455 F.2d 546 | Ct. Cl. | 1972
delivered the opinion of the court:
This is the preliminary round in an effort by the Northern Helex Company to recover $83,632,868 allegedly due it as a result of 'an admitted breach by the Government of a contract to purchase helium. On cross motions for summary judgment, we decide the issues of materiality of the defendant’s breach and of claimed waiver by the plaintiff of that default. Only those threshold issues of liability are disposed of today; the critical questions of the validity of the subsequent termination of the contract by the Government and of the recovery of damages by the plaintiff are not before us in any way.
The plaintiff, a wholly owned subsidiary of Northern Natural Gas Company, made a contract with the United States, acting through the Department of Interior, on August 15,1961. This agreement was authorized by the Helium
This provided for the purchase by the United States of the helium to be produced by Northern Helex which was estimated to be 13.5 billion cubic feet over a span of years. The helium was to be extracted from Hugoton gas, delivered, and paid for each month over the 22-year contract period with an annual fiscal year limitation of $9.5 million. The unit price of $11.24 per thousand cubic feet had increased to $12.41 by the date this 'action was filed (in December 1970) due to automatic price adjustments envisaged by the agreement. The Government also entered into similar contracts with Cities Service Helex, National Helium Corporation and Phillips Petroleum Company. Pursuant to its contract, Northern Plelex constructed facilities, extracted, and delivered helium from December 7,1962, onward.
The helium conservation program was intended to be self-liquidating, financed with borrowing authority provided by Congress and with funds lent by the Treasury Department to Interior. The borrowed funds were to be supplemented and, within 25 to 35 years, repaid with interest from helium sales proceeds. Interior was to sell some of the helium at a price high enough to pay for the entire program and still have 40-50 billion cubic feet in storage for use after 1983. The “federal market” — consisting of Government agencies, their prime contractors and subcontractors— was expected to purchase its major helium requirements from Interior and provide the basic financing for the whole program.
Unfortunately this forecast did not prove itself. The difficulty was that, from the mid-1960’s, private helium plants began to operate outside the program and to sell to govern-
In May 1970, the Interior Department convened a meeting of the four conservation contractors in which they were told that the unit price and the maximum annual payment would have to be negotiated downward. A letter of June 24, 1970 (acknowledged June 26), from Northern Helex notified the Government that its failure to make payments was a material breach which was not being waived, but that Northern Helex was willing to discuss modifications. A draft agreement which would have increased the obligations of plaintiff while the payments to it were decreased was circulated along the lines discussed in the negotiations. Meanwhile, in his request for supplemental appropriations for fiscal year 1971, the President asked only $56,100,000 in borrowing authority for obligations under the helium contracts. This amount was not sufficient to pay outstanding debts and all anticipated deliveries for the remainder of the fiscal year but only to cover five months of operation at the present contract price and seven months at the reduced price proposed by Interior. No real progress was made during the negotiations, as Northern Helex delivered 657,008,000 cubic feet of helium from November 1, 1969, through November '30, 1970, plus an addi
In its petition, plaintiff alleged that although its contractual obligation to perform had been discharged by the Government’s material breaches of contract, it would continue to tender helium to the Government in mitigation of damages and in the interest of conservation. This was done, according to Northern Iielex, because helium extraction facilities have been interrelated with its liquefied petroleum gas and petrochemical operations in such a way that the helium facilities must be continued in operation whether helium is wasted or stored. Northern Helex has no facilities for storage, purification, distribution, or marketing of helium and there is so little demand for the gas in the private market that the company has not considered it financially feasible to develop such facilities. On December 30, 1970, Northern Helex notified Interior of this suit and of its decision to continue to deliver helium, despite the material breach, because of the integration of its facilities and the need to save helium.
