                             UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT


                             No. 04-1250



ARCHER DANIELS MIDLAND COMPANY,

                                              Plaintiff - Appellee,

           versus


BRUNSWICK COUNTY, NORTH CAROLINA,

                                             Defendant - Appellant.



Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. James C. Fox, Senior
District Judge. (CA-02-96-7-F)


Argued:   October 26, 2004                 Decided:   March 15, 2005


Before WIDENER, GREGORY, and SHEDD, Circuit Judges.


Affirmed by unpublished opinion. Judge Gregory wrote the majority
opinion. Judge Widener wrote a separate concurring opinion. Judge
Shedd wrote a dissenting opinion.


ARGUED: John Joseph Butler, PARKER, POE, ADAMS & BERNSTEIN,
Raleigh, North Carolina, for Appellant. Larry Bruce Sitton, SMITH
MOORE, L.L.P., Greensboro, North Carolina, for Appellee. ON BRIEF:
Charles C. Meeker, PARKER, POE, ADAMS & BERNSTEIN, Raleigh, North
Carolina, for Appellant. Manning A. Connors, SMITH MOORE, L.L.P.,
Greensboro, North Carolina, for Appellee.


Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
GREGORY, Circuit Judge:

       This diversity action concerns a long-term contract for the

sale of water between Archer Daniels Midland Company (“ADM”) and

Brunswick    County,       North    Carolina    (“Brunswick   County”    or    “the

County”).    In 1999 the County increased its rates as part of a plan

to pay off debt incurred from efforts to expand the water system.

ADM objected to the rates, then sued the County in the U.S.

District Court for the Eastern District of North Carolina.                     The

district court granted summary judgment to ADM for liability and

damages and entered a judgment in the amount of $357,758 in

compensatory       damages    and    $58,264.64    in   prejudgment     interest.

Brunswick County now appeals the court’s rulings against it.                    We

affirm the ruling of the district court.



                                          I.

       To reveal the full context of the issues involved we quickly

revisit the parties’ pre-contractual course of dealing, the express

text    of   the    contract,       and   the   post-contractual      course    of

performance.

                      A.     Pfizer and Brunswick County

       In the early 1970s, Brunswick County had no water system.

Pfizer, Inc. (“Pfizer”) wished to run a citric acid manufacturing

plant that would need large amounts of potable water.              The parties

negotiated a deal in 1973 by which Pfizer would build its plant in


                                          2
Southport, a town in Brunswick County, and defray significantly the

water system’s costs by guaranteeing that its plant would be a

large consumer of the County’s water.    The County, in turn, built

the water system and offered advantageous pricing for the water.

      It appears from the record that the new water system quickly

became insufficient and that, among other problems, the system’s

inadequacies caused difficulties at Pfizer’s plant.    As a result,

in 1979 or 1980 the County decided to expand the water system and

distribution facility.    It secured Pfizer’s blessing by amending

the original contract and approved a bond referendum to pay for the

expansion.    The parties call the first agreement and its amendment

Phase I and Phase IA, respectively.

      Soon afterwards the County began yet another expansion of its

water system.    This expansion -– called Phase II -- was completed

in 1983 and was also funded with bonds.      Once done, the County

began to charge Pfizer rates that included costs associated with

Phase II.    Moreover, at some unknown point the County began to mix

its accounts by paying an annual subsidy from its general (non-

water system) funds in order to satisfy the debt service for Phase

II.   These actions led to a 1984 lawsuit quite similar to the one

now before us:   Pfizer sued the County for including Phase II costs

in its rate calculations.      On October 7, 1986, Pfizer and the

County settled this lawsuit by signing the contract before us (“the

contract”), which is effective until the year 2020.


                                  3
                             B.    The 1986 Contract

     The    contract    establishes        what   should    be   a    seamless     and

straightforward pricing structure.                First, ¶ 5 of the contract

states that the County must always charge Pfizer the “Lowest

Commercial Rate” (“LCR”) in effect at the time of the water’s

delivery.       J.A.   21.        The   qualifier     “commercial”     is    actually

misleading, since ¶ 4(b) clearly defines LCR as “the lowest price

charged by the County to any user purchasing water for any purpose

whatsoever.”     J.A. 20.

     Several conditional ceilings to the LCR exist in ¶ 5, but the

only two now relevant are ¶¶ 5(d) and 5(f).1                         Paragraph 5(d)

establishes that the rate charged per 1,000 gallons will not exceed

$1.50 times the Producer Price Index for Finished Goods (“PPI”)

established “from May 1, 1985 to May 1 of the calendar year in

which     the   rate   for    the       forthcoming    fiscal    year       is   being

determined.”      J.A. 22.        Paragraph 5(f) offers something like an

exception to ¶ 5(d).         The bulk of this dispute concerns whether ¶

5(f) applies, and its meaning if it does.                We thus quote ¶5(f) at

length:

     Should the maximum charges as specified herein be
     insufficient to meet the Net Operating and Maintenance
     Expense for any fiscal year plus debt service... relating
     only to Phases I and IA of the Water System (specifically


1
 Paragraphs 5(a) through 5(c) are inapplicable after 1988.
Paragraph 5(e) provides a volume-based discount to ¶ 5(d). The
district court granted summary judgment to the County on the point
that ¶ 5(e) did not apply, and ADM did not appeal.

