UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 04-1250
ARCHER DANIELS MIDLAND COMPANY,
Plaintiff - Appellee,
versus
BRUNSWICK COUNTY, NORTH CAROLINA,
Defendant - Appellant.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. James C. Fox, Senior
District Judge. (CA-02-96-7-F)
Argued: October 26, 2004 Decided: March 15, 2005
Before WIDENER, GREGORY, and SHEDD, Circuit Judges.
Affirmed by unpublished opinion. Judge Gregory wrote the majority
opinion. Judge Widener wrote a separate concurring opinion. Judge
Shedd wrote a dissenting opinion.
ARGUED: John Joseph Butler, PARKER, POE, ADAMS & BERNSTEIN,
Raleigh, North Carolina, for Appellant. Larry Bruce Sitton, SMITH
MOORE, L.L.P., Greensboro, North Carolina, for Appellee. ON BRIEF:
Charles C. Meeker, PARKER, POE, ADAMS & BERNSTEIN, Raleigh, North
Carolina, for Appellant. Manning A. Connors, SMITH MOORE, L.L.P.,
Greensboro, North Carolina, for Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
GREGORY, Circuit Judge:
This diversity action concerns a long-term contract for the
sale of water between Archer Daniels Midland Company (“ADM”) and
Brunswick County, North Carolina (“Brunswick County” or “the
County”). In 1999 the County increased its rates as part of a plan
to pay off debt incurred from efforts to expand the water system.
ADM objected to the rates, then sued the County in the U.S.
District Court for the Eastern District of North Carolina. The
district court granted summary judgment to ADM for liability and
damages and entered a judgment in the amount of $357,758 in
compensatory damages and $58,264.64 in prejudgment interest.
Brunswick County now appeals the court’s rulings against it. We
affirm the ruling of the district court.
I.
To reveal the full context of the issues involved we quickly
revisit the parties’ pre-contractual course of dealing, the express
text of the contract, and the post-contractual course of
performance.
A. Pfizer and Brunswick County
In the early 1970s, Brunswick County had no water system.
Pfizer, Inc. (“Pfizer”) wished to run a citric acid manufacturing
plant that would need large amounts of potable water. The parties
negotiated a deal in 1973 by which Pfizer would build its plant in
2
Southport, a town in Brunswick County, and defray significantly the
water system’s costs by guaranteeing that its plant would be a
large consumer of the County’s water. The County, in turn, built
the water system and offered advantageous pricing for the water.
It appears from the record that the new water system quickly
became insufficient and that, among other problems, the system’s
inadequacies caused difficulties at Pfizer’s plant. As a result,
in 1979 or 1980 the County decided to expand the water system and
distribution facility. It secured Pfizer’s blessing by amending
the original contract and approved a bond referendum to pay for the
expansion. The parties call the first agreement and its amendment
Phase I and Phase IA, respectively.
Soon afterwards the County began yet another expansion of its
water system. This expansion -– called Phase II -- was completed
in 1983 and was also funded with bonds. Once done, the County
began to charge Pfizer rates that included costs associated with
Phase II. Moreover, at some unknown point the County began to mix
its accounts by paying an annual subsidy from its general (non-
water system) funds in order to satisfy the debt service for Phase
II. These actions led to a 1984 lawsuit quite similar to the one
now before us: Pfizer sued the County for including Phase II costs
in its rate calculations. On October 7, 1986, Pfizer and the
County settled this lawsuit by signing the contract before us (“the
contract”), which is effective until the year 2020.
3
B. The 1986 Contract
The contract establishes what should be a seamless and
straightforward pricing structure. First, ¶ 5 of the contract
states that the County must always charge Pfizer the “Lowest
Commercial Rate” (“LCR”) in effect at the time of the water’s
delivery. J.A. 21. The qualifier “commercial” is actually
misleading, since ¶ 4(b) clearly defines LCR as “the lowest price
charged by the County to any user purchasing water for any purpose
whatsoever.” J.A. 20.
Several conditional ceilings to the LCR exist in ¶ 5, but the
only two now relevant are ¶¶ 5(d) and 5(f).1 Paragraph 5(d)
establishes that the rate charged per 1,000 gallons will not exceed
$1.50 times the Producer Price Index for Finished Goods (“PPI”)
established “from May 1, 1985 to May 1 of the calendar year in
which the rate for the forthcoming fiscal year is being
determined.” J.A. 22. Paragraph 5(f) offers something like an
exception to ¶ 5(d). The bulk of this dispute concerns whether ¶
5(f) applies, and its meaning if it does. We thus quote ¶5(f) at
length:
Should the maximum charges as specified herein be
insufficient to meet the Net Operating and Maintenance
Expense for any fiscal year plus debt service... relating
only to Phases I and IA of the Water System (specifically
1
Paragraphs 5(a) through 5(c) are inapplicable after 1988.
Paragraph 5(e) provides a volume-based discount to ¶ 5(d). The
district court granted summary judgment to the County on the point
that ¶ 5(e) did not apply, and ADM did not appeal.
4
excluding debt service. . . relating to Phase II and debt
service relating to any subsequent expansion of the Water
System), the charges for all customers for the year in
question shall be increased on an equal percentage basis
by the County (including increasing the maximum charges
to Pfizer beyond that otherwise authorized by this
Agreement) in order to raise sufficient funds to cover
both such Net Operating and Maintenance Expense and Phase
I and Phase IA debt service.
J.A. 22. Paragraph 5(f) is plainly structured as an “if, then”
conditional. If (and only if) “the maximum charges as specified
herein” are “insufficient” to meet the County’s “Net Operating and
Maintenance Expense” (“NOME”) plus debt service only on Phases I
and IA, then the charges for all customers “shall be increased on
an equal percentage basis.” Id. (emphasis added). Paragraph 4(c)
defines NOME in detail:
Net Operating and Maintenance Expense” shall mean the
cost of raw water and other direct expenses associated
with the operation and maintenance of the County’s Water
System. The following are examples of such items: 1.
