## 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 Justic e, 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 decis ion of the United States Court of Federal Claims awarding Nort h Star Steel Co. (“North Sta r”) damages in the amount of $1,521,626 for the government’s breach of a contract betw een Arizona Electric Power Cooperative Inc. (“AEPCO”) and the Departm ent 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. Beca use the court did not apply the proper legal standard for breach of contract, and because t he court’s findings of fact, which were made following a trial, do not support its holdings that WAPA breached its contract withNorth Star and that No rth Star entered into an amendment to the contract under dures s , the judgment in favor of North St ar is revers ed. 1 The c a se is remanded to the Court of Federal Claims, whic h is instructed to enter judgment in favor of the United States and to dismiss North Star’s Sec ond 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 o ne of four power marketin g administrations within t he U.S. Department of Energy. As such, it markets and deliv ers cost-based hydroelec tric power and related se rvices within a 15-st ate region of the central and western Un ited States. WAPA markets and tr ansmits electricity f r om multiuse water projects. WAPA’s transmission syst em carries elec tricity fro m 57 power plants operated by the Department of the Interior’s Bureau of Reclamation, the U.S. Army Corps of Engineers, and the Inter national Boun dary and Water Commission. By statute, the rates WAPA charge s in s e lling power must be at least sufficient to recover the costs associated with it s operations, maintenance, and the federal construction investment. 43 U.S.C. § 485h(c) . WAPA is in the busin ess of moving power, as well as marketing it, and accordingly m a intains an electrical transmission system and power “control areas.” A power control area is a bounded s u bsystem within the lar g er national power grid within which electric al power levels are m a inta in ed a t a leve l eq ualing their

1 As noted, North Star was a third par ty 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 par ty contracting and dealing wit h WAPA.

2006-5054, -5057 2demand. If power changes within a control area as a result of a change in demand, the power supply must be increased or decreas ed to match the level of dem and. This adjustment of power s upply to meet chang ing demand is k nown as “regulation.” N. Star Steel , 68 F ed. Cl. at 679 n.5. The Feder al Energy Regulatory Commission (“FERC”) has exc l us ive jurisdiction to “confirm, approve, and plac e in effect on a final basis,” and “to remand[] or to disapprov e , ” WAPA’s power rates. See Deleg a tio n Order for Approval of Power Marketing Admini stration 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 recyc ling 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 electr ic arc furnaces in the m anufacturing process. These furnaces required large am ount s of electricity to recycle scrap steel into new steel products. Id. at 680. At the time, WAPA was not authorized t o sell firm
power 2 to North Star because WAPA pre v ious ly ha d committed all suc h power to statutory preference customers in the relevant power contro l ar ea. These preference customers were municipalities and public corporations and agencies, as well as cooperativ es and other nonprofit organizations financ ed in whole or in part by loan s made purs uant to the Rural Elec trification Act of 1936. Id. Consequently, North Star entered into agreement with AEPCO and Mohave El ectric 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 porti on of his load requirements. N. Star Steel , 68 Fed. Cl. at 677 n.2. It is power which is guarant eed by the supplier to be available at all times. Id.

2006-5054, -5057 3Electric”) 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 cooperativ e 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. M ohave Electric is an Arizona generation and transmission cooperativ e elig ible to purchase pow er and other services from WAPA. WAPA o w n ed the only transmission lin es in t he geograp hic area of Kingman with sufficient voltage to satisfy North Star ’s electric power requir e ments. Id. at 680. Therefore, AEPCO sought to obtain non-firm transmission serv ic es for the North Star load ov er WAPA’s tr ansmission lines. WAPA was willing to furnish this service to the extent capacity was availabl e in its lines. In due cour se, AEPCO, Mohave Electric, and North Star entered into several contracts. In brief, the c ontracts provided that North Star would gain access to power lines with su fficient 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 stee l mill from outside of WAPA’s control ar ea. Id. at 680-81. This suit involv es only one of t he severa l contracts, the Consolidated A rrangements 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.

