UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

KAISER AEROSPACE & ELECTRONICS
CORPORATION, Kaiser Space Products
Division,
Plaintiff-Appellee,

v.

ALLIANT TECHSYSTEMS,
INCORPORATED,                        No. 96-2117
Defendant-Appellant,

and

HERCULES ALLEGANY BALLISTICS
LABORATORY, a Division of
Hercules, Incorporated,
Defendant.

KAISER AEROSPACE & ELECTRONICS
CORPORATION, Kaiser Space Products
Division,
Plaintiff-Appellant,

v.

ALLIANT TECHSYSTEMS,
INCORPORATED,                        No. 96-2176
Defendant-Appellee,

and

HERCULES ALLEGANY BALLISTICS
LABORATORY, a Division of
Hercules, Incorporated,
Defendant.
Appeals from the United States District Court
for the Northern District of West Virginia, at Elkins.
Richard L. Williams, Senior District Judge, sitting by designation.
(CA-95-28-2)

Argued: October 27, 1997

Decided: December 17, 1997

Before LUTTIG, Circuit Judge, CAMPBELL, Senior Circuit Judge
of the United States Court of Appeals for the First Circuit, sitting
by designation, and TRAXLER, United States District Judge for
the District of South Carolina, sitting by designation.

_________________________________________________________________

Affirmed in part, and reversed and remanded in part, by unpublished
per curiam opinion.

_________________________________________________________________

COUNSEL

ARGUED: Robert Keith Huffman, MILLER & CHEVALIER,
CHARTERED, Washington, D.C., for Appellant. Ray Manuel Ara-
gon, MCKENNA & CUNEO, L.L.P., Washington, D.C., for Appel-
lee. ON BRIEF: Alan I. Horowitz, Benjamin D.M. Wood, MILLER
& CHEVALIER, CHARTERED, Washington, D.C.; James K.
Brown, Christopher L. Callas, JACKSON & KELLY, Charleston,
West Virginia, for Appellant. Larry M. Farrell, Mark D. Shonkwiler,
MCKENNA & CUNEO, L.L.P., Washington, D.C., for Appellee.

_________________________________________________________________

Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

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OPINION

PER CURIAM:

Alliant Techsystems, Inc., defendant below, appeals from the dis-
trict court's grant of summary judgment for Kaiser Aerospace and
Electronics Corporation, plaintiff below, on, inter alia, the scope of
a contract that existed between Kaiser and Hercules Allegheny Ballis-
tics Laboratory, Alliant's predecessor in interest, and on various
counterclaims brought by Alliant against Kaiser. Alliant also appeals,
and Kaiser cross-appeals, from the district court's determination of
damages at subsequent proceedings. We reverse the district court's
grant of summary judgment for Kaiser on the scope of the contract,
and remand for further proceedings on this issue. We affirm the grant
of summary judgment for Kaiser on Alliant's counterclaims, however,
and find it unnecessary to reach the other issues raised by the parties
on appeal and cross-appeal.

I.

During the 1980's, the United States Air Force began work on a
program to develop and produce a second generation bomber-carried
missile for suppressing ground-based radar. This missile was known
as the Short Range Attack Missile II ("SRAM II"). Pursuant to this
program, the Air Force entered into a prime contract with Boeing
Aerospace for the SRAM II missiles in 1987. Boeing, in turn, entered
a subcontract with Hercules for rocket motors for Boeing's SRAM II
missiles. Hercules, in turn, entered into a subcontract with Kaiser for
the nozzles for Hercules' rocket motors.

In October 1991, the government terminated the SRAM II program
before the development stage had been completed, and before the pro-
duction stage had begun. Accordingly, the government terminated its
prime contract with Boeing in accordance with Federal Acquisition
Regulation ("FAR") § 52.249-2 (1988), incorporated into that contract
as the Termination for Convenience clause. The termination of the
prime contract triggered Boeing's termination of its subcontract with
Hercules, and Hercules' termination of its subcontract with Kaiser,
pursuant to the Termination for Convenience clauses included in each
of these subcontracts.

                    3
Upon termination of the subcontract between Hercules and Kaiser,
and in accordance with the Termination for Convenience clause, Her-
cules and Kaiser engaged in negotiations to settle their accounts.
Under the Termination for Convenience clause, which incorporated
FAR § 52.249-2, Kaiser, as a terminated subcontractor, was entitled
to reimbursement for the costs it had incurred in performing the con-
tract, as well as for lost profits, provided the termination had not
saved it from a losing contract. If the termination had, however, saved
Kaiser from such a contract, Kaiser was entitled to recover neither all
of its costs, nor any lost profits. Accordingly, to calculate how much,
if any, money was due Kaiser, it was necessary to identify the end
point of the contract to determine whether Kaiser would have made
or lost money on the contract.

