North Star Steel Co. v. United States

Error: Bad annotation destination
United States Court of Appeals for the Federal Circuit

2006-5054, -5057

NORTH STAR STEEL CO.,

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant-Appellant.

Philip L. Chabot, Jr., McCarthy, Sweeney & Harkaway, P.C., of Washington, DC,
argued for plaintiff-cross appellant.

J. Reid Prouty, Attorney, Commercial Litigation Branch, Civil Division, United
States Department of Justice, of Washington, DC, argued for defendant-appellant. With
him on the brief were Peter D. Keisler, Assistant Attorney General; David M. Cohen,
Director; and Donald E. Kinner, Assistant Director.

Appealed from: United States Court of Federal Claims

Judge Susan G. Braden
 United States Court of Appeals for the Federal Circuit

2006-5054, -5057

NORTH STAR STEEL CO.,

Plaintiff-Cross Appellant,

v.

UNITED STATES,

Defendant-Appellant.

__________________________

DECIDED: February 13, 2007
__________________________

Before SCHALL, LINN, and DYK, Circuit Judges.

SCHALL, Circuit Judge.

The United States appeals the final decision of the United States Court of

Federal Claims awarding North Star Steel Co. (“North Star”) damages in the amount of

$1,521,626 for the government’s breach of a contract between Arizona Electric Power

Cooperative Inc. (“AEPCO”) and the Department of Energy’s Western Area Power

Administration (“WAPA”), North Star being an acknowledged third party beneficiary of

the contract. N. Star Steel Co. v. United States, 68 Fed. Cl. 672 (2005). For its part,

North Star cross-appeals, arguing that the Court of Federal Claims erred in computing

the damages to which it was entitled. Because the court did not apply the proper legal

standard for breach of contract, and because the court’s findings of fact, which were

made following a trial, do not support its holdings that WAPA breached its contract with
North Star and that North Star entered into an amendment to the contract under duress,

the judgment in favor of North Star is reversed.1 The case is remanded to the Court of

Federal Claims, which is instructed to enter judgment in favor of the United States and

to dismiss North Star’s Second Amended Complaint. In view of our decision, it is not

necessary for us to reach North Star’s cross-appeal.

BACKGROUND

I.

The pertinent facts are not in dispute. WAPA is one of four power marketing

administrations within the U.S. Department of Energy. As such, it markets and delivers

cost-based hydroelectric power and related services within a 15-state region of the

central and western United States. WAPA markets and transmits electricity from multi-

use water projects. WAPA’s transmission system carries electricity from 57 power

plants operated by the Department of the Interior’s Bureau of Reclamation, the U.S.

Army Corps of Engineers, and the International Boundary and Water Commission. By

statute, the rates WAPA charges in selling power must be at least sufficient to recover

the costs associated with its operations, maintenance, and the federal construction

investment. 43 U.S.C. § 485h(c). WAPA is in the business of moving power, as well as

marketing it, and accordingly maintains an electrical transmission system and power

“control areas.” A power control area is a bounded subsystem within the larger national

power grid within which electrical power levels are maintained at a level equaling their

1
As noted, North Star was a third party beneficiary of the contract between
AEPCO and WAPA. Under these circumstances, and in the interest of clarity, unless
the context requires otherwise, we refer to North Star as the party contracting and
dealing with WAPA.

2006-5054, -5057 2
demand. If power changes within a control area as a result of a change in demand, the

power supply must be increased or decreased to match the level of demand. This

adjustment of power supply to meet changing demand is known as “regulation.” N. Star

Steel, 68 Fed. Cl. at 679 n.5. The Federal Energy Regulatory Commission (“FERC”)

has exclusive jurisdiction to “confirm, approve, and place in effect on a final basis,” and

“to remand[] or to disapprove,” WAPA’s power rates. See Delegation Order for

Approval of Power Marketing Administration Power and Transmission Rates, 48 Fed.

Reg. 55,664, 55,664-65 (Dec. 14, 1983).

