In the United States Court of Federal Claims
No. 15-1034C
(E-Filed August 15, 2017)
)
DNC PARKS & RESORTS AT )
YOSEMITE, INC., )
)
Plaintiff, )
) Motion for Summary Judgment; RCFC 56;
v. ) Affirmative Defenses; Prior Material
) Breach Doctrine
THE UNITED STATES, )
)
Defendant, )
)
v. )
)
YOSEMITE HOSPITALITY, LLC, )
)
Third-Party Defendant. )
)
Thomas P. McLish, Washington, DC, for plaintiff.
John H. Roberson, Senior Trial Counsel, with whom were Benjamin C. Mizer, Principal
Deputy Assistant Attorney General, Robert E. Kirschman, Jr., Director, and L. Misha
Preheim, Assistant Director, Commercial Litigation Branch, Civil Division, United States
Department of Justice, Washington, DC, for defendant.
OPINION
CAMPBELL-SMITH, Judge
This case involves alleged breaches of a contract for concession services in
Yosemite National Park. See Pl.’s Mot., ECF No. 44 at 4. Plaintiff claims that the
government breached its obligation under the contract “by failing to require [plaintiff’s]
successor concessioner to purchase for fair value all property [plaintiff] used or held for
use in its operations at Yosemite, along with [plaintiff’s] ‘possessory interest’ in certain
capital improvements.” Id. In its answer, defendant asserted several affirmative
defenses, including its claim that plaintiff committed a prior material breach of the
contract which relieves defendant of any continued performance thereunder, including
the obligations plaintiff now alleges defendant was required to fulfill. See Def.’s Answer
to Am. Compl., ECF No. 14 at 27-36. Before the court is plaintiff’s motion for partial
summary judgment with regard to that prior material breach affirmative defense, filed
under Rule 56 of the Rules of the United States Court of Federal Claims (RCFC). See
ECF No. 44. Plaintiff’s motion is fully briefed. For the following reasons, plaintiff’s
motion is GRANTED.
I. Background
In September 1993, the parties entered into a contract whereby plaintiff would
provide concession services to a variety of facilities in Yosemite National Park. See Am.
Compl., ECF No. 13 at 2. The contract had an initial term of fifteen years, until
September 30, 2008. The contract was renewed several times, and ultimately expired on
February 29, 2016. See id. Since that time, the concessions have been operated by
Yosemite Hospitality, LLC, the third-party defendant in this case. See ECF No. 50 at 6.
The contract at issue here includes two sections that are the subject of the current
dispute—“SECTION 12. TERMINATION,” see ECF No. 44-2 at 23-24, and “SECTION
13. COMPENSATION,” see id. at 24-25. Those provisions state as follows, and are
quoted in full to ensure a complete understanding of the context of the specifically
relevant portions:
SECTION 12. TERMINATION
(a)(1) The Secretary may terminate this contract or the Concessioner’s rights
to operate hereunder in whole or in part for default at any time and may
terminate this contract in whole or part when necessary for the purpose of
enhancing or protecting area resources or visitor enjoyment or safety.
(a)(2) The operations authorized hereunder may be suspended in whole or
in part at the discretion of the Secretary when necessary to enhance or protect
area resources or visitor enjoyment or safety.
(a)(3) Termination or suspension shall be by written notice to the
Concessioner and, in the event of proposed termination for default, the
Secretary shall give the Concessioner a reasonable period of time to correct
stated deficiencies.
(a)(4) Termination for default shall be utilized in circumstances where the
Concessioner has breached any requirements of this contract, including
failure to maintain and operate the required accommodations, facilities and
services to the satisfaction of the Secretary in accordance with the Secretary’s
requirements hereunder.
(b) In the event of termination of this contract or the Concessioner’s right
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to operate hereunder necessary for the purpose of enhancing or protecting
area resources or visitor enjoyment or safety, or for default, the total
compensation to the Concessioner for such termination shall be as described
in Section 13, “Compensation”.