2006-5054, -5057 4The CAC was entered into on August 17, 1994, betwe en W APA and AEPCO for the benefit of North Star. Id. at 681. Under the CAC, WAPA agreed to provide bot h non-firm transmission service, CAC § 6 (entitled “Non- Fi rm Transmission Service to be Provided t o AEPCO by [WAPA]”), and regulati ng s e rvices, CAC § 14 (entitled “Contro l Area and Regu lating Services”), for North Star ’s load. For North Star’s bene fit, AEPCO agreed to pay for the transmission services in accordance wit h the standard FERCapproved rate schedule. CAC § 7 (entitl ed “Charges for Non-Firm Services”). WAPA, ho wever, had technical concerns a bout bein g able to pr ovide regu lating services to meet North Star’s load requirements. 4 For this reason, WAPA n e g o tiated 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 met hodology utilizing an in-kind energy payment, which would be in addition to the FERC-approved trans mission rat e schedule. N. Star Steel , 68 Fed. Cl. at 682-83. The me thodology provided t hat North Star, through AEPCO, would provide e nergy to WAPA in the amount of tw enty percent of the metered load from North Star:

4 The Kingman mill use d powerful pulses of electricity to melt scrap metal in order to produce stee l products. WAPA wa s concerned about the large fluctuations of the load resulting from the cyclic al process of the arc furnaces melting scrap metal, th en not melting, then melting again. N. Star Steel , 68 Fed. Cl. at 682. The Court of Federal Claims noted that the load variat ion for a ty pical WAPA wholesale customer was in the range of 6 MW, while North Star’s load va riation was in the range of 85 MW. Id. WAPA also was concerned about the arc that was striking during t he melt cycle of the furnaces, appearing to the WA PA control system to be a near short circuit in the system. Id. Finally, WAPA’s facilities use d hydroun its to regulat e the North Star load. Id. Because the hydrounits would respond to fluctuations in the load, and becaus e hydrounits have a very fast response time co mpared to traditional thermal units, WAPA was concerned that the variability inherent in the arc furnace process would create exceptional wear and t ear on the hydrounits. Id.

2006-5054, -5057 5[WAPA] sh all rece ive In-Kind En ergy from AEPCO for service re ndered in connection with the Nort h 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 hour ly metered load measured in megawatthours (MWh). The In-Kind En ergy payment can be received by [WAPA] from (i) the Non-Firm Energy in exc e ss of the hourly inte grated North Star Load in M W h, (ii) the Return Energy scheduled by [WAPA] t o support the North Star Load whe n [W APA] elects, on an hourly basis, to make Return Energ y availa ble, or (iii) subseque n t Non-Firm Energy schedules from AEPCO, if required. CAC § 14. 3. The C A C further provided that t he 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 per iodically, if necessary, adjust the percentage associated with the In-K ind Energy payment. After one (1) year of normal operations, the perc entage may be adjusted in acc o rdance with said methodology

. CAC § 21.
II. North Star’s steel mill began commerc ially 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 arriv e at “an appropriate cost-based methodology” for the in-kind energy payment. N o agreement was reac hed, however. Id. at 683-89. During th e negotiations, WAPA presented several proposed methodologies to calculate charges as sociated with regulating services. WAPA’s fir s t proposal attempted to capture “replacement costs,” i.e. unit specific costs that c ould be directly associated with regulating the North Star load. Id. at 684. Su b s equently, WAPA atte mpted to obtain repla c ement costs from the

2006-5054, -5057 6Bureau of Reclamation. 5 Id. WAPA discovered that the Bureau of Reclamation did no t keep data in a manner that re fl ected replacement costs. Id. WAPA ne xt determined that an approach based upon the increm ental costs associated with possible fluctuations in North Star’s load and any res u lting stress t hat the fluctuations imposed on WAPA’s equipment and syst em was not feas ible. WAPA then sought to create a methodology that relied on a proxy for repl acement c o sts based upo n the costs of an alternative service provider. Id. Between J anuary 13, 1998, and June 2, 1998, WAPA provided s e veral proposed methodologi es to AEPCO and North Star. Id. at 684-85. On June 2, 1998, just prior to the conclus i on of the first year of operations at the Kingman mill, WAPA informed No rth Star that if there was no agreement on a revise d methodology by July 1, 1998, the in-kind energy payment of twenty percent would remain in effect. Id. at 685. On J une 5, 19 9 8 , North Star advised WAPA that it believed that the proposed methodology in cluded charges whic h were not within the purview of section 21 of the CAC and that WAPA’s ca lculation of the cost of the regulation services was “grossly excessive.” Id. In spite of their in ab ility to rea c h agr eem ent within the first year of normal operations, WAPA, North Star , and AEPCO continue d to ne gotiate with respect to a new methodology. Id. at 685-89. On June 3, 1999, a meeting t ook place t o discuss WAPA’s pr oposal to a dd Amend ment No. 3 to the CAC. Id. at 688. Amendment No. 3

5 The power plants containing the hydr oelect r ic units producing the power necessary to regulate the Nort h Star load were operated by the Bureau of Reclamation, the U.S. Army Corps of Engineers, an d the International Boundary and Water Commissio n . WAPA and its en ergy-produc ing p a rtners are separately managed an d financed. WAPA Ho me Page, h ttp://www.wapa.gov/ (follow “Ab o ut Western” hyperlin k). In addition, each water project maintains a s eparate financial system and records. Id.

