, 1919, is contained in exhibit II.
The 4,500 claims presented under Ordnance contracts had a claim value of 2.5 billion dollars. By the middle of 1919, or about 7 months after the armistice, well over 50 percent of the claims were settled. In June 1920 fewer than 500
14 National Archives, Navy Department, Supplies and Accounts, file 312.6, NovemberDecember 1918.
15 Ibid. 18 National Archires. War Department, Quartermaster Corps, file 164.1, Cancellations or Annulments. November December 1918.
17 Crowell. Benedict, and Wilson, Robert F., On. cit., p. 162. 19 National Archives, War Department, Quartermaster Corps, file 164.1, Cancellations or Annulments, November December 1918. Report of the Secretary of War, 1919. Reports of the Chief of Ordnance. 1918. 1919. and 1920. Final Report of the Board of Contract Adjustment, 1920. File 160.4, Laws. Rulings, Opinions, etc., May 1919.
19 Note the Justice Department-War Department joint action reviewing and reopening claims, 1923–25.
remained unsettled.20 The dollar value of the settlements is not available, but it seems probable that the 500 claims still unsettled in June 1920 were the larger and more technical claims. The delay in the settlement of claims is indicated in the following table which shows the percentage of total claims settled at successive intervals after the armistice.
Percentage of total ordnance claims settled by successive intervals 1
Interval, Nov. 11, 1918, to
June 30, 1919
50 94 97 (2)
1 Source: Reports of the Chief of Ordnance 1919 and 1920 and Demobilization by B. Crowell and R. F. Wilson, 1921, p. 158.
The War Department Claims Board just before its dissolution on June 30, 1920, reviewed the process of claim settlement in a publicity release as follows:
“The problem of stopping this (wartime] rush of production without causing serious damage to the country as a whole was one of the first reconstruction studies. The Government bought or assumed much of the raw material then in the plants. This was resold, many times at a loss where wartime prices were higher. The Government has made no attempt to cover the profits the manufacturer might have made if the armistice had not been signed. It was determined to suspend the contracts rather than to cancel them altogether, pending the negotiations between the War Department and the contractors for an adjustment. This policy met with the cooperation of the contractors.
“The basis of dealing adopted by the War Department in its settlement of such claims was generally applied to all claimants. Articles which had been completed under a contract were paid for on the terms provided for by the contract. If the manufacturer had made expenditures and incurred obligations which did not result in finished products, the Government took care of those obligations, protected him in his obligations to subcontractors, and gave him a remuneration for his capital and services." 21
More than two-thirds of the suspended contracts—those which met all legal requirements—used this procedure as a basis for settlement. The remaining contracts, however, required special attention because they were “informal."
During the war, in the haste to get production under way, many contracts had been entered into without the completion of the legal requirements for all contracts with the Government. For example, the contracting officer representing the Government delegated to his assistants the signing of contracts, whereas the law specified that the contracting officer must sign all contracts himself. Or, in another case, the contractor did not designate his title when he signed the contract, and this information was required by law. Such violations of the letter of the law were not important during the war, when the Government was under great pressure to secure military supplies. Regardless of the type of contract, finished goods were accepted and paid for during that period. After the war, however, the Government, no longer under this pressure, enforced the legal technicalities which had been disregarded during hostilities. Manufacturers with unfinished contracts not satisfying all of these requirements then discovered first, that they did not have valid contracts, and, second, that the Government would not accept further deliveries.
20 Report of the Chief of Ordnance, 1920. 2 United States Bulletin, May 24, 1920, p. 485. Nearly All Army Contracts Settled, etc.
22 National Archives, War Department, 'Quartermaster Corps, file 164.1, Cancellation and Annulments.
A ruling of the Comptroller of the Treasury late in November 1918 prevented immediate War Department recognition of claims under such "informal” contracts. Not only did the Comptroller refuse to make payments under these contracts, but he would not permit completion of the commitments unless the Government clearly required the product involved. Under this ruling, contractors holding informal agreements could not enter a valid claim for damages resulting from cancelation, nor could they continue production and expect the Government to accept the articles produced.”
Enactment of a law was the only way to cope with the situation. Several bills were introduced into Congress to provide recourse to contractors with such illegal or "informal" contracts. One bill embodied the suggestions of the War Department and the liquidating officer of the War Industries Board who represented industry.24 Congress finally passed a composite bill which was approved by the President on March 2, 1919, and known as the Dent Act. This act permitted all contractors, who had written evidence of the Government's intent to make a contract, to submit claims before June 30, 1919, and to receive payments. A copy of this act is attached in exhibit III.
During World War I, as at the present time, the War Department had no generally acceptable or widely used termination clause. The clauses used and procedures followed did not take account of the problem of employment, recognize the need for the resettlement of manpower, nor provide a well-defined policy for the rapid settlement of contracts so as to maintain the liquidity of industrial firms. •Lacking such provisions, there were protracted delays while the Department developed new administrative procedures. Manufacturers with informal contracts experienced further delays until the Dent Act of March 1919 validated such commitments.
World War I post-armistice developments suggest many considerations for today's post-war program. These include:
1. Early definition of a cancelation policy supported by a simple, well-organized claim-adjustment procedure, which does not exist at present.
2. Immediate enactment of enabling legislation to validate informal contracts; to provide for speedy settlement of claims; to assist industry through the difficulties that follow cancelation; and to insure continued employment for labor.
CANCELATION CLAUSES IN CONTRACTS FOR STEEL BILLETS
In World War I the Illinois Steel Co. was one of the big contractors for shell steel billets. The Illinois concern, a subsidiary of the United States Steel Co., operated mills in at least five States—Illinois, Iowa, Indiana, Wisconsin, and Minnesota. Its first contract for billets was arranged in November 1917, directly with the Chief of Ordnance of the War Department. The company secured further commitments from the Ordnance Department at irregular intervals until the war ended. Many of the contracts called for production of thousands of tons of billets weighing only 20 to 24 pounds each, and for payments of millions of dollars. All of the contracts, from November 1917 to November 1918, contained some termination provisions.
The following statements about termination clauses are based upon a study of five of these Illinois Steel Co. contracts. Because there is no apparent direct connection between the cancelation provisions of the contract and the actual abrogation of the contract, the following discussion is in two sections, namely, “provisions of termination clauses” which deals with the clauses themselves, and termination of contracts which reviews the history of three contracts canceled for different reasons.
23 National Archives, Navy Department, Supplies and Accounts, file 312.6, NovemberDecember 1918.
24 National Archives, War Department, Quartermaster Corps, file 164.1, Cancellation and Annulments November December 1918, and National Archives, War Industries Board, file 21A-A2, tray 12.