Hercules and Kaiser were unable to agree, however, on what the
end point of the contract was, and, relatedly, whether the contract, if
it had not been terminated, would have resulted in a profit or a loss
for Kaiser. This disagreement resulted from the fundamentally differ-
ent positions taken by Hercules and Kaiser as to the scope of the con-
tract that existed between them. That contract was embodied in a
master purchase order ("MPO") initially issued by Hercules on Sep-
tember 15, 1989, and reissued with some modifications on October 3,
1989. The MPO identified five phases of work--Development
("DEV"), PRFT (Pre-Flight Readiness Testing), QUAL (Qualifica-
tion), LRIP (Low Rate Initial Production), and LOT 1 (larger scale lot
production). At the time the contract was terminated, Kaiser had com-
pleted the DEV stage, had completed approximately two-thirds of the
PRFT phase, had barely begun the QUAL stage, and had not per-
formed any work at all on either the LRIP or LOT 1 phases.

Hercules insisted that the MPO initially represented a firm, fixed-
price contract for only the first two phases, and that the last three
phases were only tentative -- to be negotiated. While conceding that
the third phase had also become a firm, fixed-price contract, Hercules
maintained this was so only because Hercules and Kaiser had later
concluded negotiations as to that phase. At the time the contract was
terminated, however, Hercules and Kaiser had just begun negotiating
about the last two phases. Accordingly, Hercules argued that the end-
point of the contract was the end of the third phase, at which point
Kaiser would clearly have been losing money on the contract.

                    4
Kaiser, by contrast, argued that the MPO represented a firm, fixed-
price contract for all five phases, that the endpoint of the contract was
therefore at the end of the fifth phase, and that while it would have
been losing money at the end of the third phase, it would have made
enough money on the last two phases of the contract to convert the
interim loss into a net profit for the entire contract.

When the negotiations between Hercules and Kaiser broke down,
Hercules issued a unilateral "settlement by determination," as it was
entitled to do under the Termination for Convenience clause and
incorporated regulations. This settlement determination, which was
premised on Hercules' interpretation of the scope of the contract,
found that Hercules did not owe Kaiser any additional money, and
that Kaiser actually owed Hercules a small amount of money because
the progress payments already made by Hercules to Kaiser slightly
exceeded the amount to which Kaiser was entitled under the Termina-
tion for Convenience clause.

Kaiser then initiated this litigation against Hercules, asserting, inter
alia, a request for declaratory relief on the scope of the contract. Sev-
eral months later, Alliant acquired the assets of Hercules and assumed
responsibility for the defense of this lawsuit. Alliant subsequently dis-
covered that Kaiser had submitted allegedly false representations to
Hercules during the settlement negotiations, and raised counterclaims
against Kaiser for, inter alia, fraud, negligent misrepresentation, and
breach of the implied covenant of good faith and fair dealing. Kaiser
moved for partial summary judgment on the scope of the contract, and
on the counterclaims for fraud and negligent misrepresentation. All-
iant moved for summary judgment on Kaiser's complaint.

The district court referred the litigation to a magistrate judge, who
made various findings of fact, and recommended denying all of the
motions for summary judgment. See J.A. at 155-70. The district court
adopted the magistrate's findings of fact, but granted summary judg-
ment for Kaiser on the scope of the contract -- finding that it was a
firm, fixed-price contract for all five phases -- and on Alliant's coun-
terclaims for fraud and negligent misrepresentation. The court also,
sua sponte, granted summary judgment for Kaiser on Alliant's coun-
terclaim for breach of the covenant of good faith and fair dealing. See
generally J.A. at 232-40. At a subsequent proceeding, the district

                     5
court adjudicated the amount of money to which Kaiser was entitled
based on the termination for convenience. Alliant appeals the grant of
summary judgment on the scope of the contract and its counterclaims,
and also argues that, even assuming the district court correctly deter-
mined the scope of the contract, it erred in calculating damages. Kai-
ser cross-appeals, arguing that the district court erred in calculating
damages.

II.

The MPO states that it is a "firm-fixed price purchase order to fur-
nish all materials, labor, tooling, equipment, and other resources,
except as may otherwise be set forth herein, necessary to fabricate,
identify, inspect, pack, and deliver the below listed item(s) in exact
accordance with the requirements set forth hereunder." J.A. at 495
(emphasis added). The MPO then lists five phases, each with a sepa-
rate sub-item purchase order number. The MPO treats the first two
phases somewhat differently from the last three phases. First, the
MPO identifies a single nozzle assembly quantity and a single price
for the DEV and PFRT phases. Id. By contrast, for each of the other
phases, the MPO identifies the following two alternatives -- (1) a
quantity of nozzle assemblies manufactured entirely by Kaiser, and
(2) a quantity of nozzle assemblies in which the"shell" component of
some of the nozzle assemblies is manufactured by Hercules and fur-
nished by Kaiser. See id. at 495-96. Second, one line below and to the
right of the headings of the last three phases, the MPO says "To Be
Negotiated." No such words appear in the descriptions of either of the
first two phases. See id.