On January 14, 1971, the United States sent Northern Helex a check for $8,671,631.99 — the total amount then due for all helium delivered by plaintiff — which the company cashed, without any notation on the check, and it then amended its petition to reflect payment as a reduction of damages. On January 26, 1971, the Under Secretary of Interior wrote plaintiff terminating the contract under its termination clause, effective March 28, 1971. Plaintiff does not acknowledge the legitimacy of this asserted termination. Since then, a “no prejudice agreement” has been entered into under which Interior agrees to store helium which Northern Helex has continued to deliver. Payment also continued. Northern Helex billed Interior for helium delivered through March 31, 1971. The bills carry a legend indicating that delivery, submission of documents, and payment shall be without prejudice to the rights of the parties. After the recent Congressional appropriation of funds, on June 23, 1971 Northern Helex received a check of $2,285,872.87 for the
I. The materiality of the breach
The Government’s failure to pay a large amount over an extended period of time was a conceded breach of its contractual obligation. Arrearages in monthly payments which began in December, 1968 and continued through 1969 ranged from $664,122 to $3,235,349. For deliveries from November 1, 1969 through November 30,1970, the Government paid nothing at all. By the time suit was filed in December 1970, $8,671,632 was owing to the plaintiff.
The Government contends, however, that such delinquency without more does not constitute a total breach warranting the contractor in ending the agreement. Perhaps mere delay in payment, for a while, would not be a material breach but there is a clear distinction between delay of that kind and a total failure to pay over many months. Our jurisprudence strongly suggests that the latter sort of breach by the Government is material, just as it would be in the case of a private party. Ferris v. United States, 27 Ct. Cl. 542, 546 (1892) ; Pigeon v. United States, 27 Ct. Cl. 167 (1892) ; Overstreet v. United States, 55 Ct. Cl. 154, 172 (1920) ; Suburban Contracting
II. Waiver before suit
The Government’s primary defense is that, assuming Northern Helex could have elected to claim total breach, it waived that right by continuing performance and 'by treating the lack of payment as immaterial.
There is, of course, venerable authority that, wherever a contract not already fully performed is continued in spite of a known breach, the wronged party cannot avail himself of that excuse (Williston, Contracts, 3rd ed., Vol. 5, § 688). But it is very doubtful that, even when first formulated, that rule disregarded particular circumstances justifying further performance in the specific case. As a general proposition, one side cannot continue after a material breach by the other (such as failure to pay), act as if the contract remains fully
In addition, and this is another special aspect of the case before us, the action taken by Northern Helex was consistent with the purpose of the program, the conservation of a valuable national resource. In considering the Government’s failure to observe the procedural requirements of the National Environmental Policy Act of 1969 when it terminated the contracts of the three other suppliers,
A party who with explicit reservation of rights performs or promises performance or assents to performance in a maimer demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as “without prejudice,” “under protest” or the like are sufficient.
Plaintiff’s continued performance was founded on the required reservation. In its letter of June 24th, it wrote Interior that the failure of the Government to make payment “is a material default under the contract. We wish to reiterate that any performance rendered by Northern Helex Company subsequent to any such defaults has been and shall be with the express understanding that such action shall not constitute a waiver of any of Northern Helex Company’s rights and remedies.” On the same day, the company sent another letter, also stating that the Government’s failure to pay constituted a material breach (item 3) ; that any negotiations undertaken with Interior were voluntary (items 6-8); and that such discussions “shall not constitute a waiver by Northern Helex of any of its rights or powers, whether existing by virtue of contract or not” (item 9). On June 26th, the Acting Chief of the Division of Helium of the Bureau of Mines acknowledged receipt of both letters.
The Code’s official comment explains that Section 1-207 adds no new requirement of language of reservation not already required “but merely provides a specific measure on which a party can rely as he makes or concurs in any interim adjustment in the course of performance.” U.C.C. § 1-207 (comment 2). The defendant seizes upon language elsewhere in the comment that the provision applies not to the creation or loss of remedies in the ordinary course of performance “but rather to a method of procedure where one party is claiming as of right something which the other feels to be unwarranted.” In this instance, plaintiff’s reservation amounted to a method of procedure under which it would
One remedy under the Code (§§ 2-703, 2-704), when the buyer’s failure to pay amounts to a breach of the whole contract, empowers the wronged seller who has unidentified and unfinished goods in his possession, “in the exercise of reasonable commercial judgment for the purposes of avoiding loss and of effective realization either [to] complete the manufacture and wholly identify the goods to the contract or [to] cease manufacture and resell for scrap or salvage value or [to] proceed in any other reasonable manner.” The official comment to § 2-703 says that the article “rejects any doctrine of election of remedy as a fundamental policy”, and the comment to § 2-704 explains that “the seller is given express power to complete manufacture or procurement of the goods for the contract unless the exercise of reasonable commercial judgment as to the facts as they appear at the time he learns of the breach makes it clear that such action will result in a material increase in damages.” The comment also puts the burden on the buyer to show the commercially unreasonable nature of the seller’s action in completing manufacture.
