Opinion ID: 2116186
Heading Depth: 1
Heading Rank: 4

Heading: Alternative Contract Versus Contract With Liquidated Damages Provision.

Text: The decisive issue in this appeal is whether the Agreement is an alternative contract or a contract with a liquidated damages provision. To decide this question, we must review the district courts interpretation and construction of the Agreement. General principles of contract interpretation and construction govern our task. When the district court interprets the words of a contract, it determines the meaning of words in the contract. Fashion Fabrics v. Retail Investors Corp., 266 N.W.2d 22, 25 (Iowa 1978). When the court construes a contract, it decides the legal effect of such words. Id. We review the district court's interpretation as a legal issue unless the court used extrinsic evidence to interpret the words of the contract. Id. We always review the district court's construction of a contract as a legal issue. Id. When we are reviewing the district court's construction of a contract, we must keep in mind the cardinal rule that the intent of the parties controls. Iowa R.App. P. 14(f). Except in cases of ambiguity, we determine such intent from what the contract says. Id. Thus, if the parties' intent is clear and unambiguous from the words of the contract, we enforce the contract as written. Howard v. Schildberg Constr. Co., 528 N.W.2d 550, 555 (Iowa 1995). The parties agreed, and the district court determined, that the Agreement was plain and unambiguous and that the parties' intent could be gleaned from what the Agreement said. We agree the Agreement is plain and unambiguous; however, for reasons that follow we construe the Agreement differently. A. The basis for the district court ruling. As mentioned, the district court construed the Agreement as imposing two obligations on the Board: (1) provide the minimum tonnage of contaminated soil in a given Agreement fiscal year or (2) pay the liquidated damages for each ton under the agreed minimum. The court concluded that even assuming the IDNR's actions prevented the Board from providing the minimum tonnage, such actions did not prevent the Board from paying the liquidated damages. In construing the Agreement in this manner, the district court relied heavily on Restatement (Second) of Contracts section 261 comment f (1981). Restatement (Second) of Contracts section 261 provides for discharge of a contractual obligation when there is a supervening impracticability: Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary. Id. This rule recognizes that even though a party in assuming a duty has not qualified the language of the party's undertaking, the court may still relieve the party of that duty if performance has unexpectedly become impracticable as a result of a supervening event. Restatement (Second) of Contracts § 261 cmt. a, at 313. Comment f to section 261 recognizes one situation where this general rule does not apply: Alternative performances. A contract may permit a party to choose to perform in one of several different ways, any of which will discharge his duty. Where the duty is to render such an alternative performance, the fact that one or more of the alternatives has become impracticable will not discharge the party's duty to perform if at least one of them remains practicable. The form of the promise is not controlling, however, and not every promise that is expressed in alternative form gives rise to a duty to render an alternative performance. For example, a surety's undertaking that either the principal will perform or the surety will compensate the creditor does not ordinarily impose such a duty. Nor does a promise either to render a performance or pay liquidated damages impose such a duty. Id. (emphasis added) (citations omitted). As the italicized language says, the form of a promise is not controlling, and a promise either to render a performance or pay liquidated damages does not necessarily impose a duty to render alternative performances. Illustration 15 to comment f is a classic example of a contract to render alternative performances: On June 1, A contracts to sell and B to buy whichever of three specified machines A chooses to deliver on October 1. Two of the machines are destroyed by fire on July 1, and A fails to deliver the third on October 1. A's duty to deliver a machine is not discharged, and A is liable to B for breach of contract. If all three machines had been destroyed, A's duty to deliver a machine would have been discharged, and A would not have been liable to B for breach of contract. Id. at 319; see Glidden Co. v. Hellenic Lines, 275 F.2d 253, 257 (2d Cir.1960) (involving an alternative performance with a force majeure clause; contract provided that shipper could deliver by way of the Suez Canal, the Cape of Good Hope, or the Panama Canal; holding that force majeure clause did not excuse shipper from using Cape of Good Hope or Panama Canal when war prevented shipper from using Suez Canal, the most economical route). Illustration 16 to comment f is an example of a contract with a liquidated damages provision, and not a contract for alternative performances: A contracts to repair B's building. The contract contains a valid provision requiring A to pay liquidated damages if he fails to make any of the repairs. S is surety for A's performance. Before A is able to begin, B's building is destroyed by fire. Neither A's nor S's duty is one to render an alternative performance. As duty to repair the building is discharged, and A is not liable to B for liquidated damages or otherwise for breach of contract. S's duty as surety for A is also discharged, and S is not liable to B for breach of contract. Id. at 319-20. Obviously, A's duty is made impracticable due to the destruction of the building by fire. For this reason, A's duty is discharged. B. Public Service Co. v. Burlington Northern Railroad, 53 F.3d 1090 (10th Cir. 1995) and Superfos Investments Ltd. v. FirstMiss Fertilizer, Inc., 821 F.Supp. 432 (D.C.Miss.1993). The Board relies heavily on Public Service and Superfos in support of its position that the Agreement is simply a contract with a liquidated damages provision and not an alternative contract. We agree these cases are persuasive authority supporting the Board's position. 