Priebe Sons v. United States/Opinion of the Court

This case, here on certiorari to the Court of Claims, presents the question whether a provision in a government contract for 'liquidated damages,' as construed and applied, should be denied enforcement on the ground that it constitutes a 'penalty.'

Shortly after the enactment of the Lend-Lease Act of March 11, 1941, 55 Stat. 31, 22 U.S.C.Supp. V, § 411 et seq., 22 U.S.C.A. § 411 et seq., the United States acting through agencies of the Department of Agriculture embarked on a program of purchasing dried eggs for shipment to England and Russia. Petitioner agreed to furnish a quantity of dried eggs under that program to the Federal Surplus Commodities Corporation (FSCC). The contract called for 'May 18 (1942) delivery' which date, according to the contract, 'shall be the first day of a 10-day period within which the FSCC will accept delivery, the particular day within the period being at the FSCC's option,' Petitioner was also required to have the eggs inspected, delivery to be accompanied by inspection and weight certificates.

The ontract contained two provisions respecting 'liquidated damages.' One, contained in paragraph 9, was applicable to delays in delivery. It has no application here, for as we shall see, deliveries were timely. The provision for cliquidated damages' with which we are concerned is contained in paragraph 7 and is applicable to a totally different situation. It provides, with exceptions not material here, that 'failure to have specified quantities of dried egg products inspected and ready for delivery by the date specified in the offer' will be cause for payment of 'liquidated damages.'

On May 18, 1942, petitioner had not made delivery nor had the eggs been inspected. Inspection was, however, completed and certificates issued by May 22, which was prior to the time when FSCC asked for delivery. For it was not until May 26 that FSCC gave the first of several written notices for the shipment of eggs involved in this litigation. Petitioner made timely shipments pursuant to those instructions. Subsequently FSCC ascertained that petitioner's inspection certificates had been issued after May 18 and accordingly deducted from the price 10 cents per pound on the theory that the failure to have the eggs inspected and ready for delivery by May 18 was a default which put into operation the 'liquidated damages' provision of the contract.

Petitioner brought this suit in the Court of Claims to recover the amounts withheld plus interest. The Court of Claims, being of the view that there had been a breach of contract for which the United States was entitled to 'liquidated damages,' dismissed the petition. 65 F.Supp. 457, 460.

We construe the contract to mean that the time for delivery by petitioner was not May 18, 1942 but the time or times chosen by the FSCC within the ten-day period which began on May 18. That is to say, performance by petitioner was not due until request was made and instructions given for delivery. That interpretation is in accord with the uncontested finding of the Court of Claims that petitioner promised delivery 'within a ten-day period commencing May 18, the precise date to be selected' by the FSCC.

The contract was drawn, however, to make the 'liquidated damages' provisions include so-called defaults of petitioner which antedated the time when delivery was due but which in no way interfered with or caused delay in that performance. As noted, 'liquidated damages' became payable on 'failure to have specified quantities of dried egg products inspected and ready for delivery by the date specified in the offer,' viz. by May 18, 1942. The Court of Claims held this provision enforceable even though petitioner had made prompt delivery of the eggs, because it felt that the provision enabled respondent t carry on its dried-egg program 'with assurance that it could count on the dried-egg products being ready on the specified date.' That position is amplified by respondent. The argument in short is that liability to pay 'liquidated damages' for failure to have goods ready for delivery even prior to the time when delivery is due gives assurance against tardy deliveries; that a prompt timetable of shipments was important here because of war conditions and the necessity of having goods ready for loading whenever shipping space was available; that delay in deliveries would cause unmeasurable damage; and that even though no damage were apparent in a particular case, the cliquidated damages' provision should be enforced as a deterrent of tardy deliveries in the whole class of contracts relating to this procurement program.

It is customary, where Congress has not adopted a different standard, to apply to the construction of government contracts the principles of general contract law. United States v. Standard Rice Co., 323 U.S. 106, 111, 65 S.Ct. 145, 147, 89 L.Ed. 104, and cases cited. That has been done in other cases where the Court has considered the enforceability of 'liquidated damages' provisions in government contracts. United States v. Bethlehem Steel Co., 205 U.S. 105, 120, 121, 27 S.Ct. 450, 455, 456, 51 L.Ed. 731; Wise v. United States, 249 U.S. 361, 365, 366, 39 S.Ct. 303, 304, 63 L.Ed. 647. We adhere to those decisions and follow the same course here.

