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Kessler, Gilmore, Kronman on Contracts: Cases and Materials (1986)

United States v. Bethlehem Steel Corp.

In the early part of 1918 after protracted negotiations a series of contracts was entered into between the United States Shipping Board Fleet Corporation and the Bethlehem Shipbuilding Corporation, a subsidiary of Bethlehem Steel. Efforts to on the part of the Fleet Corporation to obtain a lump sum contract was unsuccessful. Bethlehem insisted on cost-plus-fixed-fee contracts which also included bonus-for-saving clauses amounting to 50 percent of the difference between actual and estimated costs. To accelerate production and to avoid responsibility for commandeering the plant, the negotiators for the Fleet Corporation finally acquiesced. Under the terms of the contract, Bethlehem was entitled in addition to the total costs of building the ships (about $91 million) a fixed fee of $11 million and a bonus for saving, amounting to $13 million since the estimated costs greatly exceeded actual costs. The government paid Bethlehem in addition to the actual costs, the fixed fees and about $8 million by was of bonus but refused to pay the balance amounting to $5 million. It brought a suit in equity for an accounting and for a refund of amounts paid in excess of a just and reasonable compensation, claiming fraud and economic duress. Bethlehem in return brought a damage suit for breach of contract. Consolidating the cases, the Federal District Court, strictly interpreted the contract, upheld the Master’s report granting Bethlehem full recovery. On certiorari to the Circuit Court of Appeals which had affirmed the decision of the lower court, the Supreme Court affirmed. Neither fraud nor duress was shown according to the majority speaking through Mr. Justice Black. Twenty-two percent profit on the contract was not such an exorbitant amount as to shock the conscience of the Court. It was much less than many other war contracts. The dissenting opinion of Mr. Justice Frankfurter holding Bethlehem guilty of economic duress is reprinted only in part.