Salaries 2. FICA taxes 3. Group Insurance (Medical) 4.
Payments to retirement fund 5. Professional service 6.
Postage 7. Telephone 8. Utilities 9. Travel and Training
10. Equipment repairs 11. Vehicle repairs 12. Equipment
rental 13. Chemicals 14. Automotive supplies 15.
Department supplies 16. Laboratory supplies 17. Uniforms
18. Contracted services 19. Dues and subscriptions 20.
Insurance 21. Capital equipment used to operate or
maintain the Water System, but excluding any equipment to
expand the County’s Water System. Excluded from Net
Operating Expense are all (1) debt service obligations,
(ii) all expenses which are reimbursed by special fees,
such as tap on fees, (iii) any funding of reserves for
other than operation and maintenance items; and (iv) for
the purposes of interpreting 4(c)(21) above, any costs of
capital investment to expand or extend the Water System.
J.A. 20-21.
5
In sum, the contractual text protects Pfizer by limiting the
rates the County can charge it to an amount that is (1) never more
than any other customer is charged, (2) unless certain conditions
are met, no more than (for our purposes) the PPI-adjusted price of
¶ 5(d), and (3) in any event, never more than a rate that would be
“sufficient” to meet the “cost of raw water and other direct
expenses associated with the operation and maintenance of the
County’s Water System” when coupled with other customers’ charges
(see infra Part III.A). The County, however, may (1) set the LCR
at any amount up to the ¶ 5(d) ceiling it chooses. Additionally,
(2) by requiring Pfizer to contribute “on an equal percentage
basis,” ¶ 5(f) aids the County in obtaining an amount equal to the
water system’s NOME.
C. The Parties’ Pre-Litigation Course of Performance
In 1990, Pfizer sold its manufacturing plant to ADM, making
ADM a successor in interest to the contract. As the district court
found, we have no reason to believe that the contractual
relationship between the County and Pfizer/ADM was anything but
harmonious after the contract was signed until the 1999 rate
increases. Throughout this time, Pfizer and ADM purchased immense
amounts of water from the County; in fact, ADM notes that it is the
County’s largest water customer.
The undisputed evidence before the district court shows that
in late 1997 and 1998 the County set a goal of ending its subsidy
6
of the water system, particularly the system’s Phase II debt.2
Among other evidence, Lee Smith, the County’s Director of Public
Utilities, testified at a deposition that to achieve this goal the
County set in place a five-year plan to pay off twenty percent of
the debt annually by increasing charges systemwide. Smith’s
deposition included the following exchange:
Q: Let me ask you, in referring to [the Contract], and
specifically paragraph 5, to explain how the County
has calculated the rate for water that has been
charged to ADM since January 1999.
A: Okay, the way the rate was calculated beginning
that year was that staff was given a charge to have
the –- to establish a rate that would eventually
get the water system on a paying basis, and that
was developed into a five-year plan, and that plan
was –- in that plan was a rate developed for
industrial customers, which ADM is one of. . . .
J.A. 250; see also J.A. 253. Under this “five year plan,” rather
than calculating the rate in the progression that the contract
anticipates, the County worked backwards from the goal of making
the water system self-sufficient.
Mr. Smith also testified, and no other evidence contradicts,
that so far as he knows, prior to this litigation the County had
never calculated a ¶ 5(f) rate in the manner which the County now
wishes for us to calculate it. See J.A. 275-77, 314. Rather, as
the following excerpt from Mr. Smith’s deposition indicates, the
2
In 1993 the revenue bonds associated Phases I and IA were retired,
thus dissolving those debt-service obligations.
7
only rate calculations done are reflected in a number of
worksheets:
Q: Before that [January 1, 1999] rate was put into
place, were there any calculations done to see if
that rate complied with the agreement?
A: The process was done through the finance department
as an internal process. She [Lithia Brooks] –- it
is referred to in [. . . the worksheets3]. . . .
Q: Are those calculations that were done at some point
to determine the rate of water charged to ADM?
A: Those were the –- that process was conducted by
finance, and that was –- those were the people that
conducted that particular analysis.
J.A. 254-56. After the 1999 rate increases began, in response to
ADM’s questions, the County’s counsel sent a June 29, 1999 letter
which enclosed “a summary of the calculations used by the County to
arrive at the potable water rate. . . .” J.A. 574-76. The
enclosures were worksheets for fiscal years 1998-99 and 1999-00.4
A later letter from the County’s attorney to ADM explains that the
method used in these worksheets is consistent with the County’s
prior rate-setting methods. Specifically, it states:
Information should have been sent to your office that
supports the County’s calculation of the water rate.
This method was the same method that was used to
3
The specific worksheets referred to here are found at J.A. 407,
411-413. The method used in the worksheets generated by the
County’s finance department are materially identical.
4
The 1998-99 worksheet was called “Brunswick County Water Rate
Analysis FY 98-99 Approved Budget.” The 1999-00 worksheet was
entitled “Brunswick County Water Rate Analysis FY 99-00 Revised
Recommended Budget.” J.A. 575-76. Subsequent exhibits included
in the record (as “Exhibit 12" and “Exhibit 13" at J.A. 407-13)
included the same 1998-99 worksheet and utilized the materially
same method for later fiscal years.
8
calculate the rate set in 1996. The same calculation
method that produced the $1.1815 rate (that ADM is
currently paying) [sic: $1.815] produced the $1.98 rate.
