
USCA1 Opinion

	




          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                                      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                                    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                    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                    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                    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                                      CONCLUSION                                      __________                    Based  on  the evidence  presented, the  district court          properly granted summary judgment in favor of Perini.                    Affirmed.                    ________                                         -11-
