March 29, 1993 UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 92-1978
ATLANTIC TRACK & TURNOUT COMPANY,
Plaintiff, Appellant,
v.
PERINI CORPORATION,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]
Before
Torruella, Circuit Judge,
Coffin, Senior Circuit Judge,
and Boudin, Circuit Judge.
David J. Hopwood, with whom Heafitz & Hopwood, was on brief
for appellant.
Charles E. Schaub, Jr., with whom Christopher J. Petrini,
and Hinckley, Allen & Snyder, were on brief for appellee.
March 29, 1993
TORRUELLA, Circuit Judge. Appellant Atlantic Track &
Turnout Company ("Atlantic") brought this breach of contract
action pursuant to the Uniform Commercial Code ("Code"), Mass.
Gen. L. ch. 106, 2-101, et seq. (1992). Atlantic alleged that
appellee Perini Corporation ("Perini") failed to perform under a
contract for the purchase and sale of railroad materials.
The court deferred decision on cross motions for
summary judgment and ordered a trial limited to two issues: (1)
whether the contract was ambiguous; and (2) whether trade usage
would supplement the contract terms to enable Atlantic to
maintain its action. After Atlantic's proffer, the court entered
a judgment on partial findings pursuant to Fed. R. Civ. P.
52(c)1 in favor of Perini. We affirm that judgment.
BACKGROUND
On October 21, 1987, the Massachusetts Bay
Transportation Authority ("MBTA") awarded Perini the Eastern
Route Track Rehabilitation Project. The project required Perini
to rehabilitate a thirteen mile section of double track. The
rehabilitation included undercutting the track to replace the
ballast, the track's stone foundation, and disposing of any
1 Rule 52(c) provides in relevant part:
If during a trial without a jury a party
has been fully heard with respect to an
issue and the court finds against the
party on that issue, the court may enter
judgment as a matter of law against that
party on any claim . . . that cannot
under controlling law be maintained or
defeated without a favorable finding on
that issue . . . .
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contaminated ballast materials.
In the spring of 1988, a sub-contractor tested the
ballast under the track and determined that it was all
contaminated. Perini received the test results on June 21, 1988
and discussed them with the MBTA on July 17, 1988.
In early June, 1988, Perini solicited an offer from
Atlantic to buy certain salvage from the project. Between June
28 and 30, 1988, Atlantic issued five purchase orders for "all
available" materials. The orders also furnished an estimate of
the amount of salvage that would become available.
On August 18, 1988, the MBTA directed Perini to suspend
undercutting operations until further notice. On September 13,
1988, the MBTA permanently halted all undercutting due to fiscal
constraints. As the elimination of the undercutting reduced the
value of the contract by 52%, Perini stopped all work. By
October 26, Perini had no physical presence on the project site.
On October 31, 1988, Perini proposed an equitable
adjustment of the MBTA contract. The proposal entailed an
increase in payment for completion of the remaining work under
the contract. The MBTA rejected Perini's proposal. Perini and
the MBTA thus agreed to terminate the contract.
Atlantic knew by August 22, 1988 that all undercutting
was suspended and later asked Perini when the remainder of the
materials would be available. Perini replied that the MBTA might
terminate the project and that Perini had already shipped "all
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available" salvage in accordance with the purchase orders.2
Atlantic sued Perini, claiming that the amount of materials
shipped was well below the stated estimates.
LEGAL ANALYSIS
Two reasonable interpretations of the contract's plain
language exist. On one hand, "all available" implies that Perini
satisfied its obligation under the contract by supplying the
salvage material that became available; if no material became
available to Perini, Perini faced no liability under the
contract.3 On the other hand, the estimates offered in the
purchase orders suggest that Perini had to deliver a quantity
nearing those estimates.
To convince the court that the latter interpretation
represented the true agreement, Atlantic had to overcome two
hurdles. First, as the plaintiff, Atlantic had the burden of
proving its interpretation by a preponderance of the evidence.
Second, any ambiguity in the contract should normally be
interpreted against Atlantic, the drafter of the purchase orders.
LFC Lessors, Inc. v. Pacific Sewer Maintenance, 739 F.2d 4, 7
(1st Cir. 1984).
Atlantic offered two theories beyond the plain language
of the contract supporting its interpretation of the terms.
Specifically, Atlantic argued that: (1) trade usage of the term
2 At this point, Perini had delivered approximately 15% of the
materials estimated.
