Craft MacHine Works, Inc. v. The United States

Citations: 926 F.2d 1110; 336 Cont. Cas. Fed. 76,020; 1991 U.S. App. LEXIS 2110; 1991 WL 16688Docket: 90-5094

Court: Court of Appeals for the Federal Circuit; February 12, 1991; Federal Appellate Court

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Craft Machine Works, Inc. (Craft) entered into Contract No. 62472-82-C-1455 with the Naval Facilities Engineering Command (NAVFAC) to design, assemble, deliver, and install 23 self-powered shipbuilding portal cranes. The contract included a Cargo Preference Clause mandating the use of U.S.-flag vessels for transportation of supplies, as per Federal Acquisition Regulations (FAR) Clause 62 and the Cargo Preference Act of 1904. Craft subcontracted AmClyde Engineered Products (AmClyde) for crane sub-assemblies, which in turn subcontracted with Hyundai Heavy Industries in South Korea for some components. 

When the initial crane parts were ready for shipment, AmClyde sought freight quotations from both U.S. and foreign vessels, interpreting the Cargo Preference Clause to apply only to complete crane shipments, not parts. This led to a dispute among various government entities regarding the interpretation of the 1904 Act. While the Department of Defense (DOD) did not view the Act as requiring U.S.-flag shipping for parts, the Maritime Administration (MARAD) disagreed. The conflict was escalated to the Department of Justice (DOJ), which issued a memorandum on February 2, 1988, to resolve the issue. The United States Claims Court initially interpreted the Cargo Preference Clause strictly but was subsequently reversed and remanded by the Federal Circuit Court.

In October 1987, MARAD informed Craft and AmClyde that the FAR clause mandated the exclusive use of U.S.-flag vessels for shipping, extending this requirement to parts as well as complete cranes. AmClyde disagreed with this interpretation and initiated negotiations for a shipping contract with a foreign-flag vessel, seeking NAVFAC's confirmation of its position. In November 1987, Craft also expressed its intention to use foreign-flag vessels. By December 1, 1987, without a response from NAVFAC, AmClyde contracted with a foreign-flag vessel, which included cancellation penalties. In March 1988, the contracting officer provided Craft with a DOJ memorandum clarifying that the 1904 Act applies to all supplies contracted by the armed services, regardless of title at shipment. Following this, NAVFAC directed Craft to ship crane parts using U.S.-flag vessels. Craft contested this directive, maintaining that its contract did not require U.S.-flag shipping and planned to proceed with a foreign vessel. Subsequently, AmClyde canceled its foreign shipment contract and sought an equitable adjustment from Craft, which led to Craft filing a claim after its claim was denied by the contracting officer.

Craft sued in the Claims Court for the cost difference between foreign and U.S.-flag shipping. The court ruled in favor of the United States, interpreting the Cargo Preference Clause to require U.S.-flag shipment for both end items and component parts. This court's review focuses on whether Craft's contract necessitated U.S.-flag shipment for crane components. The court emphasized that the contract, incorporating the FAR provision, mandates cargo preferences apply to "supplies to be furnished under this contract." The contract explicitly lists the supplies, defining them primarily as complete cranes. Thus, the interpretation indicates that "supplies to be furnished under this contract" refers specifically to the complete cranes, as detailed in the contract terms.

The Claims Court incorrectly interpreted the term "supplies to be furnished under this contract" by isolating the word "supplies," which led to the erroneous conclusion that it included parts. In the context of Contract No. 62472-82-C-1455, NAVFAC intended for the "supplies" to be complete cranes, which inherently include various components such as booms and platforms. Delivery of these parts alone would not fulfill the contractual obligations until they were assembled and operational. Consequently, the contract specified the delivery of complete cranes rather than individual parts.

Additionally, the interpretation of the Cargo Preference Clause by the Department of Defense (DOD) and NAVFAC, which viewed the provision as requiring the shipment of end items on U.S.-flag vessels, is afforded significant weight. The DOD, responsible for administering cargo preference policies, maintained this interpretation following a 1970 amendment to the Cargo Preference Act of 1954. MARAD's regulations and DOD's historical stance, including testimony in Congressional hearings, reinforced the view that the term "supplies" in the relevant statutes referred exclusively to end items, thus supporting the interpretation that only complete cranes were required under the contract.

On October 21, 1986, NAVFAC's Commander clarified that FAR Clause 52.247-64 mandates that end items identified in Schedule B must be shipped on U.S. Flag vessels, regardless of U.S. title acceptance. This clause does not apply to components intended for assembly into final end items. A memorandum from NAVFAC's Northern Division on March 11, 1988, confirmed that the understanding at the time of the Craft contract's award was that the Act applied solely to end items. Professor John Cibinic, Jr. supported this interpretation, stating that "supplies" in supply contracts refers specifically to the end items delivered, not the raw materials or components used in their manufacture. The court recognized DOD's expertise in cargo preference policy and ruled that "supplies to be furnished under this contract" pertains to end items, not components. Although DOD later revised its regulation to include components as "supplies," the court maintained that changes in government interpretation do not affect the original contract's meaning. The court criticized the Government's reliance on the general definition of "supplies" in FAR Sec. 2.101, arguing that it does not dictate meanings in specific contracts. The contract explicitly defined the "supplies" as complete cranes, aligning with DOD's previous policy. Consequently, the court concluded that the Cargo Preference Clause mandates U.S.-flag shipment only for complete cranes, reversing and remanding the Claims Court's judgment.

The Department of Justice (DOJ) memorandum clarifies that cargo preference requirements are not universally applicable to all shipments by suppliers or subcontractors for the Military Departments. Instead, these requirements apply specifically to supplies designated for military use at the time of maritime shipment. The memorandum emphasizes that the Cargo Preference Act is intended for supplies meant for military delivery, regardless of their title status during the contracting process.

In a related case, the Claims Court recognized Professor Cibinic's expertise in government contracts but rejected his affidavit as evidence for the term "supplies" in a contract, asserting that the contract's language was sufficiently clear. The court maintained that evidence of trade practices cannot override explicit contract terms. Nonetheless, the affidavit was acknowledged as relevant in demonstrating the reasonableness of the Department of Defense's established regulatory policy.