RENEGOTIATION OF CONTRACTSAuthor(s): HERBERT POPESource: American Bar Association Journal, Vol. 30, No. 2 (FEBRUARY 1944), pp. 78-79Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/25714812 .

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RENEGOTIATION OF CONTRACTS

By HERBERT POPE of the Chicago Bar

THE renegotiation of war contracts by statute has not been the success it was intended to be. If the

various government war agencies could have been admonished to be careful about the making of con

tracts, with the suggestion of including in the con

tracts themselves the reservation of an opportunity for the parties to redetermine by hind-sight prices which

could not be ascertained with any certainty beforehand, it may be that most of the dangers of war profiteering could have been avoided without all of the confusion that has resulted from a statute which is supposed to

combine contract-making with the taxation of excessive

profits. Making contracts is one thing, taxation of in come is another. The attempt to do both things at once by means of an ambiguous statute has resulted in uncertainty, inconsistencies and delay, not to men

tion the question of the legality of the whole undertak

ing which may not be definitely determined for a long time to come. Certainly it would have been wise if

possible to avoid the charge that the war agencies were

engaged in a completely lawless procedure, enforceable

only by threats of business injury and reprisals. We have had too much experience in recent years with

government agencies willing to stretch the interpreta tion of statutes to the limit in order to make the statute mean what they think it ought to mean.

The government agencies engaged in the renegotia tion of war contracts, or in the taxing of excessive

profits, have placed their own interpretation upon the statute, and have endeavored to persuade the officers and directors of corporations that the payments they were asked finally to make were in the nature of volun

tary payments, although there was no hesitation about

explaining the injury that might result to their business if payment was refused. There was no suggestion of

cooperation for the purpose of securing a construction of the statute by a court.

This places the officers and directors of a corporation in an awkward position to say the least. The Securities and Exchange Commission, which is supposed to pro tect stockholders from the lawless acts of the officers of

corporations, probably would not assume jurisdiction in such a case, but nevertheless, after the war is over,

particularly if the payments made have resulted disas

trously for a corporation, the stockholders might be held to have a good cause of action against the officers and directors.

There can be no doubt that the statute is not as plain as it should be. The first part of it appears to exclude from renegotiation contracts involving $100,000 or less.

If this is a general limitation, then when the words

"contract" or "sub-contract" are used subsequently in

the statute they should be construed to mean contracts or sub-contracts subject to renegotiation, that is, con

tracts for an amount above $100,000. The war agencies have not so construed the statute. Their construction has brought practically all corporations of any conse

quence making sales for war use into the renegotiation process, and has emphasized the taxing feature of the

renegotiation procedure, particularly as it results only in payments to the United States Treasury.

If the statute be construed as directed primarily at

the re-pricing of contracts, then difficulties are created if the statute is also held to include all contracts and even orders which relate to some war use. Half of the sales of some sub-contractor may be found to relate to war use and the other half to civilian use. The war

sales are re-priced through renegotiation because the

original price is held to be too high, and the company is directed to maintain the lower price in the future in

making war sales. However, the civilian sales are of

exactly the same articles and, therefore, those sales

prices must also be reduced to the level of the war

sales in order to comply with the Robinson-Patman Act. If that is done, then the so-called exorbitant prices or profits may disappear altogether. Probably the an swer of the war agencies is that this is war and all statutes except the one that interests them are to be

disregarded for the war period?not a very reassuring answer for the officers and directors who know that the

Department of Justice and the Federal Trade Com mission are just around the corner.

The Under-Secretary of War, Robert P. Patterson, defends the procedure of the war agencies in a letter to the New York Times which appeared in the issue of

December 30, 1943. He says that "keeping down exor bitant war profits is the key to the situation." And then, in order to avoid the taxation charge, he says: "The

proof that the original price was too high is found in the undue profits made by the contractor." Evidently he is not aware of the fact that renegotiation is required in many instances where profits cannot be* considered as "exorbitant" by any stretch of the imagination, and where the payment demanded may not leave the cor

poration in a very satisfactory position to meet future hazards. Finding profits excessive in 1942 while ignor ing the hazards of 1943 and 1944 is nothing more or less than additional taxation for 1942. Mr. Patterson does not regard renegotiation, how

ever, as an additional tax; he regards it as "a re-pricing

78 American Bar Association Journal

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RENEGOTIATION OF CONTRACTS

procedure/' and explains it as follows: In principle, flie contracts of a concern would be taken

up contract by contract, the profits on each contract deter

mined and the price revised accordingly, with refund

required for excessive payments already made. In practice this involves accounting difficulties in charging costs to

the various contracts. It is more convenient for both sides

to take over-all profits for the year and provide for re

funds of excessive payments and for revisions of prices on future deliveries. But the method pursued should not

obscure the fact that renegotiation is a re-pricing process, not a taxing process. When Mr. Patterson says "In principle" I suppose he

means that that is what the statute requires. Obviously, if the statute also requires that every contract, sale or

order for war use must be considered, then the pro cedure required by the statute, as he construes it, could

not be concluded until about time for the next war.