At the relevant time, North Star was a manufacturer of steel products. In the

early 1990s, it built a recycling mill near Kingman, Arizona that manufactured steel rod

and bar. North Star Steel, 68 Fed. Cl. at 679-80. This facility, which was located within

one of WAPA’s control areas, used two electric arc furnaces in the manufacturing

process. These furnaces required large amounts of electricity to recycle scrap steel into

new steel products. Id. at 680. At the time, WAPA was not authorized to sell firm

power2 to North Star because WAPA previously had committed all such power to

statutory preference customers in the relevant power control area. These preference

customers were municipalities and public corporations and agencies, as well as

cooperatives and other nonprofit organizations financed in whole or in part by loans

made pursuant to the Rural Electrification Act of 1936. Id. Consequently, North Star

entered into agreement with AEPCO and Mohave Electric Cooperative, Inc. (“Mohave

2
“Firm power” is electric energy which is intended to have assured
availability to the customer to meet all or any agreed portion of his load requirements.
N. Star Steel, 68 Fed. Cl. at 677 n.2. It is power which is guaranteed by the supplier to
be available at all times. Id.

2006-5054, -5057 3
Electric”) to provide appropriate amounts of non-firm power, required to serve the North

Star load at the Kingman mill.3 Id. at 680-81. AEPCO is a generation and transmission

cooperative organized under the Department of Agriculture’s Rural Utility Service

Administration. It is engaged in the generation of electric power and energy primarily in

the State of Arizona. Mohave Electric is an Arizona generation and transmission

cooperative eligible to purchase power and other services from WAPA.

WAPA owned the only transmission lines in the geographic area of Kingman with

sufficient voltage to satisfy North Star’s electric power requirements. Id. at 680.

Therefore, AEPCO sought to obtain non-firm transmission services for the North Star

load over WAPA’s transmission lines. WAPA was willing to furnish this service to the

extent capacity was available in its lines. In due course, AEPCO, Mohave Electric, and

North Star entered into several contracts. In brief, the contracts provided that North

Star would gain access to power lines with sufficient capacity to service its steel mill

through Mohave Electric; Mohave Electric in turn would obtain power services from

AEPCO; and AEPCO, working as an agent for North Star, would use WAPA

transmission lines to obtain the actual power used to operate the steel mill from outside

of WAPA’s control area. Id. at 680-81. This suit involves only one of the several

contracts, the Consolidated Arrangements Contract (“CAC”).

3
“Non-firm power” is power that may be interrupted for any reason at any
time. N. Star Steel, 68 Fed. Cl. at 677 n.2. A “load” is an end-use device or customer
that receives power from a power transmission system. Id. at 682 n.9.

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 The CAC was entered into on August 17, 1994, between WAPA and AEPCO for

the benefit of North Star. Id. at 681. Under the CAC, WAPA agreed to provide both

non-firm transmission service, CAC § 6 (entitled “Non-Firm Transmission Service to be

Provided to AEPCO by [WAPA]”), and regulating services, CAC § 14 (entitled “Control

Area and Regulating Services”), for North Star’s load. For North Star’s benefit, AEPCO

agreed to pay for the transmission services in accordance with the standard FERC-

approved rate schedule. CAC § 7 (entitled “Charges for Non-Firm Services”).

WAPA, however, had technical concerns about being able to provide regulating

services to meet North Star’s load requirements.4 For this reason, WAPA negotiated for

a provision in the CAC that the regulating services to be provided to North Star would

be made and paid for pursuant to an ad hoc methodology utilizing an in-kind energy

payment, which would be in addition to the FERC-approved transmission rate schedule.

N. Star Steel, 68 Fed. Cl. at 682-83. The methodology provided that North Star,

through AEPCO, would provide energy to WAPA in the amount of twenty percent of the

metered load from North Star:

4
The Kingman mill used powerful pulses of electricity to melt scrap metal in
order to produce steel products. WAPA was concerned about the large fluctuations of
the load resulting from the cyclical process of the arc furnaces melting scrap metal, then
not melting, then melting again. N. Star Steel, 68 Fed. Cl. at 682. The Court of Federal
Claims noted that the load variation for a typical WAPA wholesale customer was in the
range of 6 MW, while North Star’s load variation was in the range of 85 MW. Id. WAPA
also was concerned about the arc that was striking during the melt cycle of the
furnaces, appearing to the WAPA control system to be a near short circuit in the
system. Id. Finally, WAPA’s facilities used hydrounits to regulate the North Star load.
Id. Because the hydrounits would respond to fluctuations in the load, and because
hydrounits have a very fast response time compared to traditional thermal units, WAPA
was concerned that the variability inherent in the arc furnace process would create
exceptional wear and tear on the hydrounits. Id.