Are we to assume that since there was no objection to the
method used to set the rate at that time, that there will
be no objection to its being set the same way this time?
J.A. 580.
Despite the County’s current protests to the contrary, these
worksheets are important insights into the County’s pre-litigation
rate-setting methods. As the district court found, the worksheets
revealed that the County would: (1) calculate the PPI rate; (2)
calculate the rate necessary to cover NOME, then (3) compare the
PPI rate with the NOME rate, and only charge above the PPI rate if
(1) is less than (2). See J.A. at 664. To calculate the rate
necessary to cover NOME, the worksheets begin with the water-system
budget –- and decidedly not any other expenses, like the large
capital-projects expenses accounted for elsewhere that the County
would now have us include –- as NOME’s foundation.5 They then
deduct from the Water System budget all debt service6 and “special
fees” (including “tap” and “LCFW&SA” fees and, beginning in 1999-
00, “capacity,” “availability,” and “acreage” fees).7 The
5
The 1998-99 water system budget was $13.83 million, while the
1999-00 water system budget was $12.86 million.
6
The 1998-99 worksheet adds back in $421,000 of some other “debt
service” (which, according to the district court, is actually a
line item in the water-system budget for capital leases for water
system maintenance equipment. See J.A. 667).
7
In 1998-99, the deduction for “special fees” totaled $1.16 million
and reflected only “tap on” and “LCFWRA” fees. In fiscal year
9
worksheets then divide this resulting amount by what appears to be
the total gallons of water sold to arrive at an “approved water
rate.” See J.A. 407-11, 575-76.8 This “approved” rate was, to the
County, the maximum rate it could charge ADM.
The County now attempts to discredit its earlier clear
representations to ADM that the worksheets were “used by the County
to arrive at the potable water rate,” J.A. 574; “support[] the
County’s calculation of the water rate,” J.A. 580; were “the same
method that was used to calculate the rate set in 1996[,]” id., and
are “[t]he same calculation method that produced the [] rate (that
ADM is currently paying). . . .” Id.
The County’s offerings in support of this assertion, however,
are less than meager. It can submit only the testimony of its
Director of Fiscal Operations, Lithia E. Brooks, who now claims
that the internal worksheets were, while produced at her direction,
never actually used to calculate the ¶ 5(f) rate. E.g., J.A. 214-
17. Notably, however, Brooks echoes Smith in failing to offer any
positive method for how rates actually were charged. Thus, in
1999-00 and subsequent years, however, the County began to charge
its customers other “capacity,” “availability,” and “acreage” fees
-- in addition to the per-thousand-gallon charge. These were also
each deducted by the County as “special fees.” J.A. 407-11, 576.
The worksheets for fiscal years 1999-00 and after also then add in
to the water system budget approximately $1.6 million annually for
depreciation of capital assets. Id.
8
In 1998-99 the approved rate was $2.51 per thousand gallons. In
1999-00, it was $1.979 per thousand gallons.
10
denying that the worksheets reflected the County’s pre-litigation
rate-setting method, the County is left in the awkward position of
(1) having to admit that it never calculated ADM’s water rates
under the method they would now have us use and (2) offering no
affirmative theory -- much less evidence -- of how its rates
actually were calculated before the lawsuit. In stark contrast, on
this point ADM offers (1) clear-as-day pre-litigation admissions
from the County, sent by its attorney, that the worksheet method
was used before litigation and did reflect the County’s rate-
setting method for years before those years relevant for this
lawsuit. J.A. 572-81. Moreover, ADM offers (2) other worksheets
ordered at Ms. Brooks’ behest which consistently continue the
methods of the pre-litigation worksheets for the fiscal years up
through 2003. See J.A. 407-11.
On August 31, 2000 –- about seven months after it sent the
last letter in support of the worksheets -- the County told ADM
that it owed $191,546, the difference between the rate ADM was
paying and the rate the County had charged since January 1, 1999.
The County threatened to cancel ADM’s water service if it did not
send payment by September 21, 2000. On September 14, 2000, ADM
paid what the County said it owed under protest.
D. The Lawsuit
ADM sued on June 21, 2002. The thrust of ADM’s case is that,
because ¶ 5(f) was inapplicable, the County was unjustified in
11
charging anything more than the ¶ 5(d) rate. Specifically, ADM
contends that it overpaid by $357,768 in the years now relevant to
the contract.9 Brunswick County asserted a counterclaim for the
years ADM has paid less than the County’s full charges, and, unlike
ADM, requested a jury trial. The County’s chief counter-argument
is that its rates could have been justified, even had it not
included the Phase II debt charges.
To support this theory, the County relies upon the report and
deposition of Dr. C. W. Corssmit, Ph.D., an utilities economist who
analyzed the rates from July 1, 1998 to June 30, 2001. Most
relevantly, Dr. Corssmit’s report teased out expenditures from the
County’s non-water system budgets and submitted that they were
really expenditures that could have been, but were not, counted
9
This includes amounts of $145,546 above the ¶ 5(d) rate for 2001,
$76,686 for 2002, $105,410 for 2003, and $30,126 through October
30, 2004. J.A. 680, 728-30. The following table illustrates the
rates charged ADM compared to what the ¶ 5(d) rate would have been
during the relevant years:
Fiscal Year Paragraph 5(d) rate Rate charged to ADM
2001 $1.97 $2.20
2002 $2.04 $2.38
2003 $1.98 $2.80
2004 $2.03 $2.32
ADM has since only paid at a rate of $2.20 per thousand gallons
(charged to it in 2001) rather than the subsequently increasing
rates the County has billed.
12
under NOME. Having done so, the report concludes that adding these
expenses would have justified the County’s rates.
After discovery, ADM moved for total summary judgment.