                                           4
     excluding debt service. . . relating to Phase II and debt
     service relating to any subsequent expansion of the Water
     System), the charges for all customers for the year in
     question shall be increased on an equal percentage basis
     by the County (including increasing the maximum charges
     to Pfizer beyond that otherwise authorized by this
     Agreement) in order to raise sufficient funds to cover
     both such Net Operating and Maintenance Expense and Phase
     I and Phase IA debt service.

J.A. 22.   Paragraph 5(f) is plainly structured as an “if, then”

conditional.   If (and only if) “the maximum charges as specified

herein” are “insufficient” to meet the County’s “Net Operating and

Maintenance Expense” (“NOME”) plus debt service only on Phases I

and IA, then the charges for all customers “shall be increased on

an equal percentage basis.” Id. (emphasis added).   Paragraph 4(c)

defines NOME in detail:

     Net Operating and Maintenance Expense” shall mean the
     cost of raw water and other direct expenses associated
     with the operation and maintenance of the County’s Water
     System. The following are examples of such items: 1.
     Salaries 2. FICA taxes 3. Group Insurance (Medical) 4.
     Payments to retirement fund 5. Professional service 6.
     Postage 7. Telephone 8. Utilities 9. Travel and Training
     10. Equipment repairs 11. Vehicle repairs 12. Equipment
     rental 13. Chemicals 14. Automotive supplies 15.
     Department supplies 16. Laboratory supplies 17. Uniforms
     18. Contracted services 19. Dues and subscriptions 20.
     Insurance 21.    Capital equipment used to operate or
     maintain the Water System, but excluding any equipment to
     expand the County’s Water System.      Excluded from Net
     Operating Expense are all (1) debt service obligations,
     (ii) all expenses which are reimbursed by special fees,
     such as tap on fees, (iii) any funding of reserves for
     other than operation and maintenance items; and (iv) for
     the purposes of interpreting 4(c)(21) above, any costs of
     capital investment to expand or extend the Water System.

J.A. 20-21.



                                5
     In sum, the contractual text protects Pfizer by limiting the

rates the County can charge it to an amount that is (1) never more

than any other customer is charged, (2) unless certain conditions

are met, no more than (for our purposes) the PPI-adjusted price of

¶ 5(d), and (3) in any event, never more than a rate that would be

“sufficient” to meet the “cost of raw water and other direct

expenses associated with the operation and maintenance of the

County’s Water System” when coupled with other customers’ charges

(see infra Part III.A).      The County, however, may (1) set the LCR

at any amount up to the ¶ 5(d) ceiling it chooses.              Additionally,

(2) by requiring Pfizer to contribute “on an equal percentage

basis,” ¶ 5(f) aids the County in obtaining an amount equal to the

water system’s NOME.

         C. The Parties’ Pre-Litigation Course of Performance

     In 1990, Pfizer sold its manufacturing plant to ADM, making

ADM a successor in interest to the contract.            As the district court

found,    we   have   no   reason   to       believe   that   the   contractual

relationship between the County and Pfizer/ADM was anything but

harmonious after the contract was signed until the 1999 rate

increases.     Throughout this time, Pfizer and ADM purchased immense

amounts of water from the County; in fact, ADM notes that it is the

County’s largest water customer.

     The undisputed evidence before the district court shows that

in late 1997 and 1998 the County set a goal of ending its subsidy


                                         6
of the water system, particularly the system’s Phase II debt.2

Among other evidence, Lee Smith, the County’s Director of Public

Utilities, testified at a deposition that to achieve this goal the

County set in place a five-year plan to pay off twenty percent of

the debt annually by increasing charges systemwide.         Smith’s

deposition included the following exchange:

     Q:   Let me ask you, in referring to [the Contract], and
          specifically paragraph 5, to explain how the County
          has calculated the rate for water that has been
          charged to ADM since January 1999.
     A:   Okay, the way the rate was calculated beginning
          that year was that staff was given a charge to have
          the –- to establish a rate that would eventually
          get the water system on a paying basis, and that
          was developed into a five-year plan, and that plan
          was –- in that plan was a rate developed for
          industrial customers, which ADM is one of. . . .

J.A. 250; see also J.A. 253.     Under this “five year plan,” rather

than calculating the rate in the progression that the contract

anticipates, the County worked backwards from the goal of making

the water system self-sufficient.

     Mr. Smith also testified, and no other evidence contradicts,

that so far as he knows, prior to this litigation the County had

never calculated a ¶ 5(f) rate in the manner which the County now

wishes for us to calculate it.    See J.A. 275-77, 314.   Rather, as

the following excerpt from Mr. Smith’s deposition indicates, the




2
 In 1993 the revenue bonds associated Phases I and IA were retired,
thus dissolving those debt-service obligations.

                                   7
only    rate   calculations   done   are   reflected    in   a   number   of

worksheets:

       Q:   Before that [January 1, 1999] rate was put into
            place, were there any calculations done to see if
            that rate complied with the agreement?
       A:   The process was done through the finance department
            as an internal process. She [Lithia Brooks] –- it
            is referred to in [. . . the worksheets3]. . . .
       Q:   Are those calculations that were done at some point
            to determine the rate of water charged to ADM?
       A:   Those were the –- that process was conducted by
            finance, and that was –- those were the people that
            conducted that particular analysis.