1. Public Service Co. v. Burlington Northern Railroad . The plaintiff, an electric company, entered into an agreement with the defendant, a railroad company. The defendant agreed to transport plaintiff's coal at the rate of $14 per ton to the plaintiff's electric generating facilities in Oklahoma; the plaintiff agreed to tender a minimum of 2,600,000 tons of coal for each year of a longterm contract. The contract also had the following pertinent provision: In the event that [the plaintiff] fails to tender to [the defendant] for transportation the agreed to minimum annual volume requirement for any calendar year as required under this agreement, then the plaintiff shall have a `tonnage shortfall' [for which it shall pay the defendant] ... liquidated damages.... Public Serv., 53 F.3d at 1093. After several years, the plaintiff decided it was more economical to pay liquidated damages and ship the coal through another shipper, which charged less than the plaintiff had agreed to pay the defendant. The defendant asserted the plaintiff had breached the agreement when the plaintiff began shipping through other shippers. The plaintiff brought a declaratory judgment action and moved for summary judgment. The district court ruled that the minimum tonnage and liquidated damages provisions constituted a contract for alternative performance, which allowed the plaintiff to unilaterally reduce its minimum annual tonnage commitment to the defendant. Id. at 1095-96. As here, the parties and the trial court in Public Service agreed the contract was unambiguous. Id. at 1097. The appellate court likewise concluded the contract was unambiguous but determined, contrary to the trial court, that the contract was not an alternative performance contract. Id. at 1097-98. Citing 5 Corbin, Corbin on Contracts, section 1082, at 462 (1964), the court emphasized that a contract with a liquidated damages provision is not an alternative contract. Public Serv., 53 F.3d at 1098. The court cited with approval this additional explanation found in Corbin, section 1082, at 462: Where a contractor promises to render a certain performance or, in default thereof, to pay a definite sum as liquidated damages, he has not made an alternative contract.... It is evident that some alternative contracts giving the power of choice between the alternatives to the promisor can easily be confused with contracts that provide for the payment of liquidated damages in case of breach, provided that one of the alternatives is the payment of a sum of money.... If, upon a proper interpretation of the contract, it is found that the parties have agreed that either one of the two alternative performances is to be given by the promisor and received by the promisee as the agreed exchange and equivalent for the return performance rendered by the promisee, the contract is a true alternative contract. Public Serv., 53 F.3d at 1098-99. Applying Corbin's explanation to the facts, the court held that the plaintiffs commitment to ship the annual minimum tonnage of coal via the defendant's railroad was not set forth in the Agreement as `one of the two alternative performances ... to be given' by the plaintiff. Id. at 1099. The court accordingly held that the trial court had erred in concluding otherwise. Id. 2. Superfos Investments Ltd. v. FirstMiss Fertilizer, Inc . Superfos was somewhat different from Public Service. In Superfos, the defendant agreed to buy a minimum of 80,000 tons of anhydrous ammonia in each year of the contract. Unlike the contract in Public Service, the contract in Superfos had no express liquidated damages provision. Instead, the contract obligated the defendant to make payment for any deficiency in purchases as though the required minimum annual volume of the product had been delivered. The defendant moved for summary judgment, contending that the provision calling for payment of any deficiency in purchases at the purchase price was a penalty for failure to perform. The plaintiff countered, contending that the challenged contract was a typical `take-or-pay' contract, which is reasonable, just and enforceable according to its terms. Superfos, 821 F.Supp. at 433. The plaintiff argued that like the typical take-or-pay contracts, the challenged provision was merely an alternative performance provision in which the alternatives of taking and paying for the requisite annual volume, on the one hand, and on the other hand of paying for product not taken, are merely the buyer's alternative methods of performing its bargain. Id. This case is significant because ASPI relies on take-or-pay cases to support its position. Additionally, the district court thought that the challenged language in the Agreement and the typical take-or-pay contracts are somewhat analogous. The trial court in Superfos framed the issue this way: Was the contract a true `alternative