Today the law does not look with disfavor upon 'liquidated damages' provisions in contracts. When they are fair and reasonable attempts to fix just compensation for anticipated loss caused by breach of contract, they are enforced. Wise v. United States, supra, 249 U.S. page 365, 39 S.Ct. page 304, 63 L.Ed. 647; Sun Printing & Publishing Ass'n v. Moore, 183 U.S. 642, 672-674, 22 S.Ct. 240, 252, 253, 46 L.Ed. 366; Restatement, Contracts § 339; Dunlop Pneumatic Tyre Co. v. New Garage & M. Co., (1915) A.C. 79. And see Kothe v. R. C. Taylor Trust, 280 U.S. 224 226, 50 S.Ct. 142, 143, 74 L.Ed. 382. They serve a particularly useful function when damages are uncertain in nature or amount or are unmeasurable, as is the case in many government contracts. United States v. Bethlehem Steel Co., supra, 205 U.S. page 121, 27 S.Ct. page 456, 51 L.Ed. 731. Clydebank Engineering & Shipbuilding Co. v. Castaneda, (1905) A.C. 6, 11-13, 20; United States v. Walkof, 2 Cir., 144 F.2d 75, 77, 154 A.L.R. 1250. And the fact that the damages suffered are shown to be less than the damages contracted for is not fatal. These provisions are to be judged as of the time of making the contract. United States v. Bethlehem Steel Co., supra, 205 U.S. page 121, 27 S.Ct. page 456, 51 L.Ed. 731.

Judged by these standards, the provision in question may not be sustained as an agreement for 'liquidated damages.' It does not cover delays in deliveries. It can apply only where there was prompt performance when delivery was requested but where prompt delivery could not have been made, due to the absence of the certificates, had the request come on the first day when delivery could have been asked. A different situation might be presented had the contract provided for notice to the Government when the certificates were ready. Then we might possibly infer that promptness in obtaining them served an important function in the preparation of timetables for overseas shipments. But the contract contains no such provision; and it is shown that FSCC had no knowledge that the certificates were not ready on May 18 until long after deliveries had been made. So, it is apparent that the certificates were only an essential of proper delivery under this contract.

It likewise is apparent that the only thing which could possibly injure the Government would be failure to get prompt performance when delivery was due. We have no doubt of the validity of the provision for 'liquidated damages' when applied under those circumstances. United States v. Bethlehem Steel Co., supra; Wise v. United States, supra. And see Maryland Dredging and Contracting Co. v. United States, 241 U.S. 184, 36 S.Ct. 545, 60 L.Ed. 945; Robinson v. United States, 261 U.S. 486, 43 S.Ct. 420, 67 L.Ed. 760. But under this procurement program delays of the contractors which did not interfere with prompt deliveries plainly would not occasion damage. That was as certain when the contract was made as it later proved to be. Yet that was the only situation to which the provision in question could ever apply. Under these circumstances this provision for 'liquidated damages' could not possibly be a reasonable forecast of just compensation for the damage caused by a breach of contract. It might, as respondent suggests, have an in terrorem effect of encouraging prompt preparation for delivery. But the argument is a tacit admission that the provision was included not to make a fair estimate of damages to be suffered but to serve only as an added spur to performance. It is well-settled contract law that courts do not give their imprimatur to such arrangements. See Kothe v. R. C. Taylor Trust, supra; Restatement, Contracts § 339. All provisions for damages are, of course, deterrents of default. But an exaction of punishment for a breach which could produce no possible damage has long been deemed oppressive and unjust. See Salmond & Williams on Contracts (2d Ed. 1945) § 202.

It is said, however, that a different rule should obtain here because of the broad procurement powers involved under the Lend-Lease Act. We are pointed, however, to no provision by which the Congress authorized the imposition of penalties as sanctions to that program; nor do we find any. We cannot infer such a power. The power to purchase on appropriate terms and conditions is, of course, inferred from every power to purchase. But if that is the source of Congressional authority to impose penalties, then any procurement officer, in war or in peace, could impose them. That is contrary to the premise underlying all our decisions on this question which involve government contracts. The rule which they announce has been applied both to the exigencies of war (United States v. Bethlehem Steel Co., supra) and of peace (Wise v. United States, supra). The other view is such a radical break with the past and so counter to the whole development of the law as to indicate that the Congressional purpose should be plain before we take the step.

Reversed.

Mr. Justice BLACK, with whom Mr. Justice MURPHY agrees, dissenting.