J.A. 254-56.    After the 1999 rate increases began, in response to

ADM’s questions, the County’s counsel sent a June 29, 1999 letter

which enclosed “a summary of the calculations used by the County to

arrive at the potable water rate. . . .”               J.A. 574-76.       The

enclosures were worksheets for fiscal years 1998-99 and 1999-00.4

A later letter from the County’s attorney to ADM explains that the

method used in these worksheets is consistent with the County’s

prior rate-setting methods.     Specifically, it states:

       Information should have been sent to your office that
       supports the County’s calculation of the water rate.
       This method was the same method that was used to


3
 The specific worksheets referred to here are found at J.A. 407,
411-413.   The method used in the worksheets generated by the
County’s finance department are materially identical.
4
 The 1998-99 worksheet was called “Brunswick County Water Rate
Analysis FY 98-99 Approved Budget.”   The 1999-00 worksheet was
entitled “Brunswick County Water Rate Analysis FY 99-00 Revised
Recommended Budget.”   J.A. 575-76. Subsequent exhibits included
in the record (as “Exhibit 12" and “Exhibit 13" at J.A. 407-13)
included the same 1998-99 worksheet and utilized the materially
same method for later fiscal years.

                                     8
      calculate the rate set in 1996. The same calculation
      method that produced the $1.1815 rate (that ADM is
      currently paying) [sic: $1.815] produced the $1.98 rate.
      Are we to assume that since there was no objection to the
      method used to set the rate at that time, that there will
      be no objection to its being set the same way this time?

J.A. 580.

      Despite the County’s current protests to the contrary, these

worksheets are important insights into the County’s pre-litigation

rate-setting methods.   As the district court found, the worksheets

revealed that the County would:       (1) calculate the PPI rate; (2)

calculate the rate necessary to cover NOME, then (3) compare the

PPI rate with the NOME rate, and only charge above the PPI rate if

(1) is less than (2).     See J.A. at 664.      To calculate the rate

necessary to cover NOME, the worksheets begin with the water-system

budget –- and decidedly not any other expenses, like the large

capital-projects expenses accounted for elsewhere that the County

would now have us include –- as NOME’s foundation.5          They then

deduct from the Water System budget all debt service6 and “special

fees” (including “tap” and “LCFW&SA” fees and, beginning in 1999-

00,   “capacity,”   “availability,”    and   “acreage”   fees).7   The


5
 The 1998-99 water system budget was $13.83 million, while the
1999-00 water system budget was $12.86 million.
6
 The 1998-99 worksheet adds back in $421,000 of some other “debt
service” (which, according to the district court, is actually a
line item in the water-system budget for capital leases for water
system maintenance equipment. See J.A. 667).
7
 In 1998-99, the deduction for “special fees” totaled $1.16 million
and reflected only “tap on” and “LCFWRA” fees.      In fiscal year

                                  9
worksheets then divide this resulting amount by what appears to be

the total gallons of water sold to arrive at an “approved water

rate.”   See J.A. 407-11, 575-76.8         This “approved” rate was, to the

County, the maximum rate it could charge ADM.

      The   County   now   attempts   to     discredit   its    earlier   clear

representations to ADM that the worksheets were “used by the County

to arrive at the potable water rate,” J.A. 574; “support[] the

County’s calculation of the water rate,” J.A. 580; were “the same

method that was used to calculate the rate set in 1996[,]” id., and

are “[t]he same calculation method that produced the [] rate (that

ADM is currently paying). . . .”           Id.

      The County’s offerings in support of this assertion, however,

are less than meager.        It can submit only the testimony of its

Director of Fiscal Operations, Lithia E. Brooks, who now claims

that the internal worksheets were, while produced at her direction,

never actually used to calculate the ¶ 5(f) rate.              E.g., J.A. 214-

17.   Notably, however, Brooks echoes Smith in failing to offer any

positive method for how rates actually were charged.                 Thus, in



1999-00 and subsequent years, however, the County began to charge
its customers other “capacity,” “availability,” and “acreage” fees
-- in addition to the per-thousand-gallon charge. These were also
each deducted by the County as “special fees.” J.A. 407-11, 576.
The worksheets for fiscal years 1999-00 and after also then add in
to the water system budget approximately $1.6 million annually for
depreciation of capital assets. Id.
8
 In 1998-99 the approved rate was $2.51 per thousand gallons.                In
1999-00, it was $1.979 per thousand gallons.

                                      10
denying that the worksheets reflected the County’s pre-litigation

rate-setting method, the County is left in the awkward position of

(1) having to admit that it never calculated ADM’s water rates

under the method they would now have us use and (2) offering no

affirmative theory -- much less evidence -- of how its rates

actually were calculated before the lawsuit. In stark contrast, on

this point ADM offers (1) clear-as-day pre-litigation admissions

from the County, sent by its attorney, that the worksheet method

was used before litigation and did reflect the County’s rate-

setting method for years before those years relevant for this

lawsuit.   J.A. 572-81.   Moreover, ADM offers (2) other worksheets

ordered at Ms. Brooks’ behest which consistently continue the

methods of the pre-litigation worksheets for the fiscal years up

through 2003.   See J.A. 407-11.

