Court Opinion

ID: 3017876
Source: CourtListenerOpinion
Date Created: 2015-10-13 22:18:15.804632+00
Date Added: 2024-06-11T12:46:32.536542
License: Public Domain

____________

                                    No. 95-3398
                                   ____________

Lamb Engineering & Construction         *
Company,                                *
                                        *
                    Appellee,           *
                                        * Appeal from the United States
      v.                                * District Court for the
                                        * District of Nebraska
Nebraska Public Power District,         *
                                        *
                    Appellant.          *

                                   ____________

                      Submitted:    May 13, 1996

                          Filed:     January 9, 1997
                                   ____________

Before McMILLIAN, FAGG and LOKEN, Circuit Judges.
                              ____________

McMILLIAN, Circuit Judge.

      Nebraska Public Power District ("NPPD") appeals from a final judgment
entered in the United States District Court for the District of Nebraska
awarding Lamb Engineering & Construction Co. ("Lamb") $1,129,620 in
contract damages.   Lamb Eng'g & Constr. Co. v. Nebraska Pub. Power Dist.,
No. 4:CV94-29 (D. Neb. June 22, 1995) (Judgment) (Lamb Eng'g).            For
reversal, NPPD argues the district court erred in denying its amended
motion for judgment as a matter of law or, in the alternative, for a new
trial, interpreting the contract, instructing the jury, and admitting
certain evidence.

      NPPD also argues the district court erred in awarding attorney fees
in the amount of $277,649.50.      Id. (Aug. 25, 1995).   NPPD argues that the
award of attorney fees was contrary to Nebraska law and unsupported by the
evidence.
         For the reasons discussed below, we affirm in part and reverse in
part the order of the district court and remand the case to the district
court for a new trial.

                                  I.     Background

       NPPD, a public power district, is a public corporation and political
subdivision of the State of Nebraska.        On October 2, 1992, consistent with
certain statutory competitive bidding requirements, NPPD opened bids for
Contract No. 92-71 (the "contract") for refurbishing and upgrading 65 miles
of NPPD's 115 kilovolt transmission line which runs along the Platte River
from Columbus to Grand Island, Nebraska.           The transmission line consists
of three distinct sections which are separated by substations:           section 1,
from Grand Island to Central City; section 2, from Central City to Silver
Creek; and section 3, from Silver Creek to Columbus.           The line consists of
523 total structures.

       NPPD wrote the contract as a unit-price contract in which estimated
quantities of work were provided to bidders in order to compare bids
offered under the contract on a uniform basis.          On October 29, 1992, NPPD
awarded the contract to Lamb as the responsible bidder who submitted the
lowest and best bid of $769,300.          The exact compensation payable to Lamb
under the contract was to be determined on the basis of the unit-prices for
work actually performed.      On January 18, 1993, Lamb began work on the line,
which was to be completed by June 5, 1993.

       Lamb encountered difficulties in performing the contract.                  The
circumstances giving rise to the difficulties are disputed.           Lamb contends
that NPPD administered the contract in bad faith, causing Lamb to be unable
to   fully   perform   the   contract.      Lamb   maintains   that   "[d]uring   the
evaluation of the several bids, a faction developed within NPPD's System
Planning and Engineering Division which opposed awarding the Contract to
Lamb."   Brief for Appellee

                                          -2-
at 1.      Lamb also maintains that "these same individuals who opposed
awarding Lamb the Contract, were given responsibility for administering the
Contract and they never relented in their opposition to having Lamb perform
the work."       Id. at 2.   Lamb claims that the faction tried to hinder and
financially oppress Lamb through the faction's administration of the
contract.    Id.

        On January 29, 1993, NPPD sent a letter to Lamb seeking assurances
that Lamb would timely complete the contract.        Lamb interpreted the letter
as a threat that work be accelerated immediately or Lamb would face
possible termination, based on the fact that NPPD sent a copy of the letter
to   Lamb's surety, who was only to be contacted in the event of a
termination for default.        Brief for Appellee at 2.        Lamb suggests that
NPPD's bad faith administration of the contract is evidenced by the fact
that    almost    immediately   after   NPPD   awarded   Lamb   the   contract,   NPPD
increased its original estimate of work to be performed by 80%, but refused
to extend Lamb's time for performance.          Id. at 2-3.     Lamb maintains that
it was entitled to a time extension under the contract's force majeure
clause1 because of the additional work imposed by NPPD and

       1
        The force majeure clause provided, in pertinent part:

              The CONTRACTOR agrees that ... he has taken
        into consideration ... all of the ordinary delays
        due to normally inclement weather, in securing
        materials or workmen, or otherwise. In the event
        that the CONTRACTOR is delayed in the performance
        of the work as a result of causes beyond his
        control and which he could not have reasonably
        anticipated and without his fault or negligence,
        such as acts of God, fire, flood, war, or
        governmental or judicial action ..., the time
        specified in the Contract Documents for completion
        of the work may be extended for an appropriate
        period reflecting the actual effect of the delay on
        the performance of the work... If the CONTRACTOR
        encounters extra costs as a result of delays which
        are beyond his control and which he could not have
        reasonably anticipated and without his fault or
        negligence, including those delays which are due to
        the actions of the DISTRICT ..., the CONTRACTOR
        shall promptly give the DISTRICT notice ... of such

                                         -3-
due to "unexpected and abnormally wet and muddy soil conditions during
January through April, 1993."          Id. at 3.        Lamb claims that NPPD's
unwillingness to extend the June 5, 1993, completion date resulted in
greatly increased costs to Lamb for labor, equipment, and materials.           Id.
at 4.

