with the prospect of . . . cancellation in view, since the statute was binding and must be read into the contract"; 29 and that contracts entered into before the passage of the statute were "entered into subject to the power of Congress to enact legislation authorizing the Government to take them over for its benefit, or to modify, suspend, or cancel them, as required by the necessities of war, and an implied condition to that effect must be read into the contract.” 30 Where a contracting agency breached a contract by stopping work and taking over the inventory in contemplation of a negotiated settlement, it was held that the agency could still exercise its statutory right of cancellation by issuing a notice of cancellation at the time of trial, and that an unsubstantial default by the Government did not prevent its exercising the right of termination.31

a. Compensation. Since there is no breach of contract in the case of terminations pursuant to statutory authority, the contractor is not entitled to common-law damages. Instead the contractor is limited to the compensation provided for by the statute.32 Termination statutes have denied the payment of anticipatory profits, either expressly or by implication.33 A World War I statute providing for the payment of "just compensation" upon termination was described as an exercise of the power of eminent domain. Although that statute did not expressly prohibit the payment of anticipated profits, it was held not to justify the allowance of such profits,35 but if the contract would have been a profitable one if carried out, that fact must be given its weight in fixing "just compensation." A World War II statute providing for "fair compensation" upon termination, was held to have been enacted under the war powers of Congress and to have established a different measure of recovery than "just compensation" allowed in condemnation cases which involve a taking under the eminent domain provisions of the Fifth Amendment. In holding that terminations under the statute were not a requisitioning or condemnation of private property for public use, the court overruled the con

29 Russell Motor Car Co. v. United States, supra note 25 at 524.

30 DeLaval Steam Turbine Co. v. United States, supra note 25 at 73; accord, Monolith Portland Midwest Co. v. RFC, 178 F. 2d 854 (9th Cir. 1949), cert. denied, 339 U.S. 932 (1950), with respect to a World War II statute.

31 College Point Boat Corp. v. United States, supra note 27.

32 Monolith Portland Midwest Co. v. RFC, 95 F. Supp. 570 (8.D. Calif. 1951) and 128 F. Supp. 824, 837 (S.D. Calif. 1955).

33 Twin City Forge & Foundry Co. v. United States, 60 Ct. Cl. 673 (1925), modified per stipulation, 274 U.S. 763 (1927) (specific prohibition in Dent Act, 40 Stat. 1272 (1919)); Monolith Portland Midwest Co. v. RFC, supra note 32 ("fair compensation" under Contract Settlement Act of 1944).

Urgent Deficiency Appropriation Act of 1917, 40 Stat. 182; DeLaval Steam Turbine Co. v. United States, supra note 25; Russell Motor Car Co. v. United States, supra note 24.

DeLaval Steam Turbine Co. v. United States, supra note 25; Barrett Co. v. United States, 273 U.S. 227 (1927); College Point Boat Corp. v. United States, supra note 27; Russell Motor Car Co. v. United States, supra note 25; Meyer Scale & Hardware Co. v. United States, supra note 25.

36 DeLaval Steam Turbine Co. v. United States, supra note 25.

tractor's contention that "fair compensation" entitled him to recover benefits lost (including anticipatory profits) as a result of termination or the "value of the contract" to the contractor, because each of these would be equivalent to recovery of general damages.37

5. Effect of termination clauses. Clauses in government contracts reserving to the Government the right to terminate for convenience are valid and will be upheld by the courts.38 Terminations under such clauses, like terminations authorized by statute, are the exercise of a lawful right and do not constitute a breach of contract.39 Termination clauses can of course be used in the absence of termination statutes and can specifically exclude anticipatory profits. However, in the absence of specific provisions allowing or disallowing anticipatory profits, the courts have denied them where the termination clause provided for other compensation. In one case the Supreme Court decided that under a cost-plus-a-fixed-fee contract for the production of motors, cancelled on thirty days' notice pursuant to a termination clause which provided that a fixed fee would be paid for each completed motor, no fixed fee or profit was allowable on uncompleted motors. In another case, where the termination clause provided for payment of certain items, other than prospective profits, such profits were denied. As the court put it, “if that item of profits is recoverable, it is difficult to see what benefit accrues from the stipulated right of termination, the plaintiff having been made whole as to all other items." 42 In a third case, a concurring opinion construed a provision of the contract calling for "equitable adjustment" in the price on account of an increase or decrease of the performance required of the contractor, as prohibiting the recovery of prospective profits on items not delivered as a result of a decrease in the quantity ordered."

