It is well settled that where proof of actual damage for delay in performance of a contract is impractical or difficult, courts look with favor upon reasonable agreements for liquidated damages made by the parties.75 However, if the amount stipulated as liquidated damages is so disproportionate to the amount of the probable loss as to show that compensation was not the object of the liquidated damages clause, such clauses will be regarded by the courts as contracts for unenforceable penalties.76 The standard Navy "Liquidated Damages" clause for fixed-price supply contracts, therefore, provides in substance that if the contractor refuses or fails to make deliveries of any of the articles called for in the contract at the times specified, the contractor shall pay to the Government, as fixed, agreed and liquidated damages for each calendar day of delay in making delivery, an amount specified therein.

Contracting Officers are directed to provide, in the contract, an amount for liquidated damages which has a reasonable relation to the probable damage to the Government; and in the case of a contract for more than one type of article, an amount for each type. The contractor is not charged, however, with liquidated damages if the delay in delivery is due to causes beyond the control and without fault or negligence of the contractor.

The "Liquidated Damages" clause used in fixed-price construction contracts also requires

74 While not required in Navy contracts, liquidated damage provisions are required in construction contracts under control of the Federal Works Administration (see 40 U. S. Code 269).

16 United States v. Bethlehem Steel Co., 205 U.S. 105 (1907); Wise v. United States, 249 U.S. 361 (1919).

76 Kothe v. R. C. Taylor Trust, 280 U.S. 224 (1930); Priebe & Sons Co., Inc. v. United States, 332 U.S. 407 (1947); United States v. Kanter, 137 F. (2d) 828 (C.C.A. 8th, 1943).

"17 Comp. Gen. 354 and case there cited.

that the contractor notify the Department as to the cause of the failure to prosecute the work, whereupon the Department is required to ascertain the facts and extent of the delay. The Contracting Officer determines the extent to which the failure to perform is due to delays beyond the control and without the fault or negligence of the contractor. Such determination is specified in the contract to be conclusive on the parties, subject only to appeal by the contractor in accordance with the procedures of the "Disputes" clause.

While one might conclude that a "Liquidated Damages" clause adequately protects the Government against default by the contractor and hence renders unnecessary a "Termination for Default" clause (discussed above), each of the clauses relates to different possible future circumstances and hence serves different purposes. It may on first impression appear that the provision for assessment of excess cost under the "Default" clause, in addition to liquidated damages, is inequitable and imposes a hardship on the contractor. However, the use of the "Liquidated Damages" clause is limited to contracts where time of performance is of first importance; and since the contractor makes its bid or proposal with that clause in contemplation, the use of both clauses is for the purpose of accomplishing the desired result of delivery or performance within the time required.

"Liquidated Damages" clauses are rarely incorporated in cost-reimbursement contracts, or maximum-price contracts subject to redetermination, since the contractor would undoubtedly incur any and all costs to avoid the payment of liquidated damages, which costs are borne by the Government under a costreimbursement contract or reflected in the redetermined price of the maximum-price contract.

Prior to enactment of the Armed Services Procurement Act, no agent or officer of the Government had authority to waive a provision in a Government contract for assessment of liquidated damages;" but Section 6 of said Act provides that the Comptroller General, on the recommendation of the agency concerned, is authorized and empowered to remit the whole or any part of the liquidated damages assessed against a Government contractor as

may be just and equitable. Thus, the contractor can be protected against harsh treatment in the administration of any "Liquidated Damages" clause.

SUMMARY

All Navy contracts must and do contain (1) a clause providing that certain officials of the Government shall not benefit from the contract; (2) a clause providing for a warranty by the contractor that it has employed no person or agency (other than bona fide employees or selling agencies) to solicit or secure the contract on a commission basis; and (3) a clause setting forth the procedure to be followed in case disputes arise under the contract.

All Navy procurement contracts also contain (1) a clause providing that the contractor shall not discriminate against any employee or applicant for employment because of race, creed, color or national origin; (2) a clause providing that the contractor shall not use convict labor in the performance of the contract; and generally (3) a clause permitting assignment of claims arising under the contract, and (4) a clause requiring that only materials of domestic origin be used in the work under the contract. Furthermore, all such contracts generally contain clauses providing for (5) the contractor's undertaking, (6) inspection of the work by the Government, (7) the right of the Government unilaterally to change the contract terms, (8) payment to the contractor, (9) title to the work, (10) guaranty of the work, (11) inclusion or exclusion of Federal, State and local taxes, (12) various patent matters, (13) the rights of the Government in the event of default by the contractor, and (14) the right of the Government to terminate the contract at its convenience.