        NPPD's   description   of    the     circumstances    surrounding   Lamb's
performance is markedly different from Lamb's.         NPPD notes that "[a]lthough
Lamb characterizes itself as an experienced contractor, it primarily has
worked on substations and has had very limited experience with electric
transmission lines."    Reply Brief for Appellant at 8.          NPPD claims that,
not only did Lamb's field superintendent have no prior experience with an
electric    transmission   line     project,    but    also   Lamb's   right-of-way
coordinator and material coordinator lacked any experience with such work.2
Id. at 8-9.      As further proof of Lamb's inexperience, NPPD notes that
neither Lamb's president nor Lamb's estimator, who prepared the bid,
understood the contract's unit-pricing.          Id.    NPPD maintains that, for
these reasons, NPPD's transmission engineering department discouraged
awarding the contract to Lamb.       Id.

        After the contract was awarded to Lamb, however, NPPD claims to have
taken "extraordinary steps to assist Lamb on the project," none of which
were required under the contract.          For example, NPPD allegedly performed
an advance ground-level inspection of the line, prepared summary sheets for
Lamb showing the expected work at each structure location, contacted
landowners to arrange access routes for Lamb, and hired an outside expert
to perform aerial inspection work.      Id.    The ground-level inspection of the
line revealed that

extra costs.

        Contract No. 92-71, at D-13 to 14.
        2
     Those two positions were assigned to the 18- and 21-year-old
sons of Lamb's president. Reply Brief for Appellant at 9.

                                       -4-
more poles required replacement than anticipated, resulting in an increase
of approximately 11% over the original work estimate contained in the
contract, with a total price increase of approximately $85,403.                     NPPD
suggests that "Lamb's president mistakenly interpreted this increase to
apply only to the first section of the line," rather than to the total
contract.     Id. at 10.      NPPD claims that due to "Lamb's lack of progress
during the first month of the project and the continued failure of Lamb's
project manager to deliver required construction schedules to NPPD," it
sent Lamb the January 29, 1993, letter seeking assurance that Lamb intended
to complete the project on time.            Id.   NPPD maintains that the letter
"expressly advised Lamb that the transmission line needed to be returned
to service by the scheduled June 5th completion date in order to handle
NPPD's increased summer load," and thus no extensions would be granted.
Id.

      NPPD maintains that the force majeure clause did not apply to the
difficulties encountered by Lamb.            At trial, NPPD presented extensive
expert testimony by a meteorologist and a geotechnical engineer that "the
precipitation, temperature, groundwater, and soil conditions experienced
on the project were typical of conditions along the Platte River in
Nebraska    during   winter    and    spring,   and   should   reasonably   have    been
anticipated by Lamb."      Id. at 11.     NPPD claims that it informed Lamb that,
even though the force majeure clause did not apply, Lamb had the right
under the contract to stop work if the weather or soil conditions were
unsuitable.    Id.   In March 1993, NPPD notified Lamb that it should simply
perform as much work as possible before June 5th.              Id.

      In March 1993, Lamb and NPPD negotiated a tentative "standby"
agreement by which Lamb would temporarily shut down the project due to the
weather and soil conditions.         Lamb claims that the agreement was finalized,
thus justifying Lamb's decision to send its crews home on March 17.                Brief
for Appellee at 5.    NPPD asserts, however, that the terms of the agreement
were subject to further review of

                                          -5-
applicable labor and equipment rates.              Reply Brief for Appellant at 11.
NPPD argues that it was justified in rejecting the "standby" agreement
because    it   had   not    been   reduced   to   writing   and   faxed   to   Lamb   for
modification or execution as agreed.            Id.

        In April 1993, Lamb's performance increased as the weather and soil
conditions improved.        On April 21, 1993, NPPD suggested in a letter to Lamb
that all work in section 3 of the transmission line be deleted from the
contract, as Lamb had not yet begun any of that work.                Lamb rejected the
proposal and on May 6, 1993, demanded that it be allowed to perform the
work on section 3 as provided in the contract.

        On May 7, 1993, NPPD gave Lamb written notice that it was terminating
the contract under the contract's termination clause, which provided:

        The DISTRICT may at any time, and without cause,
        terminate this Contract by mailing a written notice
        thereof to the CONTRACTOR at the address given in the
        Proposal Section of these Contract Documents. Upon any
        such Termination, the DISTRICT shall pay the CONTRACTOR
        reasonable and proper charges for termination.

Contract No. 92-71, at D-12.         As of that date, Lamb had partially performed
its work under the contract on the first two sections of the transmission
line.     Lamb had performed work on 262 of the 523 structures on the
transmission line and had completed work on 123 of those structures.

        During the project, Lamb submitted four progress payment invoices for
work performed through February 24, 1993, March 17, 1993, April 7, 1993,
and April 23, 1993.         NPPD made adjustments to the invoices and deducted a
5% retainage fee, ultimately paying Lamb $260,991.22.              Lamb also submitted
an invoice to NPPD for state use taxes in the amount of $969.44, which NPPD
paid in full on

                                          -6-
June 30, 1993.    Lamb submitted additional invoices for:         claimed extra work
in preparing the transmission line for re-energization and in demobilizing
before the temporary shutdown of the project in mid-March 1993, totalling
$36,473.00;      "standby"     costs    during     the   temporary    shutdown     and
remobilization costs totalling $83,755.50; "down time" or "force majeure"
costs    totalling       $186,817.33;   and      "acceleration"    costs   totalling
$122,764.74.     Lamb refused to accept partial payment tendered by NPPD for
the   claimed    costs    associated    with   the   temporary    shutdown,   namely,
demobilization costs of $5,416.00 and standby costs of $25,907.40.                NPPD
denied the remaining invoices.