2006-5054, -5057 7replaced s ubsection 14.3 of th e origin al CAC with a new su bsection 14.3 which stated as follows: “The percentage of the ac tual metered Non-F i rm Energy shall be determined in accordance with the methodology in effect and as provided and set forth
in E x h i bit H.” 6 Amendment No. 3 § 4 (ent itled “Modification of Sect ion 14 of the Origina l Contract (Control Ar ea and R egulating Services)). Exhibit H set forth a new methodology for calc ulating the in-kind ene rgy payment. Amendm ent No. 3 Exhibit H (entitled “Regulating Service Arrangements for North Star St eel Plant”). On July 29, 1999, North Star aut horized AEPCO to ac c ept Amendment No. 3 a nd to amend the CAC under protest. N. Star Steel , 68 Fed. Cl. at 688-89. No rth Star’s counsel sent AEPCO a letter on that date stating “North St ar’s view that none of the pr oposals put forth by [WAPA] are truly cost-ba s ed and th at all are u n reasonab le. The current charge is so exces s ive, however, that even an unrea sonable lesser charge is preferable to the continuation of the c h arge at the existing level.” Id. at 689 (alteration in origina l ). On September 15, 19 99, WAPA and AEPCO, on North Star’s beha lf, 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 receiv e In-Kind En ergy from AEPCO for services rendered in connection with the North Star Load in the amount of Non-Fir m Energy equal to a percentage of the actual metered Non-Firm Energy used to serve the Harris Substation hour ly metered load measured in megawatthours (MWh). The per centage of the actual metered Non-Firm Energy shall be determined in accor dance with the methodology in effect and as provided and set forth in Exhibi t H. The In-Kind Energy payment can be received by [WAPA] from (i) t he Non-Firm Energy in exc e ss of the hourly integrated North Star Load in M W h, (ii) the Return Energy scheduled by [WAPA] to support t he N o rth Star Load whe n [WAPA] elects, on an hourly basis, to make Re turn Energy availa ble , or (iii) subseque n t Non-Firm Energy schedul es from AEPCO, if required.

2006-5054, -5057 8for a retroactive “true-up” of all amounts already paid, a pr ovision which North Star had sought. 7 Id.
III. On April 27, 2000, North Star filed suit in t he Court of Federal Cla ims, alleging that WAPA had breac hed the CAC. In its suit, North Star sought, among other things, monetary damages in the form of a refund for what it asserted we re overcharges by WAPA aris ing out of the methodolog ies W APA use d to determine in-kin d 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 co n t rol area an d regulatin g services from the dat e of init ial 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 other wise in accordanc e with law. The Court of Federal Claims granted the governm ent’s motion for summary judgment on the claims in the F i rst Amended Complaint, agreeing that neither the CAC nor the cited federal statutes required that WAPA charge only “actual costs” for regulati ng ser v ices unde r the CAC. See N. Star Steel Co. v. Unite d States , 58 Fed. Cl. 720, 735-38 (2003). The court, however, granted North Star leave to fi le a Second Amended Complaint to state precisely the nature of its breac h of contract claim. In its Secon d Amended Compla int, North Star alleged that the CAC required a cost-based met hodology for calculating the in-kind energy paym ent and that the fail ure to come to agr eement on a new rate

7 A “true-up” would hav e 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 hav e paid pursuant to the revised c o st-based methodology.

