United States v. Carlo Bianchi and Company/Opinion of the Court

by John Marshall Harlan II

United States Supreme Court

373 U.S. 709

United States  v.  Carlo Bianchi and Company

 Argued: April 29, 1963. --- Decided: June 3, 1963

This case involves the interpretation and application of the 'Wunderlich Act,' 68 Stat. 81, 41 U.S.C. §§ 321-322, ^[1] an Act designed to permit judicial review of decisions made by federal departments and agencies under standard 'disputes' clauses ^[2] in government contracts. The issue before us is whether, in a suit governed by this statute, the court is restricted to a review of the administrative record on issues of fact submitted to administrative determination or is free to receive new evidence on such issues.

In 1946, the respondent, Carlo Bianchi and Company, entered into a contract with the Army Corps of Engineers for the construction of a flood-control dam. Included in the work to be performed was the construction of a 710-foot tunnel, designed for the diversion of water, to be lined with concrete and to have permanent steel supports as protection for a 50-foot section at either end. The specifications did not call for such permanent supports throughout the remainder of the tunnel but only for '(t)emporary tunnel protection * * * where required for safety of the workmen.' The contract contained a standard 'changed conditions' clause, authorizing the contracting officer to provide for an increase in cost if the contractor encountered subsurface conditions materially different from those indicated in the contract or to be reasonably anticipated, and also contained the standard 'disputes' clause quoted, supra, note 2.

After the tunnel had been drilled by a subcontractor, but before it was lined with concrete, the respondent took the position that unforeseen conditions created extreme hazards for workmen, requiring permanent protection throughout the tunnel, and that it should be compensated for installing such protection. The contracting officer decided that compensation would not be made, and pursuant to the 'disputes' clause a timely appeal from his decision was taken to the Board of Claims and Appeals of the Corps of Engineers. While the appeal was pending, respondent installed the tunnel supports and completed work on the tunnel.

An adversary hearing was held before the Board, at which a record was made and each side offered its evidence and had an opportunity for cross-examination. In December 1948, the Board issued a decision against the contractor, resolving certain conflicts in the evidence in favor of the Government and holding in substance that there were no unanticipated or unforeseen conditions requiring the use of permanent steel protection throughout the tunnel.

Almost six years later, in December 1954, respondent brought the present action for breach of contract in the Court of Claims, seeking substantial damages and alleging that the decisions of the contracting officer and the Board were 'capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or were not supported by substantial evidence.' At a hearing before a Commissioner in 1956, the Government took the position that on the question whether the Board's decision was entitled to be considered final, no evidence was admissible except the record before the Board. But the Commissioner received evidence de novo, including, over government objection, a substantial amount of evidence that had not been before the Board. He subsequently made extensive findings of fact and concluded that the respondent was entitled to recover.

In an opinion issued in January 1959, the Court of Claims accepted the Commissioner's findings and conclusions, ruling that 'on consideration of all the evidence, the contracting officer's decision (as affirmed by the Board) cannot be said to have substantial support,' and thus 'does not have finality.' 169 F.Supp. 514, 517, 144 Ct.Cl. 500, 506. On the question whether it was limited in its consideration to the evidence before the Board, the court stated:

'In our opinion in Volentine and Littleton v. United States, 145 F.Supp. 952, 136 Ct.Cl. 638, holding that the trial in this court should not be limited to the record made before the contracting agency, but should be de novo, we recognized that there were logical weaknesses in our position. We concluded, however, that the intent of Congress in enacting the Wunderlich Act was in accord with our conclusion, and we adhere to that conclusion in this case.' Ibid.

After receiving additional evidence on damages, the court entered judgment for respondent in the amount of $149,617.36. We granted certiorari, 371 U.S. 939, 83 S.Ct. 321, 9 L.Ed.2d 274, to resolve a conflict among the lower courts ^[3] on the important question of the kind of judicial proceeding to be afforded in cases governed by the Wunderlich Act.

The jurisdiction of the Court of Claims in the present case is conferred by 28 U.S.C. § 1491, since this is a suit for judgment against the United States 'founded' upon an 'express or implied contract with the United States.' Ordinarily, when questions of fact arise in such suits, the function of the court is to receive evidence and to make appropriate findings as to the facts in dispute. But this Court long ago upheld the validity of clauses in government contracts delegating to a government employee the authority to make determinations of disputed questions of fact, and required such determinations to be given conclusive effect in any subsequent suit in the absence of fraud or gross mistake implying fraud or bad faith. See Kihlberg v. United States, 97 U.S. 398, 24 L.Ed. 1106; Ripley v. United States, 223 U.S. 695, 32 S.Ct. 352, 56 L.Ed. 614. Thus the function of the Court of Claims in matters governed by 'disputes' clauses was in effect to give an extremely limited review of the administrative decision, and although the scope of review was somewhat expanded by that court over the years, ^[4] it was expressly restricted in United States v. Wunderlich, 342 U.S. 98, 100, 72 S.Ct. 154, 155, 96 L.Ed. 113, to determining whether or not the departmental decision had been founded on fraud, i.e., 'conscious wrongdoing, an intention to cheat or be dishonest.'