In addition to the clauses referred to in the preceding paragraphs, all Navy procurement contracts on a cost reimbursement basis invariably contain clauses requiring that (1) the accounting methods of the contractor be approved by the Department; (2) the contractor maintain cost records with respect to the contract; (3) the contractor retain such records for a designated period of time; and (4) the contractor execute, as a condition precedent to

final payment, a release in a form satisfactory to the Department. Cost-type contracts generally contain, in addition, clauses with respect to (5) third party liability, (6) insurance, and (7) Government-furnished property. Costreimbursement type contracts provide for (8) advance approval by the Government before certain subcontracts may be made; or alternatively (9) notification to the Government of any fixed-price subcontract involving amount in excess of $25,000 or 5% of the estimated cost of the prime contract, and similar notification of any cost-plus-a-fixed-fee subcontract regardless of amount.

an

In addition to the clauses enumerated above in this summary, all Navy procurement contracts involving supplies incorporate by reference the representations and stipulations required by the Walsh-Healey Public Contracts Act, except that where said Act is inapplicable the requirements of the Eight-Hour Law of 1912 are set forth. Furthermore, such contracts contain a patent indemnity clause whenever standard commercial supplies are being procured. And if the "supplies" are vessels or aircraft, or parts thereof, the contract also incorporates by reference the agreements required by the Vinson-Trammell Act. In addition, contracts for aircraft not only incorporate the provisions of the Vinson-Trammell Act but also those of the Renegotiation Act of 1948; and such contracts, too, contain a prohibition against the employment of aliens in the performance of the work unless the Secretary of the Navy has first approved such employment. If the "supplies" involve research or development work, the contract contains a clause or clauses regarding the patent rights to be acquired by the Government thereunder, but seldom contains a patent indemnity clause.

All Navy procurement contracts involving the construction of public works set forth the requirements of (1) the Davis-Bacon Act, (2) the Copeland "Anti-Kickback" Act, and (3) the Eight-Hour Law of 1912. Fixed-price construction contracts invariably contain, also, a clause with respect to liquidated damages.

All Navy procurement contracts classified "Restricted" or higher contain, in addition, provisions with respect to (1) employment of aliens, (2) disclosure of information (includ

ing restriction on the filing of patent applications involving the subject matter of the contract), and (3) reporting of espionage, sabotage, and subversive activities.

In addition to the foregoing, Navy contracts often contain a clause providing for escalation or price determination (discussed in this Chap

ter 9), as well as other special clauses pertaining to matters peculiar to the individual contract in question. These clauses have not been discussed in this chapter at all, since their use is infrequent or else their form and coverage vary considerably with different procuring activities and with different purchases.

INTRODUCTION

The problems to be considered in this chapter are essentially those which arise when an imminent national emergency requires the construction, expansion, or conversion of industrial plants and shipyards to meet the needs of the Armed Services. In order to be in accord with the terminology employed in Section XIII of the Armed Services Procurement Regulation, the term "industrial installations" rather than the more general term "industrial facilities" will be used in this chapter wherever such use is appropriate. The former term may be defined as industrial real property, including improvements and appurtenances thereto, together with all related maintenance and production machinery and equipment, primarily used or capable of use in the procurement of supplies or services. It follows that industrial installations, by definition, and industrial facilities, by usage, do not include material furnished by the Government for incorporation in the end product to be procured, and that neither term includes jigs, dies, patterns, special hand and portable tools, and other items of a like nature which are usually collectively referred to as "special tooling." No consideration will be given in this chapter, therefore, to question involving such Government-furnished or contractor-furnished material and special tooling.

Between World War I and World War II, the thinking of the Army and the Navy was largely directed to the items which would be needed to wage a future war and not to the capacity of industry to produce such items in

* Prepared by John T. Koehler, formerly Assistant General Counsel, Department of the Navy, now Assistant Secretary of Navy.

astronomical quantities. In addition, too little thought was given to the fact that, if the required items must be produced in much less time than had hitherto been thought possible, existing industrial capacity would have to be expanded beyond the point which a more leisurely rate of production would permit.