        Following the termination of the contract, Lamb submitted three
"termination" invoices, apparently for costs in addition to those included
in the progress payment invoices submitted during the project.                   These
termination invoices included labor, equipment, and material charges for
the entire project, totalling $1,239,817.20.             NPPD refused to pay the
termination invoices and requested that Lamb submit invoices for any unpaid
unit-price work and for any reasonable and proper termination charges, as
provided by the contract.

        Lamb originally filed its complaint in the United States District
Court for the District of Utah on September 2, 1993, and subsequently
amended it twice.        NPPD's motion to dismiss for lack of jurisdiction was
denied, but the district court granted NPPD's motion to change venue to the
United States District Court for the District of Nebraska.

        In its second amended complaint, Lamb alleged:               (1) breach of
contract for wrongful termination; (2) account stated for reasonable and
proper charges for termination, including profit and post-termination
demobilization charges; and (3) unjust enrichment in an amount equal to the
reasonable value of materials and services furnished.             NPPD answered and
asserted a counterclaim,

                                         -7-
seeking:    (1) a declaratory judgment establishing the amount due to Lamb
for work performed under the contract based on unit-prices and any other
"reasonable and proper charges for termination" under the contract; and (2)
judgment    awarding   damages   in   favor   of   NPPD   for   all    cleanup   costs,
restoration costs, property damages, and rework costs for which Lamb was
responsible under the contract.

      Upon review of NPPD's Motion for Partial Summary Judgment, the
district court granted the motion in part, holding that NPPD did not breach
the contract by "enlarging the scope of work" or wrongfully terminate the
contract.     Lamb Eng'g, slip op. at 7 (Feb. 15, 1995).                 However, the
district court denied NPPD's motion for partial summary judgment with
respect to Lamb's second and third causes of action.             Id.

      During the course of the trial, Lamb's first and third causes of
action and NPPD's counterclaim were voluntarily dismissed.                Only Lamb's
account stated claim was submitted to the jury.                  The district court
submitted, over NPPD's objections, a special interrogatory to the jury to
determine whether NPPD acted in bad faith in administering the contract.
Tr. at 3865:22-3866:13.    The jury returned a verdict in favor of Lamb for
$1,129,620.00 in damages and responded affirmatively to the special
interrogatory, finding that NPPD administered the contract in bad faith.
The district court denied NPPD's motion for judgment as a matter of law or,
in the alternative, for new trial.      The district court subsequently granted
Lamb's motion for an award of attorney fees based on the jury's finding of
bad faith or alternatively, on the district court's own finding of bad
faith.   Lamb Eng'g, slip op. at 1 (Aug. 25, 1995).             NPPD appeals.

                                        -8-
                              II.   Discussion

A.    Trial Errors

       NPPD contends that various errors committed by the district court
entitle it to judgment as a matter of law or, in the alternative, a new
trial.     For clarity, we consolidate NPPD's issues on appeal and address
the purported errors by the district court.        "We review the district
court's denial of a motion for judgment as a matter of law de novo using
the same standards as the district court."   McKnight v. Johnson Controls,
Inc., 36 F.3d 1396, 1400 (8th Cir. 1994) (citations omitted).    A motion for
judgment as a matter of law presents us with a legal question on review:
"whether there is sufficient evidence to support a jury verdict."        Id.
NPPD argues that the district court erred in denying its motion for
judgment as a matter of law because Lamb failed to prove any reasonable and
proper charges for termination.     We do not find it appropriate to grant
judgment as a matter of law in favor of NPPD because the reasonable and
proper charges for termination must be decided by the factfinder on remand.

       We review a district court's denial of a new trial motion for an
abuse of discretion.   Farmland Indus., Inc. v. Morrison-Quirk Grain Corp.,
54 F.3d 478, 483 (8th Cir. 1995).     We will reverse the District Court's
decision if it "represents a clear abuse of discretion or a new trial is
necessary to avoid a miscarriage of justice."    Id.   For the reasons stated
below, we hold that the erroneous instruction of the jury regarding damages
and   contract interpretation and the erroneous admission of evidence
regarding expected loss of gross margin, total costs, and breach of
contract costs were sufficiently prejudicial to warrant setting aside the
jury's award of damages and require a new trial.       Accordingly, we affirm
in part and reverse in part and remand this case to the district court for
a new trial on damages, to be submitted to the jury in a manner consistent
with this opinion.

                                    -9-
      Damages Under the Contract's Unit-Price Provision

      The interpretation of a contract presents a question of law to be
reviewed de novo.   See Simeone v. First Bank Nat'l Ass'n, 971 F.2d 103, 106
(8th Cir. 1992); International Union of Operating Eng'rs Local 571 v.
Hawkins Constr. Co., 929 F.2d 1346, 1348 (8th Cir. 1991).

      NPPD argues the district court erred in ruling that "[w]hether the
contract was a unit-priced contract does not govern matters of damage under
the termination clause."   Lamb Eng'g, slip op. at 2 (Aug. 23, 1995).   NPPD
contends the district court should have construed the termination clause
in conjunction with the other payment provisions in the contract.3        A
contract must be construed as a whole, and "the meaning which arises from
a particular portion of an agreement cannot control the meaning of the
entire agreement where such inference runs counter to the agreement's
overall scheme or plan."    Rafos v. Outboard Marine Corp., 1 F.3d 707, 709
(8th Cir. 1993).    We agree with NPPD that the unit-price provision governs
payment owing under this contract for work already performed by Lamb.
Thus, evidence concerning work performed, for which Lamb was paid by NPPD,
is irrelevant and inadmissable on remand.   Damages for work performed, for
which Lamb has not been paid, must be calculated pursuant to the contract's
unit-price provision.      That amount is equal to Lamb's unit bid price
multiplied by the quantity of work performed by Lamb.   See Contract No. 92-
71, at C-3.