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 [WAPA] shall receive In-Kind Energy from AEPCO for service rendered in
connection with the North Star Load in the amount of Non-Firm Energy
equal to twenty percent (20%) of the actual metered Non-Firm Energy to
serve the Harris Substation hourly metered load measured in
megawatthours (MWh). The In-Kind Energy payment can be received by
[WAPA] from (i) the Non-Firm Energy in excess of the hourly integrated
North Star Load in MWh, (ii) the Return Energy scheduled by [WAPA] to
support the North Star Load when [WAPA] elects, on an hourly basis, to
make Return Energy available, or (iii) subsequent Non-Firm Energy
schedules from AEPCO, if required.

CAC § 14.3. The CAC further provided that the parties would revisit this part of the

charge for regulation services at a later time:

Prior to the conclusion of the first year of normal operations of the North
Star Plant, the parties shall jointly establish an appropriate cost-based
methodology to review, evaluate, and periodically, if necessary, adjust the
percentage associated with the In-Kind Energy payment. After one (1)
year of normal operations, the percentage may be adjusted in accordance
with said methodology.

CAC § 21.

II.

North Star’s steel mill began commercially operating on July 1, 1997. N. Star

Steel, 68 Fed. Cl. at 683. From October 23, 1997, to September 15, 1999, WAPA,

AEPCO, and North Star engaged in negotiations under section 21 of the CAC to arrive

at “an appropriate cost-based methodology” for the in-kind energy payment. No

agreement was reached, however. Id. at 683-89. During the negotiations, WAPA

presented several proposed methodologies to calculate charges associated with

regulating services. WAPA’s first proposal attempted to capture “replacement costs,”

i.e. unit specific costs that could be directly associated with regulating the North Star

load. Id. at 684. Subsequently, WAPA attempted to obtain replacement costs from the

2006-5054, -5057 6
Bureau of Reclamation.5 Id. WAPA discovered that the Bureau of Reclamation did not

keep data in a manner that reflected replacement costs. Id. WAPA next determined

that an approach based upon the incremental costs associated with possible

fluctuations in North Star’s load and any resulting stress that the fluctuations imposed

on WAPA’s equipment and system was not feasible. WAPA then sought to create a

methodology that relied on a proxy for replacement costs based upon the costs of an

alternative service provider. Id. Between January 13, 1998, and June 2, 1998, WAPA

provided several proposed methodologies to AEPCO and North Star. Id. at 684-85.

On June 2, 1998, just prior to the conclusion of the first year of operations at the

Kingman mill, WAPA informed North Star that if there was no agreement on a revised

methodology by July 1, 1998, the in-kind energy payment of twenty percent would

remain in effect. Id. at 685. On June 5, 1998, North Star advised WAPA that it believed

that the proposed methodology included charges which were not within the purview of

section 21 of the CAC and that WAPA’s calculation of the cost of the regulation services

was “grossly excessive.” Id.

In spite of their inability to reach agreement within the first year of normal

operations, WAPA, North Star, and AEPCO continued to negotiate with respect to a

new methodology. Id. at 685-89. On June 3, 1999, a meeting took place to discuss

WAPA’s proposal to add Amendment No. 3 to the CAC. Id. at 688. Amendment No. 3

5
The power plants containing the hydroelectric units producing the power
necessary to regulate the North Star load were operated by the Bureau of Reclamation,
the U.S. Army Corps of Engineers, and the International Boundary and Water
Commission. WAPA and its energy-producing partners are separately managed and
financed. WAPA Home Page, http://www.wapa.gov/ (follow “About Western” hyperlink).
In addition, each water project maintains a separate financial system and records. Id.

2006-5054, -5057 7
replaced subsection 14.3 of the original CAC with a new subsection 14.3 which stated

as follows: “The percentage of the actual metered Non-Firm Energy shall be

determined in accordance with the methodology in effect and as provided and set forth

in Exhibit H.”6 Amendment No. 3 § 4 (entitled “Modification of Section 14 of the Original

Contract (Control Area and Regulating Services)). Exhibit H set forth a new

methodology for calculating the in-kind energy payment. Amendment No. 3 Exhibit H

(entitled “Regulating Service Arrangements for North Star Steel Plant”). On July 29,

1999, North Star authorized AEPCO to accept Amendment No. 3 and to amend the

CAC under protest. N. Star Steel, 68 Fed. Cl. at 688-89. North Star’s counsel sent

