Court Opinion

ID: 194632
Source: CourtListenerOpinion
Date Created: 2011-02-07 02:21:37+00
Date Added: 2024-06-11T09:41:42.856218
License: Public Domain

March 29, 1993    UNITED STATES COURT OF APPEALS
                      FOR THE FIRST CIRCUIT
                                           

No. 92-1978

                ATLANTIC TRACK & TURNOUT COMPANY,

                      Plaintiff, Appellant,

                                v.

                       PERINI CORPORATION,

                       Defendant, Appellee.

                                           

           APPEAL FROM THE UNITED STATES DISTRICT COURT

                FOR THE DISTRICT OF MASSACHUSETTS

           [Hon. Robert E. Keeton, U.S. District Judge]
                                                      

                                           

                              Before

                    Torruella, Circuit Judge,
                                            

                  Coffin, Senior Circuit Judge,
                                              

                    and Boudin, Circuit Judge.
                                             

                                           

     David  J. Hopwood, with whom Heafitz & Hopwood, was on brief
                                                   
for appellant.
     Charles E.  Schaub, Jr.,  with whom Christopher  J. Petrini,
                                                                
and Hinckley, Allen & Snyder, were on brief for appellee.
                            

                                           

                          March 29, 1993
                                           

          TORRUELLA, Circuit  Judge.  Appellant Atlantic  Track &
                                   

Turnout  Company ("Atlantic")  brought  this  breach of  contract

action pursuant  to the  Uniform Commercial Code  ("Code"), Mass.

Gen. L. ch.  106,   2-101, et seq. (1992).  Atlantic alleged that
                                  

appellee Perini Corporation ("Perini")  failed to perform under a

contract for the purchase and sale of railroad materials.

          The  court  deferred  decision  on  cross  motions  for

summary judgment and ordered a trial  limited to two issues:  (1)

whether the contract  was ambiguous; and (2)  whether trade usage

would  supplement  the  contract  terms  to  enable  Atlantic  to

maintain its action.  After Atlantic's proffer, the court entered

a  judgment on  partial  findings pursuant  to  Fed. R.  Civ.  P.

52(c)1 in favor of Perini.  We affirm that judgment.

                            BACKGROUND
                                      

          On   October   21,    1987,   the   Massachusetts   Bay

Transportation  Authority ("MBTA")  awarded  Perini  the  Eastern

Route Track Rehabilitation Project.   The project required Perini

to rehabilitate a  thirteen mile  section of double  track.   The

rehabilitation  included undercutting  the  track to  replace the

ballast,  the  track's stone  foundation,  and  disposing of  any

                    

1  Rule 52(c) provides in relevant part:

            If during a trial  without a jury a party
            has been  fully heard with respect  to an
            issue  and  the court  finds  against the
            party on that issue, the  court may enter
            judgment as  a matter of law against that
            party  on any  claim  . .  . that  cannot
            under  controlling  law be  maintained or
            defeated without a  favorable finding  on
            that issue . . . .

                               -2-

contaminated ballast materials.

          In  the spring  of  1988, a  sub-contractor tested  the

ballast   under  the  track  and  determined   that  it  was  all

contaminated.   Perini received the test results on June 21, 1988

and discussed them with the MBTA on July 17, 1988.

          In  early June,  1988, Perini  solicited an  offer from

Atlantic to buy certain  salvage from the project.   Between June

28  and 30, 1988, Atlantic  issued five purchase  orders for "all

available" materials.   The orders also furnished  an estimate of

the amount of salvage that would become available.

          On August 18, 1988, the MBTA directed Perini to suspend

undercutting operations  until further notice.   On September 13,

1988, the MBTA  permanently halted all undercutting due to fiscal

constraints.  As the elimination of the  undercutting reduced the

value  of the  contract  by 52%,  Perini  stopped all  work.   By

October 26, Perini had no physical presence on the project site.

          On  October  31,  1988,  Perini proposed  an  equitable

adjustment  of  the MBTA  contract.    The proposal  entailed  an

increase in payment  for completion of  the remaining work  under

the contract.  The  MBTA rejected Perini's proposal.   Perini and

the MBTA thus agreed to terminate the contract.