(c) In the event it is deemed necessary to suspend operations hereunder
in whole or in part to enhance or protect area resources or visitor enjoyment
or safety, the Secretary shall not be liable for any compensation to the
Concessioner for losses occasioned thereby, including but not limited to, lost
income, profit, wages, or other monies which may be claimed, except as may
be provided in Section 13 hereof.
(d) To avoid interruption of services to the public upon the expiration or
termination of this contract or the Concessioner’s rights to operate hereunder
for any reason, the Concessioner, if requested by the Secretary, will:
(1) continue to conduce the operations authorized hereunder, pursuant to
the terms hereof, for a reasonable time to allow the Secretary to select a
successor, or will
(2) consent to the use by a temporary operator, designated by the
Secretary, of the CONSSIONER IMPROEMENTS and personal property, if
any, not including current or intangible assets, used in the operations
authorized hereunder upon fair terms and conditions, provided that the
Concessioner shall be entitled to an annual fee for the use of such
improvements and personal property, prorated for the period of use, in the
amount of the annual depreciation on such improvements and personal
property, plus a return on the book value of such improvements and personal
property equal to the prime lending rate, effective on the date the temporary
operator assumes managerial and operational responsibilities, as published
by the Federal Reserve System Board of Governors or as agreed upon by the
parties involved. In this instance the method of depreciation used shall be
either straight line depreciation or depreciation shown of Federal Tax
Returns.
SECTION 13. COMPENSATION
(a) The compensation described herein shall constitute full and just
compensation to the Concessioner from the Secretary for all losses and
claims occasioned by the circumstances described below.
(b) EXPIRATION OR TERMINATION, OPERATIONS ARE
CONTINUED
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(b)(1) If for any reason, including contract expiration or termination as
described herein, the Concessioner shall cease to be required by the Secretary
to conduct the operations authorized hereunder, or substantial part thereof,
and, at the time of such event the Secretary intends for substantially the same
or similar operations to be continued by a successor, whether a private
person, corporation or an agency of the Government, the Concessioner will:
(i) sell and transfer to the successor designated by the Secretary its
POSSESSORY INTEREST in CONCESSIONER and GOVERNMENT
IMPROVEMENTS, if any, as defined under this contract, and all other
property of the Concessioner used or held for use in the connection with such
operations; and
(ii) the Secretary will require such successor, as a condition to the
granting of a contract to operate, to purchase from the Concessioner such
POSSESSORY INTEREST, if any, and such other property, and to pay the
Concessioner the fair value thereof.
(b)(2) The fair value of any POSSESSORY INTEREST in
CONCESSIONER IMPROVEMENTS or in GOVERNMENT
IMPROVEMENTS shall be the original cost less straight line depreciation
over the estimated useful life of the asset according to Generally Accepted
Accounting Principals [sic], provided, however, that in no event shall any
such useful life exceed 30 years. In the event that such POSSESSORY
INTEREST is acquired by a successor, the successor will not be permitted to
revalue such POSSESSORY INTEREST, or alter the method of depreciation
or useful life.
(b)(3) The fair value of merchandise and supplies shall be actual cost
including transportation.
(b)(4) The fair value of equipment, and, computer software and programs,
shall be book value.
(c) EXPIRATION OR TERMINATION, OPERATIONS ARE
DISCONTINUED
(c)(1) If for any reason, including contract expiration or termination as
described herein, the Concessioner shall cease to be required by the Secretary
to conduct the operations authorized hereunder, or substantial part thereof,
and the Secretary at the time chooses to discontinue such operations, or
substantial part thereof within the area, and/or to abandon, remove, or
demolish any of the CONCESSIONER IMPROVEMENTS, if any, then the
Secretary will take such action as may be necessary to assure the
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Concessioner of compensation for:
(i) its POSSESSORY INTEREST, if any, in the amounts as set forth in
Section 13(b)(2) hereof;
(ii) the cost to the Concessioner of restoring any assigned lands to a
natural condition, including removal and demolition, (less salvage) if
required by the Secretary; and
(iii) the cost of transporting to a reasonable market for sale such movable
property of the Concessioner as may be made useless by such determination.