     On August 31, 2000 –- about seven months after it sent the

last letter in support of the worksheets -- the County told ADM

that it owed $191,546, the difference between the rate ADM was

paying and the rate the County had charged since January 1, 1999.

The County threatened to cancel ADM’s water service if it did not

send payment by September 21, 2000.     On September 14, 2000, ADM

paid what the County said it owed under protest.

                           D. The Lawsuit

     ADM sued on June 21, 2002.    The thrust of ADM’s case is that,

because ¶ 5(f) was inapplicable, the County was unjustified in


                                   11
charging anything more than the ¶ 5(d) rate.          Specifically, ADM

contends that it overpaid by $357,768 in the years now relevant to

the contract.9        Brunswick County asserted a counterclaim for the

years ADM has paid less than the County’s full charges, and, unlike

ADM, requested a jury trial.        The County’s chief counter-argument

is that its rates could have been justified, even had it not

included the Phase II debt charges.

           To support this theory, the County relies upon the report and

deposition of Dr. C. W. Corssmit, Ph.D., an utilities economist who

analyzed the rates from July 1, 1998 to June 30, 2001.             Most

relevantly, Dr. Corssmit’s report teased out expenditures from the

County’s non-water system budgets and submitted that they were

really expenditures that could have been, but were not, counted




9
 This includes amounts of $145,546 above the ¶ 5(d) rate for 2001,
$76,686 for 2002, $105,410 for 2003, and $30,126 through October
30, 2004. J.A. 680, 728-30. The following table illustrates the
rates charged ADM compared to what the ¶ 5(d) rate would have been
during the relevant years:

    Fiscal Year             Paragraph 5(d) rate   Rate charged to ADM
    2001                    $1.97                 $2.20
    2002                    $2.04                 $2.38
    2003                    $1.98                 $2.80
    2004                    $2.03                 $2.32

ADM has since only paid at a rate of $2.20 per thousand gallons
(charged to it in 2001) rather than the subsequently increasing
rates the County has billed.

                                     12
under NOME. Having done so, the report concludes that adding these

expenses would have justified the County’s rates.

      After    discovery,       ADM    moved    for     total   summary       judgment.

Brunswick County opposed and, in turn, moved only for partial

summary judgment on the issues that (1) the statute of limitations

barred any damages arising before the fiscal year beginning July 1,

2000, and (2) ¶ 5(e) (which granted a volume-based discount to the

¶ 5(d) rate) was inapplicable.

      On December 2, 2003, after ordering supplemental briefing, the

district court granted both parties’ motions -- thus finding that

the   County       breached    and    denying    the    County’s    counterclaims.

Finding that the operative portions of the contract “present[] a

difficult case for interpretation,” J.A. 659, and that neither

party   submitted      an     entirely   reasonable       reading   of    ¶    5(f)   in

litigation, the court leaned heavily on the parties’ pre-lawsuit

conduct as evidenced by the worksheets.                  The district court then

ordered further supplemental briefing on damages, and the parties

calculated the rates under the worksheet method.                        The district

court also heard a request from the County to reconsider the

propriety     of    deducting     “special      fees”    from   NOME.     The     court

declined to alter its ruling from what it found the worksheet

method to entail, and issued a final judgment on February 11, 2004,

which granted ADM $357,758 in compensatory damages and $58,264.64

in prejudgment interest.             The County timely appeals.


                                          13
                                    II.

     We review a district court’s grant of summary judgment de

novo.    Boss v. E.I. Dupont de Nemours & Co., 324 F.3d 761, 766 (4th

Cir. 2003); Goodman v. Resolution Trust Corp., 7 F.3d 1123, 1126

(4th Cir. 1993).       Summary judgment should be granted when no

genuine issue of material fact remains unresolved and the moving

party is entitled to judgment as a matter of law.          Fed. R. Civ. P.

56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49

(1986).    At the summary judgment stage, the judge's function is to

determine whether any genuine issue of material fact remains for

trial.    Anderson, 477 at 249.     Unless “the evidence is such that a

reasonable jury could return a verdict for the nonmoving party,”

summary judgment is proper.       Id. at 248.

     The district court properly noted that North Carolina law

controls the interpretation of the contract; ¶ 14 of the contract

indicates as much.       However, the court then errantly noted –-

albeit    ultimately   harmlessly   –-    a   different   summary   judgment

standard.    Citing the North Carolina Supreme Court case of Davison

v. Duke University, 194 S.E.2d 761, 783 (N.C. 1973) for the

proposition that “[t]he interpretation of a contract is a question

of law within the court’s province,” J.A. 653, the district court

simply decided that, under North Carolina law, it was to decide the

contract as a matter of law.