2006-5054, -5057 9structure until more t han two y ears after t he timeframe set forth in the contract constituted a breach of the CAC by WAPA. In additio n , North Star appeare d to alleg e that it had signed Am endment No. 3 to the contract under duress. In November of 2004, the Co urt of Federal Cla ims conducted a tr ial in whic h it received documentary evidence and heard te stimony from six No rth 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 involv ed a claim arising under section 10(a)(1) of the Contract Dis putes 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, t he court stated that “the require ment of establishing a ‘costbased methodology’ provides a clear demarca tion by which the court can determine whether and when a breach occ u rred.” Id. at 698. “Accordingly,” the court continued, “the [CAC] could be br eached if a ‘cost-bas ed methodology’ was n o t utilized by WAPA or if one of the parties fail ed 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 di d not produce or introduce WAPA cost data to establis h whether the regulating services provided to North Star, in fact, were “cost-based” and exper t test imony confirmed that WAPA did not establish a rate for regulating services that was “cost-based” on July 1, 1998 or thereafter, the court has det ermined that there is substantial evidenc e in the reco rd in this ca se that WAPA, in fact, breached th e [CAC]. Id. at 721. The Court of Federal Claims began its analy s is 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 circ umstances permitted no other alternative,

2006-5054, -5057 10and (3) such circumstances wer e the result of another party’s coercive actions.” Id. at 722 (citing Rumsfeld v

. Freedom NY, Inc. , 329 F.3d 1320, 1329 ( F ed. Cir. 2003)). With the issue thus framed, the c ourt determined that North Star had involuntarily accepted Amendment No. 3, satisfying the fi rst prong of the duress test. Id. The court also determined that the second pron g of the test was satisfi ed because the circumstances permitted North Star no alternative other than to accept Amendment No. 3. Id. Additio nally , the court noted that WAPA own ed and con t rolled the sole transmission lin e to North Star, that no other regi onal utilities offer ed regulation s e rvices at the time that met WAPA’s technica l requirements, that No rth Star had $5 million in embe dded costs from building a s witc h ing statio n to c onne ct to WAPA, and tha t 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 showi ng that the Government’s action was wrongful, i. e. , ‘(1) illeg a l, (2) a breach of an express pr ov ision of t he contract without a good-faith belief that the action was permiss ible un der the contract, or (3) a breach of t he implied covenant of good faith and fair dealing.’” Id. (citing Freedom NY , 329 F.3d at 1330). The court found that the thir d prong of the duress test was satisfied because its court-appointed expert provided substantial ev idenc e that Amendment No. 3 was not “cost-based.” Id. According l y, the court held that “WAPA’s unilatera l imposition of Amendment No. 3 on North Star on September 15, 1999 was an act of ‘economic duress’ and a br each of the obligation to negotiate in good faith.” Id. at 723. In establis hing the pr oper amount of damages, the c ourt determined that North Star had paid WAPA the voluntar ily negotiated first year rate set forth in the CAC an d that therefore no injury o ccurred until Augus t 1, 1999, the effective date of Amendment

2006-5054, -5057 11No. 3. Id. The court awarded North Star dam ages in the amount of $1,521,626 for the period thereafter. Id. The government appeals the Court of F ederal Claims’ dec is ion that W APA breached the CAC and that Ame ndment No. 3 was signed by North Star under duress. North Star in turn cross-appeal s the Court of Federal Claims’ decision that North Star was not entitled to a r e troactive “true-up” of costs under the contract. It also argues in connection with the damages i ssue that the Court of F ederal Claims violated Nort h Star’s cons titutional right to a fair trial by unlawfully s h ifting the burden of production during trial. We have jurisdiction over the appeal and cross- appeal pursuant to 28 U.S.C. § 1295(a)(3). DISCUSSI ON
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 in correct because the CDA doe s not apply to a contract, such as the CAC, in volving the provision of services by the government. Rather, as far as services are concerned, the CDA only applies when the government is the ac quiring par ty. The par ties are correct. The CDA applies to contracts entered into by an executive agency for: (1) t he procurement of property, other than real proper ty in be ing; (2) the procurement of services ; (3) the procurement of construction, alteration, repair or maintenanc e of real property; or (4) the disposal of personal property. 41 U.S.C. § 602(a); see also Fla. Power & Lig h t Co . v. United States , 307 F.3d 1364, 1371 (F ed. Cir. 2002). The CDA does not apply t o the CAC

