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754

Opinion of the Court

During the negotiations, Philips proposed to undertake a cost contract with the Navy which would include task orders for various units of work. It was ultimately agreed that each task order would fall into one of three categories, depending upon the relative commercial and military value of the engine to be developed. The Navy would pay 60 percent of the cost of a task order with high commercial potential, 80 percent of the cost where there was only a moderate commercial potential, and 100 percent of the cost where the end product of a task order had only military potential.

It was intended that the contract would last 10 years. The general provisions of the contract provided that title to all property purchased or produced for use under the contract should vest in the Government. The contract contained provisions whereby Philips would pay 40 percent of the cost under the first three task orders. The contract further provided that the Government must reimburse the contractor, upon termination, for all costs and expenses for which the contractor was to be reimbursed or otherwise compensated under the contract and for which payment had not been made prior to the termination. In the event of such a termination by the Government, Philips was to transfer title (to the extent that title had not already been transferred), and deliver to the Government the fabricated or unfabricated parts, work in progress, completed work, supplies and other material produced as a part of or acquired in respect of the performance of the work terminated, as well as special tools and tooling acquired or manufactured for the performance of the contract.

On September 10, 1946, Task Order No. 1 was issued, and on December 20, 1946, Task Order No. 2 was issued. The spirit and intent of these task orders was stated to be embodied in the Navy letter of intent dated September 26, 1945. These orders, containing special details, called for the development and construction of a new type external combustion engine to be incorporated in a standard generating set. It was estimated that the work would require 20 months of development. However, technical difficulties were countered, and in February 1947 Philips advised that the work on the first three task orders would run over 27 months.

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154 Ct. Cl.

Opinion of the Court

Due to a limitation on the Navy's funds, as well as some impatience with the progress of the work on Task Orders Nos. 1 and 2, the Navy amended these orders so as to remove electrical generator requirements and permit the work to concentrate on engine development.

On March 12, 1948, Task Order No. 3 was issued and three days later Task Order No. 2 was terminated. However, it was provided that work under Task Order No. 3 should not begin until the first “basic" engineering prototype engine covered by Task Order No. 1 was accepted by the Government. Philips prematurely delivered the work product under Task Order No. 1, which was accepted by the Government on June 1, 1948. The Navy then authorized Philips to proceed with Task Order No. 3. Shortly thereafter, Philips admitted being overanxious on the first engine and requested its return for additional development.

On April 26, 1949, Philips proposed to the Navy that Task Orders Nos. 1 and 3 be terminated and that a fourth task order be issued. In support of this proposal Philips pointed out that the requirements of Task Order No. 1 had been substantially satisfied and that it would be impractical to press for further refinements. As to Task Order No. 3, it was stated that there was no apparent interest in that type of engine. Philips suggested the development of a 1-horsepower engine as the next logical step in the development process. This proposal was rejected by the Government on May 12, 1949.

On October 25, 1949, it was decided that the contract be terminated for the convenience of the Government.

On March 2, 1950, the contracting officer determined that Philips' performance was complete, but disagreements arose concerning the scope of Philips' termination claim. It is as a result of these disagreements that this lawsuit was instigated. The plaintiff seeks a fair and reasonable amount for its termination costs and expenses.

The plaintiff predicates a claim for recovery on each of four counts: First, an equity in the termination inventory equal to 65 percent of 40 percent of the cost of such inventory. Second, interest on the amount of its claim from the date of the termination of the contract. Third, expenses

754

Opinion of the Court alleged to have been incurred as a result of the termination of the contract. Fourth, expenses alleged to have been incurred as post-termination expenditures.

We will deal with each of these counts in order. In the first count, the plaintiff contends that it never intended to enter into a contract that provided that it would pay 40 percent of the costs of machinery, materials and equipment which would be required for use during the life of the contract, which was to be for a period of 10 years, give the Government immediate title to those things, and then give the Government the right to terminate the contract at any time thereafter, and thereby obtain a windfall of 40 percent of the costs of those items. The plaintiff recognizes that it did just that, but emphasizes that it is not an equitable situation. This is a reasonable interpretation and we agree with this contention of the plaintiff. However, when the plaintiff applies this sound argument to the facts in the instant case it carries the reasonableness of its position beyond the bounds of propriety.

