Court Opinion

ID: 9470350
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:03:18.609402+00
Date Added: 2024-06-11T17:41:51.014838
License: Public Domain

RANDALL, Circuit Judge,
dissenting:
The majority holds that the phrase “new legislation, regulation, judicial action, ... or labor agreement ... enacted, promulgated, or taken or made effective after March 31, 1974” in this coal procurement contract is unambiguous and means “administrative action[ ] ... take[n] ... subsequent to March 31, 1974,” even when that “administrative action” was taken pursuant to a statute and comprehensive regulations that had been in place since June 1, 1973. Majority op., text following note 31, supra. See Montana Strip Mining and Reclamation Act, ch. 325, § 9,1973 Mont.Laws 592, 601-02 (current version at Mont.Code Ann. § 82-4-227 (1979)); Mont.Admin.Reg. §§ 26-2.10(01)-S10270 to -350 (1973) (superseded). In so doing, the majority reverses the district court’s finding that the “mere enforcement” or “new application” of the regulations to the mining area “does not constitute ‘new legislation, regulation or judicial action.’ ” The majority’s holding also effectively imposes upon the utility customers of the City of Austin and the Lower Colorado River Authority a judgment (payable over the life of the contract) that, in the parties’ preliminary estimation, should amount to something in the neighborhood of $50 million.
I join the distinguished group of judges who have held the provision in question to be unambiguous, but I agree with the district court that it cannot fairly be read as the majority reads it. I therefore dissent.
I. THE FOUR CORNERS OF THE INSTRUMENT.
Like the majority, I begin with the text of the contract and with the Montana rules of contract construction, but I part company with the majority’s analysis almost from the outset. I believe that the majority has misread the provision in question, article 9.06, has created an inconsistency between the contract’s fifth and ninth articles, has made an unnecessary gap in the language of article 9, and has, for all practical purposes, treated this contract as though it were a “cost-plus” contract, which it plainly is not. I address each of these issues in turn.

A. Contract Construction and the Text of Article 9.06.

Article 9.06 reads in its pertinent entirety as follows:
The price of coal shall be increased from the base price in the same amount that the cost per ton of mining coal at the Mine is increased by any direct cost or required investment in order to comply with any new legislation, regulation, judicial action (other than the codification of the common law), or labor agreement ... enacted, promulgated, or taken or made effective after March 31, 1974.
Article 9.06. Each of the four nouns (legislation, regulation, judicial action, and labor agreement) is presented in a careful and deliberate order to match up precisely with the four, equally carefully ordered verbs (enacted, promulgated, taken, and made ef*432fective). This one-to-one matching produces a coherent statement about legislation enacted, regulation[s] promulgated, judicial action taken, and labor agreement^] made effective. Any other match-up or jumble, e.g., judicial action enacted, produces nonsense. The operative provision, for our purposes, is therefore regulation promulgated, and no new regulation has been promulgated in this case.
The majority insists that this one-to-one matching approach is too artificial and that the contracting parties meant to cover all kinds of government action, but in its eagerness to demonstrate the invalidity of the one-to-one approach, the majority has overlooked the necessity for tying its own interpretation of the contract to the actual text. Whatever the intrinsic merit of my own reading, I submit that the majority must tie the word “regulation” to one of the four verbs, and that the majority has not done so for the simple (and all too obvious) reason that it cannot.
The contract uses the word in the sense listed second in most dictionaries, “[a] rule prescribed for the management of some matter.” See, eg., 8 Oxford English Dictionary 380 (1933). So, too, does the majority opinion. Majority op., paragraph following text accompanying note 29, supra. But then at the crucial juncture the majority begins to use the word in its first sense, “the act of regulating.” See, eg., Majority op., text accompanying note 32, supra (“ ‘new regulation’ would [not] require formal regulatory action”).1 That meaning of the word does not fit back into the contract, nor does the majority even attempt to claim that it does. Well established principles of contract construction in Montana prohibit exactly the kind of approach the majority has taken: “[A] court, in interpreting a written instrument, will not isolate certain phrases of that instrument in order to garner the intent of the parties.” Steen v. Rustad, 132 Mont. 96, 102, 313 P.2d 1014, 1018 (1957). See also Downs v. Smyk, 604 P.2d 307, 310 (Mont.1979). The word “regulation” cannot be read as though it existed in the abstract, rather than in the grammatical context of a particular sentence.2
In short, the drafters of this contract knew what they were doing when they wrote article 9.06. The operative phrase is “new regulation promulgated,” and applying an old regulation is simply not the same thing as promulgating a new one. The majority reaches a contrary conclusion only by ignoring the principle of Steen v. Rustad and by refusing to read the word “regulation” with any of the four verbs to which it might arguably be attached.