          Atlantic knew by August  22, 1988 that all undercutting

was  suspended and later asked  Perini when the  remainder of the

materials would be available.  Perini replied that the MBTA might

terminate the project  and that Perini  had already shipped  "all

                               -3-

available"  salvage  in  accordance with  the  purchase  orders.2

Atlantic  sued  Perini, claiming  that  the  amount of  materials

shipped was well below the stated estimates.

                          LEGAL ANALYSIS
                                        

          Two reasonable interpretations of the  contract's plain

language exist.  On one hand, "all available" implies that Perini

satisfied  its obligation  under  the contract  by supplying  the

salvage  material that  became available;  if no  material became

available  to  Perini,  Perini   faced  no  liability  under  the

contract.3    On the  other hand,  the  estimates offered  in the

purchase orders  suggest that  Perini had  to deliver  a quantity

nearing those estimates.

          To  convince the  court that the  latter interpretation

represented  the true  agreement,  Atlantic had  to overcome  two

hurdles.  First,  as the  plaintiff, Atlantic had  the burden  of

proving its  interpretation by  a preponderance of  the evidence.

Second,  any  ambiguity  in   the  contract  should  normally  be

interpreted against Atlantic, the drafter of the purchase orders.

LFC Lessors, Inc.  v. Pacific  Sewer Maintenance, 739  F.2d 4,  7
                                                

(1st Cir. 1984).

          Atlantic offered two theories beyond the plain language

of  the  contract supporting  its  interpretation  of the  terms.

Specifically,  Atlantic argued that:  (1) trade usage of the term

                    

2  At  this point, Perini had delivered approximately  15% of the
materials estimated. 

3  Of course, the Code requires that Perini attempt to attain the
materials in good faith.  Mass. Gen. L. ch. 106,   2-306.

                               -4-

"all available" required Perini to deliver close to the estimated

quantity  of materials,  and (2)    2-306  of the  Code expressly

required Perini  to provide  a quantity approximating  its stated

estimate.   In addition, Atlantic argued that Perini acted in bad

faith.   Atlantic revives these  theories in this  appeal, and we

address them in turn.

          I.  Trade Usage

          The district  court ruled  that Atlantic's  trade usage

proffer failed to prove  by a preponderance of the  evidence that

the contract terms embodied Atlantic's proposed meaning.  As this

conclusion constitutes a factual finding,  Mass. Gen. L. ch. 106,

  1-205(2),  we review it only  for clear error,  Athas v. United
                                                                 

States, 904 F.2d 79, 80 (1st Cir. 1990).
      

          Trade  usage will  supplement the  terms of  a contract

only when the  parties know or should know of  that usage.  Mass.

Gen. L. ch. 106,   1-205(3).  In   the  present   case,  Atlantic

provided no evidence  that Perini  knew or should  have known  of

Atlantic's interpretation of the term "all available."  There was

no  evidence that Perini engaged  in the same  trade as Atlantic.

Indeed,  one Atlantic  witness testified  that Perini  was not  a

competitor of Atlantic's.  Transcript, Non-Jury Trial Proceedings

-  Day  1, at  106.   Therefore,  we cannot  assume  knowledge of

Atlantic's  trade  practices.    Furthermore,   another  Atlantic

witness  testified that  he discussed  the terms of  the contract

with  a Perini  representative, but  never explained  the alleged

trade usage of  "all available."  Id.  at 70.  Given  the lack of
                                    

                               -5-

evidence, we cannot find that the district court clearly erred in

finding  that  the  proposed trade  usage  of  the  term did  not

supplement the contract terms.

          II.  Section 2-306

          Both  parties   agree   that  the   disputed   contract

constitutes an output contract  governed by   2-306 of  the Code.

Section 2-306 of the Code provides in relevant part:

            (1) A term which measures the quantity by
            the output of the seller . . . means such
            actual output . . .  as may occur in good
            faith,    except    that   no    quantity
            unreasonably   disproportionate   to  any
            stated estimate . .  . may be tendered or
            demanded.

