Opinion ID: 209714
Heading Depth: 1
Heading Rank: 5

Heading: The Required Acceptance Rate under the Standard Contract

Text: This court interprets a contract in accordance with its language. See Foley Co. v. United States, 11 F.3d 1032, 1034 (Fed.Cir.1993) (citing Gould, Inc. v. United States, 935 F.2d 1271, 1274 (Fed. Cir.1991)). Generally, this court also construes contract terms in the context of the entire contract, avoiding any meaning that renders some part of the contract inoperative. See Restatement (Second) of Contracts § 203(a) ([A]n interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect.). In setting the proper acceptance rate to measure damages, the Court of Federal Claims did not find DOE had an obligation to accept SNF/HLW at a rate that would prevent the utilities from bearing the costs of additional on-site waste storage facilities after January 31, 1998. The hypothetical acceptance rate that would have obviated the need for onsite storage was around 3,000 MTU/year, according to PG & E. Instead, the Court of Federal Claims concluded that the duty of good faith and fair dealing required reasonable performance under the existing circumstances and the requirements of the Standard Contract. PG & E I, 73 Fed.Cl. at 397-98. To determine the reasonable performance rate, the Court of Federal Claims consulted DOE's 1991 ACS reports and PG & E's approved schedules. According to the trial court, these reports, while not contractually binding, represented the parties' understanding that this was the process under the express terms of the Standard Contract by which a firm acceptance rate and delivery schedule[] would be determined, and the parties substantially carried out this process before DOE's breach. Id. at 399. Adopting the 1991 reports as a baseline, the Court of Federal Claims found that DOE would have accepted SNF/HLW from the utilities at 400 MTU/year beginning in 1998, 600 MTU/year in 1999, and 900 MTU/year from 2000-2007. The trial court further found that DOE would have accepted approximately all of the Humboldt Bay spent fuel by 2001, but that DOE would not have accepted any of Diablo Canyon's spent fuel by the end of 2007. Id. at 399-400. As noted by the trial court, the Standard Contract did not contain a specific acceptance rate. Instead, the Standard Contract provided a mechanism for establishing an acceptance rate through the ACS process. The contract sets forth DOE's responsibilities in Article IV(B): 5. (a) Beginning on April 1, 1991, DOE shall issue an annual acceptance priority ranking for receipt of SNF and/or HLW at the DOE repository. This priority ranking shall be based on the age of SNF and/or HLW as calculated from the date of discharge of such material from the civilian nuclear power reactor. The oldest fuel or waste will have the highest priority for acceptance, except as provided in paragraphs B and D of Article V and paragraph B.3 of Article VI hereof. (b) Beginning not later than July 1, 1987, DOE shall issue an annual capacity report [ (ACR) ] for planning purposes. This report shall set forth the projected annual receiving capacity for the DOE facility(ies) and the annual acceptance ranking relating to DOE contracts for the disposal of SNF and/or HLW including, to the extent available, capacity information for ten (10) years following the projected commencement of operation of the initial DOE facility. 10 C.F.R. § 961.11 (1984). The utilities' responsibilities appear in Article V(B): 1. Delivery commitment schedule(s)... for delivery of SNF and/or HLW shall be furnished to DOE by Purchaser. After DOE has issued its proposed [APR], as described in paragraph B.5 of Article IV hereof, beginning January 1, 1992 the Purchaser shall submit to DOE the delivery commitment schedule(s) which shall identify all SNF and/or HLW the Purchaser wishes to deliver to DOE beginning sixty-three (63) months thereafter. DOE shall approve or disapprove such schedules within three (3) months after receipt. Id. From these clauses, the trial court declined to read a reasonable rate provision into the Standard Contract, and specifically rejected PG & E's proposed 3,000 MTU/year target. PG & E I, 73 Fed.Cl. at 386. The Court of Federal Claims reasoned that adopting the 3,000 MTU/year rate would render the ACS process meaningless or inoperative. Id. at 387. The trial court's approach, up to this point, adhered to standard contract interpretation principles. The Court of Federal Claims next considered Restatement (Second) of Contracts § 204, which governs the insertion of an essential term allegedly absent from the agreement: When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court. The Court of Federal Claims looked to the examples provided by the comments to § 204, decided that none of them applied, and thus declined to use § 204 to read a specific acceptance rate term into the Standard Contract. Concluding that the Standard Contract lacked a specific acceptance rate term and that one could not be inserted as an omitted term under Restatement § 204, the Court of Federal Claims turned to the duty of good faith and fair dealing to require good-faith performance or reasonable performance by DOE, which the trial court equated with the 1991 ACS rates. See PG & E I, 73 Fed.Cl. at 378-81. The Court of Federal Claims' selection of the 1991 ACS rate cannot be correct. At the outset, as the Court of Federal Claims correctly recognized, the damages analysis for the partial breach requires some