B. The Relationship Between Articles 5 and 9.

The second unfortunate consequence of the majority’s interpretation is that it creates a direct conflict between articles 5 and 9.06. Article 5 provides, in pertinent part:
Seller agrees to acquire and install at its East Decker mine the most modern machinery, equipment and other facilities (as determined by Seller) required to produce, prepare and deliver the quality and quantity of coal provided for in • this agreement. Seller further agrees to operate and maintain said machinery, *433equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver said coal. Seller further agrees that the machinery, equipment and facilities provided by it shall be acquired with its own capital.
(emphasis added). The practical effect of this provision is that the start-up costs associated with opening the mine on the basis of the statutes and regulations in effect on March 31,1974, were to be borne by Decker. There is no real disagreement here. The majority argues, rather, that article 9.06 modifies article 5 even in the absence of a change in those statutes and regulations. I do not believe that the contract can be fairly read that way.
The gist of article 5 is that Decker was supposed to pay for opening the mine “with its own capital,” and not with money provided by the City of Austin. In return, the City agreed to pay a flat base price of $7 per ton. See article 8. Articles 9.01, 9.02, 9.03, 9.04(1), 9.08(a), 9.08(b), and 9.08(c) then provide exceptions based, respectively, upon multipliers of 1.06, 1.35, .23, .635, 1.7875, 1.7875, and .15 — all of which (not coincidentally) add up to 7.0. The drafters clearly designed article 9.06 as the “second half” of article 5. That is, Decker was willing to assume — in return for the fixed base price (subject to price adjustments) of $7 per ton — all of the basic mining expenses associated with setting up a working mine that complied with all applicable statutes and regulations in effect as of March 31, 1974. The contradiction created by the majority’s reading, in other words, arises out of the impossibility of giving full effect to article 5, which requires Decker to set up the mine with its own capital for a fixed base price of $7 per ton, if article 9.06 is read to increase the base price even when the applicable statutes and regulations have not been changed.
The majority quickly dismisses this argument on the apparent ground first, that “article 5 constitutes essentially boilerplate” and is, in any event, modified by article 9.06. See Majority op., paragraphs preceding and accompanying note 27, supra. This response is inadequate. Whether article 5 is boilerplate or not is irrelevant because whatever is in the contract we are required to enforce. More fundamentally, as I have already argued, article 9.06 most definitely does not allow Decker to pass on expenses associated with last-minute changes in its mining plan unless those expenses are caused by changes in or additions to the applicable statutes and regulations.
What appears to be the majority’s primary argument for ignoring article 5 is even more disturbing:
[T]he most obvious difficulty [with the dissent’s argument] is that, if the parties did not intend interim government-mandated cost increases to be added to the price of coal, March 31, 1974, would not have been designated as the base date in paragraph 9.06; rather[,] the start-up date would have been used.
Majority op., paragraph accompanying note 26, supra. The majority’s section-by-section chart of article 9 shows that the March 31, 1974 date was chosen for many reasons, e.g., as the base date for calculating cost increases based on the indices published by the Bureau of Labor Statistics. Nothing in the choice of March 31, 1974 is inconsistent with Decker’s assumption in article 5 of the duty to set up a working mine according to whatever plan it deemed most appropriate. The quoted portion of the majority’s opinion is no more than a restatement of a desired conclusion, and not a persuasive argument.
The majority’s interpretation of article 5 also has another troubling aspect. Contrary to what the majority suggests, what is involved here is not “damages,” which the common law would require Decker to mitigate; rather, what is involved is a mandatory direct cost pass-through. Decker does not have any duty whatsoever to minimize its start-up costs. On the contrary, Decker has the express contractual right to open the mine with whatever machinery, equipment and other facilities it likes: “Seller agrees to acquire and install . . . machinery, equipment and other facilities (as deter*434mined by Seller) required to produce” coal. Article 5 (emphasis added). The contract has no mechanism for the City of Austin to share in the decisions about how, in view of the conditions attached to the mining permit, the coal was to be mined; yet, the majority’s approach requires, in common sense and fairness, that there be such a mechanism if the City is to be saddled with the costs. It seems to me not only that the contract has no mechanism, but also that its article 5 expressly forbids us from creating one.
The best that can be said for the majority’s reading of article 5 is that Decker may not have realized that its original mining plan would not be accepted and that there was a consequent need to provide for that eventuality in the contract. The majority has resolved this problem in Decker’s favor through the simple expedient of misreading article 9.06 and reading article 5 out of the contract entirely. By way of reply I can only repeat that “[i]t is reversible error for [a Montana court] to insert into a contract language not put there by the parties,” Herrin v. Herrin, 595 P.2d 1153, 1155 (Mont. 1979), and that the majority’s holding that article 9.06 can be (mis)read without article 5 does not make that reading right.