It is well settled that a termination clause may provide a formula for the contracting officer to follow in making a determination as to the amount due the contractor in the absence of an agreement between the parties on the amount due. A determination made in accordance with such formula is binding on both parties, unless it is fraudulent, capricious or arbitrary or so grossly erroneous as neces

"Monolith Portland Midwest Co. v. RFC, 128 F. Supp. 824, 839-846 (S.D. Calif. 1955) and 95 F. Supp. 570 (S.D. Calif. 1951). This case also denied a claim for quantum meruit, independent of the statute, on the ground that the defendant did not receive the benefits.

38 Duesenberg Motors Corp. v. United States, 260 U.S. 115 (1922); Dorris Motor Car Co. v. United States, 60 Ct. Cl. 68 (1924), aff'd, 271 U.S. 96 (1926); cf. United States v. Speed, supra note 6. On adequacy of consideration, see Petroleum Refractionating Corp. v. Kendrick Oil Co., 65 F. 2d 997 (10th Cir. 1933) and Peninsular Store Co. v. United States, 58 Ct. Cl. 36 (1923).

Dorris Motor Car Co. v. United States, supra note 38.

40 Duesenberg Motors Corp. v. United States, supra note 38.

Dorris Motor Car Co. v. United States, supra note 38.

Id. at 77.

Meyer Scale & Hardware Co. v. United States, supra note 25 at 51-57.

sarily to imply bad faith, or is not supported by substantial evidence."

III. Development of Termination Procedures

6. Civil War terminations. The practice of terminating contracts for the convenience of the Government and including provisions for such termination in the contracts is not of recent origin. Indeed, as far back as the Speed case in 1869,45 the Government argued that either the slaughtering and packing contract there involved was invalid under section 7 of the Act of April 14, 1818,16 because it did not contain a provision for the termination of the contract as specified by Rule 1179 of the Army Regulations of 1863, or that such termination provision should be read into the contract. In overruling the Government's contentions and awarding the contractor damages for breach of contract, the Supreme Court held the Army regulation to be inapplicable to that type of contract, stating that the regulation had reference to contracts for the regular and continuous supply of subsistence stores and was required because the post or force to be supplied may be suddenly removed or greatly diminished.

a. The Corliss Steam-Engine Company case. Just six years after it had awarded damages in the Speed case, the Supreme Court had occasion to consider the termination and settlement of a Navy Civil War contract. In 1869 the Navy Department notified Corliss that it had decided not to accept completed engines and boilers covered by two contracts with Corliss, and directed that no further progress be made with the work. Corliss then offered either to take all of the machinery then in process and receive $150,000, or to deliver to the Government all of the machinery in its incomplete condition for $259,068.40. The Navy Department accepted the latter offer, recognizing the $259,068.40 as the "balance in settlement of the two contracts." 47 A certificate of indebtedness in that amount was issued to Corliss as there were then no appropriations available to pay the claim.

The Comptroller of the Treasury refused to approve the certificate for congressional appropriation of funds, contending, inter alia, that the settlement was not fair and reasonable, and that the contracting officer of the Navy Department had no authority to enter into it. Congress, on the recommendation of the Comptroller, enacted legislation to prevent the use of annual appropriations to pay the agreed

44 See United States v. Mason & Hanger, 260 U.S. 323 (1922); Carroll et al. v. United States, 76 Ct. Cl. 103 (1932); John H. Mathis Co. v. United States, 79 F. Supp. 703 (D.N.J. 1948); and § 1 of the Act of May 11, 1954, 68 Stat. 81, 41 U.S.C. § 321 (1958). United States v. Speed, 75 U.S. (8 Wall.) 77 (1869). See par. 3b supra.

403 Stat. 426, requiring certain contracts for Army supplies to be made under such regulations as the Secretary of War may direct.