3 Of course, the Code requires that Perini attempt to attain the
materials in good faith. Mass. Gen. L. ch. 106, 2-306.
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"all available" required Perini to deliver close to the estimated
quantity of materials, and (2) 2-306 of the Code expressly
required Perini to provide a quantity approximating its stated
estimate. In addition, Atlantic argued that Perini acted in bad
faith. Atlantic revives these theories in this appeal, and we
address them in turn.
I. Trade Usage
The district court ruled that Atlantic's trade usage
proffer failed to prove by a preponderance of the evidence that
the contract terms embodied Atlantic's proposed meaning. As this
conclusion constitutes a factual finding, Mass. Gen. L. ch. 106,
1-205(2), we review it only for clear error, Athas v. United
States, 904 F.2d 79, 80 (1st Cir. 1990).
Trade usage will supplement the terms of a contract
only when the parties know or should know of that usage. Mass.
Gen. L. ch. 106, 1-205(3). In the present case, Atlantic
provided no evidence that Perini knew or should have known of
Atlantic's interpretation of the term "all available." There was
no evidence that Perini engaged in the same trade as Atlantic.
Indeed, one Atlantic witness testified that Perini was not a
competitor of Atlantic's. Transcript, Non-Jury Trial Proceedings
- Day 1, at 106. Therefore, we cannot assume knowledge of
Atlantic's trade practices. Furthermore, another Atlantic
witness testified that he discussed the terms of the contract
with a Perini representative, but never explained the alleged
trade usage of "all available." Id. at 70. Given the lack of
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evidence, we cannot find that the district court clearly erred in
finding that the proposed trade usage of the term did not
supplement the contract terms.
II. Section 2-306
Both parties agree that the disputed contract
constitutes an output contract governed by 2-306 of the Code.
Section 2-306 of the Code provides in relevant part:
(1) A term which measures the quantity by
the output of the seller . . . means such
actual output . . . as may occur in good
faith, except that no quantity
unreasonably disproportionate to any
stated estimate . . . may be tendered or
demanded.
In the present case, the contract provided an estimate
of the expected output, and Perini tendered only 15% of that
quantity. Thus, Atlantic argues that according to 2-306,
Perini violated the contract.
While many courts and commentators have discussed the
meaning of the "unreasonably disproportionate" clause of 2-306
as applied to requirements contracts, little, if anything, has
been written on the clause's application to output contracts. We
review the former analysis, however, because it provides valuable
instruction due to the similarity between these two types of
contracts.
With respect to requirements contracts, courts differ
on the meaning of the "unreasonably disproportionate" clause.
Some courts find that "even where one party acts with complete
good faith, the section limits the other party's risk in
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accordance with the reasonable expectations of the parties."
Orange Rockland v. Amerada Hess, 397 N.Y.S.2d 814, 819 (1977).
Most courts and commentators, however, treat cases in which the
buyer demands more than the stated estimate differently than
cases in which the buyer demands less. See, e.g., Empire Gas
Corp. v. American Bakeries Co., 840 F.2d 1333, 1337-38 (7th Cir.
1988); Angelica Uniform Group, Inc. v. Ponderosa Systems, Inc.,
636 F.2d 232, 232 (8th Cir. 1980) (per curiam); R.A. Weaver and
Associates, Inc. v. Asphalt Construction, Inc., 587 F.2d 1315,
1322 (D.C. Cir. 1978). The courts that employ separate analyses
hold that while 2-306 precludes buyers from demanding a
quantity of goods that is unreasonably disproportionate to a
stated estimate, it permits "good faith reductions that are
highly disproportionate." R.A. Weaver and Associates, Inc., 587
F.2d at 1315 (emphasis added).4
The Seventh Circuit explained the argument well, Empire
Gas Corp., 840 F.2d at 1338-40, and we adopt its reasoning.
Essentially, the argument is the following. The "unreasonably
disproportionate" clause is somewhat redundant in light of the
good faith requirement in that section. The clause therefore was
4 The comments to the Code shed little light on the issue as
they, too, are ambiguous. Empire Gas Corp. v. American Bakeries
Co., 840 F.2d at 1338. Comment 3 to 2-306, for example,
provides that an "agreed estimate is to be regarded as a center
around which the parties intend the variation to occur,"
suggesting that the two situations should be treated similarly.