          In the present case,  the contract provided an estimate

of  the expected  output, and  Perini tendered  only 15%  of that

quantity.   Thus,  Atlantic argues  that  according to     2-306,

Perini violated the contract.

          While many  courts and commentators have  discussed the

meaning of the "unreasonably  disproportionate" clause of   2-306

as applied  to requirements  contracts, little, if  anything, has

been written on the clause's application to output contracts.  We

review the former analysis, however, because it provides valuable

instruction  due to  the  similarity between  these two  types of

contracts.

          With  respect to requirements  contracts, courts differ

on  the  meaning of  the "unreasonably  disproportionate" clause.

Some  courts find that "even  where one party  acts with complete

good  faith,  the  section  limits  the  other  party's  risk  in

                               -6-

accordance  with the  reasonable  expectations  of the  parties."

Orange Rockland  v. Amerada Hess,  397 N.Y.S.2d 814,  819 (1977).
                                

Most  courts and commentators, however, treat  cases in which the

buyer  demands more  than  the stated  estimate differently  than

cases in  which the buyer  demands less.   See, e.g.,  Empire Gas
                                                                 

Corp.  v. American Bakeries Co., 840 F.2d 1333, 1337-38 (7th Cir.
                               

1988); Angelica  Uniform Group, Inc. v.  Ponderosa Systems, Inc.,
                                                                

636 F.2d 232,  232 (8th Cir. 1980) (per curiam);  R.A. Weaver and
                                                                 

Associates, Inc.  v. Asphalt  Construction, Inc., 587  F.2d 1315,
                                                

1322  (D.C. Cir. 1978).  The courts that employ separate analyses

hold  that  while     2-306 precludes  buyers  from  demanding  a

quantity  of goods  that  is unreasonably  disproportionate to  a

stated  estimate,  it permits  "good  faith  reductions that  are
                                                       

highly disproportionate."  R.A.  Weaver and Associates, Inc., 587
                                                            

F.2d at 1315 (emphasis added).4

          The Seventh Circuit explained the argument well, Empire
                                                                 

Gas  Corp.,  840 F.2d  at 1338-40,  and  we adopt  its reasoning.
          

Essentially, the  argument is  the following.   The "unreasonably

disproportionate" clause  is somewhat  redundant in light  of the

good faith requirement in that section.  The clause therefore was

                    

4  The  comments to the  Code shed little  light on the  issue as
they,  too, are ambiguous.  Empire Gas Corp. v. American Bakeries
                                                                 
Co.,  840 F.2d  at 1338.    Comment 3  to    2-306, for  example,
   
provides that an  "agreed estimate is to be  regarded as a center
around  which  the  parties   intend  the  variation  to  occur,"
suggesting that  the two situations should  be treated similarly.
Comment 2  to   2-306, on  the other hand supports  the view that
the  two  situations should  receive  different  treatment as  it
provides that "good faith  variations from prior requirements are
permitted even  when the variation  may be such  as to result  in
discontinuance."  

                               -7-

likely provided to  explain the good faith term.   The good faith

requirement with respect to disproportionately  increased demands

needed  explanation  as certain  forms  of  exploitation in  that

situation do not clearly  constitute bad faith.  For  example, if

the  market price of the  subject goods rises  above the contract

price, a buyer  in a  requirements contract might  be tempted  to

demand more goods than it truly needs in order to resell them for

the better market price.  The clause eliminates that opportunity.

On  the  other hand,  exploitation, beyond  bad  faith, is  not a

concern  if a  buyer demands  less than  a stated estimate.   The

seller  has the  opportunity to  sell any  excess of  the subject

goods on the market.

          Moreover, an obligation  to buy approximately  a stated

estimate of goods would pose a significant burden on buyers as it

would force them to make inefficient business judgments, when the

point of entering a requirements contract was to engage suppliers

without  binding themselves  to buy  more  goods than  they need.