                                     14
       This was an oversight.       Since the suit was filed in federal

court, the Federal Rules of Civil Procedure govern matters like

whether Fed. R. Civ. P. 56(c) motions for summary judgment should

be granted.      As Judge Posner has explained, under Erie, federal

courts sitting in diversity should apply state contract law as

would a court in that state because contract law is substantive; it

is “concerned primarily with ‘the channeling of behavior outside

the courtroom.’”        Coplay Cement Co. v. Willis & Paul Group, 983

F.2d 1435, 1438 (7th Cir. 1993)(citations omitted).                          However,

federal law must govern whether a question is one of law or fact,

because that is a matter “internal to the federal judicial system”

involving the allocation of functions between judge and jury. Id.;

Cunningham and Co., Inc. v. Consolidated Realty Mgmt., Inc., 803

F.2d 840, 842 (5th Cir. 1986)(“The roles of judge and jury in the

interpretation     of   contracts   are       set   by   federal      law,    even    in

diversity cases.”); see also Byrd v. Blue Ridge, 356 U.S. 525, 538

(1958)(“[T]here is a strong federal policy against allowing state

rules    to   disrupt   the    judge-jury      relationship      in    the    federal

courts.”); Atkins v. Schmutz Mfg. Co., 435 F.2d 527, 536-37 (4th

Cir.    1970)(same).      In   short,    while      we   respect      and    apply    as

appropriate     substantive      state    law,      we   guard     jealously         the

independence of our internal procedural rules like summary judgment

standards.




                                         15
                                 III.

     This case turns on the interaction of a contract’s express

terms and the parties’ course of performance under the Uniform

Commercial Code (“UCC”).    Section 2-208 of the UCC, adopted by

North Carolina as N.C. Gen. Stat. § 25-2-208,10 mandates that courts

give some –- but not unreasonably heavy -- interpretive weight to

the parties’ course of performance.     On this point, § 2-208 makes

at least two principles plain:    first, a course of performance is

“relevant” to determine the “meaning of the agreement.”    N.C. Gen.

Stat. § 25-2-208(1).   Second, only when the two can not reasonably

be read in harmony do the express terms “control” the course of

performance.   N.C. Gen. Stat. § 25-2-208(2).11


10
 North Carolina has adopted Article 2 of the Uniform Commercial
Code. N.C. Gen. Stat. §§ 25-1-101 to 25-11-108. Because water can
be measured by a flow meter, it is “movable” under Article 2, and
thus the contract at issue in this suit is one for the sale of
goods. See N.C. Gen. Stat. § 25-2-105; Mulberry-Fairplains Water
Ass’n v. Town of North Wilkesboro, 412 S.E.2d 910, 915 (N.C. App.
1992)(contract for sale of water from town to business is sale of
goods); Westpoint Stevens, Inc. v. Panda-Rosemary Corp., 1999 WL
33545512 at *3 (N.C. Super. Dec 16, 1999)(finding steam to be
“goods”).
11
 Section 2-208 of the North Carolina Commercial Code provides in
full:
     (1) Where the contract for sale involves repeated
     occasions for performance by either party with knowledge
     of the nature of the performance and opportunity for
     objection to it by the other, any course of performance
     accepted or acquiesced in without objection shall be
     relevant to determine the meaning of the agreement.
     (2) The express terms of the agreement and any such
     course of performance, as well as any course of dealing
     and usage of trade, shall be construed whenever
     reasonable as consistent with each other; but when such

                                  16
      We analyze the contract with these rules equally in mind with

the   proper    summary   judgment    standard,      and    conclude       that    the

district court correctly granted summary judgment to ADM.

                 A.   The Parties’ Course of Performance

      Given     the   evidence    submitted     in   the      summary      judgment

materials, the County cannot now convincingly contest that a course

of performance did not exist.          As the County correctly realizes,

the   letters    themselves    are   not,    standing      alone,    a    course    of

performance. See Appellant’s Br. at 41-42; N.C. Gen. Stat. § 25-2-

208 cmt. 4 (“A single occasion of conduct does not fall within the

language of this section.”).         Rather, the letters and             worksheets

are simply strong evidence –- not credibly contradicted, and almost

surely   admissible12     –-     regarding    the    course     of       performance


     construction is unreasonable, express terms shall control
     course of performance and course of performance shall
     control both course of dealing and usage of trade
     (3) Subject to the provisions of the next section [§ 25-
     2-209] on modification and waiver, such course of
     performance shall be relevant to show a waiver or
     modification of any term inconsistent with such course of
     performance.
N.C. Gen. Stat. § 25-2-208.
12
 The County contends that the letters –- but, to their credit, not
the worksheets –- are inadmissible under Fed. R. Evidence 408
because they were part of “compromise negotiations.” Appellant’s
Br. at 39-40; Reply Br. at 13 n.1. We disagree. The letters were
written months prior to any lawsuit and at the time they were
written no reason existed to believe that any litigation would
necessarily come to pass.    Courts surely need not exclude all
inter-party questions and discussions about a contract; the
probative value of such evidence is quite high and considering
discussions such as this does no harm to Rule 408's good goal of
encouraging actual compromise negotiations.

                                      17
established during the pre-litigation years.               The County’s failure

to appreciate this distinction leads them to the errant argument

that the letters cannot be a course of performance because ADM

never “accepted or acquiesced in” the method proposed in the

letters and worksheets without objection.                Appellant’s Br. at 41-

43. First, ADM never disputed the method explained in the letters;

it just questioned the basis for the numbers plugged into the

calculations. But more fundamentally, these letters and worksheets

offer    the   only   evidence   we   have    of   the    County’s   (previously

admitted) rate-setting method throughout the years and, relatedly,

ADM’s continued acceptance of it.            See, e.g., Water Ass’n v. Town

of North Wilkesboro, 412 S.E.2d 910, 916 (N.C. App. 1992) (course

of performance established, and contract modified, when town sold

business water in excess of maximum contract price and amount for

15 years).     Thus, not only can the County not point to one bit of

evidence establishing any other rate-setting method used during the

many years of voluminous water sales under the contract before

1999, but the County can show no evidence that these rates were not

accepted.