Comment 2 to 2-306, on the other hand supports the view that
the two situations should receive different treatment as it
provides that "good faith variations from prior requirements are
permitted even when the variation may be such as to result in
discontinuance."
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likely provided to explain the good faith term. The good faith
requirement with respect to disproportionately increased demands
needed explanation as certain forms of exploitation in that
situation do not clearly constitute bad faith. For example, if
the market price of the subject goods rises above the contract
price, a buyer in a requirements contract might be tempted to
demand more goods than it truly needs in order to resell them for
the better market price. The clause eliminates that opportunity.
On the other hand, exploitation, beyond bad faith, is not a
concern if a buyer demands less than a stated estimate. The
seller has the opportunity to sell any excess of the subject
goods on the market.
Moreover, an obligation to buy approximately a stated
estimate of goods would pose a significant burden on buyers as it
would force them to make inefficient business judgments, when the
point of entering a requirements contract was to engage suppliers
without binding themselves to buy more goods than they need.
Essentially, a requirements contract represents a risk
allocation. "The seller assumes the risk of a change in the
buyer's business that makes continuation . . . costly, but the
buyer assumes the risk of a less urgent change in []
circumstances." Id. at 1340.
The same rationale supports different treatment of
cases such as the present one, in which the seller in an output
contract tenders less than a stated estimate, from cases in which
the seller tenders more. If a seller saw an opportunity to
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increase his profits by buying additional goods to resell as
output to the buyer, this exploitation might not conclusively
establish bad faith. The proviso would forbid such conduct. See
id. at 1338. On the other hand, an obligation to sell
approximately the stated estimate may force the seller to make
inefficient business decisions that the seller did not likely
intend when he bargained to keep the contract's quantity
provision open.
Like the risk allocation in the requirements contract,
the output contract allocates to the buyer the risk of a change
in the seller's business that makes continuation costly, while
the seller assumes the risk of a less urgent change in
circumstances. Indeed, pre-Code Massachusetts courts held that
output contracts necessarily contemplated that the level of
production would be governed by business judgment. See
Neofotistos v. Harvard Brewing Co., 171 N.E.2d 865, 868 (Mass.
1961). We see no reason for a change in that rationale.
Adopting this interpretation of 2-306, our next, and
only inquiry under this section, is whether Perini acted in good
faith.
III. Good faith
The district court determined that Perini acted in good
faith. This was a factual determination that we review only for
clear error. Athas, 904 F.2d at 80.
Atlantic offers two indications of bad faith by Perini.
First, Atlantic argues that Perini acted in bad faith by failing
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to notify Atlantic of the June 21 test results. However,
Atlantic offered no evidence that the additional contaminated
ballast signified to Perini that the contract would end. Indeed,
the record indicates that the additional contamination was good
news to Perini because the more contamination that existed, the
more money Perini stood to earn under the contract. The MBTA did
not notify Perini of its desire to end the contract until August
18 when it suspended the undercutting; Atlantic learned of the
suspension just four days later. Thus, the court did not clearly
err in finding that Perini acted in good faith with respect to
notification.
Second, Atlantic argues that Perini acted in bad faith
by failing to make a reasonable attempt to complete the MBTA
project when the MBTA eliminated the undercutting. Atlantic
contends that in its negotiations for an equitable adjustment of
the contract, Perini requested an unreasonable increase in the
contract price. Thus, Atlantic argues that Perini's attempt to
complete the project was in bad faith.
Based on the evidence presented, however, this argument
fails. For one thing, a contractor may seek an equitable
adjustment to the contract when a large quantity of work is
eliminated. See Peter Kiewit Sons' Co. v. United States, 109 Ct.
Cl. 517, 522-23 (1947). Atlantic failed to show that Perini did
not make reasonable attempts to negotiate an adjustment. That
the MBTA and Perini failed to reach an acceptable agreement does
not show that the attempted negotiations were in bad faith.
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Moreover, a party who ceases performance under an
output contract for independent business reasons acts in good
faith. Neofotistos, 171 N.E.2d at 868. Atlantic offered no
evidence that Perini did not agree to end the MBTA contract due
to a valid independent business reason. Indeed, Atlantic offered
no evidence of any reason why Perini agreed to end the contract.
Thus, the district court did not clearly err in its good faith
determination.
CONCLUSION
Based on the evidence presented, the district court
properly granted summary judgment in favor of Perini.
Affirmed.
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