     3
     Contrary to Lamb's assertion, Brief for Appellee at 12, NPPD
properly preserved its objection to the district court's
interpretation of the termination clause.        See Answer and
Countercl., App. for Appellant at 19-35; Mtn. in Limine,
Supplemental App. for Appellant at 110-115; Pretrial Conference
Order, App. for Appellee at 121-25; and Mtns. for Judgment
Notwithstanding   the  Verdict   and  Alternatively   New  Trial,
Appellant's Addendum at 15.

                                    -10-
      Damages for Future Profits

      NPPD also argues the district court erred in admitting expected loss
of gross margin evidence.     We agree.

      The contract's termination clause provided:

      The DISTRICT may at any time, and without cause,
      terminate this Contract by mailing a written notice
      thereof to the CONTRACTOR at the address given in the
      Proposal Section of these Contract Documents. Upon any
      such Termination, the DISTRICT shall pay the CONTRACTOR
      reasonable and proper charges for termination.

Contract No. 92-71, at D-12.       Under Nebraska law, loss of profit damages
may be awarded only where a wrongful termination occurred.          Von Dorn v.
Mengedoht, 59 N.W. 800, 802 (Neb. 1894) (cited with approval in Kroeger v.
Franchise Equities, Inc., 212 N.W.2d 348, 349 (Neb. 1973)); accord Makskym
v. Loesch, 937 F.2d 1237, 1245 (7th Cir. 1991) (When a contract is
"terminated by either party without breach or liability, the only money
owing to either is money that has accrued from the past performance of the
contract.").   Here, the termination clause explicitly gave NPPD the right
to terminate the contract "at any time and without cause."

      The district court also erroneously instructed the jury on damages
by permitting the jury to "consider all the circumstances, including the
amount of work expected to be performed ... and any other factors that are
shown by the evidence and that bear on the issue on what charges for
termination    are   reasonable   and   proper."   Appellant's   Addendum   at 8
(emphasis added).    Because a damage award for loss of expected gross margin
is contrary to Nebraska law, the district court abused its discretion in
admitting this evidence and allowing the jury to consider it in determining
damages.

                                        -11-
      Reasonable and Proper Charges for Termination

      NPPD also argues the district court erred in instructing the jury to
determine the meaning of the termination clause.4            NPPD specifically
objects to the district court's instructions that "any doubt concerning the
meaning [of the contract] must be resolved against the party that drafted
the contract language [NPPD]," and the jury should interpret the contract
in a way which will prevent "oppressive or inequitable results."               Tr.
3866:14-3867:25.   Under Nebraska law, the proper construction of a written
contract is a question of law to be determined by the court.         Swanson v.
Baker Indus., Inc., 615 F.2d 479, 483 (8th Cir. 1980).       Where a provision
in a written contract is not ambiguous, the trial court must determine its
meaning as a matter of law, and not submit the issue to the jury.         Smith
v. Wrehe, 261 N.W.2d 620, 625 (Neb. 1978).

      Here, the district court found that the termination clause was
unambiguous.     Lamb Eng'g, slip op. at 3 (May 26, 1995).          Because the
contract was unambiguous, the district court committed reversible error in
submitting the issue to the jury.         See United States Fire Ins. Co. v.
Pressed Steel Tank Co., Inc., 852 F.2d 313, 316-17 (7th Cir. 1988).

      We read the unambiguous provision in the termination clause providing
for the "reasonable and proper charges for termination" to include only
those reasonable and proper expenses incurred, or disbursements made, in
connection with the termination.     See BLACK'S LAW DICTIONARY 233 (6th ed.
1990) (defining charges as "[t]he expenses which have been incurred, or
disbursements made, in connection with a contract, suit, or business
transaction").      The   determination    of   which   expenses   incurred,    or
disbursements made, in

        4
        After examining the trial transcript, we reject Lamb's
contention that NPPD did not properly object to the jury
instruction regarding contract interpretation. See Tr. at 3779:20-
3780:5; 3782:20-3783:13.

                                    -12-
connection with the termination were reasonable and proper is a question
of fact for the factfinder.

      We agree with NPPD that the district court abused its discretion in
admitting total costs evidence.    This court gives "great deference to a
district court's rulings on admissibility of evidence and will reverse only
if the court has committed a clear abuse of discretion."   United States v.
Jackson, 914 F.2d 1050, 1053 (8th Cir. 1990).     Furthermore, we will not
disturb a jury's verdict "absent a showing that the evidence was so
prejudicial as to require a new trial which would be likely to produce a
different result."   O'Dell v. Hercules, Inc., 904 F.2d 1194, 1200 (8th Cir.
1990).   Lamb's total costs evidence, showing the magnitude of Lamb's
expenses during the entire project, is irrelevant to the determination of
the reasonable and proper expenses incurred, or
disbursements made, in connection with the termination.5

      NPPD argues the district court erred in admitting Trial Exhibits 112
and 113 and William Schwartzkopf's testimony