The first major expansion in the Navy's war procurement program took place in June, 1940. After the fall of France and the Low Countries, Congress voted to make substantial additions to the United States Fleet. In June and July, 1940, the authorized strength of the Navy was approximately doubled. The "11 Percent Expansion Act" of June 14, 1940 (Public Law 629, 76th Congress; 34 U. S. Code 498-1) and the "70 Percent Expansion Act" of July 19, 1940 (Public Law 757, 76th Congress, 34 U. S. Code 498-2) were passed in recognition of the threats to the security of this nation implicit in the German victories. These authorizations were accompanied by grants of contract authority and the necessary appropriations. At the same time, the Act of June 28, 1940 (Public Law 671, 76th Congress, 50 U. S. Code App. 1151) granted limited authority to negotiate contracts for vessels, propulsion machinery, and equipment, and also granted the necessary authority to construct shipyards and plants to build the vessels and to produce munitions. Requests to Congress for authority to negotiate contracts had repeatedly emphasized that the Navy had need for utilizing the services of all shipbuilders and manufacturers of naval ordnance and other munitions, rather than the services of only those making the lowest bids. As a matter of fact, the contracts let by the Bureau of Ships in the latter part of 1940 and the early part of 1941 to construct the addi

tions to the Fleet authorized by Congress tied up, for the most part, the existing naval shipbuilding capacity of the nation. It was not until the early part of 1942 that the completion of vessels on the ways, and the availability of new ship yards constructed during 1940 and 1941, made possible the execution of additional shipbuilding contracts.

It was apparent, both to the Navy and to private industry, that the vast expansion of the Fleet could not be accomplished without a large expansion of private industrial and shipbuilding capacity. Private industry took the position that it could not possibly undertake an expansion program of its own which would be of sufficient magnitude to meet increased Fleet requirements. At the same time, the expansion program of the Army was demanding its share of available sources of supply, and the result was that the Armed Services were faced with the grim alternatives of increasing existing sources of supply or doing without many of the items that each of them needed.

Insofar as the Navy was concerned, it was interested in two types of industrial installations: namely, those owned and operated by the Navy, such as navy yards, naval gun factories, and the shore establishment generally; and those owned and operated by private industry, which produced naval vessels, aircraft, munitions, and other Fleet requirements. Although the former type of industrial installations absorbed labor and critical raw materials, the expansion of privately owned installations presented by far the most serious problem; and the manner in which this problem was handled will be the chief concern of this chapter.

All shipbuilding, ship repair, aeronautical, ordnance, and other industrial installations furnished or sponsored by the Navy during the war, and the period of the national emergency which preceded the declaration of war, were provided under contracts of the following principal types:

However, in the five-year period from 1 July 1940 through 30 June 1945, the Navy actually spent a total of approximately $10,000,000,000 on industrial and non-industrial installations, including construction and other work under the cognizance of the Bureau of Yards and Docks.

The need for new capacity, particularly for the expansion of shipyards and airplane factories, was so great in 1939 and 1940, and the funds which the Navy had available for this purpose were so small, that methods other than those available under appropriations by Congress had to be utilized if the expansion program was to be successfully carried out. Three differing approaches were worked out and widely utilized: (1) financing through Defense Plant Corporation, (2) extended use of Emergency Plant Facilities contracts, and (3) direct financing by the Government.

DEFENSE PLANT CORPORATION CONTRACTS

The Defense Plant Corporation was established on August 22, 1940, as a subsidiary of Reconstruction Finance Corporation and pursuant to the authorization contained in Public Law 664, 76th Congress, approved June 25, 1940 (54 Stat. 572), as amended by Public Law 108, 77th Congress, approved June 10, 1941 (55 Stat. 248). The implementing legislation authorized Reconstruction Finance Corporation to make loans to any corporation for plant construction or expansion, and further authorized RFC, either directly or through subsidiaries, "... to purchase and lease land, to purchase and produce equipment, supplies, and machinery, for the manufacture of arms, ammunition, and implements of war...." Such increased plant capacity was to be made available to private corporations for the manufacture of munitions of war. At the time the Defense Plant Corporation was established, neither the Army nor the Navy had the benefits of the sweeping War Powers Act (the First War Powers Act became law on December 18, 1941); nor, as pointed out heretofore, did they have sufficient funds available to undertake any substantial plant expansion. The machinery employed by the Army, Navy, RFC and DPC, aided by the Army-Navy Munitions Board, to make full use of the Act of June