Essentially,   a   requirements   contract  represents   a   risk

allocation.   "The seller  assumes the  risk of  a change  in the

buyer's  business that makes continuation  . . .  costly, but the

buyer   assumes  the  risk  of   a  less  urgent   change  in  []

circumstances."  Id. at 1340.
                   

          The  same  rationale  supports  different  treatment of

cases such as  the present one, in which the  seller in an output

contract tenders less than a stated estimate, from cases in which

the seller  tenders more.   If  a  seller saw  an opportunity  to

                               -8-

increase his  profits by  buying  additional goods  to resell  as

output  to the  buyer, this  exploitation might  not conclusively

establish bad faith.  The proviso would forbid such conduct.  See
                                                                 

id.  at  1338.    On  the  other  hand,  an  obligation  to  sell
  

approximately  the stated estimate  may force the  seller to make

inefficient  business decisions  that the  seller did  not likely

intend  when  he  bargained   to  keep  the  contract's  quantity

provision open.

          Like the risk allocation  in the requirements contract,

the output contract allocates to the  buyer the risk of a  change

in the  seller's business  that makes continuation  costly, while

the   seller  assumes  the  risk  of  a  less  urgent  change  in

circumstances.  Indeed,  pre-Code Massachusetts courts  held that

output  contracts necessarily  contemplated  that  the  level  of

production  would   be  governed  by  business   judgment.    See
                                                                 

Neofotistos v. Harvard  Brewing Co., 171  N.E.2d 865, 868  (Mass.
                                   

1961).  We see no reason for a change in that rationale.

          Adopting this interpretation of    2-306, our next, and

only  inquiry under this section, is whether Perini acted in good

faith.

          III.  Good faith

          The district court determined that Perini acted in good

faith.  This was a factual determination that we review only  for

clear error.  Athas, 904 F.2d at 80.
                   

          Atlantic offers two indications of bad faith by Perini.

First,  Atlantic argues that Perini acted in bad faith by failing

                               -9-

to  notify  Atlantic  of the  June  21  test  results.   However,

Atlantic  offered no  evidence that  the additional  contaminated

ballast signified to Perini that the contract would end.  Indeed,

the record  indicates that the additional  contamination was good

news to Perini because the  more contamination that existed,  the

more money Perini stood to earn under the contract.  The MBTA did

not notify  Perini of its desire to end the contract until August

18  when it suspended  the undercutting; Atlantic  learned of the

suspension just four days later.  Thus, the court did not clearly

err in finding  that Perini acted in  good faith with  respect to

notification.

          Second, Atlantic argues that  Perini acted in bad faith

by  failing to  make a  reasonable attempt  to complete  the MBTA

project  when the  MBTA  eliminated the  undercutting.   Atlantic

contends that  in its negotiations for an equitable adjustment of

the contract,  Perini requested  an unreasonable increase  in the

contract price.   Thus, Atlantic argues that Perini's  attempt to

complete the project was in bad faith.  

          Based on the evidence presented, however, this argument

fails.    For  one thing,  a  contractor  may  seek an  equitable

adjustment  to  the contract  when a  large  quantity of  work is

eliminated.  See Peter Kiewit Sons' Co. v. United States, 109 Ct.
                                                        

Cl. 517, 522-23 (1947).  Atlantic failed to show that Perini  did

not make  reasonable attempts to  negotiate an adjustment.   That

the  MBTA and Perini failed to reach an acceptable agreement does

not show that the attempted negotiations were in bad faith. 

                               -10-

          Moreover,  a  party  who ceases  performance  under  an

output  contract for  independent business  reasons acts  in good

faith.   Neofotistos, 171  N.E.2d at 868.     Atlantic offered no
                    

evidence that Perini did  not agree to end the  MBTA contract due

to a valid independent business reason.  Indeed, Atlantic offered

no evidence of any reason why Perini agreed to  end the contract.

Thus, the  district court did not  clearly err in  its good faith

determination.

                            CONCLUSION
                                      

          Based  on  the evidence  presented, the  district court

properly granted summary judgment in favor of Perini.

          Affirmed.
                  

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