is the making of a contract to repay. Congressional repudiation of such an obligation might weaken the power of the Government to borrow in the future. (8) As a practical matter, the exercise of the power of Congress to withdraw the privilege of suit would achieve the same result. MEMORANDUM MARCH 2, 1942. To: Mr. Henry L. McIntyre. Subject: Constitutionality of the Emergency Price Control Act in its Effect upon Existing Government Contracts. THE PROBLEM This memorandum will deal with the constitutionality of the Emergency Price Control Act in its effect upon existing contracts to which the United States Government, or an agency or department thereof, is a party. It appears from the Emergency Price Control Act that price orders may cut across existing contracts even with the United States, and for purposes of this memorandum that interpretation of the statute will, in general, be assumed. Under the relevant cases, it is submitted that no constitutional provision is thereby violated. RELEVANT STATUTORY PROVISIONS Section 4 (a) of the Emergency Price Control Act provides: "It shall be unlawful, regardless of any contract, agreement, lease, or other obligation heretofore or hereafter entered into, for any person to sell or deliver any commodity, or in the course of trade or business to buy or receive any commodity, or to demand or receive any rent for any defense-area housing accommodations or otherwise to do or omit to do any act, in violation of any regulation or order under section 2, or of any price schedule effective in accordance with the provisions of section 206, or of any regulation, order, or requirement under section 202 (b) or section 205 (f), or to offer, solicit, attempt, or agree to do any of the foregoing." 1 Section 205 (d) provides: "No person shall be held liable for damages or penalties in any Federal, State, or Territorial court, on any grounds for or in respect of anything done or omitted to be done in good faith pursuant to any provision of this Act or any regulation, order, price schedule, requirement, or agreement thereunder, or under any price schedule of the Administrator of the Office of Price Administration or of the Administrator of the Office of Price Administration and Civilian Supply, notwithstanding that subsequently such provision, regulation, order, price schedule, requirement, or agreement may be modified, rescinded, or determined to be invalid. In any suit or action wherein a party relies for ground of relief or defense upon this Act or any regulation, order, price schedule, requirement, or agreement thereunder, the court having jurisdiction of such suit or action shall certify such fact to the Administrator. The Administrator may intervene in any such suit or action." 2 Under section 302 (h): "The term 'person' includes an individual, corporation, partnership, association, or any other organized group of persons, or legal successor or representative of any of the foregoing, and includes the United States or any agency thereof, or any other government, or any of its political subdivisions, or any agency of any of the foregoing: Provided, That no punishment provided by this Act shall apply to the United States, or to any such government, political subdivision, or agency." 3 It would thus appear that, under the terms of the statute, price orders may cut across even contracts that have been made with the Government of the United 1 P. L. 421, 77th Cong. 2 Id. 3 Id. States or any agency thereof. That interpretation will be followed for purposes of this memorandum. EFFECT OF MAXIMUM PRICE REGULATIONS UPON EXISTING CONTRACTS Let us suppose that the United States has contracted with A, a private party, to purchase a quantity of goods at a certain price. Thereafter, before delivery or payment, the Administrator issues a maximum price regulation establishing a maximum price below the contract price. It now becomes illegal for A to sell or deliver the goods at the contract price, and for the United States to buy or accept delivery. Moreover, the United States may no longer be held to the contract at that price. It is well established in the law of contracts that supervening domestic law which renders performance impossible or illegal will excuse the promisor's breach. Assuming that it is permissible to cut across contracts between private individuals, are there any constitutional reasons why that should not also be true of contracts to which the United States is a party? SUPPORT FOR THE POWER OF CONGRESS TO AFFECT GOVERNMENT CONTRACTS In general, the rules of impossibility as a defense to a contractual action apply alike to private and public contracts. It is true that where the promisor himself has made his own performance impossible, he