UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

KAISER AEROSPACE & ELECTRONICS

CORPORATION, Kaiser Space Products

Division,

Plaintiff-Appellee,

v.

ALLIANT TECHSYSTEMS,

INCORPORATED, No. 96-2117

Defendant-Appellant,

and

HERCULES ALLEGANY BALLISTICS

LABORATORY, a Division of

Hercules, Incorporated,

Defendant.

KAISER AEROSPACE & ELECTRONICS

CORPORATION, Kaiser Space Products

Division,

Plaintiff-Appellant,

v.

ALLIANT TECHSYSTEMS,

INCORPORATED, No. 96-2176

Defendant-Appellee,

and

HERCULES ALLEGANY BALLISTICS

LABORATORY, a Division of

Hercules, Incorporated,

Defendant.
Appeals from the United States District Court

for the Northern District of West Virginia, at Elkins.

Richard L. Williams, Senior District Judge, sitting by designation.

(CA-95-28-2)

Argued: October 27, 1997

Decided: December 17, 1997

Before LUTTIG, Circuit Judge, CAMPBELL, Senior Circuit Judge

of the United States Court of Appeals for the First Circuit, sitting

by designation, and TRAXLER, United States District Judge for

the District of South Carolina, sitting by designation.

_________________________________________________________________

Affirmed in part, and reversed and remanded in part, by unpublished

per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Robert Keith Huffman, MILLER & CHEVALIER,

CHARTERED, Washington, D.C., for Appellant. Ray Manuel Aragon, MCKENNA & CUNEO, L.L.P., Washington, D.C., for Appellee. ON BRIEF: Alan I. Horowitz, Benjamin D.M. Wood, MILLER

& CHEVALIER, CHARTERED, Washington, D.C.; James K.

Brown, Christopher L. Callas, JACKSON & KELLY, Charleston,

West Virginia, for Appellant. Larry M. Farrell, Mark D. Shonkwiler,

MCKENNA & CUNEO, L.L.P., Washington, D.C., for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See

Local Rule 36(c).

_________________________________________________________________

 2
OPINION

PER CURIAM:

Alliant Techsystems, Inc., defendant below, appeals from the district court's grant of summary judgment for Kaiser Aerospace and

Electronics Corporation, plaintiff below, on, inter alia, the scope of

a contract that existed between Kaiser and Hercules Allegheny Ballistics Laboratory, Alliant's predecessor in interest, and on various

counterclaims brought by Alliant against Kaiser. Alliant also appeals,

and Kaiser cross-appeals, from the district court's determination of

damages at subsequent proceedings. We reverse the district court's

grant of summary judgment for Kaiser on the scope of the contract,

and remand for further proceedings on this issue. We affirm the grant

of summary judgment for Kaiser on Alliant's counterclaims, however,

and find it unnecessary to reach the other issues raised by the parties

on appeal and cross-appeal.

I.

During the 1980's, the United States Air Force began work on a

program to develop and produce a second generation bomber-carried

missile for suppressing ground-based radar. This missile was known

as the Short Range Attack Missile II ("SRAM II"). Pursuant to this

program, the Air Force entered into a prime contract with Boeing

Aerospace for the SRAM II missiles in 1987. Boeing, in turn, entered

a subcontract with Hercules for rocket motors for Boeing's SRAM II

missiles. Hercules, in turn, entered into a subcontract with Kaiser for

the nozzles for Hercules' rocket motors.

In October 1991, the government terminated the SRAM II program

before the development stage had been completed, and before the production stage had begun. Accordingly, the government terminated its

prime contract with Boeing in accordance with Federal Acquisition

Regulation ("FAR") § 52.249-2 (1988), incorporated into that contract

as the Termination for Convenience clause. The termination of the

prime contract triggered Boeing's termination of its subcontract with

Hercules, and Hercules' termination of its subcontract with Kaiser,

pursuant to the Termination for Convenience clauses included in each

of these subcontracts.

 3
Upon termination of the subcontract between Hercules and Kaiser,

and in accordance with the Termination for Convenience clause, Hercules and Kaiser engaged in negotiations to settle their accounts.

Under the Termination for Convenience clause, which incorporated

FAR § 52.249-2, Kaiser, as a terminated subcontractor, was entitled

to reimbursement for the costs it had incurred in performing the contract, as well as for lost profits, provided the termination had not

saved it from a losing contract. If the termination had, however, saved

Kaiser from such a contract, Kaiser was entitled to recover neither all

of its costs, nor any lost profits. Accordingly, to calculate how much,

if any, money was due Kaiser, it was necessary to identify the end

point of the contract to determine whether Kaiser would have made

or lost money on the contract.