performance' contract (giving the buyer the option of taking and paying for product or of paying for product not taken), or [was it,] in fact, one which provides for a primary obligation (taking and paying for product) with provision for the payment of liquidated damages or a penalty (paying for product not taken) as a means of encouraging or ensuring the buyers performance of the primary obligation[?] Id. Before resolving the issue, the court found the following explanation of alternative performance contracts persuasive: A contract may give an option to one or both parties either to perform a specified act or to make a payment; and though this form of contract cannot be used as a cover for the enforcement of a penalty, yet if on a true interpretation it appears that it was intended to give a real option, that is, that it was conceived possible that at the time fixed for performance, either alternative might prove the more desirable, the contract will be enforced according to its terms. The fact that a promise is expressed in the alternative, however, may easily be given too much weight. As the question of liquidated damages or penalty is based on equitable principles, it cannot depend on the form of the transaction, but rather on its substance. It follows that a contract expressed in the alternative, when examined in the light of the existing facts may prove to be: (1) a contract contemplating a single definite performance with a penalty stated as an alternative; (2) a contract contemplating a single definite performance with a sum named as liquidated damages as an alternative; or (3) a contract by which either alternative may prove the more advantageous and is as open to the promisor as the other. Id. at 434 (quoting 5 Samuel Williston, A Treatise on the Law of Contracts § 781, at 706-07 (3d ed.1961)); see Restatement (Second) of Contracts § 356 cmt. c, at 159 (Although the parties may in good faith contract for alternative performances ..., a court will look to the substance of the agreement to determine whether this is the case or whether the parties have attempted to disguise a provision for a penalty that is unenforceable....). In Superfos, the court looked to a number of factors in reaching the conclusion that the contract in question was not a true alternative performance contract. First, the court explained that the pay option in a take-or-pay contract is neither a penalty nor a damage provision. Rather, the pay option is one of the buyer's performance alternatives. Superfos, 821 F.Supp. at 434. In a take-or-pay contract, the buyer can perform in either one of two ways: (1) take the minimum purchase obligation of the product or (2) pay the minimum bill. Id. Second, the court recognized that take-or-pay contracts are common to the gas industry and are viewed as apportioning the risks of natural gas production and sales between the buyer and seller. Id. By assuring the buyer a supply of gas, the seller bears the risk of production. To compensate the seller for this risk, the buyer agrees to take, or pay for if not taken, a minimum quantity of gas. Id. The buyer thus bears the risk of market demand, and if the demand for gas decreases, the seller is assured of receiving the price for the contract quantity delivered each year. Id. Third, the court did not view the contract in question as a typical take-or-pay contract. The plaintiff's contention that it assumed the risks associated with production was not so because a force majeure provision in the contract relieved both parties of liability for failure to perform resulting from events of force majeure. Id. at 436. Last, typical take-or-pay contracts allow a buyer to make-up for gas paid for but not taken. Thus, the take-or-pay contract allows the buyer a credit for gas paid for but not taken and permits the buyer to recoup the make-up gas over the term of the contract. Id. at 436-37. The make-up provision presents the buyer a real choice between the two obligations [take or pay;] the second alternative, that of paying for gas not taken, is a prepayment resulting in a later credit, rather than a penalty. Id. at 437. The real choice provided by the makeup provision is a determinative factor in the analysis of provisions of a contract to ascertain whether those contracts truly do provide `alternative obligations.' Id. Without the make-up provision, there is no real option because the buyer would be paying for nothing. Id. Because the contract gave the defendant no make-up right beyond the contract year, the court concluded the defendant had no real alternative under the contract. Id. at 439. In Superfos, the court recognized that a contract with the payment of a liquidated sum of money as one of the alternative methods of performance can be a valid alternative performance contract. Id. The court, however, also recognized that where it cannot reasonably be concluded that at the time the contract was entered, paying for a product not taken might prove as desirable as taking the product and paying for it, then it cannot be reasonably concluded that the pay alternative is a true alternative. Id. Thus, each of the alternative performances must present a real choice. Or, put another way, the pay alternative must be just as advantageous as taking and paying for the product. In the court's opinion the pay option in the challenged contract was not a real option. Id. C. The merits. With the foregoing authorities in mind, we turn to the question of whether the Agreement here was a true alternative contract. Looking to the language of the Agreement, we note the provision