Instead of deciding that perhaps the statute does not

involve such an absurdity, Mr. Patterson says the war

agencies just adopt the more convenient method of

considering "over-all profits for the year." Why this

procedure does not involve an additional tax for each

taxable year it is difficult to see, but Mr. Patterson is

perfectly satisfied that the taxing method used by the war agencies "should not obscure the fact that renegotia tion is a re-pricing process, not a taxing process." He

and the war agencies are not concerned with the mean

ing of the statute but with what they think it ought to mean. Having decided that question for themselves

they object, as Mr. Patterson says, to any interference on the part of Congress.

It is plain now what has happened. Renegotiation of contracts has been extended to cover contracts, orders and sales which were not only not intended to be

renegotiated or re-priced but which in fact cannot be

renegotiated or re-priced within any reasonable period of time, and certainly not within the period allowed

by the statute. Therefore the words "excessive profits" have been used to justify an annual assessment upon certain of the profits of a corporation without reference to the different periods of time that different contracts

may run and without regard to what may happen in the next year or the year after when some of the con tracts may terminate. Also the existence of "excessive

profits" in one year and the liability for a payment to the United States Treasury is determined before con

sideration is given to the other taxes that have to be

paid for that year. The tax burden of one corporation having substantially the same profits before taxes as

another corporation may be very different from that of the other company. It is only after taxes that the

question of excessive profits can have any real meaning for any one taxable year. Mr. Patterson makes -no

reference to the many corporations that have been

subjected to renegotiation for the year 1942 whose

profits after taxes cannot by any reasonable standard be considered exorbitant or excessive. When compared with the profits of many corporations of similar size

having no war work the profits of many companies

deemed subject to renegotiation look anything but

exorbitant. Renegotiation, therefore, does much more

than remove profiteering from war business. It is no

wonder that investors are learning to avoid investments

in companies subject to renegotiation by the over-all tax method.

Mr. Patterson's statement that "The proof that the

original price was too high is found in the undue

profits made by the contractor" assumes that excessive

profits alone are sufficient proof of too high a price. This would be true then even though the prices of the

contractor in question were no higher than the prices of competing companies whose profits were less. This

simply reopens the controversy regarding the real issue

involved. Is it a price question or a profit question? Is the price paid one contractor too high if the same

price paid to another contractor is not too high? If it

is not, then "undue profits" do not determine that "the

original price was too high." That means that neither

profits nor prices give the final answer in a great many of the cases. There is the question of the volume of

business for instance. From the legal point of view

the choice in many cases seems to lie between an un

authorized tax and an illegal rebate under the Robin

son-Patman Act. The theories or formulas actually

applied by the war agencies to determine the amount of

the refund in particular cases, or to determine that no

renegotiation is required, are not disclosed by the war

agencies. They are their secrets, and are not told either

to Congress or the public. They give the answer and

that is all the taxpayer or rebater is entitled to know.

Pay, or else. "Just see how much money we have col

lected already." It is easy to sympathize with the many fine and cap

able persons engaged in attempting to solve the renego tiation problem. They have been asked to do too

much if all contracts, sub-contracts, orders and sales for

war use must be re-priced, and all of our other laws

regarding prices must be respected. No doubt many situations could have been taken care of by properly drawn contracts. There are many other situations that could be taken care of only by taxes applying to special classes of cases. Neither the war agencies nor the busi ness men have been sure of the tools that the war

agencies were given to work with, and the risks which

many officers and directors of corporations have been

asked to assume are too great. Why should the latter

be asked to assume all the risks involved in doubtful

legislation and in doubtful procedures under such

doubtful legislation? They are treated as if they were

the owners of property of which they are in fact only trustees. As trustees they are required to consider the

validity and meaning of the statute as well as the

validity and fairness of the procedure adopted under it, and they must consider also how much lawless injury may be done to the company's business if, as trustees,

they decide they are legally obligated not to make the

payment demanded.

February, 1944 Vol. 30 79

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