AEPCO a letter on that date stating “North Star’s view that none of the proposals put

forth by [WAPA] are truly cost-based and that all are unreasonable. The current charge

is so excessive, however, that even an unreasonable lesser charge is preferable to the

continuation of the charge at the existing level.” Id. at 689 (alteration in original). On

September 15, 1999, WAPA and AEPCO, on North Star’s behalf, signed Amendment

No. 3, effective retroactively to August 1, 1999. Id. Amendment No. 3 did not provide

6
The full revised subsection 14.3 stated:

[WAPA] shall receive In-Kind Energy from AEPCO for services rendered
in connection with the North Star Load in the amount of Non-Firm Energy
equal to a percentage of the actual metered Non-Firm Energy used to
serve the Harris Substation hourly metered load measured in
megawatthours (MWh). The percentage of the actual metered Non-Firm
Energy shall be determined in accordance with the methodology in effect
and as provided and set forth in Exhibit H. The In-Kind Energy payment
can be received by [WAPA] from (i) the Non-Firm Energy in excess of the
hourly integrated North Star Load in MWh, (ii) the Return Energy
scheduled by [WAPA] to support the North Star Load when [WAPA]
elects, on an hourly basis, to make Return Energy available, or (iii)
subsequent Non-Firm Energy schedules from AEPCO, if required.

2006-5054, -5057 8
for a retroactive “true-up” of all amounts already paid, a provision which North Star had

sought.7 Id.

III.

On April 27, 2000, North Star filed suit in the Court of Federal Claims, alleging

that WAPA had breached the CAC. In its suit, North Star sought, among other things,

monetary damages in the form of a refund for what it asserted were overcharges by

WAPA arising out of the methodologies WAPA used to determine in-kind payments.

Subsequently, North Star filed a First Amended Complaint, in which it sought a

declaration that the amount it was required to pay for WAPA control area and regulating

services from the date of initial operation on July 1, 1997, to March 2003 violated the

CAC, violated various federal statutes, and was arbitrary, capricious, and an abuse of

discretion and not otherwise in accordance with law. The Court of Federal Claims

granted the government’s motion for summary judgment on the claims in the First

Amended Complaint, agreeing that neither the CAC nor the cited federal statutes

required that WAPA charge only “actual costs” for regulating services under the CAC.

See N. Star Steel Co. v. United States, 58 Fed. Cl. 720, 735-38 (2003). The court,

however, granted North Star leave to file a Second Amended Complaint to state

precisely the nature of its breach of contract claim. In its Second Amended Complaint,

North Star alleged that the CAC required a cost-based methodology for calculating the

in-kind energy payment and that the failure to come to agreement on a new rate

7
A “true-up” would have provided a retroactive adjustment of the amounts
paid by North Star for regulating services, refunding to North Star the difference
between what it paid and what it would have paid pursuant to the revised cost-based
methodology.

2006-5054, -5057 9
structure until more than two years after the timeframe set forth in the contract

constituted a breach of the CAC by WAPA. In addition, North Star appeared to allege

that it had signed Amendment No. 3 to the contract under duress.

In November of 2004, the Court of Federal Claims conducted a trial in which it

received documentary evidence and heard testimony from six North Star witnesses,

four government witnesses, and a court-appointed expert. Thereafter, the court issued

an opinion. The court held at the outset that it had jurisdiction over North Star’s suit

under 28 U.S.C. § 1491(a)(2) because the suit involved a claim arising under section

10(a)(1) of the Contract Disputes Act of 1978 (“CDA”). N. Star Steel, 68 Fed. Cl. at 696.

Turning to the merits, the court addressed first North Star’s breach of contract

claim. Framing the issue, the court stated that “the requirement of establishing a ‘cost-

based methodology’ provides a clear demarcation by which the court can determine

whether and when a breach occurred.” Id. at 698. “Accordingly,” the court continued,

“the [CAC] could be breached if a ‘cost-based methodology’ was not utilized by WAPA

or if one of the parties failed to negotiate in good faith.” Id. The court went on to hold

that WAPA had breached the CAC by failing to establish a cost-based methodology:

In light of the fact that WAPA did not produce or introduce WAPA cost
data to establish whether the regulating services provided to North Star, in
fact, were “cost-based” and expert testimony confirmed that WAPA did not
establish a rate for regulating services that was “cost-based” on July 1,
1998 or thereafter, the court has determined that there is substantial
evidence in the record in this case that WAPA, in fact, breached the
[CAC].