For convenience the plaintiff's first count may be divided into three distinct claims, as follows: (1) engine models; (2) materials, tools and equipment; (3) capital equipment. Plaintiff lumps the above-mentioned items under the heading of inventory and argues that inasmuch as the contract, which was to run for 10 years with the plaintiff paying 40 percent of the cost, was terminated after three and a half years, their costs should only be 35 percent of the 40 percent. However, when the claim is broken down into these categories it becomes clear that this argument is sound only as to part of the claim. The materials, tools and equipment which are properly labeled inventory are those items which would be used during the course of the contract, other than capital equipment. When the contract was terminated the title to these items vested in the defendant. These items had a specific value at the time of the termination for which the defendant had paid only 60 percent of the costs. As to these items the plaintiff had an equity based on its 40 percent share of the costs. A list of this equipment on hand at the termination of the contract is as follows:

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Metals in mill product form (tubing, sheets, rods, wire, etc.)..
Tape, belting, paint, plexiglass, etc.
Purchase parts (bearings, bushings, inserts, pins, pulleys,

rings, valves, and seals)..
Miscellaneous small items (tool boxes, oil cans, baking pans,

lettering pens, staplers, etc.).
Test meters..
Laboratory supplies.
Small tools..
Machine tool accessories
Measuring gauges.
Special tools.

Total..

4,779.12

691, 67 3,744.76 1, 329.52 2, 722.63

959. 30

561. 33 30, 090.43

276.67 1, 497.90

533.77 1,089. 05

383.72

224.53 12,036. 17

19, 954. 33

Therefore, plaintiff is entitled to recover $19,954.33 based on its equity in the value of the inventory. Only the abovelisted material is inventory. The four engines which constitute the basis for the major portion of the plaintiff's claim can hardly be called inventory. As to the engines, the plaintiff has no equity for several reasons. First, there is no basis in claiming that the value of the engines at the time of the termination of the contract is the cost of the engines. This was a research and development contract for which millions of dollars might be spent but the result be valueless. On the other hand, the more successful the development the less valuable the end product because they were seeking to develop an efficient yet economical prime mover. Therefore, if they had been successful, the result would have been an inexpensive engine. Surely, they cannot have a better claim because they were unsuccessful.

Second, the fact that the contract was to run for 10 years is in no manner connected with this part of the plaintiff's claim. The engines were not developed under the general contract but under specific task orders pursuant to the general contract. There is no requirement in the contract which makes it mandatory for the Government to spend a certain amount each year or describes specifically the engines to be developed. It was intended at the time the contract was entered into that the contract itself should broadly cover the developmental work but that details of particular projects should be specified in separate task orders. The equity,

754

Opinion of the Court

if any, that the plaintiff would have would be measured over the life of a particular task order, not over the life of the 10-year contract. Since it was estimated that it would require 20 months to develop the type of engine desired, and plaintiff actually worked on the engines for three and a half years, any equity that the plaintiff might have had was completely exhausted.

Third, a contributing factor leading to the termination of the contract was the plaintiff's dissatisfaction with the terms of the specific task orders and the lack of commercial possibilities for the type of engines being developed. In fact, plaintiff requested the defendant to terminate the two outstanding task orders because it felt that one was substantially developed and the other was of no interest. How then can these engines be of such value to the plaintiff ? Clearly, it is simply an attempt to recoup a substantial amount of the expenses which the plaintiff contracted to incur in the expectation of receiving commercial benefits. Since these commercial benefits did not become a reality, it would appear that the plaintiff entered into a bad bargain, but this can be of no concern here. It would appear that the plaintiff received exactly that for which it bargained. Therefore, the plaintiff is entitled to no part of its claim as to the engines. This is in no way unfair to the plaintiff for it need only be pointed out that the results of research are both tangible and intangible. True enough, the Navy received the physical assets, but the plaintiff retained the "know-how” at a cost of only 40 percent. In other words, plaintiff received 100 percent of the "know-how" with an expenditure of only 40 percent of the costs.

The third part of the plaintiff's first count concerns capital equipment. It should be noted that the determination of this issue is not based on equity but merely follows the terms of the contract as agreed to by the parties. The pertinent parts of the contract are set out as follows:

SECTION 5. (a) Title to property purchased for the performance of this contract and for the cost of which the Contractor is entitled to be reimbursed under this contract shall automatically pass to and vest in the Government upon delivery to the Contractor, or upon the happening of any other event prior to such deliv

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