is not excused. But the fact that the promisor was active in bringing about the change of law making performance of his promise impossible does not defeat his defense, since the change must be deemed to have been made for the public good; for similar reasons, the United States as a contracting party can assert subsequent impossibility due to an act of Congress or an administrative board. That the Government passing the statute or making the order is itself the promisor does not render it liable to the promisee.s This result is reached because the United States as a contractor is separate and distinct from the United States as a sovereign; it may not be charged in one capacity for its acts done in the other capacity.9 The outstanding case for these propositions is Horowitz v. United States.10 There the Government (through the New York Ordinance Board) had sold silk to the claimant, agreeing in the sales contract to ship the silk promptly after receipt of shipping instructions, so that he might have an opportunity to resell before completing payment. There was a failure to ship promptly because of an embargo placed on freight shipments of silk by the United States Railroad Administration; this failure to comply with the terms of the agreement caused the claimant to lose this opporunity to sell at a profit. The Supreme Court held that the United States, when sued as a contractor, cannot be held liable for an obstruction to the performance of the particular contract resulting from its public and general acts as a sovereign. The Court quoted from Jones v. United States, as follows: "The two characters which the Government possesses as a contractor and as a sovereign cannot be thus fused; nor can the United States while sued in the one It should be noted that the First War Powers Act, 1941 (P. L. 354, 77th Cong.), in title II, sec. 201, provides: "The President may authorize any department or agency of the Government exercising functions in connection with the prosecution of the war effort, in accordance with regulations prescribed by the President for the protection of the interest of the Government, to enter into contracts and into amendments or modifications of contracts heretofore or hereafter made and to make advance, progress, and other payments thereon, without regard to the provisions of law relating to the making, performance, amendment, or modification of contracts whenever he deems such action would facilitate the prosecution of the war * * It is possible that the Emergency Price Control Act was enacted in the light of that provision and was intended to be subject thereto (87 Congressional Record 10097). If so, the President could authorize Government contracts in contravention of price orders and regulations. However, it should be noted that sec. 305 of the Emergency Price Control Act provides: "No provision of law in force on the date of enactment of this act shall be construed to authorize any action inconsistent with the provisions and purposes of this act." Sec. 4 (a). • VI Williston, Contracts (rev. ed.), secs. 1935, 1938. See in general Office of Price Administration memorandum by i. H. Schneider, Constitutionality of the Proposed Price Control Act in Its Effect Upon Existing Contracts (Court Review Research and Opinion Section, Jan. 2, 1942). 7 VI Williston, Contracts, sec. 1959. VI Williston, Contracts, sec. 1938, note 10. Maxwell v. United States, 3 F. (2d) 906 (C. C. A. 4th, (1925)); United States v. Warren Transportation Co. 7 F. (2d) 161 (D. Mass.); United States v. Coal Cargo of Henry Co., 11 F. (2d) 809 (C. C. A., 3d (1926)), cert. den. sub nom. United States v. A Cargo of About 3,428 Tons, 273 Ú. S. 696 (1927); Smoot's Case, 82 U. S. 36, 45 (1876); United States v. Fuller, 296 F. 178 (D. C. Kan. (1923)); United States v. Bentley, 293 F. 229, 235 (D. C. S. D. Ohio, (1923)); Horowitz v. United States, 267 U. S. 458 (1925); Jones v. United States. 1 Ct. Cl. 383 (1865); Deming v. United States, 1 Ct. Cl. 190 (1865); Wilson's Case, 11 Ct. Cl. 513. 10 267 U. S. 458 (1925). 11 character be made liable in damages for their acts done in the other. Whatever acts the Government may do, be they legislative or executive, so long as they be public and general, cannot be deemed specially to alter, modify, obstruct, or violate the particular contracts into which it enters with private persons * * * In this court the United States appear simply as contractors, and they are to be held liable only within the same limits that any other defendant would be in any other court. Though the sovereign acts performed for the public good may work injury to some private contractors, such parties gain nothing by having the United States as their defendants." 