McNamara Construction of Manitoba, Ltd. v. United States

Bennett, Judge,

delivered the opinion of the court:

By fixed-price contract dated June 30, 1964, plaintiff McNamara Construction of Manitoba, Ltd. (hereinafter McNamara) undertook to construct for the Army Corps of Engineers a canal lock and related structures (New Second Lock) at St. Mary’s Falls Canal, Sault Ste. Marie, Michigan.¹ The original completion date of June 30,1967, was extended by a series of modifications to October 19,1968. The work was completed and accepted as of that latter date and the administrative claims under the contract have been settled.

This claim arises out of unusually severe labor problems— strikes, delays, and harassment — which plagued McNamara throughout the performance of the contract and which resulted in additional labor (and labor-related) costs. The contracting officer freely granted plaintiff extensions of time for the delays resulting from those labor problems because the delays were not McNamara’s fault, but disclaimed any authority or obligation to make a financial adjustment.² Plaintiff’s subsequent request to the Secretary of the Army for special, discretionary statutory relief pursuant to Public Law 85-804, 72 Stat. 972 (1958), 50 U.S.C. § 1431 et seq.,. was denied.

Plaintiff now seeks to recover those additional labor costs³ in this court on a theory of reformation of contract due to an alleged mutual mistake of fact. The mutual mistake of fact, states plaintiff, was that “neither the contractor nor the [Engineering] Corps was aware of or could possibly have anticipated the unreasonable and uncooperative attitude and conduct of the labor unions.” Plaintiff says both parties assumed labor would behave in a responsible fashion but they were mistaken in that assumption. As proof of the alleged mutual mistake, plaintiff notes that the Government’s estimate of the cost of the project, $22,189,692, was roughly equivalent to plaintiff’s bid of $21,471,690; yet, after accounting for modifications, the unanticipated labor costs swelled the ultimate cost of the project allegedly in excess of $6 million above those figures.

Plaintiff’s claim must fail. There was, simply, no mutual mistake of fact by the parties of the type for which judicial relief may be given. Both parties, at the time of executing the contract, were fully aware of the potential for labor difficulties. This awareness is reflected in clause 5 of the contract, which states in relevant part:

5. TERMINATION EOR DEFAULT — DAMAGES EOR DeLAV-Time Extensions

*_ * * # *

(d) The Contractor’s right to proceed shall not be so terminated nor the Contractor charged with resulting damage if:

(1) The delay in the completion of the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor, including * * * strikes * * *.

Even were the above provision not in the contract, we could take judicial notice of the risk of strikes and other labor problems inherent in the vast.majority of construction contracts. This is a fact of modern commercial life. Neither the contractor nor the Government could be presumed ignorant of this risk. Defendant denies that it ever entered into the contract upon the assumption of labor peace and says that this was just plaintiff’s unilateral assumption.

What we have in the instant case, therefore, is a risk which is known to both parties and results from human inability to predict the future. The authorities are unanimous in distinguishing such risks from bona ffde mutual mistakes of fact. In 13 WillistoN, CoNteacts § 1543 (3d ed. 1970) at 75, it is said:

* * * there must be excluded from consideration mistakes as to matters which the contracting parties had in mind as possibilities and as to the existence of which they took the risk. * * *.

A similar statement is made in 3 CoebiN, Contracts § 598 (2ed. 1960) at 585-86:

* * * The same result obtains in any case where the risk of the existence of some factor or of the occurrence of an event is consciously considered in agreeing upon terms. There is no mistake; instead, there is awareness of the uncertainty, a conscious ignorance of the future. * * *.

The EestateMBNT, Contracts § 502, comment /, reinforces the distinction:

Where the parties know that there is doubt in regard to a certain matter and contract on that assumption, the contract is not rendered voidable because one is disappointed in the hope that the facts accord with his wishes. The risk of the existence of the doubtful fact is then assumed as one of the elements of the bargain.

See also Leasco Corp. v. Taussig, 473 F. 2d 777 (2d Cir. 1972).

Plaintiff argues, however, that while both parties may have been aware of the risk of a “normal” strike, neither party anticipated the severe labor difficulties which eventuated. This attempted distinction based on the degree of the difficulties encountered is fallacious. First, there is no evidence whatsoever that defendant ever thought in terms of a “normal” as opposed to a “severe” strike. Secondly, the distinction is unworkable as a practical matter, because there is no such recognizable concept as a “normal” strike, and no clear line between “normal” and “severe” difficulties. Furthermore, it is unlikely that the parties to a contract of this type ever plan for the most unfavorable outcome, even though they are aware of the risk of such an outcome.⁴

In those circumstances, not present here, in which we are able to identify a mutual mistake of fact, we still cannot grant reformation if the contract puts the risk of the mistake upon the party asking reformation. National Presto Industries, Inc. v. United States, 167 Ct. Cl. 749, 764, 338 F. 2d 99, 108 (1964), cert. denied, 380 U.S. 962 (1965). In the instant case, the risk of labor strife was placed, both explicitly and implicitly by the contract, on McNamara.