2006-5054, -5057 12because it was a contract for the provisio n of services by the government. Nevertheless, jurisdiction properly lay in th e 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 agains t the United States founded either upon the Constit u tion, or any Act of Congre ss or any regulation of an executive department, or upon any expr ess or im plied contract with the United States, or for liquidated or unliquidat ed dam ages in cases not soundin g in tort. Because North Star’s claim ar os e out of the CAC, an expr ess c ontract with the United States, the exercise of jurisdiction by the Court of Federal Claims was prop er under the Tucker Act.
II. Turning to the merits, as noted, t he government appeals both the ruling t h at WAPA bre a ched the CAC a nd the rulin g that North Star agr eed to Amendment No. 3 to the contract under dur ess, wh ile North Star cross-appeals t he Court of Federal Claims’ damages determination. In reviewing a dec i si on of th e Court of Federal Claims, this court reviews conclus i ons of law, such as contract interpretation, de nov o. Trauma Serv. Group v. United States , 104 F.3d 1321, 1325 (Fed. Cir. 1997). Findings of fact made by the Court of Federal Claims followin g 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 gov ernment argues that the Court of Federal Cla ims er red by finding a breach of contract based sole ly on WAPA’s failure to use a cos t -based methodology

. According to the government, i n order to prove that WAPA bre a ched the CAC, Nort h

2006-5054, -5057 13Star was required to prove that WAPA n egotiated in bad fait h. The g o vernment contends that the facts found by the Cour t of Federal Claims, which the government does not challenge, do not support a determi nation of bad faith and therefore do not establish b r each of the CAC. North Star responds tha t WAPA violated the requirement of section 21 of the CAC by developing a non-cost-based methodol ogy and that the evidenc e is sufficient to support a conclusi on that WAPA did n o t act in g ood faith in developing its methodology. We agree with the government. Section 21 of the CAC pr ovided t hat North Star and WAPA would “jointly estab lish an appr opriate cos t -based methodology.” This court has recognized that a provision which calls upon the parties to a c o ntract to agree in the future on a specified point or contract te rm, often referred to as an “agreement to agree,” imposes an obligati on on the parties to nego tiate in good faith. See Av iation Contractor Employees , Inc. v. United States , 945 F.2d 1568, 1572 (Fed. Cir. 1991); see also Gardiner, Kamya & Assoc s . v. United States , 369 F.3d 1318, 132 2 (Fed. Cir. 2004); Cit y of Tacoma v. United States , 31 F.3d 1130, 1132 (Fed. Cir. 1994). Therefore, the correct standard f o r determi ning whether WAPA or North Star breached section 21 of the CA C was whether either party failed to negotiate in good faith wit h respect to an appropriate cost-based methodology. It does not appear that the Court of Federal Claims employed this standard. As noted abov e, the court stated t hat the CAC would be breache d if one of the partie s failed to n egotiate in good faith or “if a ‘cost-based methodolo g y’ was no t utilized b y 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 14Howev e r, it erred in p o siting in the a l ter native, without qua lificat io n, that WAPA woul d breach the contract if it fail ed to u t ilize a c o st-based methodol ogy. Failure on the part of WAPA to utilize a c o st-based methodolo g y would not, standing alone, amount to a breach of contract. S u ch failure would repres ent 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-disclos ure during negotiations of information in its posses s ion, or to which it had acces s , that was pertinent to the formulation of a c o st-based met hodology. The point is that the failure t o utilize a c o st-based methodolo g y, without mo re, could not co nstitute a breach of contract on WAPA’s p a rt. The reason is tha t section 21 of the CAC obligated WAPA to negotiate in good fait h for a co st-based me thodolo g y. It did not ob liga t e WAPA t o employ a c o st-based methodology if dev elopm ent of such a met hodology did not prove feasible. Moreover, the Cour t of Federal Claims ’ findings of fact do not support a determination of breach under t he correct standard because there was no finding of bad faith on the part of WAPA. In conclud i n g that WAPA had breached the contract, th e court relied first on its finding that during neg otiations and discovery , and at trial, WAPA claimed that the Bur eau of Reclamation did not ha ve data that would enable the
governmen t to determine whet her the com pensatio n WAPA received fo r its sale of regulating services to North Star was su fficient to cover the portion of its annua l operation and maintenance costs associated with regu lation of the North Star load. N. Star Steel , 68 Fed. Cl. at 699. While the c ourt expressed ske pticism about WAPA’s inab ility to document costs, see id. at 699-700, it did not make a finding that cost data