     5
      We address additional reasons that the testimony and exhibits
used to present the total cost evidence was inadmissible, since the
issue may recur on remand. Trial Exhibit 293, dated May 15, 1995,
was a report prepared by Bruce Wisan, a certified public
accountant, for Lamb's attorney just weeks before trial.        The
report explicitly indicated that it was prepared solely for use in
the Lamb and NPPD litigation, thus, it is does not qualify as a
business record under Fed. R. Evid. 803(6) as an exception to the
hearsay rule.    See Potamkin Cadillac Corp. v. B.R.I. Coverage
Corp., 38 F.3d 627, 632 (2d Cir. 1994); Paddack v. Dave
Christensen, Inc., 745 F.2d 1254, 1258-59 (9th Cir. 1984).
Similarly, Wisan's testimony, which was based upon his personal
review and audit of Lamb's costs records, was inadmissible without
Wisan's designation as an expert witness because his testimony was
based upon the report he prepared for use in the litigation and not
in the ordinary course of business.      See Burlington N. R.R. v.
Nebraska, 802 F.2d 994, 1004-05 (8th Cir. 1986).

                                    -13-
concerning them.6   Trial Exhibit 113 lists two methods for calculating the
reasonable and proper termination charges.7       App. for Appellee at 256.      The
Termination Invoices method is based upon Lamb's termination invoice
requests, minus payments Lamb received for completed work.           The Cost Method
is based upon Lamb's adjusted costs, overhead, profit, owned equipment
value, and loss of gross margin on uncompleted work, minus payment already
received for completed work.     Evidence admitted for purposes of the jury's
determination of reasonable and proper termination charges must be relevant
to the reasonable and proper expenses incurred, or disbursements made, in
connection with the termination, and shall not include lost profits, costs
incurred which had already been reimbursed at the time of the termination,
or costs that are not connected with the termination.

       NPPD also argues the district court erred in admitting Trial Exhibits
185, 193, and 196 ("termination" invoices), Trial Exhibits 139, 141, and
165   ("force   majeure"   or   "down   time"   invoices),   Trial     Exhibit   171
("acceleration" invoice), and testimony regarding those trial exhibits.
Lamb admits in its brief that this evidence was admitted as relevant to its
breach of contract claim, which was subsequently withdrawn.               Brief for
Appellee at 21.     Lamb argues that this evidence remained relevant to the
termination clause claim to "show the magnitude of the increase in Lamb's
costs resulting from performing its work in the changed and abnormally
severe conditions."    Id.

       While NPPD failed to request a limiting instruction regarding this
evidence and its questionable applicability to the termination

           6
        After reviewing the trial transcript, we reject Lamb's
assertion that NPPD did not object to the admission of this
evidence. See Tr. at 1765:23-1766:5; 1761:2-6; 1769:15-17.
       7
       The contents of Trial Exhibit 112 are duplicated in Trial
Exhibit 113. For simplicity, we address only Trial Exhibit 113,
but our findings apply to both Trial Exhibits.

                                        -14-
clause damages, we find NPPD's initial objection to the relevancy of the
evidence sufficient to preserve this issue for appellate review.              This
evidence was relevant only to the breach of contract claim and should not
have been admitted to determine damages owed under the termination clause.

      "That    these   errors   caused,   or   contributed   to,   a   prejudicial
conclusion is obvious when one considers the jury verdict."        GFH Fin. Serv.
Corp. v. Kirk, 437 N.W.2d 453, 460 (Neb. 1989) (finding obvious error where
"[t]he language of this instruction allowed the jury to consider a total
damages figure before any credits were given for the 'reasonable sales
value' of the equipment, it allowed the jury to consider storage fees which
were not recoverable under the lease, and it allowed the jury to consider
the attorney fees expended by the plaintiff when such fees are not
recoverable under the laws of the State of Nebraska").        Any money owed by
NPPD to Lamb for work already performed must be calculated using the
contract's unit-price provision.      Damages available under the reasonable
and proper termination charges provision are limited to the reasonable and
proper expenses incurred, or disbursements made, in connection with the
termination.

      Because the jury returned only a general verdict, it is impossible
to determine whether the inadmissible evidence did not affect the verdict,
See Square Liner 360E, Inc. v. Chisum, 691 F.2d 362 (8th Cir. 1982),
therefore warranting a new trial.    A new trial is also required because the
district court improperly allowed the jury to interpret an unambiguous
contract.   See Green Tree Acceptance, Inc. v. Wheeler, 832 F.2d 116, 117-18
(8th Cir. 1987) ("Because we cannot be confident that the jury verdict was
not tainted by the erroneous and prejudicial submission of an unambiguous
contract for jury interpretation, we reverse and remand

                                      -15-
for a new trial.").8      Finally, a new trial on the issue of damages is
warranted based on the district court's erroneous submission of the bad
faith special interrogatory to the jury.9          See Libbey-Owens-Ford Co. v.
Insurance Co. of N. Am., 9 F.3d 422, 427 (6th Cir. 1993) ("One ground for
a new trial is the submission to the jury of an issue not appropriate for
its consideration.")10; see also Feldman v. Connecticut Mut. Life Ins. Co.,
142 F.2d 628, 634 (8th Cir. 1944) ("[T]he submission of an improper special
interrogatory, or the submission of a special interrogatory without such
explanation or instruction as will enable the jury competently to answer
it,   manifestly   may   constitute   reversible   error   where   the   record   is
convincing that the answer made to the special interrogatory has determined
the result of the jury's general verdict.").       For these reasons, we reverse
the damages award and remand the case to the district court for a new trial
on the issue of damages.11

B.    Attorney Fees Award

       It is not clear whether the district court awarded attorney fees to
Lamb under state law or federal law.       Thus, we address the