Clause 13 of the contract places responsibility on the contractor to take steps “reasonably necessary to ascertain the nature and location of the work, and the general and local conditions which can affect the work or the cost thereof. Any failure by the Contractor to do so will not relieve him from responsibility for successfully performing the work without additional expense to the Government.” Plaintiff assures the court, and we see no reason to doubt the fact, that plaintiff visited the site prior to bidding, and investigated as best it could the availability and cost of labor in the area. Plaintiff’s effort to comply with clause 13 does not, however, alter the clear implication of the clause that the risk that local conditions will turn out to be other than plaintiff expected falls on plaintiff. We have previously held, for example, that the presence of such a clause in a contract placed the risk of a mistake as to subsurface materials on the contractor. Flippin Materials Co. v. United States, 160 Ct. Cl. 357, 312 F. 2d 408 (1963). In Flippin the contractor did not make an adequate on-site investigation but did argue for reformation. In stating principles useful to us in resolving the instant case, the court said:

* * * a mutual mistake as to a fact or factor, even a material one, will not support relief if the contract puts the risk of such a mistake on the party asking reformation (United States v. Hathaway, 242 F. 2d 897 (C.A. 9, 1957)), or normally if the other party, though made aware of the correct facts, would not have agreed at the outset to the change now sought * * *. [160 Ct. Cl. at 368, 312 F. 2d at 415.]

Continuing, the court stated further:

* * * The elaborate contract provisions on “Site Investigation and Representations”, [footnote omitted] together with the omission of the usual changed conditions clause, show that the risks of mistakes as to subsurface materials were deliberately placed on the plaintiff; in the absence of misrepresentation, the contractor was to be bound by what he met during performance. * * *. [160 Ct. Cl. at 368-69, 312 F. 2d at 415-16.]

Plaintiff McNamara does not claim any misrepresentation by defendant, only mutual ignorance. But, the site investigation (disclaimer) clauses in the two cases are similar in indicating that the contractor carries the risk of mistake arising from his investigation of “general and local conditions which can affect the work or the cost thereof.”

Also in Flippin, there was labor trouble for which the parties were not to blame. The court held this gave plaintiff no right to recover the losses arising therefrom for such recovery would be “an unauthorized gratuity without consideration.” 160 Ct. Cl. at 371, 312 F. 2d at 417.

The fact that McNamara’s contract provided for extensions of time in the event of delay due to strikes and other causes (clause 5(d) (2)), but not for compensation of costs arising out of strikes, is also significant in light of traditional allocation of risks in a fixed-price contract. The rule is succinctly stated in United States v. Spearin, 248 U.S. 132, 136 (1918):

* * * Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation, because unforeseen difficulties are encountered. * * *.

We have consistently held that the contractor in a fixed-price contract assumes the risk of unexpected costs. Sperry Rand Corp. v. United States, 201 Ct. Cl. 169, 181, 475 F. 2d 1168, 1175-76 (1973); Aerojet-General Corp. v. United States, 199 Ct. Cl. 422, 434, 467 F. 2d 1293, 1300-01 (1972); Rolin v. United States, 142 Ct. Cl. 73, 82, 160 F. Supp. 264, 268-69 (1958). See also 3 CorbiN, CONTRACTS § 598 (2d ed. 1960) at 590. In firm fixed-price contracts, risks fall on the contractor, and the contractor takes account of this through his prices. Nash, Risk Allocation in Government Contracts, 34 Geo. Wash. L. Rev. 693, 694-96, 701-02 (1966).

A labor strike, beyond the control of either party, may be analogized to an act of God. In Tombigbee Constructors v. United States, 190 Ct. Cl. 615, 420 F. 2d 1037 (1970), the flooding of a borrow pit from which the contractor was to obtain dirt delayed work and raised costs. We found that neither party had made rain, or the lack of it, a basis of the bargain, and that the contract was silent as to the allocation of the loss. The burden of this act of God, therefore, was left on the contractor, for there was no basis for shifting the loss to defendant. Only an extension of time was available for relief. 190 Ct. Cl. at 627, 420 F. 2d at 1043. In light of clauses 5 and 13 in the McNamara contract, there is even less basis for shifting McNamara’s loss to the Government. See also Day v. United States, 245 U.S. 159 (1917); Amino Bros. Co. v. United States, 178 Ct. Cl. 515, 372 F. 2d 485, cert. denied, 389 U.S. 846 (1967); Arundel Corp. v. United States, 103 Ct. Cl. 688, cert. denied, 326 U.S. 752 (1945).