C. The Gap Created by the Majority's Reading of Article 9.06.

The third major problem with the majority’s reading of the contract is that it creates an inexplicable gap in the otherwise fairly tight latticework of the contract. Article 9.06 provides that if “the cost per ton of mining coal at the Mine is increased by any direct cost or required investment,” that increased cost may be passed on to the City of Austin (emphasis added). The problem, as the majority appears to concede, lies in calculating “the cost per ton of mining coal at the Mine” when the contract itself provides no schedule defining that cost. See Majority op., paragraph accompanying note 28, supra. Under my interpretation of the contract, the problem was very unlikely to arise, but under the majority’s interpretation, the problem was almost unavoidable. I find it hard to believe that the drafters of a contract as important and sophisticated as this one would not have expressly provided for a contingency that, given the majority’s reading, was almost certain to arise.
As a general matter, it is difficult (though not impossible) to conceive of an “increase” in the “cost” of something unless that particular something is described, i.e., unless there is provided some kind of base figure or schedule from which the increase can be calculated. Under both my interpretation and that of the majority, if mining costs were increased “by any direct cost or required investment” after 1978 (when the mine entered production), the amount of the increase could be accurately calculated by consulting Decker’s books. See article 17 (requirement that Decker keep books in accordance with generally accepted accounting principles). A cost increase imposed between 1974 (when the contract was signed) and 1978 (the start-up year) would present a more difficult problem: the contract provides no schedule of estimated costs, and actual cost figures would not yet have been developed. No one would argue that Decker should be forced to bear the increased expenses associated with a Montana statute or regulation enacted or promulgated between 1974 and 1978, and yet the contract clearly provides no precise mechanism for calculating how to pass on those increased expenses to the City of Austin. My argument would therefore appear to prove too much: if the contract provides a rule of decision that we could use as a basis for passing on the expenses associated with a pre-1978 but post-1974 statute or regulation, then it provides such a rule of decision for the present case as well.
I submit that this objection to my reading of the contract is not well taken. A statute or regulation enacted or promulgated between 1974 and 1978 would have been unexpected. Montana had just enacted a new mining statute, with a comprehensive set of interpretative regulations, in 1973 and — in the apparent and ultimately vindicated judgment of the parties — was not likely to make any material changes in that administrative scheme before 1978. The contract *435admittedly does not deal very well (if at all) with the possibility of a pre-1978 statutory or regulatory amendment. But the unexpected is not this case. Decker knew from the very beginning that it would have to apply for a mining permit shortly after the contract was signed. The possibility of an adverse or partially adverse regulatory decision was real and immediate. If Decker had wanted to shift the burden of this known and expected risk to the City of Austin, it should have provided an appropriate contractual provision with an accompanying schedule of projected mining costs. Cf. article 9.02 (clause includes pre-opening labor cost increases, and provides sixteen-page schedule as “Exhibit B”). It did not, and, under Montana contract law, this court should not provide such a provision. Her-rin, supra, 595 P.2d at 1155 (“It is reversible error for the District Court to insert into a contract language not put there by the parties.”).
The majority’s response to this no-base-schedule problem amounts to no more than a simple assertion that the problem is insignificant — with the implication that the courts can always step in and make the requisite calculations for the contracting parties. See Majority op., paragraph accompanying note 28, supra. Any lawyer who has ever participated in major contract drafting will immediately appreciate that this is not the way things are done: the last thing contract drafters want is uncertainty that may require expensive and time-consuming judicial intervention. And under the majority’s interpretation, such intervention was almost certain to be necessary.
The majority further asserts — in two passages I find nothing short of astonishing— that the drafters could not, in any event, have provided the requisite schedule of mining costs because of the inherent uncertainties in the entire project. See Majority op., note 28, supra (“An accurate ‘schedule’ for such an unknowable, future occurrence contradicts the very uncertainty with which the parties were concerned.”); Majority op., third-to-last text paragraph, supra (uncertainties “could not have been factored by the parties into the contract”). This is simply not so. The majority plainly does not understand how such a schedule is drafted. The base schedule in this case would have been based upon the working papers that Decker undoubtedly prepared when it made the calculations necessary for the submission of its original $7 per ton bid. If those projections then turned out to be overly optimistic — for example, if a change in the mining plan required the use of more trucks and shovels than had been anticipated — the later calculation of the increased costs would have been a matter of simple arithmetic.
The majority’s interpretation also creates an internal inconsistency among the ten price adjustment sections in article 9. As I interpret article 9, all ten sections would almost surely have base figures; uncertainty would arise only in the unlikely event of a pre-1978 change in the applicable statutes and regulations. As the majority interprets the article, nine sections have base figures, but, in the very likely event that Decker’s mining plan would have to be significantly altered, the relevant part of article 9.06 does not.3 I think that it is improbable that the drafters would have provided precise numbers in nine instances, but not in one. *436Articles 9.02 and 9.08(a) have an attached schedule (Exhibit B, which lists labor costs) and, had the drafters wanted to include the pre-1978 “cost increases” associated with the risk that the Montana Department of State Lands would require expensive changes in Decker’s mining plan, they surely would not have failed to provide an appropriate schedule so that the amount of the increase could be calculated without recourse to litigation. The drafters knew how to write a true “cost-plus” provision for the pre-opening period. See articles 9.02, 9.08(a). They chose not to do so for article 9.06, and I think that this court should not do it for them.