(c)(2) Any such property that has not been removed by the Concessioner
within a reasonable time following such determination shall become the
property of the United States without compensation therefor.
(d) DEFAULT
Notwithstanding any other provision of this contract to the contrary, in the
event of termination of this contract for default for failure to maintain and
operate the required accommodations, facilities, and services to the
satisfaction of the Secretary in accordance with the Secretary’s requirements
hereunder, compensation for the Concessioner’s POSSESSORY INTEREST
in CONCESSIONER IMPROVEMENTS and in GOVERNMENT
IMPROVEMENTS, if any, shall be as set forth in Section 13(b)(2) hereof.
ECF No. 44-2 at 23-25.
Plaintiff alleges that defendant breached its obligation to ensure that the third-
party defendant purchased the subject property at a fair price. See Am. Compl., ECF No.
13 at 22-23. In addition, plaintiff alleges that defendant’s failure to ensure the purchase
of certain property was a breach of the covenant of good faith and fair dealing, see id. at
23-24, as well as a violation of the terms of the prospectus that governed the solicitation
of the new concessions contract, see id. at 24-25.
In its answer to plaintiff’s amended complaint, defendant asserted three
affirmative defenses: (1) mootness of several claims, see ECF No. 14 at 23; (2) failure to
state a claim upon which relief can be granted, see id. at 24-26; and (3) prior material
breach of the covenant of good faith and fair dealing, claiming that plaintiff provided, in
bad faith, an inflated value for the property it expected the third-party defendant to
purchase, see id. at 27-36. Plaintiff now seeks summary judgment on the last defense,
claiming that the terms of the contract prevent defendant from availing itself of the
common law defense of prior material breach. See ECF No. 44.
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II. Legal Standards
Summary judgment is appropriate when there is no genuine issue of material fact
and the moving party is entitled to judgment as a matter of law. RCFC 56(a); Celotex
Corp. v. Catrett, 477 U.S. 317, 322 (1986). A fact is material if it “might affect the
outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 248 (1986). An issue is genuine if it “may reasonably be resolved in favor of either
party.” Id. at 250. “[T]he mere existence of some alleged factual dispute between the
parties will not defeat an otherwise properly supported motion for summary judgment;
the requirement is that there be no genuine issue of material fact.” Id. at 247-48
(emphasis in original).
The moving party bears the initial burden of demonstrating the absence of any
genuine issue of material fact. Celotex Corp., 477 U.S. at 323. The burden then shifts to
the nonmoving party to show that a genuine issue of material fact does exist such that the
case should proceed to trial. Id. at 324.
The court must view the inferences to be drawn from the underlying facts in the
light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio
Corp., 475 U.S. 574, 587 (1986); Mingus Constructors, Inc. v. United States, 812 F.2d
1387, 1391 (Fed. Cir. 1987). The court, however, must not weigh the evidence or make
findings of fact. See Anderson, 477 U.S. at 249 (“[A]t the summary judgment stage the
judge’s function is not himself to weigh the evidence and determine the truth of the
matter but to determine whether there is a genuine issue for trial.”); Ford Motor Co. v.
United States, 157 F.3d 849, 854 (Fed. Cir. 1998) (“Due to the nature of the proceeding,
courts do not make findings of fact on summary judgment.”).
This case presents a question of contract interpretation, an issue properly resolved
as a matter of law. See Grumman Data Sys. Corp. v. Dalton, 88 F.3d 990, 997 (Fed. Cir.