Plaintiff relies heavily on our National Presto decision, supra. National Presto is distinguishable from the instant case, however, on every count. In that case the contractor had agreed to produce 105-mm. shells by a new experimental method. Prior to contract, the parties had mutually agreed after discussion that the shells could be produced without the use of turning equipment. This belief proved incorrect. We held that the unanticipated need for turning equipment was a mutual mistake of fact. We also held that plaintiff should not assume the entire risk, because the parties were engaged in a “joint enterprise” in which the Government was just as interested in the “perfection of the new process” as in the end product. 167 Ct. Cl. at 764, 338 F. 2d at 108-09. We further noted that because of the Government’s interest in perfecting the process, it received a direct benefit from the costs expended in determining that turning machines were required. Finally, we noted that “ [s] ince the Government was to pay for the machines, [footnote omitted] in the area of equipment the agreement was at least as close to a cost contract as to a fixed-price one.” 167 Ct. Cl. at 765, 338 F. 2d at 109. Based on the peculiar facts of the case, we awarded the contractor one-half of the unanticipated cost.

In cases subsequent to National Presto we have made it very clear that the result in that case was reached on the unique facts there presented. See, for example, Sperry Rand Corp. v. United States, supra; Olin, Mathieson Chem. Corp. v. United States, 179 Ct. Cl. 368, 408 (1967); and Natus Corp. v. United States, 178 Ct. Cl. 1, 371 F. 2d 450 (1967). In the instant case we have seen that there was no mutual mistake of fact as to the risk of labor difficulties. There was, moreover, no “joint enterprise” and no experimental value to the Government in the process used to build the New Second Look. The Government received no benefit from the additional costs of the labor strikes and expressed no willingness to assume such costs. Nor can such willingness be fairly inferred, as in National Presto. McNamara’s contract was a fixed-price agreement to build a lock, and defendant got only what it contracted for in that contract. The risks were assigned to plaintiff by the contract.

Other cases cited by plaintiff are inapposite. In Poirier & McLane Corp. v. United States, 128 Ct. Cl. 117, 120 F. Supp. 209 (1954), both the Government and the contractor intended the payment to labor of “the prevailing wage rate,” which the parties believed was 85 cents. This rate was thus stated in the contract. In fact, however, the prevailing rate was $1 per hour, and since the court found that both parties intended that the contract should contain the actual rate, we reformed the contract to reflect such intent. Accord, Southwest Welding & Mfg. Co. v. United States, 179 Ct. Cl. 39, 373 F. 2d 982 (1967); Stafford v. United States, 109 Ct. Cl. 479, 507, 74 F. Supp. 155, 159-60 (1947). In the McNamara contract, however, the Government’s only intent was to pay the fixed price set by the contract. Cf. Evans Reamer & Machine Co. v. United States, 181 Ct. Cl. 539, 552, 386 F. 2d 873, 880-81 (1967), cert. denied, 390 U.S. 982 (1968). No assumption of labor harmony was made a basis of the bargain, there was no understanding or commitment by defendant to pay “the prevailing wage rate” or actual labor costs, and defendant had no duty to warn this experienced contractor to beware of potential labor difficulties other than as suggested by clauses 5 and 13. For reformation we would need some antecedent expressions by the parties at variance with the terms of the contract or some articulated mutual assumption regarding labor behavior which we could incorporate into the agreement or some indication that a mutual mistake existed as to a hard fact on which the parties had based the contract. A mistake on the part of one contracting party will not provide the basis for reformation, particularly where it is based on an unwarranted assumption of the party who should have known better on the basis of its experience. Olin Mathieson Chem. Corp. v. United States, supra. Reformation based on such assumption or on inference arising from the contract price would render fixed-price contracts meaningless and throw the procurement process into chaos.