It is plain from these provisions that, to determine whether waiver has occurred, a more complex inquiry must be made than merely, “did performance continue?” The guiding principle is whether, in the individual circumstances, the seller exercised “reasonable commercial judgment” in continuing to manufacture and deliver, in the effort to mitigate damages, although his obligation to perform had been discharged by the buyer’s total breach. See Hawkland, A Transactional Guide to the Uniform Commercial \Oode, Yol. 1, p. 280 (1964). What we have already said shows that, in our judgment, plaintiff was fully warranted in following the course it chose. It exercised “reasonable commercial judgment” in deciding to continue performance.
Under the traditional view, the innocent but aggrieved
We are convinced of the fairness of following the modern U.C.C. rule in this case because of the harshness of a contrary result on our special facts, where cessation of production was commercially impossible and avoidance of waste most desirable. As Williston explains the rationale behind the strict doctrine of election of remedies (Williston, Contracts, supra, sec. 684), that theory has little impact here. He says: “The law simply does not, under the circumstances, permit a party to exercise two alternative or inconsistent rights or remedies.” In this instance, continued delivery was not an inconsistent, voluntarily chosen, course of action, but an indispensable route which was the only practicable one. The Government was not hurt and it did not change its position. It was certainly not misled into thinking that payment was immaterial to Northern Helex and that the latter would
The parties’ own agreement bolsters the conclusion that plaintiff could continue to deliver without waiving the Government’s breach. Article XYII provided: “No waiver by either party for any one or more defaults by the other in the performance of any provisions of this contract shall operate or be construed as a waiver of any future default or defaults, whether of a like or of a different character.” This indicates that even an express waiver would be limited, and would operate only as to the particular defaults mentioned. Each successive non-payment would continue to be a breach. With this provision in the contract it is very hard to infer a continuing waiver by Northern Helex as the Government’s debt to it waxed greater by the month; the opposite inference is the more reasonable. The same clause scotches any suggestion that plaintiff owed the defendant a warning before deciding to bring suit. Notice that nonpayment was a material breach had already been given, and that was enough.
III. Waiver after suit
The Government urges as another instance of waiver continued performance by Northern Helex after filing suit. Not only did the plaintiff tender helium, but it corrected errors in measurement and determined the exact volume of the helium-gas mixture. Such adherence to the letter of the contract does not, however, undercut plaintiff’s position; on the contrary, the performance which continued and which
The Government points, too, to the cashing of the check sent by the defendant on January 14,1971 to cover all money then owing, as mooting or waiving the cause of action. Neither of the cases it cites (Routed Thru-Pac, Inc. v. United States, 185 Ct. Cl. 428, 440, 401 F. 2d 789, 796 (1968), and Early & Daniel Co. v. United States, 271 U.S. 140 (1926)) is pertinent. In Routed Thru-Pao, the entire amount of the defendant’s counterclaim was tendered by the plaintiff; the check was then accepted and deposited. In our case, there was no payment in full of the entire amount claimed as a result of total breach, about ninety million dollars. In Early & Daniel Company, the two parties disputed the Government’s call for more hay than the contract required; following delivery under protest, plaintiff accepted the Government’s tender of the contract price and was thereby held to have waived its right to a higher price. That case likewise differs in that the total contract price was paid to the contractor and accepted by him; here, we have only partial payment, expressly accepted by way of mitigation of damages.