In addition, the MPO states that "Progress payments shall be made
against Master Purchase Order 0820058 [the number that appears at
the top of the MPO] in accordance with FAR 52.232-15 at (80%) of
cost." J.A. at 497. The MPO also expressly incorporates a document
entitled Appendix "A," J.A. at 497, which in turn incorporates various
FAR provisions, including §§ 52.209-1 and 2. J.A. at 481-82. These
provisions appear to prohibit the award of the production phases of
the contract (LRIP and Lot 1) until the QUAL phase has been com-
pleted. See J.A. at 329-31. In addition, Appendix A reserves Hercu-
les' right to make certain changes relating to matters such as
specification and delivery, and provides that if such changes cause

                    6
changes in the cost of, or the time required for, performance of the
contract, Hercules must make "equitable adjustments" to the contract
price, delivery schedule, or both. J.A. at 484-85. Finally, Appendix A
includes a typical merger clause, that is labeled"Entire Agreement,"
and states, inter alia, that the MPO and accompanying documents
constitute the "complete and exclusive agreement of Hercules and
Seller, [and] merges and supersedes all prior understandings and rep-
resentations (oral and written) . . . . All amendment(s) to this agree-
ment shall be formally authorized in writing by the Hercules Buyer."

The district court interpreted the MPO to constitute a firm, fixed-
price agreement for the entire five phases of the contract. The court
interpreted the phrase "To Be Negotiated," which appeared within
each of the last three phases, to mean only that the parties would
negotiate over which option within that phase would be adopted, i.e.,
whether Kaiser would provide all the nozzle shells, or whether Hercu-
les would provide some of those shells. See J.A. at 235-36. We find
that this interpretation constitutes neither an inevitable, nor even the
most natural, reading of the MPO. Accordingly, we reverse the dis-
trict court's grant of summary judgment for Kaiser on the scope of the
contract. Because, however, the contract is not entirely free from
ambiguity, and because the district court erroneously refused to con-
sider certain proffered course-of-performance and trade-usage evi-
dence that raises factual controversy about the proper interpretation
of the contract, we remand the question of the scope of the contract
for further proceedings consistent with this opinion.

We believe the phrase "To Be Negotiated" naturally connotes more
than merely choosing between two fully explicated options. Under the
district court's interpretation of the MPO, it is difficult to understand
what, precisely, would be the subject of negotiation. Negotiation sug-
gests compromise, and it is hard to see how any compromise can be
involved in an "either/or" decision, especially where, as under the dis-
trict court's understanding of the MPO, the other terms of the agree-
ment are fixed. Also, on the district court's reading, the phrase "To
Be Negotiated" adds little to the meaning of the contract, which
already states the two possible options under each of the last three

                     7
phases, and necessarily implies that a choice will be made about
which option to pursue.1

If anything, it would be more natural to read the MPO as establish-
ing a firm, fixed-price contract for the first two phases, but as estab-
lishing only tentative grounds for negotiation for the last three phases.
The phrase "To Be Negotiated," which is placed in each of the last
three phases, supports this reading. See J.A. at 495-96. That each of
the last three phases has disjunctive options also suggests that the
final details are not yet settled. See id. In addition, such a reading is
consistent with the MPO's statement that "[t]his is a firm-fixed price
purchase order to furnish all materials, [etc.], except as may otherwise
be set forth herein . . . ," J.A. at 495 (emphasis added), which can be
read to mean that the MPO is only binding unless otherwise desig-
nated (e.g., by the words, "To Be Negotiated"). Reading the MPO as
establishing a firm, fixed-price contract for only the first two phases
is also consistent with Appendix A's incorporation of the qualifica-
tion regulations, J.A. at 481-82, which suggest that contracts for the
production phases (LRIP and LOT 1) cannot be awarded until the
QUAL stage had been successfully completed. See J.A. at 329-31.