Plaintiff reminds us of our statement in Peter Kiewit Sons' Co. v. United States, 109 Ct. Cl. 517, 523, 74 F. Supp. 165, 168 (1947), that a contract with the Government should not be a “gambling transaction.” Plaintiff is mistaken, though, if it would interpret this statement as a repudiation of the concept of entrepreneurial risk. In Peter Kiewit, the contractor was required to bid a unit price per cubic yard for borrow excavation, based on estimates of the amount of excavation necessary to permit the construction of airfield runways at a certain grade. After work had begun, the Government changed the finished grade for borrow excavation, thereby reducing significantly the amount of excavation to be done. Though the reduced quantity of excavation raised the contractor’s unit cost, the Government refused to accede to a change in contract terms on the ground that the contract’s “quantities” clause had alerted the contractor that ultimate quantities might be more or less than the estimates. We held in favor of the contractor, stating that the contractor properly believed that the estimates would prove approximately correct. It can be seen from the above recitation of facts that, unlike the labor costs incurred by McNamara, the increased unit costs in Peter Kiewit were the result of the Government’s changing a key assumption of the contract. The Government’s estimates and the contractor’s planning were based on a particular grade of excavation. When the Government changed the grade, it changed the basis of the bargain. In contrast, an absence of labor strife was not the basis of McNamara’s bargain. Williston cites our Flippin Materials and National Presto cases as authority for the rule that “[w]ith respect to any matter not made a basic assumption of the contract, the parties take their chances.” 13 Williston, Contracts § 1543 (3d ed. 1970) at 75. The contract here cannot be reformed to reflect such expression and intent as plaintiff asserts. We simply do not have a mutual mistake. On the contrary, as pointed out above, clauses 5 and 13 of the contract refute it by showing that labor trouble was anticipated, considered, and resolved by those clauses. That is the mutual intent and basic assumption that the parties here did express and it governs the case. It is true that neither party to the contract was to blame for the illegal, unreasonable labor trouble and misbehavior that increased plaintiff’s costs. But, that does not justify a shift of such costs to defendant unless defendant had agreed to accept them or, as National Presto teaches, “would have been willing, if it had known the true facts from the beginning, to bear a substantial part of the additional expenses.” 167 Ct. Cl. at 769, 338 F. 2d at 112. Here, it not only did not so agree but, in anticipation of difficulties, wrote the contract in such a way as to avoid their burden.

Virginia Eng. Co. v. United States, 101 Ct. Cl. 516 (1944), and Tobin Quarries, Inc. v. United States, 114 Ct. Cl. 286, 84 F. Supp. 1021 (1949), provide no support for plaintiff’s claim. Both cases involved misrepresentation by the Government. There was no Government misrepresentation in the instant case.

In research and development contracts where costs are uncertain, the parties often agree to share those that cannot be foreseen. In fixed-price contracts, such as here where some risks are under control of third parties, if the Government intends to pay a part or all of the labor or material costs whatever they might be (otherwise the price might be much higher to cover the risk), such cost estimates frequently are not required to be included in bid estimates. Instead the contract incorporates an article for escalation adjustments in price according to an agreed formula reflecting labor or material cost increases during performance. This makes certain that the contractor will not lose a reasonable profit due to such contingencies. Cf. Bethlehem Steel Corp. v. United States, 191 Ct. Cl. 141, 423 F. 2d 300 (1970). Defendant put no such clause in the contract here nor even a changed conditions clause for extra work. Absence of such negates belief that defendant intended at the outset to agree to the relief now sought or did not intend to put the risk of changed conditions on the contractor alone. This brings the problem within the Flippin rule where the contractor also tripped over both obstacles. Plaintiff would convert this fixed-price contract into a cost-plus contract and make the defendant an insurer upon the assumption that Congress wanted the project so badly that it would pay any price for it.

However sympathetic we may be to plaintiff’s hardship, we can find no basis for plaintiff’s recovery as a matter of law or in equity through contract reformation. We cannot assume that had it known these increased labor costs were inevitable Congress would have agreed to pay for them. We cannot base an award by judgment upon speculation or inference as to congressional attitudes. In Stafford v. United States, supra, and Flippin Materials Co. v. United States, supra, and in Ozark Dam Constructors v. United States, 153 Ct. Cl. 120, 288 F. 2d 913 (1961), the court held that it could not grant an equitable adjustment to restore a contractor’s losses due to labor troubles for which the parties to the contract were not to blame. There, as here, increased costs arising from labor troubles were not caused or desired by the contracting parties and neither could have prevented the same.

Defendant’s motion for summary judgment is granted. Plaintiff’s cross-motion for summary judgment is denied. The petition is dismissed.

1 The contract is designated DA 620 — 064, CIVENG 64 — 140. Plaintiff was the low bidder.

2 The contracting officer’s position that neither he nor any contract appeals board has jurisdiction to consider plaintiff’s claim for additional labor costs is undisputed by the parties.

3 The additional cost of labor is asserted to be $6,312,817.21.

4 Compare Restatement, Contracts § 602, Illustration 8, at p. 985:

“8. A contracts with B to dig a trench In a stated place. Owing to frozen ground A cannot make a thorough examination of the character of the soli. The fact that the soil is such as to make excavation materially more difficult than either A or B supposes does not make the contract voidable, if the parties did not base their contract on any particular condition of the soil.” [Emphasis supplied. J