Hercules and Kaiser were unable to agree, however, on what the

end point of the contract was, and, relatedly, whether the contract, if

it had not been terminated, would have resulted in a profit or a loss

for Kaiser. This disagreement resulted from the fundamentally different positions taken by Hercules and Kaiser as to the scope of the contract that existed between them. That contract was embodied in a

master purchase order ("MPO") initially issued by Hercules on September 15, 1989, and reissued with some modifications on October 3,

1989. The MPO identified five phases of work--Development

("DEV"), PRFT (Pre-Flight Readiness Testing), QUAL (Qualification), LRIP (Low Rate Initial Production), and LOT 1 (larger scale lot

production). At the time the contract was terminated, Kaiser had completed the DEV stage, had completed approximately two-thirds of the

PRFT phase, had barely begun the QUAL stage, and had not performed any work at all on either the LRIP or LOT 1 phases.

Hercules insisted that the MPO initially represented a firm, fixedprice contract for only the first two phases, and that the last three

phases were only tentative -- to be negotiated. While conceding that

the third phase had also become a firm, fixed-price contract, Hercules

maintained this was so only because Hercules and Kaiser had later

concluded negotiations as to that phase. At the time the contract was

terminated, however, Hercules and Kaiser had just begun negotiating

about the last two phases. Accordingly, Hercules argued that the endpoint of the contract was the end of the third phase, at which point

Kaiser would clearly have been losing money on the contract.

 4
Kaiser, by contrast, argued that the MPO represented a firm, fixedprice contract for all five phases, that the endpoint of the contract was

therefore at the end of the fifth phase, and that while it would have

been losing money at the end of the third phase, it would have made

enough money on the last two phases of the contract to convert the

interim loss into a net profit for the entire contract.

When the negotiations between Hercules and Kaiser broke down,

Hercules issued a unilateral "settlement by determination," as it was

entitled to do under the Termination for Convenience clause and

incorporated regulations. This settlement determination, which was

premised on Hercules' interpretation of the scope of the contract,

found that Hercules did not owe Kaiser any additional money, and

that Kaiser actually owed Hercules a small amount of money because

the progress payments already made by Hercules to Kaiser slightly

exceeded the amount to which Kaiser was entitled under the Termination for Convenience clause.

Kaiser then initiated this litigation against Hercules, asserting, inter

alia, a request for declaratory relief on the scope of the contract. Several months later, Alliant acquired the assets of Hercules and assumed

responsibility for the defense of this lawsuit. Alliant subsequently discovered that Kaiser had submitted allegedly false representations to

Hercules during the settlement negotiations, and raised counterclaims

against Kaiser for, inter alia, fraud, negligent misrepresentation, and

breach of the implied covenant of good faith and fair dealing. Kaiser

moved for partial summary judgment on the scope of the contract, and

on the counterclaims for fraud and negligent misrepresentation. Alliant moved for summary judgment on Kaiser's complaint.

The district court referred the litigation to a magistrate judge, who

made various findings of fact, and recommended denying all of the

motions for summary judgment. See J.A. at 155-70. The district court

adopted the magistrate's findings of fact, but granted summary judgment for Kaiser on the scope of the contract -- finding that it was a

firm, fixed-price contract for all five phases -- and on Alliant's counterclaims for fraud and negligent misrepresentation. The court also,

sua sponte, granted summary judgment for Kaiser on Alliant's counterclaim for breach of the covenant of good faith and fair dealing. See

generally J.A. at 232-40. At a subsequent proceeding, the district

 5
court adjudicated the amount of money to which Kaiser was entitled

based on the termination for convenience. Alliant appeals the grant of

summary judgment on the scope of the contract and its counterclaims,

and also argues that, even assuming the district court correctly determined the scope of the contract, it erred in calculating damages. Kaiser cross-appeals, arguing that the district court erred in calculating

damages.

II.

The MPO states that it is a "firm-fixed price purchase order to furnish all materials, labor, tooling, equipment, and other resources,

except as may otherwise be set forth herein, necessary to fabricate,

identify, inspect, pack, and deliver the below listed item(s) in exact

accordance with the requirements set forth hereunder." J.A. at 495

(emphasis added). The MPO then lists five phases, each with a separate sub-item purchase order number. The MPO treats the first two

phases somewhat differently from the last three phases. First, the

MPO identifies a single nozzle assembly quantity and a single price

for the DEV and PFRT phases. Id. By contrast, for each of the other

phases, the MPO identifies the following two alternatives -- (1) a

quantity of nozzle assemblies manufactured entirely by Kaiser, and

(2) a quantity of nozzle assemblies in which the"shell" component of

some of the nozzle assemblies is manufactured by Hercules and furnished by Kaiser. See id. at 495-96. Second, one line below and to the

right of the headings of the last three phases, the MPO says "To Be

Negotiated." No such words appear in the descriptions of either of the

first two phases. See id.