Brunswick County opposed and, in turn, moved only for partial
summary judgment on the issues that (1) the statute of limitations
barred any damages arising before the fiscal year beginning July 1,
2000, and (2) ¶ 5(e) (which granted a volume-based discount to the
¶ 5(d) rate) was inapplicable.
On December 2, 2003, after ordering supplemental briefing, the
district court granted both parties’ motions -- thus finding that
the County breached and denying the County’s counterclaims.
Finding that the operative portions of the contract “present[] a
difficult case for interpretation,” J.A. 659, and that neither
party submitted an entirely reasonable reading of ¶ 5(f) in
litigation, the court leaned heavily on the parties’ pre-lawsuit
conduct as evidenced by the worksheets. The district court then
ordered further supplemental briefing on damages, and the parties
calculated the rates under the worksheet method. The district
court also heard a request from the County to reconsider the
propriety of deducting “special fees” from NOME. The court
declined to alter its ruling from what it found the worksheet
method to entail, and issued a final judgment on February 11, 2004,
which granted ADM $357,758 in compensatory damages and $58,264.64
in prejudgment interest. The County timely appeals.
13
II.
We review a district court’s grant of summary judgment de
novo. Boss v. E.I. Dupont de Nemours & Co., 324 F.3d 761, 766 (4th
Cir. 2003); Goodman v. Resolution Trust Corp., 7 F.3d 1123, 1126
(4th Cir. 1993). Summary judgment should be granted when no
genuine issue of material fact remains unresolved and the moving
party is entitled to judgment as a matter of law. Fed. R. Civ. P.
56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49
(1986). At the summary judgment stage, the judge's function is to
determine whether any genuine issue of material fact remains for
trial. Anderson, 477 at 249. Unless “the evidence is such that a
reasonable jury could return a verdict for the nonmoving party,”
summary judgment is proper. Id. at 248.
The district court properly noted that North Carolina law
controls the interpretation of the contract; ¶ 14 of the contract
indicates as much. However, the court then errantly noted –-
albeit ultimately harmlessly –- a different summary judgment
standard. Citing the North Carolina Supreme Court case of Davison
v. Duke University, 194 S.E.2d 761, 783 (N.C. 1973) for the
proposition that “[t]he interpretation of a contract is a question
of law within the court’s province,” J.A. 653, the district court
simply decided that, under North Carolina law, it was to decide the
contract as a matter of law.
14
This was an oversight. Since the suit was filed in federal
court, the Federal Rules of Civil Procedure govern matters like
whether Fed. R. Civ. P. 56(c) motions for summary judgment should
be granted. As Judge Posner has explained, under Erie, federal
courts sitting in diversity should apply state contract law as
would a court in that state because contract law is substantive; it
is “concerned primarily with ‘the channeling of behavior outside
the courtroom.’” Coplay Cement Co. v. Willis & Paul Group, 983
F.2d 1435, 1438 (7th Cir. 1993)(citations omitted). However,
federal law must govern whether a question is one of law or fact,
because that is a matter “internal to the federal judicial system”
involving the allocation of functions between judge and jury. Id.;
Cunningham and Co., Inc. v. Consolidated Realty Mgmt., Inc., 803
F.2d 840, 842 (5th Cir. 1986)(“The roles of judge and jury in the
interpretation of contracts are set by federal law, even in
diversity cases.”); see also Byrd v. Blue Ridge, 356 U.S. 525, 538
(1958)(“[T]here is a strong federal policy against allowing state
rules to disrupt the judge-jury relationship in the federal
courts.”); Atkins v. Schmutz Mfg. Co., 435 F.2d 527, 536-37 (4th
Cir. 1970)(same). In short, while we respect and apply as
appropriate substantive state law, we guard jealously the
independence of our internal procedural rules like summary judgment
standards.
15
III.
This case turns on the interaction of a contract’s express
terms and the parties’ course of performance under the Uniform
Commercial Code (“UCC”). Section 2-208 of the UCC, adopted by
North Carolina as N.C. Gen. Stat. § 25-2-208,10 mandates that courts
give some –- but not unreasonably heavy -- interpretive weight to
the parties’ course of performance. On this point, § 2-208 makes
at least two principles plain: first, a course of performance is
“relevant” to determine the “meaning of the agreement.” N.C. Gen.
Stat. § 25-2-208(1). Second, only when the two can not reasonably
be read in harmony do the express terms “control” the course of
performance. N.C. Gen. Stat. § 25-2-208(2).11
10
North Carolina has adopted Article 2 of the Uniform Commercial
Code. N.C. Gen. Stat. §§ 25-1-101 to 25-11-108. Because water can
be measured by a flow meter, it is “movable” under Article 2, and
thus the contract at issue in this suit is one for the sale of
goods. See N.C. Gen. Stat. § 25-2-105; Mulberry-Fairplains Water
Ass’n v. Town of North Wilkesboro, 412 S.E.2d 910, 915 (N.C. App.
1992)(contract for sale of water from town to business is sale of
goods); Westpoint Stevens, Inc. v. Panda-Rosemary Corp., 1999 WL
33545512 at *3 (N.C. Super. Dec 16, 1999)(finding steam to be
“goods”).
11
Section 2-208 of the North Carolina Commercial Code provides in
full:
(1) Where the contract for sale involves repeated
occasions for performance by either party with knowledge
of the nature of the performance and opportunity for
objection to it by the other, any course of performance
accepted or acquiesced in without objection shall be
relevant to determine the meaning of the agreement.
(2) The express terms of the agreement and any such
course of performance, as well as any course of dealing
and usage of trade, shall be construed whenever
reasonable as consistent with each other; but when such
16
We analyze the contract with these rules equally in mind with
the proper summary judgment standard, and conclude that the
district court correctly granted summary judgment to ADM.