       8
      We reject Lamb's assertion, Brief for Appellee at 25-26, that
because NPPD failed to request a special interrogatory to determine
upon which method of costs the jury relied, NPPD cannot show
prejudice sufficient to warrant a new trial.
            9
        After reviewing the record, we find, contrary to Lamb's
assertion, Brief for Appellee at 45, that NPPD did properly object
to the submission of the bad faith issue to the jury.       Tr. at
3779:1-10; 1867:22-1868:20; 1869:11-16; 1870:23-1871:8.
       10
      The bad faith issue was erroneously submitted to the jury for
the reasons discussed under the attorney fee award issue.
       11
      We reject Lamb's claim that NPPD did not properly assert the
grounds which warrant a new trial, as NPPD's brief incorporates the
grounds   asserted    in   its   Amended   Motions   for   Judgment
Notwithstanding the Verdict and Alternatively New Trial. App. for
Appellant at 93-100.

                                       -16-
propriety of the award under both state and federal law.12          For the
following reasons, we vacate the district court's award of attorney fees.

      Nebraska Law

      NPPD maintains that Nebraska law does not authorize attorney fees for
bad faith pre-litigation conduct.    We agree.

      We review the district court's application of state law to the facts
de novo.   Price v. Seydel, 961 F.2d 1470, 1475 (9th Cir. 1992) (Price); see
also Actors' Equity Ass'n v. American Dinner Theatre Inst., 802 F.2d 1038,
1042 (8th Cir. 1986) (Actors' Equity Ass'n) ("The legal principles that the
court relies on to inform its discretion [in awarding attorney fees],
however, are subject to de novo review.").    In a diversity case "where the
state law does not run counter to a valid federal statute or rule of court,
and usually it will not, state law denying the right to attorney's fees or
giving a right thereto, which reflects a substantial policy of the state,
should be followed."    Alyeska Pipeline Co. v. Wilderness Soc'y, 421 U.S.
240, 259 n.31 (1975) (Alyeska); see also Price, 961 F.2d at 1475 (a federal
court applies state law in awarding attorney fees when those fees are
connected to the substance of the case);     Public Serv. Co. v. Continental
Cas. Co., 26 F.3d 1508, 1520 (10th Cir. 1994) (the right to recover
attorney fees is substantive and thus determined by state law in diversity
cases); Ross v. Inter-Ocean Ins. Co., 693 F.2d 659, 661 (7th Cir. 1982)
(the right to attorney fees in a diversity action is governed by

      12
       In its motion for an award of attorney fees, Lamb asserted
its entitlement to the award "under applicable federal and/or state
law relating to bad faith pre-litigation or litigation conduct."
App. for Appellant at 80, 83. The district court specified in its
Order that it granted attorney fees "on the basis of bad faith pre-
litigation conduct and not on the basis of litigation conduct."
Lamb Eng'g & Constr. Co. v. Nebraska Pub. Power Dist., No. 4:CV94-
29 (D. Neb. Aug. 25, 1995) (Lamb Eng'g).

                                    -17-
state law); Shelak v. White Motor Co., 636 F.2d 1069, 1072 (5th Cir. 1981)
("[I]n an ordinary diversity case, state rather than federal law governs
the issue of the awarding of attorney's fees."); Western Sur. Co. v. Lums
of   Cranston,    Inc.,   618 F.2d 854,   855    (1st   Cir.   1980)   ("[B]ecause
jurisdiction in this case rested upon diversity of citizenship, state law
would govern an award of attorney's fees.").

       Nebraska law allows the recovery of attorney fees only where such
recovery is provided by statute or where the uniform course of procedure
has been to allow such recovery.          Holt County Coop. Ass'n v. Corkle's,
Inc., 336 N.W.2d 312, 315 (Neb. 1983) (Holt County Coop. Ass'n).               We find
no Nebraska statute which provides for recovery of attorney fees in a
contract action.13    Nor do we find that Nebraska has adopted a course of
procedure by which attorney fees may be awarded in this case.              Although the
Nebraska Supreme Court has recognized a court's inherent power to award
attorney fees against a party based on its bad faith, such an award is
limited to cases in which the bad faith pertains to conduct during the
course of litigation.     Id. (emphasis added).        The district court explicitly
awarded attorney fees "on the basis of bad faith pre-litigation conduct and
not on the basis of litigation conduct."            Lamb Eng'g, slip op. at 1 (Aug.
25, 1995).      We hold that such an award of attorney fees is contrary to
Nebraska law.    We further opine that the Nebraska Supreme Court would not
extend Holt County Coop. Ass'n to include such pre-litigation conduct.              In
City of Gering v. Smith Co., 337 N.W.2d 747 (Neb. 1983), the Nebraska
Supreme Court refused to extend its prohibition concerning the

       13
       Neb. Reissue Rev. Stat. § 25-824 (2), (4) (1995), provides
for attorney fee awards based on bad faith litigation conduct.
This statutory attorney fee provision was enacted by the Nebraska
Legislature subsequent to the Nebraska Supreme Court's 1983
decision in Holt County Coop. Ass'n v. Corkle's, Inc., 336 N.W.2d
312 (Neb. 1983).

                                        -18-
allowance of attorney fees beyond that provided in Holt County Coop. Ass'n.

      Federal Law

      NPPD also argues the district court's inherent power to award
attorney fees for bad faith is inapplicable because in this case the bad
faith conduct was pre-litigation conduct.       We agree.