Id. at 721.

The Court of Federal Claims began its analysis of the duress issue by noting that

a finding of economic duress requires “that (1) the party alleging duress involuntarily

accepted another party’s terms, (2) the circumstances permitted no other alternative,

2006-5054, -5057 10
and (3) such circumstances were the result of another party’s coercive actions.” Id. at

722 (citing Rumsfeld v. Freedom NY, Inc., 329 F.3d 1320, 1329 (Fed. Cir. 2003)). With

the issue thus framed, the court determined that North Star had involuntarily accepted

Amendment No. 3, satisfying the first prong of the duress test. Id. The court also

determined that the second prong of the test was satisfied because the circumstances

permitted North Star no alternative other than to accept Amendment No. 3. Id.

Additionally, the court noted that WAPA owned and controlled the sole transmission line

to North Star, that no other regional utilities offered regulation services at the time that

met WAPA’s technical requirements, that North Star had $5 million in embedded costs

from building a switching station to connect to WAPA, and that North Star needed a

reliable source of power. Id. As far as the third prong of the duress test was

concerned, the court noted that “coercion requires a showing that the Government’s

action was wrongful, i.e., ‘(1) illegal, (2) a breach of an express provision of the contract

without a good-faith belief that the action was permissible under the contract, or (3) a

breach of the implied covenant of good faith and fair dealing.’” Id. (citing Freedom NY,

329 F.3d at 1330). The court found that the third prong of the duress test was satisfied

because its court-appointed expert provided substantial evidence that Amendment No.

3 was not “cost-based.” Id. Accordingly, the court held that “WAPA’s unilateral

imposition of Amendment No. 3 on North Star on September 15, 1999 was an act of

‘economic duress’ and a breach of the obligation to negotiate in good faith.” Id. at 723.

In establishing the proper amount of damages, the court determined that North

Star had paid WAPA the voluntarily negotiated first year rate set forth in the CAC and

that therefore no injury occurred until August 1, 1999, the effective date of Amendment

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No. 3. Id. The court awarded North Star damages in the amount of $1,521,626 for the

period thereafter. Id.

The government appeals the Court of Federal Claims’ decision that WAPA

breached the CAC and that Amendment No. 3 was signed by North Star under duress.

North Star in turn cross-appeals the Court of Federal Claims’ decision that North Star

was not entitled to a retroactive “true-up” of costs under the contract. It also argues in

connection with the damages issue that the Court of Federal Claims violated North

Star’s constitutional right to a fair trial by unlawfully shifting the burden of production

during trial. We have jurisdiction over the appeal and cross-appeal pursuant to 28

U.S.C. § 1295(a)(3).

DISCUSSION

I.

As a preliminary matter, we address the jurisdiction of the Court of Federal

Claims. As noted, the court ruled that it had jurisdiction under the CDA pursuant to 28

U.S.C. § 1491(a)(2). Both parties urge that this was incorrect because the CDA does

not apply to a contract, such as the CAC, involving the provision of services by the

government. Rather, as far as services are concerned, the CDA only applies when the

government is the acquiring party. The parties are correct. The CDA applies to

contracts entered into by an executive agency for: (1) the procurement of property,

other than real property in being; (2) the procurement of services; (3) the procurement

of construction, alteration, repair or maintenance of real property; or (4) the disposal of

personal property. 41 U.S.C. § 602(a); see also Fla. Power & Light Co. v. United

States, 307 F.3d 1364, 1371 (Fed. Cir. 2002). The CDA does not apply to the CAC

2006-5054, -5057 12
because it was a contract for the provision of services by the government.

Nevertheless, jurisdiction properly lay in the Court of Federal Claims under the Tucker

Act, 28 U.S.C.A. § 1491(a)(1), which provides:

The United States Court of Federal Claims shall have jurisdiction to render
judgment upon any claim against the United States founded either upon
the Constitution, or any Act of Congress or any regulation of an executive
department, or upon any express or implied contract with the United
States, or for liquidated or unliquidated damages in cases not sounding in
tort.

Because North Star’s claim arose out of the CAC, an express contract with the United

States, the exercise of jurisdiction by the Court of Federal Claims was proper under the

Tucker Act.

II.