D. This Is Not a “Cost-plus” Contract.

Although Decker conceded at oral argument that it is “not arguing that this is a cost-plus contract in the sense that that’s how it’s written,” the majority has effectively adopted precisely that approach:
In short, adjustment is provided for all other interim cost increases; interim increases required by governmental action are not treated any differently under the terms of the contract itself. If we are to give effect to every part of the contract, we must conclude that qualified, interim government-mandated cost increases were to be treated like all other cost increases and added to the price of the coal.
Majority op., paragraph accompanying note 29, supra (footnote omitted); see also Majority op., paragraph accompanying note 26, supra (statement to the same effect). From the near all-inclusiveness of the various specific price adjustments in article 9, in other words, the majority argues that we can infer that the parties meant to pass along to the City of Austin the presently disputed expenses as well.
This argument falls immediately because it directly contradicts Montana contract law. The relevant statute provides:
All things that in law or usage are considered as incidental to a contract or as necessary to carry it into effect are implied therefrom unless some of them are expressly mentioned therein, in which case all other things of the same class are considered to be excluded.
Mont.Code Ann. § 28-3-702 (1981). The inclusion of the many price adjustments in article 9 does not imply the existence of other adjustments that might have been included in a “cost-plus” contract. On the contrary, the inclusion of the various adjustments means, under section 28-3-702, that we may not infer the existence of any other, extra-contractual adjustments.
I recognize, of course, that the Montana statute does little more than codify the maxim inclusio unius, exclusio alterius, and that mechanical reliance on a Latin maxim, even if statutorily mandated, generally should not replace sound substantive analysis. The point under section 28-3-702 needs to be made, however, because the majority’s de facto “cost-plus” approach seems to have some surface appeal — and no basis whatsoever in the text of the contract or in the Montana rules of contract construction.
II. THE EXTRINSIC EVIDENCE.
With all due respect for the parties and for the distinguished group of judges who have also read this contract, I think that it is appropriate to assume, for the sake of argument, that the contract is nevertheless unclear and that we therefore have occasion to examine evidence dehors its express language.
The parties, perhaps because each believes (no doubt for different reasons) that the contract is unambiguous, have submitted virtually no extrinsic evidence. We have been given no memoranda of telephone conversations, no accounts of contract bargaining sessions, no preliminary contract drafts — indeed, we have been given nothing except a thirty-one page report from the Bechtel Power Corporation. The following analysis is thus perforce confined to the report.
According to the report, four companies competed for the right to supply coal for the City of Austin’s Fayette Power Project. Among the reasons for recommending *437Decker’s proposal over the others, the following was listed first: “Decker’s is the only proposal which provides assurance of long-term price stability. The other three proposals contain explicit or implied clauses for renegotiation of the base price on an accept-the-increase-or-terminate-the-con-traet basis.” Decker’s bid was accepted, in other words, because “[t]he Decker coal price is firm and there is no price renegotiation clause” (emphasis added). This statement does, I believe, speak for itself. The fixed $7 per ton price induced the City of Austin to enter into this contract in the first place.
Having gotten the job on the basis of its “firm” $7 per ton bid, Decker has now been put in the same position as it would have been in had it submitted the same kind of flexible-base-price proposal as its three competitors. Decker now wants, according to its statement at oral argument, a base price of about $8 per ton (subject, of course, to the various adjustments of article 9). In short, Decker wants — and the majority has given it — the bid advantages of a low price without the consequent disadvantages of lower gross receipts once the job is won. This, in my view, is absolutely unacceptable.