     The County also submits the novel suggestion that a course of

performance between a successor in interest to a contract and an

original party to the contract may not shed light on the intent of

the original parties.        See id. at 20, 36-38.             This also falls

short.    A contractual successor stands in its predecessor’s shoes


                                       18
for both rights and responsibilities and -- at least -- a frank

admission about the course of performance by an original party to

the contract surely may be used against it by the successor.       Were

it any other way, it seems that the UCC’s course of performance and

waiver doctrines would be read out of existence whenever a contract

for the sale of goods is assigned.             Such a result would be

particularly   likely,   and    particularly    unjust,   in   long-term

contracts like this one.       This cannot comport with the intent of

the drafters of the UCC.

     The County finally argues that a genuine issue of material

fact remains as to the course of performance because Ms. Brooks

claims that the County never used these methods to set rates.13

Appellant’s Br. at 38-39.      This too must fail.   With silence that

speaks loudly, the County submits no other affirmative method in

the summary judgment materials to contradict the clear statement of


13
  Specifically, Ms. Brooks contends that the Utilities Department
–- not the finance department, which evidently developed the
worksheet –- sets the water rate. Ms. Brooks’ testimony included
the following exchanges:
     Q.   Is [the worksheet] used in any way to assist the
     County in determining the water rates to be charged to
     customers? A. No, sir, it is not. . . . Q. How does
     the County calculate, then the rate that is charged to
     customers for water? A. That is simply based on the
     amount that is calculated needed to cover projected
     expenses for that department.
J.A. 215. Yet the head of the utilities department, Mr. Smith,
plainly states that, prior to Dr. Corsmitt’s post-litigation
involvement in the matter, the County never interpreted ¶ 5(f) as
it would now have the court do.      This fruitless and circular
finger-pointing simply does not create a triable issue of fact on
the parties course of performance.

                                   19
their attorney that the methods outlined in the worksheets were

used by the County before litigation.          We find it difficult to

believe that any reasonable jury would weigh a bare, post-hoc

denial, offered with nothing else to stand in its place, over a

pre-litigation   admission   by   a    sophisticated   contracting   party

vetted by its lawyer and subsequently bolstered by other uses.

Here the County sent letters stating, among other things, that “a

summary of the calculations used by the County to arrive at the

potable water rate. . . .”        J.A. 574 and “[t]his method was the

same method that was used to calculate the rate set in 1996.            The

same calculation method that produced the [rate that ADM was paying

at the time of the letter] produced [this] rate.”          J.A. 580.    In

sum, while ADM, as the plaintiff, assuredly bears the burden of

proof on establishing a course of performance, the County has

simply offered no evidence which genuinely puts into issue that the

worksheets evidenced the course of performance.

                 B.   Express Text of the Contract

     Because “[t]he parties themselves know best what they have

meant by their words of agreement and their action under that

agreement is the best indication of what that meaning was,”            N.C.

Gen. Stat. § 25-2-208 cmt. 1., § 25-2-208(2) commands us to

construe the course of performance and express contractual text

harmoniously “whenever reasonable.”         Thus, it follows that only

when such a reading is decidedly unreasonable do the express terms


                                      20
“control.”       N.C. Gen. Stat. § 25-2-208(2).                 The operative express

terms for this contract are those which determine whether ¶ 5(f)

applies: (1) “maximum charges as specified herein” and (2) “NOME.”

When (2) is an amount greater than (1), then ¶ 5(f) might apply.

As    explained       below,   these       sections      may,   with      one    exception,

reasonably     be      read    in    harmony      with    the    parties’        course   of

performance.

                 1.     “Maximum charges as specified herein”

       Paragraph       5(f)    notes    that      when    the   “maximum        charges    as

specified herein” are “insufficient” to cover NOME, the County

shall charge all its customers equally more in order to equal NOME.

J.A. 22.     The worksheets consistently divide the County’s NOME by

all    gallons     of    water      sold    by    the    County      to   establish       the

“calculated rate to cover operations.”                     J.A. 575-76.          Thus, the

district court found that the contract’s real meaning was informed

by    the   parties’      pre-litigation          conduct,      as   evidenced      in    the

worksheets, which was to utilize all water rates.                          The court did

so, however, in spite of its opinion that the only “maximum

charges”     the      contract      expressly     provided      “herein”        were   ADM’s

charges set out in the immediately preceding paragraphs 5(a)-(e).