Turning to the merits, as noted, the government appeals both the ruling that

WAPA breached the CAC and the ruling that North Star agreed to Amendment No. 3 to

the contract under duress, while North Star cross-appeals the Court of Federal Claims’

damages determination. In reviewing a decision of the Court of Federal Claims, this

court reviews conclusions of law, such as contract interpretation, de novo. Trauma

Serv. Group v. United States, 104 F.3d 1321, 1325 (Fed. Cir. 1997). Findings of fact

made by the Court of Federal Claims following a trial are reviewed under the “clearly

erroneous” standard. City of El Centro v. United States, 922 F.2d 816, 819 (Fed. Cir.

1990). We address the breach issue first.

III.

The government argues that the Court of Federal Claims erred by finding a

breach of contract based solely on WAPA’s failure to use a cost-based methodology.

According to the government, in order to prove that WAPA breached the CAC, North

2006-5054, -5057 13
Star was required to prove that WAPA negotiated in bad faith. The government

contends that the facts found by the Court of Federal Claims, which the government

does not challenge, do not support a determination of bad faith and therefore do not

establish breach of the CAC. North Star responds that WAPA violated the requirement

of section 21 of the CAC by developing a non-cost-based methodology and that the

evidence is sufficient to support a conclusion that WAPA did not act in good faith in

developing its methodology.

We agree with the government. Section 21 of the CAC provided that North Star

and WAPA would “jointly establish an appropriate cost-based methodology.” This court

has recognized that a provision which calls upon the parties to a contract to agree in the

future on a specified point or contract term, often referred to as an “agreement to

agree,” imposes an obligation on the parties to negotiate in good faith. See Aviation

Contractor Employees, Inc. v. United States, 945 F.2d 1568, 1572 (Fed. Cir. 1991); see

also Gardiner, Kamya & Assocs. v. United States, 369 F.3d 1318, 1322 (Fed. Cir.

2004); City of Tacoma v. United States, 31 F.3d 1130, 1132 (Fed. Cir. 1994).

Therefore, the correct standard for determining whether WAPA or North Star breached

section 21 of the CAC was whether either party failed to negotiate in good faith with

respect to an appropriate cost-based methodology.

It does not appear that the Court of Federal Claims employed this standard. As

noted above, the court stated that the CAC would be breached if one of the parties

failed to negotiate in good faith or “if a ‘cost-based methodology’ was not utilized by

WAPA.” N. Star Steel, 68 Fed. Cl. at 721. The court correctly stated that a breach of

contract would occur if one of the parties to the CAC failed to negotiate in good faith.

2006-5054, -5057 14
However, it erred in positing in the alternative, without qualification, that WAPA would

breach the contract if it failed to utilize a cost-based methodology. Failure on the part of

WAPA to utilize a cost-based methodology would not, standing alone, amount to a

breach of contract. Such failure would represent a breach of contract only if it was the

result of WAPA’s failure to negotiate in good faith. An example of conduct that would

constitute a failure to negotiate in good faith would be WAPA’s non-disclosure during

negotiations of information in its possession, or to which it had access, that was

pertinent to the formulation of a cost-based methodology. The point is that the failure to

utilize a cost-based methodology, without more, could not constitute a breach of

contract on WAPA’s part. The reason is that section 21 of the CAC obligated WAPA to

negotiate in good faith for a cost-based methodology. It did not obligate WAPA to

employ a cost-based methodology if development of such a methodology did not prove

feasible.

Moreover, the Court of Federal Claims’ findings of fact do not support a

determination of breach under the correct standard because there was no finding of bad

faith on the part of WAPA. In concluding that WAPA had breached the contract, the

court relied first on its finding that during negotiations and discovery, and at trial, WAPA

claimed that the Bureau of Reclamation did not have data that would enable the

government to determine whether the compensation WAPA received for its sale of

regulating services to North Star was sufficient to cover the portion of its annual

operation and maintenance costs associated with regulation of the North Star load. N.

Star Steel, 68 Fed. Cl. at 699. While the court expressed skepticism about WAPA’s

inability to document costs, see id. at 699-700, it did not make a finding that cost data

2006-5054, -5057 15
did in fact exist or that WAPA intentionally withheld any cost data, see id. at 701 (“Since

it would not have been cost-effective for the court to have ordered an independent audit

of the Bureau of Reclamation and/or WAPA’s accounting records to ascertain whether

cost data existed, the court suggested, and the parties agreed, to appoint an

independent expert . . . .”). Nor has North Star called our attention to any evidence that

would support a finding of bad faith. The second finding upon which the court relied for

its breach determination was that substantial expert testimony confirmed that WAPA did

not establish a cost-based methodology with AEPCO/North Star. Id. at 701-21.