The Wunderlich decision, rendered over strong dissents, evoked considerable effort to obtain legislation expanding the scope of review beyond questions of fraud. A number of bills were introduced in the Eighty-second and Eighty-third Congresses; hearings were held in the Senate ^[5] and House of Representatives; ^[6] and the resulting statute known as the 'Wunderlich Act' was ultimately approved by both Houses in 1954. This statute, quoted in full in note 1, supra, is entitled an Act 'To permit review of decisions of the heads of departments * * * involving questions arising under Government contracts,' and provides in substance that a departmental decision on a question of fact rendered pursuant to a 'disputes' clause shall be final and conclusive in accordance with the provisions of the contract

'unless the same is fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence.'

Respondent has not argued in this Court that the underlying controversy in the present suit is beyond the scope of the 'disputes' clause in the contract or that it is not governed by the quoted language in the Wunderlich Act. Thus the sole issue, as stated supra, p. 710, is whether the Court of Claims is limited to the administrative record with respect to that controversy or is free to take new evidence. In considering this issue, we put to one side questions of fraud, which are not involved in this case, which normally require the receipt of evidence outside the administrative record for their resolution, and which could be considered in judicial proceedings even prior to the enactment of the statute.

It is our conclusion that, apart from questions of fraud, determination of the finality to be attached to a departmental decision on a question arising under a 'disputes' clause must rest solely on consideration of the record before the department. This conclusion is based both on the language of the statute and on its legislative history.

1. With respect to the language used, we note that the statute is designated as an Act 'To permit review' and that the reviewing function is one ordinarily limited to consideration of the decision of the agency or court below and of the evidence on which it was based. Indeed, in cases where Congress has simply provided for review, without setting forth the standards to be used or the procedures to be followed, this Court has held that consideration is to be confined to the administrative record and that no de novo proceeding may be held. Tagg Bros. & Moorhead v. United States, 280 U.S. 420, 50 S.Ct. 220, 74 L.Ed. 524; National Broadcasting Co. v. United States, 319 U.S. 190, 227, 63 S.Ct. 997, 1014, 87 L.Ed. 1344. And of course, as shown by the Tagg Bros. and NBC cases themselves, the function of reviewing an administrative decision can be and frequently is performed by a court of original jurisdiction as well as by an appellate tribunal.

Moreover, the standards of review adopted in the Wunderlich Act-'arbitrary,' 'capricious,' and 'not supported by substantial evidence'-have frequently been used by Congress and have consistently been associated with a review limited to the administrative record. ^[7] The term 'substantial evidence' in particular has become a term of art to describe the basis on which an administrative record is to be judged by a reviewing court. This standard goes to the reasonableness of what the agency did on the basis of the evidence before it, for a decision may be supported by substantial evidence even though it could be refuted by other evidence that was not presented to the decision-making body.

2. The legislative history supports our conclusion that the language used in the Act should be given its customary meaning. It is true that several witnesses representing contractors explained the purpose of the proposed legislation as restoring rights the contractors had before Wunderlich, ^[8] and that it had apparently been the practice of the Court of Claims to receive evidence on matters covered by 'disputes' clauses. ^[9] But is seems clear in context that these witnesses meant only that the standards of review should cover more than conscious fraud, as the Court of Claims had assumed prior to Wunderlich. Indeed with respect to the procedural significance of the substantial evidence test, a leading contractor's representative stated that it would

'result in these various departments and agencies feeling that they will have to produce their witnesses at these hearings and permit the contractor to examine them, in order to have in the record some substantial evidence to support their decisions when they go up on appeal to the court.' ^[10]

The House Report recommending the bill ultimately enacted leaves little doubt that the review intended was one confined to the administrative record. H.R.Rep.No. 1380, 83d Cong., 2d Sess.; U.S.C.ode Congressional and Administrative News 1954, p. 2191 et seq. The explicit references to the Administrative Procedure Act, 60 Stat. 243, 5 U.S.C. § 1009, and to this Court's discussion of the standards of review in Consolidated Edison Co. of New York v. National Labor Relations Board, 305 U.S. 197, 229, 59 S.Ct. 206, 216, 83 L.Ed. 126, are only the least indications. Even more significant is the Committee's view, echoing that of the witness quoted above, that the standards proposed would remedy the practice in many departments of failing to acquaint the contractor with the evidence in support of the Government's position:

'It is believed that if the standard of substantial evidence is adopted this condition will be corrected and that the records of hearing officers will hereafter contain all of the testimony and evidence upon which they have relied in making their decisions. It would not be possible to justify the retention of the finality clauses in Government contracts unless the hearing procedures were conducted in such a way as to require each party to present openly its side of the controversy and afford an opportunity of rebuttal.' H.R.Rep. No. 1380, 83d Cong., 2d Sess. 5; U.S. Code Congressional and Administrative News 1954, p. 2195.