       We attack this problem differently. As established above, the

course of performance was not genuinely in dispute.                             Given this,

under N.C. Gen. Stat. § 25-2-208(2), the proper question before the

court is simply whether the express text may reasonably be read in


                                             21
harmony with the course of performance.          It can.     The contract

surely does not assume that ADM and the County contract in a

vacuum.   Indeed, without other customers, many important portions

of the contract are rendered meaningless:        among other references

to revenue received from other users of the water system, ¶¶ 4(b)

and 5 ensure that all other customers’ charges must be higher than

ADM’s; ¶ 6 requires that the County charge all customers fairly and

as low as practicable and requires that all water-system revenues

(not merely ADM’s) exclusively for water system purposes.14           This

all allows at least a reasonable reading that “herein” was meant to

refer to the entire contract –- and thus other customers’ charges

-- not merely the     immediately preceding ¶¶ 5(a)-(e).       Indeed, as

notable as what the contract expressly says is what it does not but

could have said if the parties meant to give “herein” such a

cramped meaning:      the contract decidedly does not refer to the

charges “as specified in the immediately preceding paragraphs” or

“the maximum charges otherwise allowed to Pfizer.”            Finally, we

also note ADM’s uncontested citation of an identical contract –-

complete with an identical ¶ 5(f) -- the County entered into with

the town of Long Beach.      J.A. 590.     This contract’s existence is

important   because   it   severely    undermines   any   notion   that   in


14
 Indeed, ¶ 5(f) itself requires all other rates to be increased
equally to ADM’s rates if they are ever increased beyond the ¶ 5(d)
PPI-rate whenever the “maximum charges” are “insufficient.” It is
certainly not unreasonable to read these two phrases of ¶ 5(f) in
equilibrium.

                                      22
drafting ¶ 5(f) the County relied solely on Pfizer/ADM’s charges to

cover NOME.      Thus, as established by both the plain text and

confirmed by the parties’ plain course of performance, the district

court was well within its rights to find as a matter of law that

¶ 5(f)’s “if” trigger -- “the maximum charges as specified herein”

–-    encompasses   all   water    sold,     not    merely    the   charges    of

Pfizer/ADM.    There simply is no factual dispute on this point for

a jury to consider.

                                   2.    NOME

      The other side of the ¶ 5(f) coin is NOME.                     The County

challenges the district court’s exclusion of three categories of

expenses from NOME:       (1) large capital expenses accounted for

outside the water-system budget, (2)               depreciation for capital

expenses, and (3) certain “fees” the County began charging in 1999.

The district court properly excluded all three.

      Unlike it evidently did in the worksheets, the County now

wishes to go back and include significant expenses from the capital

projects fund in the calculation of NOME.                As Ms. Brooks argues,

“many significant capital expenditures for, among other things,

maintaining the water system are not reported as an expenditure in

the   Water   System   Operating    Fund     but   are   instead    reported   as

expenditures in the Capital Products Fund.”                 J.A. 59.    Yet the

summary judgment materials make clear that the County utilized the

water system budget –- and not other capital projects expenses


                                        23
which the County now claims should count -- as the baseline for

calculating NOME.

     The contract defines NOME as “the cost of raw water and other

direct expenses” of operating and maintaining -– but not expanding

–- the system.   To be sure, this makes no explicit reference to the

water system budget; but neither does this text make unreasonable

a reading that the water system budget was to serve as the

contract’s proxy for “the cost of raw water and other direct

expenses.”   Following the district court’s reasoning, it hardly

seems that the parties, when drafting the contract, anticipated

retaining an utilities economist annually to tease out “water

system” expenses from areas other than that which the County

previously and readily recognized were water system expenses. Yet,

since the course of performance did not include such expenses, to

find that such capital expenses should be included we would have to

be so sure that this was the parties’ intent that it would be

unreasonable to believe otherwise.    Surely it is not.   Thus, since

the course of performance and express text can reasonably be read

in harmony here, we are commanded to do so.     See N.C. Gen. Stat.

§ 25-2-208(2).

     The interpretation of the fees and depreciation accounted for

on   the   1999-00   worksheet   is   a   slightly   tougher   issue.

Paragraph 4(c) states that “all expenses which are reimbursed by

special fees, such as tap on fees” may not be included in the


                                 24
definition of NOME.         J.A. 21.          The question is whether the

additional charges the County apparently began in 1999 are thus

“special fees, such as a tap on fee.”

     We first note that the County’s consistent method as evidenced

in the worksheets was to deduct all three fees from the water

system budget.      Indeed, in every fiscal year that these fees were

charged, they were listed by the County under the category “special

fees.”   See J.A. 407-11, 575-76.       We also see that the County’s own

witnesses state consistently that acreage fees directly reimburse

debt expenses and the capacity fees reimburse expansion expenses.

Besides the fact that both of these fees directly reimburse an

expense -- and are therefore “special” -- they doubly deserve

exclusion    from    NOME   because    they    reimburse   expenses     plainly

impermissible under ¶ 4(c).15         Thus, the course of performance and

express text are capable of being reasonably read in harmony.

     Finally, the district court found that “depreciation should

not be counted towards NOME because it. . . is a fictional, rather

than a “direct expense” to the water system.            J.A. 666.   The County

challenges    this    ruling   by     arguing    that    depreciation    is   a

“maintenance” expense that is especially important to include if


15
 As for the “availability” fees, while we certainly presume that
the County acts under in good faith, we note that (1) the contract
is written in a way such that the County holds all the cards and
could easily manipulate what any fee “reimburses”; and (2) prior to
litigation (the period which North Carolina contract law gives
heaviest weight), the County called availability fees “special” and
deducted them when calculating their rates.

                                       25
the “direct” capital maintenance expenses are not included.                     We

again agree with the district court.                  Paragraph 4(c) of the

contract took the time to list twenty-one examples of “direct

expenses,”      ranging   from   FICA    taxes   to   postage    to    laboratory

supplies   to    uniforms.       Given    this   level   of   detail    for   such

comparatively minuscule items, it is unreasonable to believe that

an expense as enormous as depreciation -- a $1.6 million annual

entry on the worksheets -- was left off the list of “direct

expense” examples by accident.             Thus, consistent with the UCC’s

commands, the district court was correct here to allow the “express

text” of the contract “control” the parties’ course of performance.