1996). When interpreting a contract, the court looks first to the plain language. See
McAbee Constr., Inc. v. United States, 97 F.3d 1431, 1435 (Fed. Cir. 1996). “We give
the words of the agreement their ordinary meaning unless the parties mutually intended
and agreed to an alternative meaning.” Harris v. Dep’t of Veterans Affairs, 142 F.3d
1463, 1467 (Fed. Cir. 1998). “A contract should be interpreted in such a way that all
parts make sense.” Hughes Comms. Galaxy, Inc. v. United States, 998 F.2d 953, 958
(Fed. Cir. 1993) (citing United States v. Johnson Controls, Inc., 713 F.2d 1541, 1555
(Fed.Cir.1983)).
A contract term is ambiguous if it is “susceptible to more than one reasonable
interpretation.” McAbee, 97 F.3d at 1435. Absent ambiguity, the court must give the
contract terms their “plain and ordinary meaning,” and may not consider evidence
extrinsic to the agreement. Id. (citing Alaska Lumber & Pulp Co. v. Madigan, 2 F.3d
389, 392 (Fed. Cir. 1993) and Interwest Constr. v. Brown, 29 F.3d 611, 615 (Fed. Cir.
1994)).
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III. Analysis
Although neither the plaintiff nor the defendant frames the issue in precisely this
way, in order to determine whether defendant may raise the affirmative defense of prior
material breach, the court must engage in a two-part analysis. First, the court must decide
whether the parties are legally able to contract around the common law defense of prior
material breach. If so, the court then must consider whether the parties effectively did so.
A. Parties to a contract can legally agree to terms that displace the common
law defense of prior material breach.
As an initial matter, the court notes the wide latitude that parties have in
establishing the terms of a contract between them. As the Court of Claims has observed:
“It is so basic a tenet of contract law as to require no citation, that each party is entitled to
compliance by the other party with the plain terms of their agreement, unless it is
palpably illegal.” Am. Chemical Soc’y v. United States, 438 F.2d 597, 604 (Ct. Cl.
1971).
In its response to plaintiff’s motion, defendant insists that the defense of prior
material breach is available “irrespective of any contractual termination clause.” See
ECF No. 50 at 14. Defendant also describes its position as follows: “where a party
breaches a contract with a termination clause with respect to a central, material term of
the contract, and does so in bad faith, the non-breaching party is not required to adhere to
the contract’s termination clause requirements.” See ECF No. 50 at 16. Defendant
seems to argue that it is not possible for the parties to agree to terms that absolutely
displace the common law defense of prior material breach. Instead, defendant insists,
that a breach committed in bad faith, such as the breach plaintiff allegedly committed
here, prevents the operation of any such contract provision. See id. at 15. To be clear,
defendant does not argue that either the termination provision or compensation provision
of the contract is illegal. But defendant, essentially, argues for an exception to the
general rule that the parties are free to agree to, and will be bound by, any legal contract
terms.
In support of this argument, defendant cites as the “seminal case,” Olin Corp. v.
Central Industries, Inc., 576 F.2d 642, 647 (5th Cir. 1978). Id. at 16. In Olin, the United
States Court of Appeals for the Fifth Circuit reviewed the language of a termination
provision included in a contract for the sale of fertilizer. Olin, 576 F.2d at 647. The
termination provision at issue entitled the breaching party to provide notice of the breach
and the opportunity to cure the breach prior to termination. Id. The court concluded that,
because the contract did not indicate that the termination clause outlined the exclusive
means for terminating the contract, the defense of prior material breach was a
“cumulative remedy,” allowing immediate “termination for ‘a breach which is material,
or which goes to the root of the matter or essence of the contract.’” Id. (quoting Williston
on Contracts § 842 (3d ed.)).
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Defendant cites a number of additional cases that follow on the reasoning from
Olin. See L.K. Comstock & Co. v. United Eng’rs & Constructors, Inc., 880 F.2d 219,
232 (9th Cir. 1989) (quoting the discussion of Olin in 2 Corbin on Contracts § 1266 (C.