12 In Deming v. United States, 13 the claimant had contracted to furnish goods to the Government, which he could procure only by importation. The Government then imposed a higher duty, interfering with his performance. He contended that it should be treated as a case of interference by the promisee with the promisor's performance. However, the court declared: "This statement of his case is plausible but is not sound. And herein is its fallacy that it suppose the general enactments of Congress are to be construed as evasions of his particular contract. This is a grave error. A contract between the Government and a private party cannot be specially affected by the enactment of a general law. The statute bears upon it as it bears upon all similar contracts between citizens, and affects it in no other way." 14 15 An interesting early Court of Claims case in this line, Wilson's case,' arose during the Civil War. The claimant had contracted to sell a certain number of mules to the United States. When he attempted to deliver them, a Union Army officer refused to let him proceed along the road. As a result, the Confederate Army captured the mules. The United States had then compelled the claimant to perform by delivering other mules. The court pointed out that the double character of the Government as contractor and as sovereign must not be lost sight of. For acts of its contracting agents within the scope of their authority, it is liable as a contracting party. But, it was held, for the general acts of a military officer acting for the public defense, it is not liable as a contracting party, though the acts operated as an interference and directly prevented performance of the contract. There are several cases holding that sovereign acts of the United States performed for the general good cannot be set up as a defense to libel for delay in loading cargo merely because the United States is libelant.16 In Maxwell v. United States, 17 a contractor was to build a post office for the United States within a certain time. It was held that he was not relieved from liability for failure to do so by the war activities of the Government, which made it difficult or impossible for him to get labor and materials at prices warranted by the contract. The Court quoted from 39 Cyc. 743: "The Government as a contractor cannot be held liable for the public acts of the Government as a sovereign, and whatever acts the Government may do, as long as they may be public and general, cannot be deemed specially to violate the particular contracts into which it enters with individuals." Several pertinent conclusions may be drawn from these cases. When the acts of the United States as a sovereign prevent performance, it is not liable for breach of an implied promise not to hinder the other party in carrying out his performance, nor is the United States liable for breach of contracts when its acts as sovereign make its own performance impossible. The Horowitz case 18 is particularly valuable. In that case the Government's shipment of the silk within the time required by the agreement was made illegal by an administrative order putting an embargo on shipments of silk. In the usual situation under the Emergency Price Control Act, the purchase by the Government and the sale by the private party at the contract price will be made illegal by a maximum price regulation. The Supreme Court in the Horowitz case decided that the administrative order could validly prevent performance of the contract, and the Government had a valid defense for nonperformance. The result and reasoning there would seem applicable here. 11 Emphasis supplied. 12 1 Ct. Cl. 383, 384 (1865). 13 1 Ct. Cl. 190 (1865). 14 Id., 191. 15 11 Ct. Cl. 513. 16 United States v. Coal Cargo of Henry County, 11 F. (2d) 809 (C. C. A. 3d (1926)), cert. den. sub nom. United States v. A Cargo of About 3,428 Tons, 273 U. S. 696 (1927); United States v. Warren Transportation Co., 7 F. (2d) 161 (D). Mass.). 17 3 F. (2d) 906 (C. C. A. 4th (1925)). 18 Supra. Also of relevance are the cases holding that the United States cannot contract away the legislative powers of regulation entrusted to Congress by the Constitution. Thus the Supreme Court in North American Commercial Co. v. United States, held that regulation of commerce, includling seal fisheries, involved exercise of power as a sovereign, and "such governmental powers cannot be contracted away." 19 The fact that preexisting Government contracts might be interferred with does not restrict the general congressional powers of regulation. CONSTITUTIONAL OBJECTIONS THAT MAY BE RAISED: THE LYNCH CASE AND SIMILAR CASES The impairment of contracts clause of the Constitution 20 applies only to States and not