A. The Parties’ Course of Performance
Given the evidence submitted in the summary judgment
materials, the County cannot now convincingly contest that a course
of performance did not exist. As the County correctly realizes,
the letters themselves are not, standing alone, a course of
performance. See Appellant’s Br. at 41-42; N.C. Gen. Stat. § 25-2-
208 cmt. 4 (“A single occasion of conduct does not fall within the
language of this section.”). Rather, the letters and worksheets
are simply strong evidence –- not credibly contradicted, and almost
surely admissible12 –- regarding the course of performance
construction is unreasonable, express terms shall control
course of performance and course of performance shall
control both course of dealing and usage of trade
(3) Subject to the provisions of the next section [§ 25-
2-209] on modification and waiver, such course of
performance shall be relevant to show a waiver or
modification of any term inconsistent with such course of
performance.
N.C. Gen. Stat. § 25-2-208.
12
The County contends that the letters –- but, to their credit, not
the worksheets –- are inadmissible under Fed. R. Evidence 408
because they were part of “compromise negotiations.” Appellant’s
Br. at 39-40; Reply Br. at 13 n.1. We disagree. The letters were
written months prior to any lawsuit and at the time they were
written no reason existed to believe that any litigation would
necessarily come to pass. Courts surely need not exclude all
inter-party questions and discussions about a contract; the
probative value of such evidence is quite high and considering
discussions such as this does no harm to Rule 408's good goal of
encouraging actual compromise negotiations.
17
established during the pre-litigation years. The County’s failure
to appreciate this distinction leads them to the errant argument
that the letters cannot be a course of performance because ADM
never “accepted or acquiesced in” the method proposed in the
letters and worksheets without objection. Appellant’s Br. at 41-
43. First, ADM never disputed the method explained in the letters;
it just questioned the basis for the numbers plugged into the
calculations. But more fundamentally, these letters and worksheets
offer the only evidence we have of the County’s (previously
admitted) rate-setting method throughout the years and, relatedly,
ADM’s continued acceptance of it. See, e.g., Water Ass’n v. Town
of North Wilkesboro, 412 S.E.2d 910, 916 (N.C. App. 1992) (course
of performance established, and contract modified, when town sold
business water in excess of maximum contract price and amount for
15 years). Thus, not only can the County not point to one bit of
evidence establishing any other rate-setting method used during the
many years of voluminous water sales under the contract before
1999, but the County can show no evidence that these rates were not
accepted.
The County also submits the novel suggestion that a course of
performance between a successor in interest to a contract and an
original party to the contract may not shed light on the intent of
the original parties. See id. at 20, 36-38. This also falls
short. A contractual successor stands in its predecessor’s shoes
18
for both rights and responsibilities and -- at least -- a frank
admission about the course of performance by an original party to
the contract surely may be used against it by the successor. Were
it any other way, it seems that the UCC’s course of performance and
waiver doctrines would be read out of existence whenever a contract
for the sale of goods is assigned. Such a result would be
particularly likely, and particularly unjust, in long-term
contracts like this one. This cannot comport with the intent of
the drafters of the UCC.
The County finally argues that a genuine issue of material
fact remains as to the course of performance because Ms. Brooks
claims that the County never used these methods to set rates.13
Appellant’s Br. at 38-39. This too must fail. With silence that
speaks loudly, the County submits no other affirmative method in
the summary judgment materials to contradict the clear statement of
13
Specifically, Ms. Brooks contends that the Utilities Department
–- not the finance department, which evidently developed the
worksheet –- sets the water rate. Ms. Brooks’ testimony included
the following exchanges:
Q. Is [the worksheet] used in any way to assist the
County in determining the water rates to be charged to
customers? A. No, sir, it is not. . . . Q. How does
the County calculate, then the rate that is charged to
customers for water? A. That is simply based on the
amount that is calculated needed to cover projected
expenses for that department.
J.A. 215. Yet the head of the utilities department, Mr. Smith,
plainly states that, prior to Dr. Corsmitt’s post-litigation
involvement in the matter, the County never interpreted ¶ 5(f) as
it would now have the court do. This fruitless and circular
finger-pointing simply does not create a triable issue of fact on
the parties course of performance.
19
their attorney that the methods outlined in the worksheets were
used by the County before litigation. We find it difficult to
believe that any reasonable jury would weigh a bare, post-hoc
denial, offered with nothing else to stand in its place, over a
pre-litigation admission by a sophisticated contracting party
vetted by its lawyer and subsequently bolstered by other uses.
Here the County sent letters stating, among other things, that “a
summary of the calculations used by the County to arrive at the
potable water rate. . . .” J.A. 574 and “[t]his method was the
same method that was used to calculate the rate set in 1996. The
same calculation method that produced the [rate that ADM was paying
at the time of the letter] produced [this] rate.” J.A. 580. In
sum, while ADM, as the plaintiff, assuredly bears the burden of
proof on establishing a course of performance, the County has
simply offered no evidence which genuinely puts into issue that the
worksheets evidenced the course of performance.
B. Express Text of the Contract
Because “[t]he parties themselves know best what they have
meant by their words of agreement and their action under that
agreement is the best indication of what that meaning was,” N.C.
Gen. Stat. § 25-2-208 cmt. 1., § 25-2-208(2) commands us to
construe the course of performance and express contractual text
harmoniously “whenever reasonable.” Thus, it follows that only
when such a reading is decidedly unreasonable do the express terms
20
“control.” N.C. Gen. Stat. § 25-2-208(2). The operative express
terms for this contract are those which determine whether ¶ 5(f)
applies: (1) “maximum charges as specified herein” and (2) “NOME.”
When (2) is an amount greater than (1), then ¶ 5(f) might apply.