minimum acceptance rate. Moreover, without an acceptance rate, the contract would be meaningless and nonsensical because DOE could opt to accept waste at zero MTU/year and satisfy its performance obligations without actually doing anything. The acceptance rate is thus an essential term of the contract. While the Standard Contract did not spell out a particular numeric or descriptive acceptance rate, it did set forth the specific mechanism for calculating that rate, that is, the ACS process. While not explaining the ACS process in great detail, the contract specified that the ACS process was the basis for calculating an acceptance rate. In sum, the language of the contract specifies that the ACS process provides the contractual acceptance rate. Alternatively, this court sees § 204 of the Restatement as another way to reach the same result. Because the brief contractual description of the ACS process does not disclose an actual acceptance rate, the acceptance rate arguably constitutes an omitted term in the Standard Contract. Thus, the language of § 204 applies to this case. The acceptance rate is, as per § 204, a term which is essential to a determination of [the parties'] rights and duties, which the parties did not include (or, at least, did not adequately define) in the contract itself. Thus, § 204 justifies a reasonable substitute for the omitted term. Ultimately, whether acceptance rate is viewed as an omitted term that can be supplied by § 204 or instead as a term of the contract calculated through the ACR process set forth explicitly in the contract, the outcome is the same: the ACR process provides the most reasonable approach to setting an acceptance rate. As the trial court correctly noted, the ACR process provides the most suitableand perhaps onlymethod of setting the rate. As described earlier, the Court of Federal Claims declined to apply Restatement § 204 to read an acceptance rate term into the Standard Contract because this case did not match any of the examples in the comments to § 204. This court's § 204 analysis is merely an alternative to the preferable reasoning based on the contract language itself, but nonetheless this court notes that the comments to § 204 do not present an exhaustive list of potential situations for application of the principle embodied within § 204. This case presents a situation that falls squarely within the language of § 204 itself, even if not within one of the examples. Because the ACS process provides the mechanism for calculating the acceptance rate under the contract, the salient question becomes which ACS to use. DOE issued its first report in June 1987, in compliance with the Standard Contract, followed by additional reports in June 1988, December 1990, and December 1991. In its Illustrative Waste Acceptance Schedule for the First 10 Years of Facility Operation, the June 1987 report planned to accept SNF/HLW from the utilities at a rate of 1,200 MTU/year in 1998, ramping up to 2,000 MTU/year by 2003, and then to 2,650 MTU/year from 2004 through 2007. After DOE issued its June 1987 ACR, Congress passed the 1987 Amendments Act to the NWPA, which, as described above, implemented a linkage requirement precluding DOE from constructing an MRS facility without authorization for a permanent storage repository. Moreover the 1987 Act capped the capacity of an MRS facility to 10,000 MTU until operation of a permanent repository, and to 15,000 MTU thereafter. From the passage of the 1987 Act onward, DOE drastically reduced each subsequent report, no doubt reflecting accurately the impossibility of full contract compliance under these new linkage terms. In its December 1991 report, DOE projected a waste acceptance schedule of 300 MTU/year beginning in 1998, with up to 875 MTU/year in 2001, and up to 1,800 MTU/year in 2010, when the permanent repository was projected to come online. The Court of Federal Claims adopted the 1991 ACS process for calculating rate commitments and damages relying on the duty of good faith and fair dealing. See PG & E I, 73 Fed.Cl. at 399. The trial court did not, however, sufficiently explain its choice of the 1991 process over earlier reports. As noted earlier, this court agrees with the Court of Federal Claims that the ACS process is the express mechanism in the Standard Contract that the parties intended to be used to determine DOE's acceptance rate and that the parties actually and substantially applied to make such a determination, id. at 398, and is thus the proper basis for determining the acceptance rate. However, this court disagrees with the Court of Federal Claims' conclusion that the 1991 ACS process provides the most accurate reflection of the parties' intent for full contract performance. Incidentally, the Government advocated the 1991 process to the trial court as the correct acceptance rate. With that argument, the Government implicitly conceded that DOE also considered the ACS process to set the contract's acceptance rates. The ACS processes are all post-formation conduct in relation to the language of the contract. Nonetheless the contract itself specified that this process would set the proper acceptance rate. Because this court relies on this post-formation conduct to interpret the contract itself, the most accurate picture of the parties' intent for this contract is their conduct at a time when both parties still anticipated timely and full performance of the contract. See Julius Goldman's Egg City v. United States, 697 