United States of America, Plaintiff-appellant, v. H. H. Reisman, Defendant-appellee, 611 F.2d 325 (9th Cir. 1980)

The United States filed suit in district court seeking actual damages for defendant Reisman's breach of a contract to purchase chromite ore, following a Board of Contract Appeals ruling that the liquidated damages provision was unenforceable. The District Court for the Central District of California dismissed the complaint and the United States appealed. We reverse and remand.

Jurisdiction is based on 28 U.S.C. § 1291.

Factual Background.

This is a government contracts case in which the central issue is the availability to the government of a remedy in court for the total breach of the contract by the other party thereto.

The contract came into existence on August 14, 1970 when the defendant Reisman agreed to purchase from the General Services Administration (GSA) 803,527 tons of metallurgical grade chromite ore. The contract required that Reisman furnish to GSA an irrevocable sight commercial letter of credit for the full amount of the purchase price by August 24, 1970. Reisman failed to meet this deadline and obtained time extensions from the contracting officer on August 24, 1970 and August 27, 1970. The extension of August 27 expired on September 2, 1970. Again Reisman failed to furnish the required letter of credit and the contracting officer mailed to Reisman a notice of default which stated that unless the default was cured by September 18, 1970 Reisman would lose his right to purchase the chromite and the government would exercise its rights to assess liquidated damages pursuant to General Condition 9 of the contract.¹ 

Once more Reisman failed to furnish the letter of credit and, in exchange for Reisman's offer to increase the purchase price by $50,000, the government agreed to an extension of approximately 10 working days. On October 2, 1970, Reisman made his fourth request for an extension of time within which to supply the letter of credit. This was refused and the contracting officer's notice of September 2, 1970 became effective.

Thereafter in a timely manner Reisman exercised his request to appeal under the standard Disputes provisions of the contract.² 

More than a year later, December 15, 1971, the GSA Board of Contract Appeals, after holding that it had jurisdiction to determine the enforceability of the liquidated damages provision of the contract, held that Reisman's failure to furnish the letter of credit constituted a default permitting the invocation of the liquidated damage provision and that under the facts of the case that provision was an unenforceable penalty.

All the while the chromite ore remained in the hands of the GSA. Finally, on August 18, 1974, GSA sold the ore to another for $353,026.10 less than Reisman had agreed to pay. The government, acting on the belief that the Disputes Clause does not afford a means by which this difference could be recovered, merely presented its claim to Reisman for this sum through certificates of indebtedness issued by the General Accounting Officer under 31 U.S.C. §§ 71, 93. Reisman refused to pay and this suit was commenced by the United States against Reisman on July 29, 1976 in which it sought recovery of this difference plus 6% Interest from June 18, 1971 to August 19, 1974.

Reisman's defense in the district court was that the Disputes Clause is applicable to claims such as the government presented and that as a consequence the government's complaint should be dismissed. The district court agreed and dismissed the complaint "for failure to exhaust administrative remedies." We believe this constituted error.

Applicability of Disputes Clause.

The fundamental principle that governs the disposition of this case was stated in United States v. Utah Construction and Mining Co., 384 U.S. 394, 404, 86 S. Ct. 1545, 1551, 16 L. Ed. 2d 642 (1966). It is that "(t)he power of the administrative tribunal to make final and conclusive findings on factual issues rests on the contract . . ." That is, whether the government is entitled to bring this suit depends on the proper interpretation of the contract. If the contract, properly interpreted, requires the government to resolve its damage claim under the Disputes Clause, then the district court's dismissal was proper. However, if no such requirement exists, then we must reverse.

Only recently did we recognize this principle when in Kyle Engineering Co. v. Kleppe, 600 F.2d 226, 230-31 (9th Cir. 1979) we said:

"It is important to note, however, that not all contractual disputes are subject to the exhaustion requirement; exhaustion is required only for disputes 'arising under the contract.' Utah Construction Co., 384 U.S. at 407, 86 S. Ct. 1545. The test to be employed in distinguishing claims within the disputes clause procedure from those outside that procedure 'is whether the controversy is fully redressable under a provision of the contract other than the disputes clause itself.' Bethlehem Steel Corp. v. Grace Line, Inc., 135 U.S.App.D.C. 81, 86, 416 F.2d 1096, 1101 (1969). In other words, a fact-dispute 'arises under the contract' only when the disputed fact is capable of complete resolution by a procedure specified in the contract:

'In consequence claims which are adjustable under contractual provisions must be submitted for the administrative determinations prescribed by the contract, while claims for breach of contract those not adjustable in that fashion may be litigated in a court of competent jurisdiction without previous resort to that procedure. Id.' "

Nothing in S & E Contractors, Inc. v. United States, 406 U.S. 1, 92 S. Ct. 1411, 31 L. Ed. 2d 658 (1972) is to the contrary. That case merely held "that absent fraud or bad faith the federal agency's settlement under the disputes clause is binding on the Government; that there is not another tier of administrative review . . . ." Id. at 4, 92 S. Ct. at 1414. This holding presupposes that the contract made the Disputes Clause procedures applicable; it merely held that another tier of administrative review, such as the United States was insisting upon in the case, did not exist.

Turning to the contract between Reisman and the United States, the strength of Reisman's contentions is found in General Condition 9. Supra n. 1. He points out that his breach was a "failure to pay," which is a type of breach for which the remedy of liquidated damages is provided, and which is not the type embraced in the last sentence of General Condition 9 which reads:

"If the purchaser otherwise fails in the performance of his obligations thereunder, the Government may exercise such rights and may pursue such remedies as are provided by law or under the contract."It follows, Reisman asserts, that this suit was brought prior to the exhaustion of administrative remedies.

The difficulty with this interpretation of the contract is that it leads either to a useless resort to administrative remedies in this case, or to the result that, where the liquidated damages clause is unenforceable, no remedy, either administrative or judicial, is available. We hold that no such meaning was intended. The reasonable meaning and the one we hold was intended is that when the liquidated damages clause is determined administratively to be unenforceable the breach of "failure to pay" becomes one not subject to the Disputes Clause. As a consequence judicial remedies become available. The contract provides no administrative resolution under these circumstances; hence resolution must be provided by litigation. As indicated above, to refer this dispute back to the contracting officer could benefit Reisman, aside from the delay the referral would generate, only if the contract were interpreted administratively to provide no relief to the government following the failure of the liquidated damages clause to perform its function. To so interpret the contract would be unreasonable.

Our interpretation finds support in Aerial Lumber Company v. United States, 239 F.2d 906 (9th Cir. 1956) and Century Investment Corporation v. United States, 250 F.2d 139 (9th Cir. 1957). While these cases are distinguishable in several respects from this case, it remains true that both declined to make recourse to the contracting officer a condition precedent to a suit in court by the United States to recover damages for a total breach of the contract.

We therefore reverse and remand to the district court for further proceedings.

REVERSED and REMANDED.