As explained below, these sections may, with one exception,
reasonably be read in harmony with the parties’ course of
performance.
1. “Maximum charges as specified herein”
Paragraph 5(f) notes that when the “maximum charges as
specified herein” are “insufficient” to cover NOME, the County
shall charge all its customers equally more in order to equal NOME.
J.A. 22. The worksheets consistently divide the County’s NOME by
all gallons of water sold by the County to establish the
“calculated rate to cover operations.” J.A. 575-76. Thus, the
district court found that the contract’s real meaning was informed
by the parties’ pre-litigation conduct, as evidenced in the
worksheets, which was to utilize all water rates. The court did
so, however, in spite of its opinion that the only “maximum
charges” the contract expressly provided “herein” were ADM’s
charges set out in the immediately preceding paragraphs 5(a)-(e).
We attack this problem differently. As established above, the
course of performance was not genuinely in dispute. Given this,
under N.C. Gen. Stat. § 25-2-208(2), the proper question before the
court is simply whether the express text may reasonably be read in
21
harmony with the course of performance. It can. The contract
surely does not assume that ADM and the County contract in a
vacuum. Indeed, without other customers, many important portions
of the contract are rendered meaningless: among other references
to revenue received from other users of the water system, ¶¶ 4(b)
and 5 ensure that all other customers’ charges must be higher than
ADM’s; ¶ 6 requires that the County charge all customers fairly and
as low as practicable and requires that all water-system revenues
(not merely ADM’s) exclusively for water system purposes.14 This
all allows at least a reasonable reading that “herein” was meant to
refer to the entire contract –- and thus other customers’ charges
-- not merely the immediately preceding ¶¶ 5(a)-(e). Indeed, as
notable as what the contract expressly says is what it does not but
could have said if the parties meant to give “herein” such a
cramped meaning: the contract decidedly does not refer to the
charges “as specified in the immediately preceding paragraphs” or
“the maximum charges otherwise allowed to Pfizer.” Finally, we
also note ADM’s uncontested citation of an identical contract –-
complete with an identical ¶ 5(f) -- the County entered into with
the town of Long Beach. J.A. 590. This contract’s existence is
important because it severely undermines any notion that in
14
Indeed, ¶ 5(f) itself requires all other rates to be increased
equally to ADM’s rates if they are ever increased beyond the ¶ 5(d)
PPI-rate whenever the “maximum charges” are “insufficient.” It is
certainly not unreasonable to read these two phrases of ¶ 5(f) in
equilibrium.
22
drafting ¶ 5(f) the County relied solely on Pfizer/ADM’s charges to
cover NOME. Thus, as established by both the plain text and
confirmed by the parties’ plain course of performance, the district
court was well within its rights to find as a matter of law that
¶ 5(f)’s “if” trigger -- “the maximum charges as specified herein”
–- encompasses all water sold, not merely the charges of
Pfizer/ADM. There simply is no factual dispute on this point for
a jury to consider.
2. NOME
The other side of the ¶ 5(f) coin is NOME. The County
challenges the district court’s exclusion of three categories of
expenses from NOME: (1) large capital expenses accounted for
outside the water-system budget, (2) depreciation for capital
expenses, and (3) certain “fees” the County began charging in 1999.
The district court properly excluded all three.
Unlike it evidently did in the worksheets, the County now
wishes to go back and include significant expenses from the capital
projects fund in the calculation of NOME. As Ms. Brooks argues,
“many significant capital expenditures for, among other things,
maintaining the water system are not reported as an expenditure in
the Water System Operating Fund but are instead reported as
expenditures in the Capital Products Fund.” J.A. 59. Yet the
summary judgment materials make clear that the County utilized the
water system budget –- and not other capital projects expenses
23
which the County now claims should count -- as the baseline for
calculating NOME.
The contract defines NOME as “the cost of raw water and other
direct expenses” of operating and maintaining -– but not expanding
–- the system. To be sure, this makes no explicit reference to the
water system budget; but neither does this text make unreasonable
a reading that the water system budget was to serve as the
contract’s proxy for “the cost of raw water and other direct
expenses.” Following the district court’s reasoning, it hardly
seems that the parties, when drafting the contract, anticipated
retaining an utilities economist annually to tease out “water
system” expenses from areas other than that which the County
previously and readily recognized were water system expenses. Yet,
since the course of performance did not include such expenses, to
find that such capital expenses should be included we would have to
be so sure that this was the parties’ intent that it would be
unreasonable to believe otherwise. Surely it is not. Thus, since
the course of performance and express text can reasonably be read
in harmony here, we are commanded to do so. See N.C. Gen. Stat.
§ 25-2-208(2).
The interpretation of the fees and depreciation accounted for
on the 1999-00 worksheet is a slightly tougher issue.
Paragraph 4(c) states that “all expenses which are reimbursed by
special fees, such as tap on fees” may not be included in the
24
definition of NOME. J.A. 21. The question is whether the
additional charges the County apparently began in 1999 are thus
“special fees, such as a tap on fee.”
We first note that the County’s consistent method as evidenced
in the worksheets was to deduct all three fees from the water
system budget. Indeed, in every fiscal year that these fees were
charged, they were listed by the County under the category “special
fees.” See J.A. 407-11, 575-76. We also see that the County’s own
witnesses state consistently that acreage fees directly reimburse
debt expenses and the capacity fees reimburse expansion expenses.
Besides the fact that both of these fees directly reimburse an
expense -- and are therefore “special” -- they doubly deserve
exclusion from NOME because they reimburse expenses plainly
impermissible under ¶ 4(c).15 Thus, the course of performance and
express text are capable of being reasonably read in harmony.
