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Question: The case indicates that the required Termination clause was not included in the contract, but the Government terminated the contract for convenience anyway. Yet, the Court sided with the Government and determined the clause was implicitly in the contract. Why?

312 F.2d 418 United States Court of Claims. G. L. CHRISTIAN AND ASSOCIATES v. The UNITED STATES. No. 5659. Jan. 11, 1963. Action against United States to determine claims for damages arising from government's termination of federal housing project contract at federal fort. The Court of Claims, Davis, Judge, held that termination article required by Armed Services Procurement Regulations would be read into contract where it had been expected that quarters allowance to military personnel assigned to fort would pay off construction loans, and loans had been insured by Federal Housing Administration, and, therefore, upon government's termination of contract, de facto prime contractor and its subcontractors could not recover unearned but anticipated profits but would be allowed profits only under formula in standard termination clause. Order in accordance with opinion. Opinion DAVIS, Judge.1 This case, which involves claims totaling $5,156,144.50,2 grew out of the deactivation of Fort Polk, Louisiana, by the Department of the Army in 1958. At the time when the decision to deactivate Fort Polk was made, a large housing project, which was to consist of 2,000 dwelling units for the use of military personnel at Fort Polk, was being constructed under a contract that had previously been made by the Corps of Engineers pursuant to the provisions of the Capehart Act.3 The housing contract was terminated by the Corps of Engineers on February 5, 1958, after which numerous claims for damages were submitted to the Government. Most of the claims (from a numerical standpoint) were settled administratively; and the claims asserted in the present litigation remain for disposition because the particular claimants and the administrative agency **420 could not agree on the amounts due the claimants. This suit therefore involves only the residue of the claims. ... II The Government concedes that the claimants are entitled to be made financially whole, at least with respect to all reasonable expenses that they incurred in preparing to perform work under the Fort Polk housing contract, in partially performing that contract from August 1957 to January 1958, and in meeting the situation that arose when the contract was formally terminated by the Government early in February 1958. The controversy revolves around the proper amounts of the claimants' unreimbursed expenses and the legal question whether the claimants are entitled to recover for anticipated profits. At the time work was suspended in January 1958, the project was only 2.036% complete, and the work was substantially behind schedule.6 The principal legal question is whether the claimants should be permitted to recover for anticipated profits. In*11 this connection, it is settled that, when the Government enters into a contract, it has rights and it ordinarily incurs responsibilities similar to those of a private person who is a party to a contract (Lynch v. United States, 292 U.S. 571, 579, 54 S.Ct. 840, 78 L.Ed. 1434 (1934); Perry v. United States, 294 U.S. 330, 352, 55 S.Ct. 432, 79 L.Ed. 912 (1935)), and if the Government terminates a contract without justification, such termination is a breach of the contract and the Government becomes liable for all the damages resulting from the wrongful act (United States v. Behan, 110 U.S. 338, 346, 4 S.Ct. 81, 28 L.Ed. 168 (1884); United States v. Spearin, 248 U.S. 132, 138, 39 S.Ct. 59, 63 L.Ed. 166 (1918)). The damages will include not only the injured party's expenditures and losses in partially performing the contract, but also, if properly proved, the profits that such party would have realized if he had been permitted to complete the contract. Broadbent Portable Laundry Corp. v. United States,56 Ct.Cl. 128, 132 (1921); see United States v. Behan, supra, 110 U.S. at p. 344, 4 S.Ct. at p. 83. The objective is to put the injured party in as good a position pecuniarily as he would have been in if the contract had been completely performed. Miller v. Robertson, 266 U.S. 243, 257, 45 S.Ct. 73, 69 L.Ed. 265 (1924); Needles for Use and Benefit of Needles v. United States, 101 Ct.Cl. 535, 619 (1944). The right to recover for anticipated profits arises, however, only if the termination of the contract by the Government is wrongful and constitutes a breach. If the Government has reserved the right to terminate a contract for its convenience and then does so, there is no breach and normally there can be no recovery for the profits that would have been made if the Government had not exercised its reserved right. Davis Sewing Machine Co. of Delaware v. United States, 60 Ct.Cl. 201, 217 (1925), affirmed 273 U.S. 324, 47 S.Ct. 352, 71 L.Ed. 662 (1927); **424 College Point Boat Corp. v. United States, 267 U.S. 12, 45 S.Ct. 199, 69 L.Ed. 490 (1925); De Laval Steam Turbine Co. v. United States, 284 U.S. 61, 73, 52 S.Ct. 78, 76 L.Ed. 168 (1931). In the present case, although the Fort Polk housing contract did not contain any provision expressly authorizing the Government to terminate the contract for its convenience, the Government contends that the contract should be read as if it did contain such a clause. This argument is largely based upon Section 8.703 of the