2006-5054, -5057 15did in fact exist or tha t WAPA in t entiona lly withhe ld a n y cost data , see id. at 701 (“Sinc e it would not have been cost-effective for t he court to have ordered an independent audit of the Bureau of Reclamation and/or WAPA’s accounting re cords to ascertain whether cost data existed, the c ourt 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 whic h the cour t relied for its breach determination was tha t substantial e x p e rt testim ony co nfirmed that WAPA d i d not establish a cost-based met hodology with AEPCO/North Star. Id. at 701-21. Howev e r, for the reas ons disc us sed in t he preceding paragraph, a finding that WAPA did not est ablis h a cost-based methodology , abs ent a finding of bad fa ith, is insufficient as a matter of law to establish a b r each of the CAC by WAPA.
IV. Turning to t he issue of duress, the gover nment recognizes that North Star agreed to Amendment No. 3 under prot est, thereby apparently invol untarily accepting WAPA’s terms. The governm ent argues , however, that the Court of Feder al Claims erred in finding that North Star had no alt e rnative other than to sign Amendment No. 3 because North Star could hav e refused to sign Am endment No. 3, could have c ontinued to receive p o w er transmission services from WAPA at the ne gotiat ed twenty percent rate, and could have left intact WAPA’s contract ual obligation to negotiate a mutually acceptable cost-based methodology. The gover nment also takes issue wit h the Court of Federal Claims’ ruling that because Am endment No. 3 was n o t cost-based, WAPA breached its duty to negotiate in good fait h, and therefore acted coercively toward s North Star. The government re iterates that the facts f ound by the Court of Federal

2006-5054, -5057 16Claims do not support a det ermination of bad faith. Nort h Star counters that the Court of Federal Claims’ ru ling that Nor t h Star had no alte rnative 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 neces sary to dev e lop a cost based methodology. North Star argues that signing Amendment No. 3 was the only way to obtain any reduction in the twenty perc ent surcharge in effect . Therefore, it urges, it signed under duress. Again, we agree with the government. To render a contra ct unenforceable for duress, a party must establish (1) that it inv o luntarily ac cepted t he other party’s terms, (2) that circumstances permitted no other alte rnative, and (3) that such circ umstances were the result of the other party’s coerciv e acts. Freedom NY , 329 F.3d at 1329. As seen abov e, the Cour t of Federal Claims st at ed the correct three prong test for duress. Howev e r, while it is undisp uted that AEPCO si gned Amendment No. 3 under protest, which s a tis f ies the first prong of the duress test, the court’s findi ngs 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 r e sult of W APA’s coer cive acts—
was not met. 8 The third prong is not met because ther e was no wrongful action by the government. For the third pr ong of economic duress to have been met in this case, the circumstances wh ich North St ar confronted must have resu lted from WAPA’s coerciv e

8 Because we conclude that the thir d prong of the duress test was n o t met, it is not necessary for us to address t he government’s argument that the Court of Federal Claims erred in holdi ng that the s e cond prong was met. We thus express n o view on that question.

2006-5054, -5057 17acts. As the Court of Federal Claims itself stat ed, “coercion requires a showing that the Government’s action was wrongf ul, i.e. , ‘(1) illegal, (2) a breach of an expres s provision of the contract without a good-faith belief that the action was permissible under the contract, or (3) a breach of the implied cov enant of good faith an d fair dealing.’” N. Star Steel , 69 F ed. Cl. at 721 (citing F r eedom NY , 329 F.3d at 1330). T here is no evidenc e that WAPA acted ille g a lly. At the same time , we have held in Part III above that the Court of Federal Cla ims erred in holding t hat WAPA breached t he cont ract by failing t o utilize a co st-based methodolo g y

. We also hav e h e ld , as a matter of law, that there could be n o breach of contract because t here was no findin g that WAPA failed to negotiate in good fait h with respect to the development of a cost-based methodology and no s howing of evidence to support a finding of bad faith. U nder these circumstances, the sit uation in which North Star found itself could not, as a matter of law, be said to have been the p r oduct of coer cive co nduct on the part of WAPA, wh ic h is what is r equired by prong th ree of the duress test. For these reasons, the Court of Federal Claims erred in holding that Amen dment No. 3 to the C A C was signed under duress. CONCLUS ION 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 Nort h Star agreed to Am endment No. 3 to the CAC under duress, the judgment in favor of North Star is rev e rs ed. The case is remanded to the Court of Federal Claims, which is instr u cted to enter judgment in favor

2006-5054, -5057 18of the United States and dismis s North St ar’s Second Amended Complaint. In view of our decision, it is not necessary for us to reach North St ar’s cross-appeal. REVERSED and REMANDED

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