Finally, the district court found that “depreciation should
not be counted towards NOME because it. . . is a fictional, rather
than a “direct expense” to the water system. J.A. 666. The County
challenges this ruling by arguing that depreciation is a
“maintenance” expense that is especially important to include if
15
As for the “availability” fees, while we certainly presume that
the County acts under in good faith, we note that (1) the contract
is written in a way such that the County holds all the cards and
could easily manipulate what any fee “reimburses”; and (2) prior to
litigation (the period which North Carolina contract law gives
heaviest weight), the County called availability fees “special” and
deducted them when calculating their rates.
25
the “direct” capital maintenance expenses are not included. We
again agree with the district court. Paragraph 4(c) of the
contract took the time to list twenty-one examples of “direct
expenses,” ranging from FICA taxes to postage to laboratory
supplies to uniforms. Given this level of detail for such
comparatively minuscule items, it is unreasonable to believe that
an expense as enormous as depreciation -- a $1.6 million annual
entry on the worksheets -- was left off the list of “direct
expense” examples by accident. Thus, consistent with the UCC’s
commands, the district court was correct here to allow the “express
text” of the contract “control” the parties’ course of performance.
See N.C. Gen. Stat. § 25-2-208(2).
IV.
For no shortage of reasons, a court “faces a conceptually
difficult task in deciding whether to grant summary judgment on a
matter of contract interpretation.” World-Wide Rights Ltd. V.
Combe Inc., 955 F.2d 242, 245 (4th Cir. 1992). Here this is so
because a court must hold in equipoise a proper respect for the
express text and the UCC’s practical command to allow the parties’
conduct to aid in defining the text all while determining whether
any genuine issues of material fact remain and refraining from
deciding disputed facts.
26
The district court completed this difficult task acceptably.
No genuine dispute existed regarding the County’s pre-litigation
rate-setting method, and thus the parties’ course of performance
was clear enough. The district court properly read the express
text of the contract and the course of performance in harmony when
it was reasonable to do so, but when, on the issue of
depreciation, such a reading was unreasonable, it correctly allowed
the express text to control. Thus, the district court’s judgment
is
AFFIRMED.
27
WIDENER, Circuit Judge, concurring:
I concur in Judge Gregory’s majority opinion. I should add
that I would affirm on the opinion of the district court.
28
SHEDD, Circuit Judge, dissenting:
I respectfully dissent. The dispute between the parties
should be governed by the unambiguous language of the contract and
not, as the majority incorrectly rules, by the parties’ so-called
course of performance.
The relevant contractual language provides:
5. The County will charge [ADM] for water actually
delivered to [ADM] . . . , and [ADM] will pay for such
water, at the Lowest Commercial Rate in effect at the
time of such deliveries provided, however, that in no
event shall such charge exceed the following amounts:
. . .
(d) For fiscal years subsequent . . . to 1988, an
amount per 1,000 gallons not to exceed $1.50 times the
ratio of the change in the PPI [Producer Price Index] .
. . .
(f) Should the maximum charges as specified herein
be insufficient to meet the Net Operating and Maintenance
Expense [NOME] for any fiscal year . . . , the charges
for all customers for the year in question shall be
increased on an equal percentage basis by the County
(including increasing the maximum charges to [ADM] beyond
that otherwise authorized by this Agreement) in order to
raise sufficient funds to cover . . . such [NOME].1
The parties agree that ADM must pay either the amount
described in section 5(d), which is the PPI rate, or the amount
described in section 5(f), which is the NOME rate. The parties, of
course, disagree as to which of these two rates applies.
1
Section 5(f) also includes language allowing the addition of debt
service expenses for Phase I and Phase IA into the calculation.
These debt service obligations were fulfilled by 1993, so they are
not relevant to this case.
29
To determine which rate applies, we must first turn to the
express terms of the contract. Under North Carolina law, “the
most fundamental principle of contract construction [is] that the
courts must give effect to the plain and unambiguous language of a
contract.” Johnston County v. R.N. Rouse & Co., 414 S.E.2d 30, 34
(N.C. 1992). If the language of a contract is unambiguous, the
intention of the parties must be inferred from the words of the
contract. Walton v. City of Raleigh, 467 S.E.2d 410, 411 (N.C.
1996). Under such circumstances, the “court’s only duty is to
determine the legal effect of the language used and to enforce the
agreement as written.” Atlantic & E. Carolina Ry. Co. v. Southern
Outdoor Adver., Inc., 501 S.E.2d 87, 90 (N.C. Ct. App. 1998). A
contract is not ambiguous merely because the parties differ on how
to interpret its terms. Walton, 467 S.E.2d at 412. Unambiguous
contracts are interpreted by the court as a matter of law. First-
Citizens Bank & Trust Co. v. 4325 Park Rd. Assocs., 515 S.E.2d 51,
54 (N.C. Ct. App. 1999); World-Wide Rights Ltd. Partnership v.
Combe, Inc., 955 F.2d 242, 245 (4th Cir. 1992).
Although the relevant contractual provisions require careful
reading and cross-referencing, they are nonetheless unambiguous.
The PPI rate in section 5(d) -- an indexed rate that is not in
dispute -- applies unless “the maximum charges as specified” in
section 5 of the contract are “insufficient to meet the [NOME] for
any fiscal year.” Section 5(f). If the “maximum charge” ADM would
30
be required to pay in a given year for its water consumption based
on the PPI rate2 is “insufficient to meet” the qualifying NOME
expenses allowed under the contract, then the County may charge ADM
the higher NOME rate under section 5(f).3
The qualifying NOME expenses are clearly defined in section
4(c) of the contract. They include direct expenses for salaries,
postage, utilities, uniforms, insurance, chemicals, laboratory
supplies, training and travel, and many other typical expenses
incurred in operating a water system.