This sound and clearly expressed purpose would be frustrated if either side were free to withhold evidence at the administrative level and then to introduce it in a judicial proceeding. Moreover, the consequence of such a procedure would in many instances be a needless duplication of evidentiary hearings and a heavy additional burden in the time and expense required to bring litigation to an end. Thus in the present case judicial proceedings began in 1954, almost six years after completiton of the departmental proceedings, and a final decision on the issue of liability was not rendered until 1959. This is surely delay at its worst, and we would be loath to condone any procedure under which the need for expeditious resolution would be so ill-served. Here the procedure is clearly inconsistent with the legislative directive.

It is contended that the Court of Claims has no power to remand a case such as this to the department concerned, cf. United States v. Jones, 336 U.S. 641, 670-671, 69 S.Ct. 787, 802-803, 93 L.Ed. 938, and thus if the administrative record is defective or inadequate, or reveals the commission of some prejudicial error, the court can only hold an evidentiary hearing and proceed to judgment. There are, we believe, two answers to this contention. First, there would undoubtedly be situations in which the court would be warranted, on the basis of the administrative record, in granting judgment for the contractor without the need for further administrative action. Second, in situations where the court believed that the existing record did not warrant such a course, but that the departmental determination could not be sustained under the standards laid down by Congress, we see no reason why the court could not stay its own proceedings pending some further action before the agency involved. Cf. Pennsylvania R. Co. v. United States, 363 U.S. 202, 80 S.Ct. 1131, 4 L.Ed.2d 1165. Such a stay would certainly be justified where the department had failed to make adequate provision for a record that could be subjected to judicial scrutiny, for it was clearly part of the legislative purpose to achieve uniformity in this respect. And in any case in which the department failed to remedy the particular substantive or procedural defect or inadequacy, the sanction of judgment for the contractor would always be available to the court.

In its argument here, the Government has urged that if judicial review is confined to the administrative record, it must be concluded that the Board's determination is supported by substantial evidence and thus is entitled to finality under the Wunderlich Act. The respondent, on the other hand, contends that there were several irregularities in the Board's procedures that preclude giving its determination conclusive effect.

Neither of these matters is properly embraced within our grant of certiorari, and we are therefore not called upon to pass on them. We hold only that in its consideration of matters within the scope of the 'disputes' clause in the present case, the Court of Claims is confined to review of the administrative record under the standards in the Wunderlich Act and may not receive new evidence. We therefore vacate the judgment below and remand the case for further proceedings in conformity with this opinion. It is so ordered.

Judgment vacated and case remanded.

Mr. Justice DOUGLAS, with whom Mr. Justice STEWART concurs, dissenting.

Notes

1. 41 U.S.C. § 321 provides: 'No provision of any contract entered into by the United States, relating to the finality or conclusiveness of any decision of the head of any department or agency or his duly authorized representative or board in a dispute involving a question arising under such contract, shall be pleaded in any suit now filed or to be filed as limiting judicial review of any such decision to cases where fraud by such official or his said representative or board is alleged: Provided, however, That any such decision shall be final and conclusive unless the same is fraudulent or capricious or arbitrary or so grossly erroneous as necessarily to imply bad faith, or is not supported by substantial evidence.'
2. The standard 'disputes' clause, as included in the contract involved in this case, provides: 'Except as otherwise specifically provided in this contract, all disputes concerning questions of fact arising under this contract shall be decided by the contracting officer subject to written appeal by the contractor within 30 days to the head of the department concerned or his duly authorized representative, whose decision shall be final and conclusive upon the parties thereto. In the meantime the contractor shall diligently proceed with the work as directed.'
3. With the decision below, compare, e.g., Allied Paint & Color Works, Inc. v. United States, 309 F.2d 133 (C.A.2d Cir.); Wells & Wells, Inc. v. United States, 269 F.2d 412 (C.A.8th Cir.). See also Mann Chemical Laboratories, Inc. v. United States, 174 F.Supp. 563 (D.C.D.Mass.). In suits involving less than $10,000, the District Courts have concurrent jurisdiction with the Court of Claims over claims arising under government contracts, 28 U.S.C. § 1346(a)(2), and in suits by the Government under such contracts have exclusive jurisdiction, see 28 U.S.C. § 1345.
4. See, e.g., Southern Shipyard Corp. v. United States, 76 Ct.Cl. 468; Needles for Use and Benefit of Needles v. United States, 101 Ct.Cl. 535.
5. Hearings before a Subcommittee of the Senate Judiciary Committee on S. 2487, 82d Cong., 2d Sess.
6. Hearings before the House Judiciary Committee on H.R. 1839 et al., 83d Cong., 1st Sess.
7. See, e.g., § 10 of the Administrative Procedure Act, 60 Stat. 243, 5 U.S.C. § 1009; § 10 of the Fair Labor Standards Act, 52 Stat. 1065, as amended, 29 U.S.C. § 210; § 10 of the National Labor Relations Act, 49 Stat. 453, as amended, 29 U.S.C. § 160.
8. See, e.g., Senate Hearings, supra, note 5, at 32-35, 57 58.
9. The Government citing Needles for Use and Benefit of Needles v. United States, 101 Ct.Cl. 535, 606-607, suggests that although the Court of Claims did receive 'live' evidence on such matters, it may not have 'consciously considered evidence not presented and not available to the administrative officers making the final administrative decision.'
10. House Hearings, supra, note 6, at 79-80.