Indeed, the majority has now put Decker in a better position than its three competitors would have been in. All they had asked for, according to the Bechtel report, was an accept-the-increase-or-terminate-the-contract provision. If I read the majority’s opinion correctly, it has given Decker the accept-the-increase part of the formula without giving the City of Austin the correlative option of terminating the contract. This, too, in my view, is absolutely unacceptable.
The majority has not considered any of this extrinsic evidence for the ostensible reason that, if a contract is clear, Montana law prohibits the interpreting court from looking at anything else. I suggest that the majority’s real (though unstated) reasons may have more to do with the impossibility of dealing with the Bechtel Power report without conveying the distinct impression that this case has been wrongly decided.
III. CONCLUSION.
Article 5 of this coal procurement contract expressly provides that Decker shall bear the expenses in issue. That article gives Decker the right to set up the mine in whatever sound manner it likes and the duty of doing so with its own capital. Article 9 then provides for a number of price adjustments, but none of those adjustments affects Decker’s article 5 duty in the present case because the relevant triggering event — a change in the applicable statutes or regulations — has not occurred.
The majority reaches a contrary conclusion by making two interpretative mistakes. First, the majority virtually ignores article 5. Second, the majority misreads article 9.06 by posing the relevant interpretative question in terms of one meaning of the word “regulation” (“a rule prescribed for the management of some matter”) and the answer in terms of an entirely different meaning (“the act of regulating”): the practical consequence of the majority’s sleight-of-hand is that it cannot tie its interpretation of the word (“the act of regulating”) to any of the four verbs in the contract to which it might arguably be attached. In order to have read the word in the contract — as the Montana rules of construction require us to do — the majority would have had to have adopted a meaning of the word that it cannot adopt without conceding that it has wrongly decided this case.
I submit that the majority’s interpretation does not make sense on any level. If Decker had wanted to pass on to the City of Austin the risks associated with applying for a mining permit from the Montana Department of State Lands, it should have expressly done so in the contract. Contracts of this caliber should not be “saved” by the Fifth Circuit, particularly when doing so creates both an obvious gap (how do we calculate the “cost” to be passed through here?) and an obvious inconsistency (between articles 5 and 9). The City of Austin entered into this contract in the first place principally because “[t]he Decker coal price is firm and there is no price renegotiation clause.” Now, according to the majority, that price must be renegotiated without *438offering the City the correlative option of terminating the contract. Since the contract (for obvious reasons) has no mechanism for this renegotiation, what should have been a simple matter of arithmetic and contract interpretation has become a complicated proceeding for “damages.”
I recognize that this is a diversity case in which Montana law governs. Nevertheless, I have prepared a dissent from the majority’s opinion not simply because I think that the legal conclusions reached by that opinion are incorrect. I am greatly troubled by the fact that in order to remedy a mistake made by a Montana coal company in assessing the possible impact of the Montana statutory and regulatory scheme on its mining plan, the majority has, in effect, saddled the already overburdened utility customers served by the City of Austin and the Lower Colorado River Authority with a $50 million judgment representing a fourteen percent increase over what the parties agreed to as the cost of the coal.
I respectfully dissent.