Armed Services Procurement *12 Regulations.7Section 8.703 provided (with an exception which is not pertinent here) that 'the following standard clause shall be inserted in all fixed-price construction contracts amounting to more than $1,000,' and then proceeded to prescribe a detailed termination clause that began with the unequivocal declaration that 'the performance of work under this contract may be terminated by the Government in accordance with this clause in whole, or from time to time in part, whenever the Contracting Officer shall determine that such termination is in the best interest of the Government,' and included a formula which did not encompass anticipated profits. As the Armed Services Procurement Regulations were issued under statutory authority,8 those regulations, including Section 8.703, had the force and effect of law. See Williams v. Commissioner of Internal Revenue, 44 F.2d 467, 468 (C.A.8, 1930); Ex parte Sackett, 74 F.2d 922923 (C.A.9, 1935). If they applied here, there was a legal requirement that the plaintiff's contract contain the standard termination clause and the contract must be read as if it did. College Point Boat Corp. v. United States, supra; De Laval Steam Turbine Co. v. United States, supra; Monolith Portland Midwest Co. v. R.F.C., 178 F.2d 854, 858 (C.A.9, 1949), cert. denied, 339 U.S. 932, 70 S.Ct. 668, 94 L.Ed. 1352 (1950). The question of whether the regulations did govern the present contract depends upon Section 1.102 which limited their applicability to 'purchases and contracts made by the Department of Defense * * * for the procurement of supplies or services which obligate appropriated funds * * *' (emphasis added). Plaintiff contends that the Fort Polk housing contract did not 'obligate appropriated funds.' It points out that the construction of housing projects at military installations under the Capehart Act was financed by means of loans from private lending institutions, and the contractors and subcontractors doing the construction work were paid out of the proceeds of such loans. In this case, the *13 money for the construction of the Fort Polk housing project was loaned by the Republic National Bank of Dallas, and the progress payments to Centex-Zachry and its subcontractors during the partial construction of the project were derived from the loans made by the Republic National Bank of Dallas.9 **425 On the other hand, the Government insists that it was anticipated that the cost of constructing the Fort Polk housing project would ultimately be liquidated out of appropriated funds, because it was expected that the housing project would be completed, that the dwelling units would be occupied by military personnel assigned to Fort Polk, and that the quarters allowances of such military personnel (provided for in the annual appropriations to the Department of the Army) would be used to pay off, over a period of years, the loans made by the Republic National Bank of Dallas. Also, the loans made by the bank for the construction of the Fort Polk housing project were insured by the Federal Housing Administration, and from the beginning there was at least a possibility that the F.H.A. might be compelled to make good on its commitments to the bank. As indicated in footnote 9, supra, on completion of the project or on termination of the contract, the Government specifically undertook (in the contract with plaintiff and accompanying agreements) to take over ownership of the mortgagor-corporations, to assume liability to the mortgagee for sums advanced, and pay the outstanding notes. Moreover, Centex-Zachry *14 and its subcontractors have looked to the Government for settlement and payment of their claims, and have received very large amounts of appropriated funds in the partial settlements which have already been accomplished. Despite the unusual character of the contract, we have little difficulty in reading the Procurement Regulations, especially the rule requiring the insertion of the standard termination clause, as applying to the present type of agreement which could and would obligate appropriated funds, ultimately if not immediately. As we see it, the primary aim of the exclusion of agreements which do not obligate appropriated funds is to put to one side the contracts of the conventional nonappropriated-fund instrumentalities of the armed forces, such as post exchanges, ships' stores, officers' clubs, and the like. The contracts of such agencies, although made by Government officers, do not bind appropriated funds, do not create debt of the United States, and may not be vindicated in this court. Borden v. United States, 116 F.Supp. 873, 126 Ct.Cl. 902 (1953); Pulaski Cab Co. v. United States, 157 F.Supp. 955, 141 Ct.Cl. 160 (1958); cf. Standard Oil Co. of California v. Johnson, 316 U.S. 481, 485, 62 S.Ct. 1168, 86 L.Ed. 1611 (1942). Those are the contracts which the Procurement Regulations declare are to be governed by their own separate rules. But the Regulations do not intimate that contracts which obligate the United States, and create debt of the United States upon which suit is and can be brought, are also excluded simply because the use or obligation of appropriated funds is delayed and to some extent contingent. There is no doubt that the contract in this case bound the United States and that appropriated funds are importantly involved. The contractor and subcontractors did not hesitate to consider the United States, which of course pays through appropriated funds, liable for the