Kaufman supp. 1984) for the proposition that a termination clause governing notice of a
breach and opportunity to cure will not operate to prevent the non-breaching party from
rescinding the contract when a “vital breach,” frustrating the purpose of the contract, is
committed); Larken, Inc. v. Larken Iowa City Ltd. P’ship, 589 N.W.2d 700, 704 (Iowa
1998) (holding that the non-breaching party was not required to comply with the notice
and opportunity to cure provisions of the contract prior to termination when the breach
“went to the heart of the contract”); LJL Transp., Inc. v. Pilot Air Freight Corp., 599 Pa.
546, 567, 962 A.2d 639, 652 (2009) (concluding that “when there is a breach of contract
going directly to the essence of the contract, which is so exceedingly grave as to
irreparably damage the trust between the contracting parties, the non-breaching party may
terminate the contract without notice, absent explicit contractual provisions to the
contrary”); Southland v. Mir, 748 F.Supp. 969 (E.D.N.Y. 1990) (holding that a breach
that went to the “essence of the contract” vitiated the need to comply with the notice and
cure provisions of the contract). Desly Int’l Corp. v. Otkrytoe Aktsionernoe Obshchestvo
“Spartak”, 2016 WL 4532113 (E.D.N.Y. Aug. 29, 2016) (quoting Olin, 576 F.2d at 647:
“Unless a contract provision for termination for breach is in terms exclusive, it is a
cumulative remedy and does not bar the ordinary remedy of termination for a breach
which is material, or which goes to the root of the matter or essence of the contract.”).
This line of cases, however, does not go as far as defendant’s argument. Even the
court’s decision in Olin qualifies its conclusion as applicable only if the termination
provision at issue is not “exclusive.” Olin, 576 F.2d at 647. This necessarily implies that
the parties are free to agree to such an exclusive term, and cannot support application of
the blanket rule advocated by defendant in this case.
The reasoning in a recent case decided by this court bolsters this conclusion. In K-
Con Bldg. Sys., Inc. v. United States, 131 Fed. Cl. 275 (2017), the court considered
whether the defense of prior material breach precluded the recovery of liquidated
damages provided for in the contract at issue. The case involved a contract between
plaintiff and the Coast Guard for construction of a prefabricated building. See id. at 278.
The plaintiff did not complete the work, and as a result, the Coast Guard assessed
liquidated damages and terminated the contract for default. See id. In its initial
complaint, plaintiff challenged the termination and liquidated damages assessment, while
defendant counterclaimed to recover the liquidated damages. See id. Plaintiff defended
its claim to avoid payment of liquidated damages, in part, on the basis that defendant’s
improper termination of the contract was a prior material breach. See id. at 332-333.
The court began its analysis by defining the doctrine of prior material breach as
follows: “when a party to a contract is sued for breach, it may defend on the ground that
there existed a legal excuse for its nonperformance at the time of the alleged breach.” See
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id. at 332 (quoting Barron Bancshares, Inc. v. United States, 366 F/3d 1360, 1380 (Fed.
Cir. 2004)). The court explained that the doctrine:
is based on the principle that where performances are to be exchanged under
an exchange of promises, each party is entitled to the assurance the he will
not be called upon to perform his remaining duties of performance with
respect to the expected exchange if there has already been an uncured
material failure of performance by the other party.
Id. at 332-33 (quoting Restatement (Second) of Contracts § 237 cmt. b (Am. Law Inst.
1981)). Although the court recognized that the Coast Guard had, in fact, breached the
contract, the court held that the doctrine of prior material breach did not allow plaintiff to
avoid paying liquidated damages for its own breach on that basis. The court concluded
that the express terms of the contract made clear that plaintiff was liable for liquidated
damages, irrespective of the Coast Guard’s breach. See id. at 333.
The court’s decision in K-Con is in accord with the general contract principle that
the parties are free to contract for, and are bound by, any legal terms included in a
contract. The cases presented by defendant do not persuade the court to depart from this
maxim. As such, the court declines to adopt defendant’s position that a prior material
breach necessarily means that it would avoid liability to compensate plaintiff pursuant to
the termination clause in the contract. Instead, the court will look to the specific
language in the contract to make that determination.