F.2d 1051, 1058 (Fed.Cir.1983) (per curiam) (A principle of contract interpretation is that the contract must be interpreted in accordance with the parties' understanding as shown by their conduct before the controversy. (citing Macke Co. v. United States, 199 Ct.Cl. 552, 467 F.2d 1323, 1325 (1972))); Macke, 467 F.2d at 1325 ([H]ow the parties act under the arrangement, before the advent of controversy, is often more revealing than the dry language of the written agreement by itself.). The 1991 ACS process does not reflect the parties' intent regarding the contractual acceptance rate. The 1991 process came after the passage of the 1987 Amendments Act. Therefore its projections incorporated that Act's linkage requirements that prohibited acceptance without some difficult (and even yet unachieved) prior actions. The 1991 report assumed that Congress would change its mind. DOE pointed out in its 1991 report that the projected acceptance rates do not reflect the MRS facility schedule linkages with the repository development that were imposed by the NWPA. PG & E I, 73 Fed.Cl. at 368 (quoting December 1991 Annual Capacity Report). In other words, the 1991 acceptance rates themselves were scarcely possible in the environment after the 1987 Amendments Act. Indeed the record shows that the linkages imposed by the 1987 Amendments presented the specter of an impending breach. This specter necessarily tainted the 1991 report. With strict linkages and no resolution of the permanent repository problem forthcoming, DOE's timely performance of its full contractual obligations had, by then, already become a distant possibility. In fact, in its June 1988 report, DOE explained that the linkage provisions made operations of and waste acceptance at a DOE facility significantly before 2003 unlikely. PG & E I, 73 Fed.Cl. at 367 (quoting June 1988 Annual Capacity Report). The record also suggests that DOE may have put forth the 1991 acceptance rates as a litigation strategy, to minimize DOE's exposure for its impending breach, rather than as a realistic, good faith projection for waste acceptance. The Court of Federal Claims judge in the companion Yankee Atomic Electric Co. v. United States, 73 Fed.Cl. 249 (2006) ( Yankee I ) case credited the testimony of a former DOE contractor who stated at trial that the 1991 ACR was intended to limit DOE's liability for breach of contract. Id. at 273. For these reasons, among others, this court concludes that the 1991 report does not present an acceptable acceptance rate under the Standard Contract. In contrast, the June 1987 ACS process occurred several months before the passage of the 1987 Amendments Act (in December 1987), that is, before the linkage requirements made DOE's breach virtually inevitable. The record suggests that in 1987, both the DOE and the nuclear utilities realistically expected that DOE would accept SNF/HLW on schedule. This court has considered that even the 1987 report could reflect some distortion, given its preparation nearly contemporaneous with the 1987 Amendments Act. DOE's submission to Congress in 1987, as discussed above, included a request for an MRS facility in connection with DOE's projected waste acceptance rates. The record shows, however, that Congress rejected DOE's proposal and imposed more stringent linkage requirements, forbidding even the construction of an MRS facility before NRC authorization of a permanent repository. In other words, DOE proposed a linkage between MRS operation and a permanent repository in 1987 and apparently foresaw that such linkage might jeopardize the obligation to accept waste by January 31, 1998. Nonetheless, DOE was merely addressing a contingency rather than a known reality at the time of the 1987 report. The 1987 ACR process therefore provides the best available pre-breach snapshot of both parties' intentions for an acceptance rate. After the 1987 Amendments Act, breach became highly likely or inevitable because of the strict linkage requirements. Later ACS reports became tainted by the impending breach and even impending litigation strategies. In sum, the 1987 report is an ACS report that contemplated full and timely performance. Thus, this report presents the most reasonable measure of the contractual acceptance rate. Accordingly this court offers the Court of Federal Claims on remand the opportunity to recalculate damages based on that rate. The trial court relied heavily on the duty of good faith and fair dealing to set the rate according to the 1991 ACS rate. In fact, an accurate assessment of the duty of good faith and fair dealing would reach the same result this court reaches with this opinion. Indeed the duty of good faith and fair dealing contemplates a method of setting a reasonable rate for full compliance with the contract. After all, parties to a contract agree to perform fully, not partially. Thus the reasonable remedies under good faith and fair dealing duties would seek a rate based on full performance. The 1987 report was the last attempt to comply with the terms of the contract. After the 1987 Amendments Act, full compliance was a remote, even impossible, goal, and later reports reflected that reality. For these reasons, this court concludes that the Standard Contract required DOE to accept SNF/HLW in accordance with the 1987 ACR process. On remand, the Court of Federal Claims will have the opportunity to calculate the damages owed to PG & E for DOE's partial breach of the Standard Contract on this basis.