In addition, the MPO states that "Progress payments shall be made

against Master Purchase Order 0820058 [the number that appears at

the top of the MPO] in accordance with FAR 52.232-15 at (80%) of

cost." J.A. at 497. The MPO also expressly incorporates a document

entitled Appendix "A," J.A. at 497, which in turn incorporates various

FAR provisions, including §§ 52.209-1 and 2. J.A. at 481-82. These

provisions appear to prohibit the award of the production phases of

the contract (LRIP and Lot 1) until the QUAL phase has been completed. See J.A. at 329-31. In addition, Appendix A reserves Hercules' right to make certain changes relating to matters such as

specification and delivery, and provides that if such changes cause

 6
changes in the cost of, or the time required for, performance of the

contract, Hercules must make "equitable adjustments" to the contract

price, delivery schedule, or both. J.A. at 484-85. Finally, Appendix A

includes a typical merger clause, that is labeled"Entire Agreement,"

and states, inter alia, that the MPO and accompanying documents

constitute the "complete and exclusive agreement of Hercules and

Seller, [and] merges and supersedes all prior understandings and representations (oral and written) . . . . All amendment(s) to this agreement shall be formally authorized in writing by the Hercules Buyer."

The district court interpreted the MPO to constitute a firm, fixedprice agreement for the entire five phases of the contract. The court

interpreted the phrase "To Be Negotiated," which appeared within

each of the last three phases, to mean only that the parties would

negotiate over which option within that phase would be adopted, i.e.,

whether Kaiser would provide all the nozzle shells, or whether Hercules would provide some of those shells. See J.A. at 235-36. We find

that this interpretation constitutes neither an inevitable, nor even the

most natural, reading of the MPO. Accordingly, we reverse the district court's grant of summary judgment for Kaiser on the scope of the

contract. Because, however, the contract is not entirely free from

ambiguity, and because the district court erroneously refused to consider certain proffered course-of-performance and trade-usage evidence that raises factual controversy about the proper interpretation

of the contract, we remand the question of the scope of the contract

for further proceedings consistent with this opinion.

We believe the phrase "To Be Negotiated" naturally connotes more

than merely choosing between two fully explicated options. Under the

district court's interpretation of the MPO, it is difficult to understand

what, precisely, would be the subject of negotiation. Negotiation suggests compromise, and it is hard to see how any compromise can be

involved in an "either/or" decision, especially where, as under the district court's understanding of the MPO, the other terms of the agreement are fixed. Also, on the district court's reading, the phrase "To

Be Negotiated" adds little to the meaning of the contract, which

already states the two possible options under each of the last three

 7
phases, and necessarily implies that a choice will be made about

which option to pursue.1

If anything, it would be more natural to read the MPO as establishing a firm, fixed-price contract for the first two phases, but as establishing only tentative grounds for negotiation for the last three phases.

The phrase "To Be Negotiated," which is placed in each of the last

three phases, supports this reading. See J.A. at 495-96. That each of

the last three phases has disjunctive options also suggests that the

final details are not yet settled. See id. In addition, such a reading is

consistent with the MPO's statement that "[t]his is a firm-fixed price

purchase order to furnish all materials, [etc.], except as may otherwise

be set forth herein . . . ," J.A. at 495 (emphasis added), which can be

read to mean that the MPO is only binding unless otherwise designated (e.g., by the words, "To Be Negotiated"). Reading the MPO as

establishing a firm, fixed-price contract for only the first two phases

is also consistent with Appendix A's incorporation of the qualification regulations, J.A. at 481-82, which suggest that contracts for the

production phases (LRIP and LOT 1) cannot be awarded until the

QUAL stage had been successfully completed. See J.A. at 329-31.