The parties dispute two categories of expenses under the
definition of NOME. The first disputed provision allows the County
to add into NOME direct expenses for “[c]apital equipment used to
operate or maintain the Water System.” Section 4(c)(21). The
County presented evidence of such expenses in the relevant years,
but the district court precluded these amounts from the calculation
of NOME. Because the unambiguous language of the contract clearly
allows the County to include these expenses in calculating NOME,
the district court’s exclusion of them was erroneous. The second
disputed provision states that “all expenses which are reimbursed
2
There are several “maximum charges” listed in section 5, but,
based on the particular facts of the case, the only “maximum
charge” specified in section 5 that could be used to make this
necessary calculation under section 5(f) is the PPI rate under
section 5(d).
3
ADM argues that “maximum charges” means all charges paid by all
customers. There is no support for this interpretation based on
the plain terms of the contract.
31
by special fees, such as tap on fees” shall be excluded from NOME.
Section 4(c)(21)(ii) (emphasis added). The County, for example,
charges each customer a tap-on fee when it physically connects that
customer to the water system. This fee pays for the labor and
plumbing supplies required to make the connection. Because the
customer is required to reimburse the County for these particular
expenses by paying the fee, the County in effect incurs no net
expense. Allowing the County to add its tap-on expenses to NOME
when they have already been directly reimbursed by the customer
would improperly inflate NOME and, more importantly, would violate
the terms of the contract.
In addition to tap-on fees, the County charges acreage,
capacity, and availability fees. Unlike tap-on fees, there is
evidence that these three fees do not directly reimburse the County
for any specific expenses incurred by the County. If these fees do
not represent “expenses which are reimbursed by special fees,” they
should have no effect on NOME. Nevertheless, the district court
ruled that the amount of revenue recovered by these fees should be
subtracted from NOME. NOME, however, is a calculation of expenses,
not revenues. Based on the contract, not even tap-on fees are
actually subtracted from NOME; rather, the corresponding expenses
reimbursed by the tap-on fees are excluded from NOME. Requiring
the County to subtract its revenues from the acreage, capacity, and
availability fees improperly reduces NOME and thus affects the
32
determination of whether the County may charge ADM the higher NOME
rate in section 5(f). Accordingly, the district court erred by
requiring, as a matter of law, the subtraction of these fees from
NOME.4
The majority ignores the unambiguous language of the contract
and instead purports to decide the case, as a matter of law, based
on the parties’ so-called course of performance. North Carolina
law provides that when a contract governed by the commercial code
“involves repeated occasions for performance by either party with
knowledge of the nature of the performance and opportunity for
objection to it by the other, any course of performance accepted or
acquiesced in without objection shall be relevant to determine the
meaning of the agreement.” N.C. GEN. STAT. § 25-2-208(1) (emphasis
added). ADM did not know the “nature of the [County’s]
performance” (i.e., how the County calculated the water rate)
until it first disputed the County’s new water rate in 1999. After
ADM disputed the rate, the County provided copies of its internal
worksheets. Upon receiving the County’s internal calculations, ADM
did not “accept” or “acquiesce” in the County’s calculation.
Instead, ADM informed the County that the information “still does
not satisfy ADM that the new rate is in compliance with the terms
4
At oral argument, counsel for ADM conceded that availability fees
do not directly reimburse any specific expenses. Counsel for ADM
also conceded that the County’s argument relating to acreage and
capacity fees has merit.
33
of the contract,” and, most tellingly, ADM refused to pay the
increased rate imposed by the County. Thus, there is no course of
performance between the parties, as defined by § 25-2-208, that is
“relevant to determine the meaning of the agreement” in this case.
Id.
The district court’s misplaced reliance on course of
performance necessarily affects the determination of the maximum
rate the County is allowed to charge ADM under the express terms of
the contract. Accordingly, I would reverse the grant of summary
judgment in favor of ADM.
Even if I were to agree that the parties’ course of
performance qualifies as relevant evidence to help determine the
meaning of the agreement, I would reverse summary judgment and
remand for trial. Instead of treating the parties’ so-called
course of performance as relevant evidence, the district court and
the majority essentially replace the parties’ written agreement
with what they consider to be the parties undisputed course of
performance. This purported course of performance is, however,
disputed at its very core. The County’s evidence shows that the
internal worksheets, which the district court and now the majority
basically treat as the new contract, were not used to calculate
ADM’s rate. Instead of viewing this evidence in the light most
favorable to the County, which we must do in our summary judgment
review, the majority does its own weighing of the evidence and
34
rejects it as unbelievable.5 A jury, rather than the majority,
should be allowed to decide which evidence to believe.
Finally, the majority fails to consistently apply what it
deems to be the parties’ so-called pre-litigation course of
performance. In the worksheets, which the majority views as
sacrosanct for all other purposes, the County included depreciation
in NOME. To be consistent, the majority would necessarily have to
conclude that this too was part of the parties’ course of
performance. Nevertheless, the majority insists that depreciation
cannot be included in this calculation because the express terms of
the contract prohibit the County from doing so. This conclusion by
the majority is internally inconsistent with its view of the
parties so-called course of performance, and it is also an
incorrect ruling based on the evidence in the record.6
5
The majority finds “it difficult to believe that any reasonable
jury would” believe the County’s denial that the worksheets were
used to set ADM’s rate. The majority’s prediction on what a jury
might do with this evidence might be correct, but that question is
for the jury to decide.
6
At the very least, there is a question of fact whether
depreciation can be included in NOME. The express terms of the
contract allow the County to include capital maintenance and
operation expenses in NOME. The County’s expert opined that
depreciation can be an appropriate way to estimate capital
maintenance and operation expenses. We must credit this testimony
in our review of a grant of summary judgment.
35