relating to the commitment to supply the minimum tonnage of contaminated soil and the provision for liquidated damages are not set forth as alternatives. Additionally, the Board's obligation to provide the minimum tonnage of contaminated soil is not contained in the same article of the Agreement as the liquidated damages provision. This separation at least suggests the two obligations are not alternative performances. The language in this respect is akin to the language in Public Service, where in one clause the plaintiff agreed to transport a minimum amount of coal at a specified price during the contract year and in another clause agreed to pay liquidated damages for any shortfall during such year. The Agreement uses the words liquidated damages in one of the so-called alternatives. This is telling on the question of the parties' intent. Such language ordinarily means the parties intended a remedy for damages in the event of nonperformance. This is reinforced in the last part of the provision, which describes the liquidated damages as a reasonable estimate of [ASPI's] damages associated with the Board's inability to supply petroleum-contaminated soils. Parties include a liquidated damages provision in their contracts to provide a ready and relatively easy calculation of damages if there is a breach of contract. See Restatement (Second) of Contracts § 356 cmt. a, at 157 (stating purpose of liquidated damages provision is to provide a way to establish damages for nonperformance when those damages would otherwise be difficult to determine). One rule of contract construction relevant here is that we give words their commonly accepted meaning and interpret them in the context in which they are used. Home Fed. Sav. & Loan Assn. v. Campney, 357 N.W.2d 613, 617 (Iowa 1984). If the liquidated damages language in the Agreement means what it says, then there is no alternative to pay liquidated damages in the event of a shortfall of contaminated soil. This is because in a true alternative contract, the alternatives are not damages provisions but rather performance alternatives. Superfos, 821 F.Supp. at 434. Liquidated damages, on the other hand, are a remedy for a breach of a contract. See Restatement (Second) of Contracts §§ 346, 356, at 110, 157. Turning to the substantive provisions of the Agreement, we can easily say it is not a take-or-pay contract. Like the contract in Superfos, the Agreement has a force majeure provision relieving the parties of risks if they are unable to perform because of events covered by force majeure. Risk allocation is a hallmark of take-or-pay contracts. Superfos, 821 F.Supp. at 435. Most significant is the absence of a makeup provision in the Agreement. The Agreement has no provision that requires ASPI beyond the contract year to remediate contaminated soil for which the Board has paid liquidated damages. The Agreement unequivocally provides that payment of liquidated damages is due at the end of each Agreement fiscal year. Thus, the Board has no real choice to pay and later make up for the deficiency in tonnage within a make-up period. There is still another reason the Board has no real choice under the Agreement: The alternative of paying $70.38 per ton of nonprocessed soil is not equally as advantageous to the Board as paying for soil that was remediated. See Corbin § 1082, at 464. In short, the Board has no real choice of alternatives. In effect, under the district court's construction of the Agreement, the Board is paying for nothing. Moreover, we agree with the Board that the district court's construction of the Agreement renders the force majeure provision a nullity. Under the courts construction, the force majeure provision would never relieve the Board from paying liquidated damages even though events within the force majeure provision occurred. This is in violation of another rule of contract construction: Because an agreement is to be interpreted as a whole, it is assumed in the first instance that no part of it is superfluous; an interpretation which gives a reasonable, lawful, and effective meaning to all terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect. Fashion Fabrics, 266 N.W.2d at 26 (citation omitted). Finally, we reject ASPI's contention that unless we view the Agreement as an alternative contract, we will render the liquidated damages provision a nullity. In making this contention, ASPI assumes that whenever there is an inability to supply soil, the force majeure provision would always excuse performance. ASPI reads too much into the force majeure provision. The provision only excuses failures to perform obligations under the Agreement due to events, actions, or contingencies beyond [the parties'] reasonable control. Events within the Board's reasonable control that render the Board unable to perform are not excused and would require the Board to pay liquidated damages. One example would be the Board's arbitrary refusal to supply any available contaminated soil to ASPI. The force majeure provision would not excuse the Board from paying liquidated damages if ASPI sought those damages as a remedy. We agree with the Board that the Agreement is not an alternative performance contract. We hold that as a matter of law the Agreement is a contract to provide a minimum of 20,000 tons of contaminated soil per Agreement year, with a liquidated damages provision in the event of the Board's unexcused nonperformance. The district court erred in concluding otherwise and in sustaining ASPI's motion for summary judgment and in overruling the Board's motion on this issue.