Federal Courts – Choice of Law Application of Federal Law to Government Subcontract in Federal Diversity Case

Defendant obtained a government missile contract, and plaintiff was subcontracted to manufacture containers for the missiles. When certain changes in elements of the containers were ordered by the Government, plaintiff demanded an “equitable adjustment” from defendant pursuant to the terms of the subcontract. Defendant paid only the costs of effecting the necessary changes. Plaintiff instituted this suit in federal district court alleging diversity of citizenship and demanding that the adjustment include, as allowed by California law, compensation for overhead losses caused by a partial work stoppage during the delay in effecting the changes. The district court characterized the contract as a government contract, held that federal rather than state law applied, and found for defendant on the merits. On appeal, held, affirmed. Although the subcontract cannot be characterized as a government contract, federal law should be applied for its interpretation since the federal interest in national security requires a uniform federal rule for the construction of such government subcontracts. American Pipe & Steel Corp. v. Firestone Tire & Rubber Co., 292 F.2d 640 (9th Cir. 1961).