to the Federal Government. Even the States, however, have been upheld in passing statutes which modified or destroyed contract rights, where there was an exercise of the State police power.21 In each case the court's result is reached by a balancing of the opposing interests. There are many cases upholding State action which has cut across obligations of the State itself, where the action was taken under a valid power of regulation, 22 and these holdings are persuasive authority at least for similar power in the Federal Government. Indeed, it has been suggested that the incidental power of Congress over contract is greater than that of the States because of the inapplicability of the impairment of contracts clause.23 While the contract clause applies only to States, the fifth amendment may operate as a somewhat similar limit upon the Federal Government in repudiating its contracts. The case of Lynch v. United States must be considered here. In that case Congress by the Economy Act 24 had purported to repeal "all laws granting or pertaining to yearly renewable term insurance." If valid, this would abrogate the outstanding war-risk insurance policies and relieve the United States from all liability without making compensation to the beneficiaries. The Supreme Court, speaking through Mr. Justice Brandeis, held that these policies were contracts of the United States and therefore were property and created vested rights protected by the fifth amendment. The opinion declares: "That the contracts of war-risk insurance were valid when made is not questioned. As Congress had the power to authorize the Bureau of War Risk to issue them, the due process clause prohibits the United States from annulling them, unless, indeed, the action taken falls within the Federal police power or some other paramount power. The Solicitor General does not suggest, either in brief or argument, that there were supervening conditions which authorized Congress to abrogate these contracts in the exercise of the police or any other power. 1925 The Court was merely holding that there is no congressional power of repudiation, as such, of Government contracts. Congress could not decide to abrogate its contracts merely to reduce Government expenditures; that is mere repudiation, not regulation. However, the Court clearly indicated that in the exercise of a power granted it by the Constitution, Congress could by general regulation cut across contracts with the United States, along with contracts between individuals. The Emergency Price Control Act and the orders under it are a general scheme of regulation carrying out the war power and the commerce and currency powers of Congress, not an attempt by the Federal Government to escape its obligations.26 The Lynch case thus is not inconsistent with, but rather supports, the position that an exercise of a proper power of regulation, affecting Government contracts only incidentally along with other similar contracts, is constitutional. * * * * * * 19 171 U. S. 110, 137; see also, United Shoe Machine Co. v. United States (258 U. S. 451 (1922)). 20 Art. 1, sec. 10, 1: "No State shall pass any law impairing the obligation of contracts * * 21 Veix v. Sirth Ward Ass'n. (310 U. S. 32 (1940); Block v. Hirsch (256 U. S. 135 (1920)); Marcus Brown v. Feldman (256 U. S. 170 (1920)); Levy v. Stern (258 U. S. 242 (1922)) Home Bldg. & Loan Ass'n. v. Blaisdell (54 S. Ct. 231 (1934)); Dillingaam v. McLaughlin (264 U. s. v. 370 (1924)); Ass'n of etc., Stores v. Chardavoyne (23 N. Y. S. (2d) 662 (City Ct. 1940)). Since the Feldman case, supra, State legislation affecting private contracts has been tested by the 14th Amendment, and the Supreme Court has invoked the contract clause only as to contracts to which the State was a party. 22 Atlantic Coastline R. R. v. Goldsboro (232 U. S. 548 (1914)) (neither the contract clause nor the due process clause overrides the power of a State to establish necessary and reasonable regulations under its police power); Chicago & Alton R. R. v. Traubarger (238 U. S. 67 (1915)); Chicago B. & O. R. R. v. Nebraska (170 U. S. 57); Stone v. Mississippi (101 U. S. 814); Butchers Union Co. v. Crescent City (111 U. S. 746); Chicago B. & O. R. R. v. Drainage Commissioners (200 U. S. 561, 592). 23 United States v. United Shoe Machine Co. (264 F. 138 (1920)) aff'd 258 U. S. 451 (1922). 24 48 Stat. 9. 25 292 U. S. 571, 580 (1933); emphasis supplied. 