. To state the matter at its simplest, the sentence “Mining regulation in Montana is a complicated affair; the applicable regulations cover scores of pages” uses the word in the two different senses.

. The majority has attempted to gloss over its failure to tie its interpretation to the text of the contract by invoking the well-worn principle that “words of a contract are to be understood in their ordinary and popular sense rather than according to their strict legal meaning unless used by the parties in a technical sense.” Mont.Code Ann. § 28-3-501 (1981). This conclusion explains nothing and, as far as it does go, is demonstrably wrong. Even if we managed somehow to read the word “regulation” without also looking at the sentence in which it appears, the word would still not mean what the majority says it means. When used in a thirty-four page, $350 million-plus contract — a document drafted by attorneys presumably expert in natural resources law — the word “regulation” has its normal specialized or legal meaning, that is, something promulgated in accordance with the Montana or United States administrative procedure acts and published either in the Code of Federal Regulations or in the Administrative Rules of Montana.

. Column three of the majority’s section-by-section chart of article 9 makes five mistakes: (1) The base for article 9.04(2) is 0 because the City pays all of that cost; (2) the bases for article 9.05 are the various published tax schedules in effect March 31, 1974; (3) see item (1), supra; (4) the “quality” portion of the contract is perhaps more specific than any other part of the contract, see articles 4 & 9.09 (“The adjustment in price shall be the amount derived by multiplying the percentage resulting from the ratio of the actual BTU value per pound of coal over 9,200 BTU per pound, times the delivered cost of the coal purchased hereunder at Buyer’s consuming power plants, minus the delivered cost of coal at Buyer’s consuming power plants before the BTU adjustment.”); and (5) article 9.10 is surplusage and simply says that Decker may not charge a higher price than that allowed by law: the concept of a “base” in that context would not even make sense. All of this leaves article 9.06 as the only part of article 9 that, under the majority’s reading, has no base.
The majority’s indication in column 3 of the chart that the contrary is true is misleading in the extreme.