We 'find more persuasive the decisions indicating that, where the Government knows of the contractor’s intention not to relinquish his right to full payment, the acceptance of partial payment, even without notation on the check, does not waive his claim. In one case, although the contractor had signed a voucher which stated that payment represents “complete and final settlement,” there was no waiver because there were timely protests. Inland Trucking Corp. v. United States, 150 Ct. Cl. 642, 281 F. 2d 457 (1960). We have held, too, that when a certain sum is due acceptance of part payment will
Here, the Government makes no argument that it was misled by the cashing of the check or ignorant of plaintiff’s vigorous prosecution of this suit. Indeed, after the filing of suit on December 24, 1970 every billing statement (except for one inadvertent omission over a one-week period) contained the legend: “Delivery of helium, submission of these documents, and payment shall be without prejudice to the rights and obligations of the parties.” After the large payment on January 22,1971, Northern Helex amended its petition to reflect its receipt of the Government’s check. Again, on June 10, 1971 plaintiff wrote that it would consider further payments “as a reduction of damages and to be without prejudice to the rights of the parties in the pending Court of Claims case.” Accordingly, another check for $2,285,872.87 was received on June 23rd and accepted. The whole pattern of plaintiff’s conduct demonstrates that it has consistently continued to reserve its rights. We think it had the privilege to accept payment with such reservations, especially since interest could not be collected for further delay. There has therefore been no waiver of defendant’s breach. See Anderson, Uniform Commercial Code. p. 285, §2-612:16 (1971).
For these reasons, we hold that the Government’s breach (through non-payment) was material and total, justifying the contractor in considering the contract at an end, and that Northern Heles has not waived that breach.
The plaintiff’s motion for summary judgment is granted and the defendant’s is denied. The amount of recovery, if any, will be determined in further proceedings under Rule 131 (c).
Whether or not these figures are slightly inflated, as Government counsel suggested in the reply brief and at oral argument, is a consideration which may be relevant to a trial on damages but not to our determination of liability.
Intermixing the separate issue of waiver with that of the materiality of the breach, defendant relies on Pasquel v. Owen, 186 F. 2d 263 (C.A. 8, 1950) ; Willard Sutherland & Co. v. United States, 262 U.S. 489 (1923) ; Farr v. Hain S.S., 121 F. 2d 940 (C.A. 2, 1945) ; and Blair v. United States, 147 F. 2d 840 (C.A. 8, 1941). In none of these eases was there the question of the materiality of a gross failure to pay. Farr and Blair stand for the proposition that where one of the parties decides to continue performance after a default which was not material it can still sue for damages, but even that fact-pattern is not present here.
unlike plaintiff, those three companies did not file suit here and did not treat their contracts as discharged by the failure to pay. After the Interior Department terminated their agreements in January 1971 (as it did plaintiff's), they sued in a district court to enjoin the termination. The Tenth Circuit upheld the injunction on the ground that Interior had failed to comply -with the conditions of the Environmental Policy Act before it ended performance.
Plaintiff relies on the Government's response to the Northern Helex letters of June 24th characterizing the non-payment as a material breach and stating that further performance would not be a waiver of that breach. In its entirety, this response was: “On behalf of Assistant Secretary Dole, thank you for the two letters you handed me on June 25. We appreciate having them.” It Is hard to divine assent in this routine acknowledgment.
Changes in the New York Law of Damages, 31 Pordham L. Rev. 749, 752 (1963).
This case is therefore different from DeVito v. United States, 188 Ct. Cl. 979, 413 F. 2d 1147 (1969), in which there was no reservation of rights and the contractor continued to work in reliance on the Government’s failure to terminate.
Even under the conventional view that assent is necessary, it is held that a party deciding to proceed with performance after breach may still change his mind if the other party has not changed his position in reliance. Western Transmission Corp. v. Colorado Mainline, Inc., 376 P. 2d 470, 472 (C.A. 10, 1967).
As a result of our finding of material breach due to nonpayment, we need not, and do not, pass on the two other grounds put forward by the plaintiff In its petition: — breach by anticipatory repudiation and breach of the implied obligation to preserve the federal market.