However, for the reasons discussed in the preceding paragraph, a finding that WAPA

did not establish a cost-based methodology, absent a finding of bad faith, is insufficient

as a matter of law to establish a breach of the CAC by WAPA.

IV.

Turning to the issue of duress, the government recognizes that North Star agreed

to Amendment No. 3 under protest, thereby apparently involuntarily accepting WAPA’s

terms. The government argues, however, that the Court of Federal Claims erred in

finding that North Star had no alternative other than to sign Amendment No. 3 because

North Star could have refused to sign Amendment No. 3, could have continued to

receive power transmission services from WAPA at the negotiated twenty percent rate,

and could have left intact WAPA’s contractual obligation to negotiate a mutually

acceptable cost-based methodology. The government also takes issue with the Court

of Federal Claims’ ruling that because Amendment No. 3 was not cost-based, WAPA

breached its duty to negotiate in good faith, and therefore acted coercively towards

North Star. The government reiterates that the facts found by the Court of Federal

2006-5054, -5057 16
Claims do not support a determination of bad faith. North Star counters that the Court

of Federal Claims’ ruling that North Star had no alternative but to agree to Amendment

No. 3 was proper because WAPA controlled not only the sole transmission system

available to transmit energy to North Star, but also the data necessary to develop a cost

based methodology. North Star argues that signing Amendment No. 3 was the only

way to obtain any reduction in the twenty percent surcharge in effect. Therefore, it

urges, it signed under duress.

Again, we agree with the government. To render a contract unenforceable for

duress, a party must establish (1) that it involuntarily accepted the other party’s terms,

(2) that circumstances permitted no other alternative, and (3) that such circumstances

were the result of the other party’s coercive acts. Freedom NY, 329 F.3d at 1329. As

seen above, the Court of Federal Claims stated the correct three prong test for duress.

However, while it is undisputed that AEPCO signed Amendment No. 3 under protest,

which satisfies the first prong of the duress test, the court’s findings of fact do not

support a determination of duress. The reason is that the third prong of the test—that

the circumstances which North Star faced were the result of WAPA’s coercive acts—

was not met.8

The third prong is not met because there was no wrongful action by the

government. For the third prong of economic duress to have been met in this case, the

circumstances which North Star confronted must have resulted from WAPA’s coercive

8
Because we conclude that the third prong of the duress test was not met,
it is not necessary for us to address the government’s argument that the Court of
Federal Claims erred in holding that the second prong was met. We thus express no
view on that question.

2006-5054, -5057 17
acts. As the Court of Federal Claims itself stated, “coercion requires a showing that the

Government’s action was wrongful, i.e., ‘(1) illegal, (2) a breach of an express provision

of the contract without a good-faith belief that the action was permissible under the

contract, or (3) a breach of the implied covenant of good faith and fair dealing.’” N. Star

Steel, 69 Fed. Cl. at 721 (citing Freedom NY, 329 F.3d at 1330). There is no evidence

that WAPA acted illegally. At the same time, we have held in Part III above that the

Court of Federal Claims erred in holding that WAPA breached the contract by failing to

utilize a cost-based methodology. We also have held, as a matter of law, that there

could be no breach of contract because there was no finding that WAPA failed to

negotiate in good faith with respect to the development of a cost-based methodology

and no showing of evidence to support a finding of bad faith. Under these

circumstances, the situation in which North Star found itself could not, as a matter of

law, be said to have been the product of coercive conduct on the part of WAPA, which

is what is required by prong three of the duress test. For these reasons, the Court of

Federal Claims erred in holding that Amendment No. 3 to the CAC was signed under

duress.

CONCLUSION

Because the Court of Federal Claims’ findings of fact do not, as a matter of law,

support the court’s holding’s (i) that WAPA breached the contract of which North Star

was a third party beneficiary, and (ii) that North Star agreed to Amendment No. 3 to the

CAC under duress, the judgment in favor of North Star is reversed. The case is

remanded to the Court of Federal Claims, which is instructed to enter judgment in favor

2006-5054, -5057 18
of the United States and dismiss North Star’s Second Amended Complaint. In view of

our decision, it is not necessary for us to reach North Star’s cross-appeal.

REVERSED and REMANDED

2006-5054, -5057 19