      We review the District Court's award of attorney fees de novo.
      Once the trial court has made a finding of bad faith, an
      award of attorneys' fees is within its discretionary
      power and will not be disturbed absent an abuse of
      discretion. The legal principles that the court relies
      on "to inform its discretion, however, are subject to de
      novo review."

Actors' Equity Ass'n, 802 F.2d at 1042 (citations omitted).

      Federal courts have the inherent power to assess attorney fees in
narrowly defined circumstances, despite the so-called "American rule,"
which prohibits fee shifting in most cases.14    Chambers v. NASCO, Inc., 501
U.S. 32, 45 (1991) (Chambers).   Courts have established limited exceptions
to the American rule, however, such as "when the losing party has acted in
bad faith, vexatiously, wantonly, or for oppressive reasons."15   Id. at 45-
46 (quoting other cases).    Federal courts sitting in diversity can use
their inherent power to assess attorney fees as a sanction for bad faith
conduct even if the applicable state law does not recognize the bad

      14
       The American rule on the award of attorney fees in federal
litigation is well-settled in its requirement that, absent a
statute or an enforceable contract, each party is responsible for
its own fees.    Actors' Equity Ass'n v. American Dinner Theatre
Inst., 802 F.2d 1038, 1041 (8th Cir. 1986) (citing Alyeska Pipeline
Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 247, 257 (1975)).
     15
      For simplicity, we recognize this standard as the "bad faith
exception" to the American rule.

                                    -19-
faith exception to the general rule against fee shifting.      Id. at 51-52.
In the present case, we examine the district court's inherent power to
award attorney fees for bad faith pre-litigation conduct.

       A court's inherent power to award attorney fees pursuant to the bad
faith exception "depends not on which party wins the lawsuit, but on how
the parties conduct themselves during the litigation."    Id. at 53 (emphasis
added).    This court has recently adopted the view promulgated by various
circuits that, in determining whether to award attorney fees based on the
litigant's bad faith, "'[t]he court may consider conduct both during and
prior to the litigation, although the award may not be based solely on the
conduct that led to the substantive claim.'"     McLarty v. United States, 6
                                       16
F.3d 545, 549 (8th Cir. 1993) (McLarty)     (quoting Perales v. Casillas, 950
F.2d 1066, 1071 (5th Cir. 1992)); accord Association of Flight Attendants
v.   Horizon Air Indus., Inc., 976 F.2d 541, 548-50 (9th Cir. 1992)
(Association of Flight Attendants); Shimman v. International Union of
Operating Eng'rs, Local 18, 744 F.2d 1226, 1233 (6th Cir. 1984) (Shimman),
cert. denied, 469 U.S. 1215 (1985).

       Lamb relies upon Yonker Constr. Co. v. Western Constr. Corp., 935
F.2d 936, 942 (8th Cir. 1991) (Yonker Constr. Co.), as well as Richardson
v. Communication Workers, 530 F.2d 126, 132 (8th Cir.) (Richardson), cert.
denied, 429 U.S. 824 (1976), in arguing that

          16
         McLarty v. United States, 6 F.3d 545 (8th Cir. 1993),
involved the recovery of attorney fees against the government under
the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412(b), which
authorizes an award of attorney fees to a prevailing party where
the government's position is not substantially justified.
Consistent with a court's inherent power to award attorney fees
against a litigant guilty of bad faith, attorney fees are awarded
under the EAJA where the government has acted "in bad faith,
vexatiously, wantonly, or for oppressive reasons." Id. at 549.
Under the EAJA, the government is liable for fees and expenses to
the same extent as any other party under the common law. Id.

                                   -20-
the court has the inherent power to award attorney fees for bad faith
prefiling conduct.    In Yonker Constr. Co., we held that "[b]ad faith may
occur during either contract performance or litigation." 935 F.2d at 942.
In Richardson, we allowed recovery of attorney fees under the bad faith
exception based on a labor union's intentional failure to discharge its
fiduciary duty to represent plaintiff in his grievance and its actual
inducement of his wrongful discharge. 530 F.2d at 133.

      We take this opportunity to clarify and distinguish these cases in
light of McLarty.    In McLarty, this court acknowledged that in determining
a litigant's bad faith, the court may consider conduct both during and
prior to the litigation, but it may not base an award solely on the conduct
that led to the substantive claim. 6 F.3d at 549.     The Sixth Circuit
explained this rule by stating that fees awarded under the bad faith
exception "are designed to punish the abuse of the judicial process rather
than the original wrong."      Shimman, 744 F.2d at 1232 n.9.      Thus, "[a]
person who harms another in bad faith is nonetheless entitled to defend a
lawsuit in good faith."     Id. at 1232.    In Yonker Constr. Co., the jury
found that the defendant acted in bad faith in performing the subcontract
and in initiating its counterclaim. 935 F.2d at 942.      We recognize the
filing of a counterclaim as litigation conduct.