cancellation of the contract. Large sums of appropriated monies were accepted after administrative settlement, and suit is now brought in a court whose judgments are payable through appropriated funds. It would be extraordinary, we think, if an agreement for the breach of which the United States must pay through appropriations was not deemed to obligate such funds. The Congressional authorization for the contract, i.e., the *15 Capehart Act itself, recognizes affirmatively that appropriated funds will be involved. One section authorized 'to be appropriated such sums as may be necessary to provide for **426 payment to meet losses from such guaranty' given by the Defense Department to the Armed Services Housing Mortgage Insurance Fund (12 U.S.C. 1748b(b)(2) (1958 ed.)). Another provision permits the military departments to use '(a) ppropriations for quarters allowances or appropriate allotments' for the payment of principal, interest, and other obligations of mortgagor corporations acquired by the Government (42 U.S.C. 1594b (1958 ed.)) (see footnote 9, supra). The Congress which passed the Capehart Act understood that in the long run the housing contracts thereunder could and would 'obligate appropriated funds.' We are not, and should not be, slow to find the standard termination article incorporated, as a matter of law, into plaintiff's contract if the Regulations can fairly be read as permitting that interpretation. The termination clause limits profit to work actually done, and prohibits the recovery of anticipated but unearned profits. That limitation is a deeply ingrained strand of public procurement policy. Regularly since World War I, it has been a major government principle, in times of stress or increased military procurement, to provide for the cancellation of defense contracts when they are no longer needed, as well as for the reimbursement of costs actually incurred before cancellation, plus a reasonable profit on that workbut not to allow anticipated profits. In World War I, there was the Act of June 15, 1917, 40 Stat. 182, and the Dent Act of 1919, 40 Stat. 1272, both of which were held to prevent awards of prospective or possible profits. Russell Motor Car Co. v. United States, 261 U.S. 514, 523524, 43 S.Ct. 428, 67 L.Ed. 778 (1923); Barrett Co. v. United States, 273 U.S. 227, 235, 47 S.Ct. 409, 71 L.Ed. 621 (1927); De Laval Steam Turbine Co. v. United States, 284 U.S. 61, 73, 52 S.Ct. 78, 76 L.Ed. 168 (1931). In World War II, the termination provisions used by the war contracting agencies (at least since late 1941) uniformly disallowed anticipated profits. See the opinion of Mr. Justice Douglas in United States v. Penn Foundry & Mfg. Co., 337 U.S. 198, 214 216, 69 S.Ct. 1009, 93 L.Ed. 1308 (1949), also 337 U.S. at 205206, 69 S.Ct. at 1012 1013; Office of Contract Settlement, A History of War Contract Termination and Settlements (July *16 1947), pp. 1, 27. The same policy against unearned profits was embodied in the Contract Settlement Act (Act of July 1, 1944, 58 Stat. 649), Section 6(d)(5) of which directed war contracting agencies, in settling terminated contracts, to award 'such allowance for profit on the preparations made and work done for terminated portion of the war contract as is reasonable under the circumstances'; the regulation issued by the Office of Contract Settlement specifically limited profit to preparations made and work done (32 C.F.R., 1944 Supp., Sec. 8006.3(c), p. 3065). Similarly, the Lucas Act of August 7, 1946, 60 Stat. 902, authorizing the departments and agencies 'to consider, adjust, and settle equitable claims of contractors,' limited the amount of the claim to 'losses (not including diminution of anticipated profits) incurred * * *.' Since World War II, the standard termination clauses promulgated by the Defense Department and its constituent agencies have taken the same tack. Literally thousands of defense contracts and subcontracts have been settled on that basis in the past decades. This history shows, in our view, that the Defense Department and the Congress would be loath to sanction a large contract which did not provide for power to terminate and at the same time proscribe anticipated profits if termination did occur. Particularly in the field of military housing, tied as it is to changes and uncertainties in installations,10 would it be necessary to take account of a possible termination in advance of completion, and to guard against a common law measure of recovery which had been disallowed for so many years in **427 military procurement. The experienced contractor in this case, for its part, could not have been wholly unaware that there might be a termination for the convenience of the Government, which the defendant would not deem a breach. Although the housing contract does not contain such an express provision, there are at least four references in it (and the accompanying agreements) to a 'termination of the Housing Contract for the convenience of the Government' and to the Government's assumption of certain obligations in that event. These references must have had some meaning. *17 For many years unearned profits have not been paid upon such terminations, and we think it probable, too, that Centex-Zachry knew of that general policy. For all of these reasons, we believe that it is both fitting and legally sound to read the termination article required by the Procurement Regulations as necessarily applicable to the present contract and therefore as incorporated into it by operation of law.