B. The contract expressly provides for compensation when the contract is
terminated.
The contract provisions at issue, quoted in full above, relate to the issues of
contract termination and compensation. See ECF No. 44 at 6-7 (plaintiff’s’ motion
identifying sections 12 and 13 as the subject of this dispute); ECF No. 50 at 7
(defendant’s response identifying sections 12 and 13 as the provisions at issue). With
regard to termination of the contract, the following provisions are of particular relevance
here:
SECTION 12. TERMINATION
(a)(4) Termination for default shall be utilized in circumstances where the
Concessioner has breached any requirements of this contract . . .
(b) In the event of termination of this contract or the Concessioner’s right
to operate hereunder . . . for default, the total compensation to the
Concessioner for such termination shall be as described in Section 13,
“Compensation”.
9
ECF No. 44-2 at 23.
The court finds these provisions unambiguous, and the plain language leads
directly to two conclusions. First, the contract dictates that termination resulting from
any breach on plaintiff’s part will be treated as a termination for default. Defendant has
made no argument that the breach alleged here falls outside the scope of this clause,
beyond the assertion addressed at length above that plaintiff’s prior material breach
excuses defendant’s compliance with the termination provisions. Defendant argues that
plaintiff was required to fulfill its duty of good faith and fair dealing in executing under
the contract, but breached that obligation, therefore excusing defendant from performing
its remaining obligations under the contract. See ECF No. 14 at 27-36 (statement of
defendant’s third affirmative defense); ECF No. 50 at 12 (defendant contends that “[t]he
breach of the duty of good faith and fair dealing constituted a prior material breach,
providing a legal excuse of the NPS’s nonperformance with respect to Section 13 of the
Contract”). The broadly inclusive language in section 12(a)(4), in the court’s view,
obviates any argument that this provision excludes the breach alleged here.
This conclusion is also supported by the broadly inclusive language in section
13(b)(1), which states that the compensation provisions apply “[i]f for any reason,
including contract expiration or termination as described herein, the Concessioner shall
cease to be required by the Secretary to conduct the operations authorized hereunder.”
ECF No. 44-2 at 24 (emphasis added).
In addition, section 12(b) clearly indicates that, in the event that the contract is
terminated for default, the compensation provisions in section 13 remain operative—that
compensation due to plaintiff “shall be as described” therein. Plaintiff correctly states,
“the Contract itself provides that [plaintiff’s] rights under Section 13 survive even if it
were to default under the Contract.” ECF No. 44 at 11. As such, the parties have agreed
to contract terms that displace defendant’s ability to assert the defense of prior material
breach to avoid payment to plaintiff under section 13.
The parties have no dispute regarding the contract language at issue. Because that
language is unambiguous, the court has no need to consider evidence extrinsic to the
contract. Consequently, any disputes of fact that may exist between the parties are
immaterial to the court’s present analysis. 1
1
Third-party defendant claims, in its opposition to plaintiff’s motion, that defendant
should be permitted to raise the defense of prior material breach because the provisions of
the contract are divisible. See ECF No. 65. This argument fails for the same reasons
defendant’s argument fails—the parties have agreed to terms that require defendant to
comply with the compensation requirements of section 13, even assuming a breach on
plaintiff’s part.
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IV. Conclusion
For the foregoing reasons, plaintiff’s motion for partial summary judgment, ECF
No. 44, is GRANTED, and defendant’s third affirmative defense asserted in answer to
the amended complaint, ECF No. 14, is DISMISSED.
On March 13, 2017, the court suspended all deadlines in this case. See ECF No.
53. The parties are directed to confer and file a joint status report proposing a schedule to
govern the next steps in this litigation, on or before September 1, 2017.
IT IS SO ORDERED.
s/ Patricia Campbell-Smith
PATRICIA CAMPBELL-SMITH
Judge
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