      We similarly distinguish Richardson, in which attorney fees were
awarded for defendant Unions' failure to represent the plaintiff in
grievance proceedings and its inducement of the plaintiff's discharge. 530
F.2d at 133.   We presume, without commenting on whether we agree, that the
Richardson panel found the grievance proceedings to be akin to litigation
conduct.   Similarly, the Ninth Circuit has distinguished Richardson from
the line of cases from which McLarty evolved on the basis that Richardson
involved both bad faith in refusing to recognize a clear legal right, thus
necessitating that an action be filed and justifying an

                                    -21-
award of attorney fees, and bad faith in the conduct underlying the cause
of action, which alone, under McLarty, would not justify an award of
attorney fees.      See Association of Flight Attendants, 976 F.2d at 549.17
In other words, Richardson is an "exceptional case," id., because, in that
case, defendant Unions refused to provide legal representation despite its
clear obligation to do so, thus making litigation inevitable.                    Thus, the
attorney fees award in Richardson was not based solely on the conduct that
led to the substantive wrongful discharge claim.                 See McLarty, 6 F.3d at
549.
       We find support for our holding today implicitly in the language of
the Chambers majority opinion and explicitly in the dissenting opinions.
Justice Kennedy's dissent in Chambers is not based so much upon a differing
view of the rule regarding attorney fees for bad faith litigation conduct,
but instead on a different interpretation of the district court's opinion.
Id. at 72-73 (Kennedy, J., dissenting).             More specifically, the majority
opinion     held   that   "the   District   Court    did   not    attempt   to   sanction
petitioner for breach of contract, but rather imposed sanctions for the
fraud he perpetrated on the court and the bad faith he displayed toward
both his adversary and the court throughout the course of the litigation."
Id. at 54.     The majority opinion expressed "no opinion as to whether the
District Court would have had the inherent power to sanction Chambers for
conduct relating to the underlying breach of contract."                Id. at 55 n.16.
The four dissenting Justices, however, read the district court opinion as
imposing sanctions for "petitioner's flagrant, bad-faith breach of

       17
       The Sixth Circuit interpreted Richardson v. Communication
Workers, 530 F.2d 126 (8th Cir.) (Richardson), cert. denied 429
U.S. 824 (1976), as an effort by this court to expand the bad faith
exception to include bad faith in the conduct giving rise to the
underlying claim and rejected any such extension.       Shimman v.
International Union of Operating Eng'rs, Local 18, 744 F.2d 1226,
1233 (6th Cir. 1984) (Shimman), cert. denied, 469 U.S. 1215 (1985).
We believe the Sixth Circuit interpreted Richardson too broadly and
agree with the analysis that court used in Shimman.

                                        -22-
contract."     Id. at 60 (Scalia, J., dissenting).            In his dissent, Justice
Kennedy, joined by Chief Justice Rehnquist and Justice Souter, concluded
that the majority opinion's assertion that the district court did not
impose sanctions for breach of contract "appears to disclaim that its
holding    reaches    prelitigation     conduct."       Id.    at   72   (Kennedy,    J.,
dissenting).     Justice Kennedy suggested that,

      [d]espite the Court's equivocation on the subject, it is
      impermissible to allow a District Court acting pursuant
      to its inherent authority to sanction such prelitigation
      primary conduct. A court's inherent authority extends
      only to remedy abuses of the judicial process.

Id. at 74 (Kennedy, J., dissenting) (citation omitted).                  Justice Scalia
"emphatically agree[d] with Justice Kennedy" that the district court had
no power to impose sanctions based upon bad faith breach of contract.                 Id.
at 60 (Scalia, J., dissenting).        Justice Scalia further recognized that the
American rule,

      deeply rooted in our history and in congressional
      policy,    prevents   a   court    (without   statutory
      authorization) from engaging in what might be termed
      substantive fee shifting, that is, fee shifting as part
      of the merits award. It does not in principle bar fee
      shifting as a sanction for procedural abuse.

Id. at 59 (Scalia, J., dissenting) (citations omitted).

      We infer support for our holding today from the Chambers majority
opinion,     which   stated   that   "the   sanctions    imposed     applied   only    to
sanctionable acts which occurred in connection with the proceedings in the
trial court."18      Id. at 55.      This statement, combined with the explicit
denial of the Supreme Court's

     18
      One incidence of petitioner Chambers' bad faith conduct was
his fraudulent transfer of assets, which, although it "took place
before the suit was filed, it occurred after Chambers was given
notice, pursuant to court rule, of the pending suit," and thus was
considered part of the proceeding. Chambers v. NASCO, Inc., 501
U.S. 32, 55 n.17 (1991).

                                         -23-
adjudication of the applicability of attorney fees for pre-litigation
breach of contract, leads us to hold that the district court's inherent
power to award attorney fees as a sanction for bad faith conduct does not
extend to pre-litigation conduct.

      In the present case, the bad faith conduct, or more specifically, the
bad faith administration of the contract, was part of the underlying
substantive claim.     In fact, Lamb originally pleaded a breach of contract
claim based upon NPPD's contract administration, but subsequently dismissed
it voluntarily.     Second Am. Compl., App. for Appellant at 12.         As developed
during oral argument, Lamb's claim for reasonable and proper damages under
the contract's termination clause is essentially a breach of contract
claim, as NPPD did not pay what Lamb says it owed Lamb under the
termination damages clause.         Lamb cannot circumvent the McLarty rule by
voluntarily dismissing the original substantive claim, but using the
conduct upon which that claim was based as a means to obtain attorney fees.

      Thus, we hold that NPPD's bad faith administration of the contract
was   pre-litigation      conduct    upon   which   the    underlying    substantive
termination clause claim is based.          Under McLarty, such conduct does not
provide a basis upon which the court may use its inherent power to award
attorney    fees.     6 F.3d 545.   Because     the   bad   faith   exception   is
inapplicable to this case as a matter of law, we see no reason to review
the district court's factual finding of bad faith administration of the
contract.    Similarly, because the bad faith exception does not apply in
this case, the bad faith issue should not have been submitted to the jury.
For these reasons, we vacate the district court's award of attorney fees.

                                        -24-
                              III.   Conclusion

      Accordingly, the District Court's judgment is affirmed in part and
reversed in part and the case is remanded to the district court for a new
trial on damages.

      A true copy.
            Attest:
                    CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.

                                     -25-