26 See memorandum, "The Bill Proposing Emergency Price Control is Within the Powers of Congress'' House hearings on H. R. 5479, pp. 63-87. In Heinrich v. United States 27 the Government sold land to a private party, specifically agreeing that he would not be taxed for past improvements; later it attempted to charge him for such improvements, to make him in effect pay twice. This case has been cited to support the proposition that the Federal Government may not constitutionally take any action which would abrogate its contracts. However, the case is not authority for any such general statement The breach of obligation was not related to the tax power and was not necessary to preserve the power or the country. Moreover, the case was appealed to the circuit court of appeals where the Government requested that the case be dismissed ab initio, to obliterate the district court opinion.28 The Court for technical reasons refused to remand and direct the lower court to rewrite its opinion, but it did indicate that it could not approve that court's reasoning. The situation in the Heinrich case is clearly distinguishable from that under the Emergency Price Control Act, for the taxing statute there directly and specifically affected the contract of one particular individual, whose part of the agreement was completely and irrevocably executed. Maximum price regulations, of course, are of general application. Moreover (ordinarily) the only contracts affected will be those unexecuted on either side. The only case in which partially executed contracts would be cut across is where payment has been made but delivery has not, when the order is issued, and there it is fairly clear that the parties may be restored to status quo.29 The plaintiff in Choate v. Trapp 30 purchased land from the Federal Government under an agreement that the land be free from taxation. Congress later repealed the tax provision, and the State of Oklahoma then levied its tax. The land was part of an Indian reservation, and could not be taxed by a State without the consent of Congress. The tax was held invalid on the ground that Congress had not intended to permit State taxation since it could not constitutionally do so.31 There was no holding as to the power of Congress itself to tax the land. If congressional permission of State taxation would have been unconstitutional, it would be so because it was not related to or in exercise of any proper power under the Constitution. The case in no way conflicts with the position that Government contracts may be cut across by regulatory action of general applicability under a power granted expressly or impliedly by the Constitution. THE GOLD CLAUSE CASES Nortz v. We now come to a consideration of the Gold Clause Cases. Norman v. Baltimore & Ohio R. R.32 dealt with a corporate bond calling for payment in gold coin of the same standard of value as of the date the bond was issued. The Supreme Court held that the joint resolution of Congress 33 which changed that contract obligation to an obligation to pay dollar for dollar in legal tender was valid under the currency power; it stated in dictum 34 that contracts of the United States might stand on a different footing but gave no reason for that statement. United States 35 presented the same problem as to a Treasury gold certificate, but the Court did not decide whether the certificate was a contract, nor whether, if it were, the resolution was constitutional as to it, because no damage was proved; suit in the Court of Claims is permitted only where damage exists. But in Perry v. United States 36 a Government bond was involved, clearly a contract of the United States. This has proved to be the most controversial of the Gold Clause Cases, and it is, of course, the most relevant to our problem. The Court ultimately held that the plaintiff could recover nothing because he had shown no damage and therefore had no standing in the Court of Claims to attack the resolution. However, the Court in a dictum that aroused a storm of discussion, declared that the joint resolution was unconstitutional. It stated: "The Government's contention thus raises a question of far greater import than the particular claim of the plaintiff * The contention necessarily imports that the Congress can disregard the obligations of the Government at * * 27 12 F. (2d) 938 (D. C. Mont. 1926), appeal dismissed, 16 F. (2d) 112 (CCA, 9th, (1926)). 28 A subsequent statute had since wiped out the tax on the property. 29 See memorandum, supra, by H. H. Schneider, pp 16-17. 30 224 U. S. 665 (1911). 31 The Choate case was approved in United States v. United Shoe Machine Co. (264 F. 138, aff'd. 258 U. S. 451 (1921)); the actual holding there was that there was no repudiation of a contract, and no vested interest. (See also, Sinking Fund Cases, 99 U. S. 700, 727 (1878) (no deprivation of a concedely vested interest).) 32 294 U. S. 24 (1934). 33 48 Stat. 112 (1933), 31 U. S. C. sec. 1. 34 294 U. S. 240, 305. 35 294 U. S. 317 (1934). 36 294 U. S. 348 (1934). |