Although it is most natural to read the contract in this manner, we
are unable to conclude with confidence that such a reading is the cor-
rect one. The placement of neither the phrase "To Be Negotiated" nor
the clause "except as may otherwise be set forth herein" is entirely
free from ambiguity.2 Moreover, as Kaiser emphasizes, the final MPO
_________________________________________________________________
1 At oral argument, Kaiser took the position that the district court's
interpretation of the contract was the correct one, apparently abandoning
its earlier contention that the phrase "To Be Negotiated" meant only that
the parties would negotiate about matters such as price increases result-
ing from changes in production schedules, specifications, or both. Kai-
ser's initial reading of the MPO rendered the phrase"To Be Negotiated"
completely redundant, because Appendix A explicitly requires equitable
adjustments for changes in specifications or delivery requirements. That
reading also suggested that equitable adjustments are available only for
the last three phases, in direct contradiction to Appendix A, which
plainly contemplates equitable adjustments for the entire contract (what-
ever the scope of that contract may be).
2 It is worth noting, for example, that in the initial MPO, issued Sep-
tember 15, 1989, the phrase "To Be Negotiated" appeared next to the

                     8
allows it to bill progress payments against the MPO, even though the
initial MPO did not. Kaiser argues that this change allowed it to bill
progress payments against the entire value of all five phases. While
it is not clear that this is necessarily so, and while Kaiser does not,
in fact, appear to have made billings in this manner, the change does
support a finding that the MPO is ambiguous, especially in conjunc-
tion with the other textual uncertainties.

Because the MPO is not entirely clear, and because the district
court erred in refusing to consider Alliant's proffered course-of-
performance and trade-usage evidence, compare West Va. Code § 46-
2-202 (1996) (U.C.C. § 2-202) (Evidence of course of dealing, trade
usage, or course of performance may be used to explain or supple-
ment the terms of a final, integrated agreement.) with J.A. at 234-36
(district court's refusal to consider such evidence), we remand for fur-
ther proceedings the question of the scope of the contract created by
the MPO. Because we conclude that the district court erred in deter-
mining the scope of the contract that existed between Hercules and
Kaiser, we need not consider Alliant's other arguments relating to its
obligation to Kaiser under the contract. Nor need we consider either
party's objections to the district court's calculation of damages.

III.

The one remaining issue is whether the district court erred in grant-
ing summary judgment for Kaiser on Alliant's counterclaims for neg-
_________________________________________________________________
heading of each of the last three phases. See J.A. at 477-78. In the modi-
fied MPO, issued October 3, 1989, this phrase appears one line lower,
next to the heading for the first subheading of each phase. See id. at 495-
96. This court was unable to discover whether this change was inten-
tional, either from the record, or from the parties' submissions or oral
argument. If intentional, the change might well support the district
court's interpretation of the contract, though it would still be unclear
what, precisely, was to be negotiated. From the face of the MPO alone,
however, it seems at least equally likely that the change was simply typo-
graphical.

Similarly, the placement of the second clause may be susceptible to an
alternative reading, i.e., that the MPO is a fixed price contract to furnish
all materials, etc., except those materials otherwise designated, which
could refer to the possibility mentioned in the last three phases of Hercu-
les' supplying some of the nozzle shells.

                     9
ligent misrepresentation, fraud, and breach of the implied covenant of
good faith and fair dealing. These counterclaims are all predicated on
certain evidence, obtained by Alliant from Kaiser during discovery,
that suggests Kaiser made false representations to Hercules about the
amount of "management consideration" included in its settlement pro-
posals. Alliant argues that these misrepresentations caused it to spend
more money on the negotiations than it need otherwise have spent,
and may also have contributed to the need for litigation. Having
reviewed the record and submissions of the parties, and having had
the benefit of oral argument, we are of the opinion that the district
court correctly determined that Alliant has failed to prove reliance,
i.e., that Hercules would have acted differently but for the misrepre-
sentation. Moreover, given the essentially irreconcilable views of the
scope of the contract taken by Kaiser and Hercules during the settle-
ment negotiations, as well as the large sums of money in dispute, we
believe that extensive negotiation and litigation were probably inevi-
table anyway, regardless of Kaiser's alleged misrepresentations.
Although Alliant has introduced testimony that it spent approximately
$50,000 more on the negotiations than it would have had Kaiser been
completely forthright, we believe this evidence is merely speculative
in light of the distance between the parties' bargaining positions. For
both of these reasons we affirm the district court's grant of summary
judgment for Kaiser on Alliant's counterclaims for negligent misrep-
resentation and fraud, and for the latter reason we affirm the district
court's grant of summary judgment for Kaiser on Alliant's counter-
claim for breach of the implied covenant of good faith and fair deal-
ing.

CONCLUSION

For the reasons stated herein, we affirm the district court's grant of
summary judgment for Kaiser on Alliant's counterclaims, but reverse
its grant of summary judgment for Kaiser on the scope of the contract
that existed between Kaiser and Hercules, and remand this issue for
further proceedings consistent with this opinion.

          AFFIRMED IN PART, AND REVERSED
          AND REMANDED IN PART

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