Corliss Steam-Engine Co. v. United States, 10 Ct. Cl. 494, 499 (1874).

amount, and directed a re-examination of the claim by law officers and engineers of the Navy "who shall deduct from the contract price with said steam-engine company whatever sum it would have cost said company to have completed their said contract.” 49

In an action brought by Corliss on the certificate of indebtedness, the Court of Claims fully approved the settlement made between the Department and Corliss.50 In affirming the Court of Claims decision, the Supreme Court stated: 51

The duty of the Secretary of the Navy, by the Act of April 30, 1798, creating the Navy Department, extends *** to 'the procurement of naval stores, and materials, and the construction, armament, equipment and employment of vessels of war, as well as all other matters connected with the naval establishment of the United States.' That legislation existing, the discharge of the duty devolving upon the Secretary necessarily requires him to enter into numerous contracts for the public service; and the power to suspend work contracted for, whether in the construction, armament or equipment of vessels of war, when from any cause the public interest requires such suspension, must necessarily rest with him. As, in making the original contracts, he must agree upon the compensation to be made for their entire performance, it would seem that when those contracts are suspended by him, he must be equally authorized to agree upon the compensation for their partial performance. Contracts for the armament and equipment of vessels of war may, and generally do, require numerous modifications in the progress of the work, where that work requires years for its completion. With the improvements constantly made in shipbuilding and steam machinery and in arms, some parts originally contracted for may have to be abandoned, and other parts substituted; and it would be of serious detriment to the public service if the power of the head of the Navy Department did not extend to providing for all such possible contingencies by modification or suspension of the contracts, and settlement with the contractors.

But aside from this general authority of the Secretary of the Navy, under the orders of the President, he was, during the rebellion, specially authorized and required by Acts of Congress, either in direct terms or by specific appropriations for that purpose, to construct, arm, equip and employ such vessels of war as might be needed for the efficient prosecution of the war. In the discharge of this duty, he made the original contracts with the claimant. The completion of the machinery contracted for having become unnecessary, from the termination of the war, the Secretary, in the exercise of his judgment *** suspended the work. Under these circumstances, we are of the opinion that he was authorized to agree with the claimant upon the compensation for the partial performance, and that the settlement thus made is binding upon the Government.

48 Act of February 24, 1870, 16 Stat. 68; Act of March 3, 1871, 16 Stat. 531; Act of May 23, 1872, 17 Stat. 154.

49 Act of July 15, 1870, 16 Stat. 325.

50 Corliss Steam-Engine Co. v. United States, 10 Ct. Cl. 494 (1874).

51 United States v. Corliss Steam-Engine Co., 91 U.S. 321, 322, 323 (1876).

As a result of the Corliss decision, the authority of contracting agencies to terminate contracts and settle the attendant claims became well recognized. The Corliss decision has never been modified or overruled by the Supreme Court and has become the cornerstone of present contract termination and settlement procedures.

The Government's common-law obligations upon termination, where the right to terminate was not reserved in the contract, were further clarified by subsequent Supreme Court decisions.52

7. World War I terminations. Early upon America's entry into the First World War, legislation was enacted which enabled the Navy Department to handle the termination of its World War I contracts. The Urgent Deficiency Appropriation Act of 1917 53 empowered the President "to modify, suspend, cancel or requisition any existing or future contract for the building, production or purchase of ships" or material related thereto; provided that on cancellation the Government should make "just compensation to be determined... by the President." Contractors dissatisfied with a determination were to be paid 75 percent thereof, and could sue for the balance claimed. The President's authority under this statute was delegated to the Navy Department and to the United States Shipping Board. In settling contracts cancelled under that act the Navy Department paid the contractor for such items as raw and partly finished materials, purchased parts, special tooling, special facilities, work in process, overhead, depreciation, subcontract settlements, and profit on work done. Upon payment for such items the Government took title to the materials, tools, or facilities paid for, but in some cases permitted the contractor to retain the items paid for by appropriate credit for market or salvage values. The courts denied recovery of anticipated profits as part of "just compensation" under the act and held the act to be binding on contracts entered into before its passage as well as those entered into thereafter.54

a. The Dent Act. The War Department did not receive statutory authority for the settlement of terminated World War I contracts until after the war was over. The need to speed up procurement during the war had led to relaxation of procurement regulations. There were a great many "informal" contracts which were not evidenced in writing 55 or were not signed by a contracting officer. On November 25, 1918, the Comptroller of the Treasury ruled that settlements of contracts so made would be invalid.58 The decision admitted the

6 See United States v. Behan, supra note 6; United States v. Purcell Envelope Company, 249 U.S. 313 (1919); see also Amoskeag Mfg. Co. v. United States, 84 U.S. (17 Wall.) 592 (1873).

58 Act of July 15, 1917, 40 Stat. 182.

64 See par. 4, supra.

As required by REV. STAT. §§ 3744 and 3745 (1875), repealed by the Act of Oct. 21, 1941, 55 Stat. 743.

50 25 COMP. DEC. 398, 404 (1918).