Although it is most natural to read the contract in this manner, we

are unable to conclude with confidence that such a reading is the correct one. The placement of neither the phrase "To Be Negotiated" nor

the clause "except as may otherwise be set forth herein" is entirely

free from ambiguity.2 Moreover, as Kaiser emphasizes, the final MPO

_________________________________________________________________

1 At oral argument, Kaiser took the position that the district court's

interpretation of the contract was the correct one, apparently abandoning

its earlier contention that the phrase "To Be Negotiated" meant only that

the parties would negotiate about matters such as price increases resulting from changes in production schedules, specifications, or both. Kaiser's initial reading of the MPO rendered the phrase"To Be Negotiated"

completely redundant, because Appendix A explicitly requires equitable

adjustments for changes in specifications or delivery requirements. That

reading also suggested that equitable adjustments are available only for

the last three phases, in direct contradiction to Appendix A, which

plainly contemplates equitable adjustments for the entire contract (whatever the scope of that contract may be).

2 It is worth noting, for example, that in the initial MPO, issued September 15, 1989, the phrase "To Be Negotiated" appeared next to the

 8
allows it to bill progress payments against the MPO, even though the

initial MPO did not. Kaiser argues that this change allowed it to bill

progress payments against the entire value of all five phases. While

it is not clear that this is necessarily so, and while Kaiser does not,

in fact, appear to have made billings in this manner, the change does

support a finding that the MPO is ambiguous, especially in conjunction with the other textual uncertainties.

Because the MPO is not entirely clear, and because the district

court erred in refusing to consider Alliant's proffered course-ofperformance and trade-usage evidence, compare West Va. Code § 46-

2-202 (1996) (U.C.C. § 2-202) (Evidence of course of dealing, trade

usage, or course of performance may be used to explain or supplement the terms of a final, integrated agreement.) with J.A. at 234-36

(district court's refusal to consider such evidence), we remand for further proceedings the question of the scope of the contract created by

the MPO. Because we conclude that the district court erred in determining the scope of the contract that existed between Hercules and

Kaiser, we need not consider Alliant's other arguments relating to its

obligation to Kaiser under the contract. Nor need we consider either

party's objections to the district court's calculation of damages.

III.

The one remaining issue is whether the district court erred in granting summary judgment for Kaiser on Alliant's counterclaims for neg-

_________________________________________________________________

heading of each of the last three phases. See J.A. at 477-78. In the modified MPO, issued October 3, 1989, this phrase appears one line lower,

next to the heading for the first subheading of each phase. See id. at 495-

96. This court was unable to discover whether this change was intentional, either from the record, or from the parties' submissions or oral

argument. If intentional, the change might well support the district

court's interpretation of the contract, though it would still be unclear

what, precisely, was to be negotiated. From the face of the MPO alone,

however, it seems at least equally likely that the change was simply typographical.

Similarly, the placement of the second clause may be susceptible to an

alternative reading, i.e., that the MPO is a fixed price contract to furnish

all materials, etc., except those materials otherwise designated, which

could refer to the possibility mentioned in the last three phases of Hercules' supplying some of the nozzle shells.

 9
ligent misrepresentation, fraud, and breach of the implied covenant of

good faith and fair dealing. These counterclaims are all predicated on

certain evidence, obtained by Alliant from Kaiser during discovery,

that suggests Kaiser made false representations to Hercules about the

amount of "management consideration" included in its settlement proposals. Alliant argues that these misrepresentations caused it to spend

more money on the negotiations than it need otherwise have spent,

and may also have contributed to the need for litigation. Having

reviewed the record and submissions of the parties, and having had

the benefit of oral argument, we are of the opinion that the district

court correctly determined that Alliant has failed to prove reliance,

i.e., that Hercules would have acted differently but for the misrepresentation. Moreover, given the essentially irreconcilable views of the

scope of the contract taken by Kaiser and Hercules during the settlement negotiations, as well as the large sums of money in dispute, we

believe that extensive negotiation and litigation were probably inevitable anyway, regardless of Kaiser's alleged misrepresentations.

Although Alliant has introduced testimony that it spent approximately

$50,000 more on the negotiations than it would have had Kaiser been

completely forthright, we believe this evidence is merely speculative

in light of the distance between the parties' bargaining positions. For

both of these reasons we affirm the district court's grant of summary

judgment for Kaiser on Alliant's counterclaims for negligent misrepresentation and fraud, and for the latter reason we affirm the district

court's grant of summary judgment for Kaiser on Alliant's counterclaim for breach of the implied covenant of good faith and fair dealing.

CONCLUSION

For the reasons stated herein, we affirm the district court's grant of

summary judgment for Kaiser on Alliant's counterclaims, but reverse

its grant of summary judgment for Kaiser on the scope of the contract

that existed between Kaiser and Hercules, and remand this issue for

further proceedings consistent with this opinion.

AFFIRMED IN PART, AND REVERSED

AND REMANDED IN PART

 10