See N.C. Gen. Stat. § 25-2-208(2).



                                         IV.

     For no shortage of reasons, a court “faces a conceptually

difficult task in deciding whether to grant summary judgment on a

matter of contract interpretation.”              World-Wide Rights Ltd. V.

Combe Inc., 955 F.2d 242, 245 (4th Cir. 1992).                  Here this is so

because a court must hold in equipoise a proper respect for the

express text and the UCC’s practical command to allow the parties’

conduct to aid in defining the text all while determining whether

any genuine issues of material fact remain and refraining from

deciding disputed facts.




                                         26
     The district court completed this difficult task acceptably.

No genuine dispute existed regarding the County’s pre-litigation

rate-setting method, and thus the parties’ course of performance

was clear enough.       The district court properly read the express

text of the contract and the course of performance in harmony when

it   was   reasonable    to   do   so,    but   when,   on   the   issue   of

depreciation, such a reading was unreasonable, it correctly allowed

the express text to control.       Thus, the district court’s judgment

is

                                                                   AFFIRMED.




                                     27
WIDENER, Circuit Judge, concurring:

     I concur in Judge Gregory’s majority opinion.   I should add

that I would affirm on the opinion of the district court.




                               28
SHEDD, Circuit Judge, dissenting:

     I respectfully dissent.        The dispute between the parties

should be governed by the unambiguous language of the contract and

not, as the majority incorrectly rules, by the parties’ so-called

course of performance.

     The relevant contractual language provides:

     5.   The County will charge [ADM] for water actually
     delivered to [ADM] . . . , and [ADM] will pay for such
     water, at the Lowest Commercial Rate in effect at the
     time of such deliveries provided, however, that in no
     event shall such charge exceed the following amounts:

           . . .

           (d) For fiscal years subsequent . . . to 1988, an
     amount per 1,000 gallons not to exceed $1.50 times the
     ratio of the change in the PPI [Producer Price Index] .
     . . .

          (f) Should the maximum charges as specified herein
     be insufficient to meet the Net Operating and Maintenance
     Expense [NOME] for any fiscal year . . . , the charges
     for all customers for the year in question shall be
     increased on an equal percentage basis by the County
     (including increasing the maximum charges to [ADM] beyond
     that otherwise authorized by this Agreement) in order to
     raise sufficient funds to cover . . . such [NOME].1

     The   parties   agree   that   ADM   must   pay   either   the   amount

described in section 5(d), which is the PPI rate, or the amount

described in section 5(f), which is the NOME rate.        The parties, of

course, disagree as to which of these two rates applies.



1
 Section 5(f) also includes language allowing the addition of debt
service expenses for Phase I and Phase IA into the calculation.
These debt service obligations were fulfilled by 1993, so they are
not relevant to this case.

                                    29
     To determine which rate applies, we must first turn to the

express terms of the contract.       Under North Carolina law,     “the

most fundamental principle of contract construction [is] that the

courts must give effect to the plain and unambiguous language of a

contract.”   Johnston County v. R.N. Rouse & Co., 414 S.E.2d 30, 34

(N.C. 1992).     If the language of a contract is unambiguous, the

intention of the parties must be inferred from the words of the

contract.    Walton v. City of Raleigh, 467 S.E.2d 410, 411 (N.C.

1996).   Under such circumstances, the “court’s only duty is to

determine the legal effect of the language used and to enforce the

agreement as written.”    Atlantic & E. Carolina Ry. Co. v. Southern

Outdoor Adver., Inc., 501 S.E.2d 87, 90 (N.C. Ct. App. 1998).        A

contract is not ambiguous merely because the parties differ on how

to interpret its terms.     Walton, 467 S.E.2d at 412. Unambiguous

contracts are interpreted by the court as a matter of law.       First-

Citizens Bank & Trust Co. v. 4325 Park Rd. Assocs., 515 S.E.2d 51,

54 (N.C. Ct. App. 1999); World-Wide Rights Ltd. Partnership v.

Combe, Inc., 955 F.2d 242, 245 (4th Cir. 1992).

     Although the relevant contractual provisions require careful

reading and cross-referencing, they are nonetheless unambiguous.

The PPI rate in section 5(d) -- an indexed rate that is not in

dispute --     applies unless “the maximum charges as specified” in

section 5 of the contract are “insufficient to meet the [NOME] for

any fiscal year.”   Section 5(f).    If the “maximum charge” ADM would


                                    30
be required to pay in a given year for its water consumption based

on the PPI rate2 is “insufficient to meet” the qualifying NOME

expenses allowed under the contract, then the County may charge ADM

the higher NOME rate under section 5(f).3

     The qualifying NOME expenses are clearly defined in section

4(c) of the contract.   They include direct expenses for salaries,

postage, utilities, uniforms, insurance, chemicals, laboratory

supplies, training and travel, and many other typical expenses

incurred in operating a water system.

     The parties dispute two categories of expenses under the

definition of NOME. The first disputed provision allows the County

to add into NOME direct expenses for “[c]apital equipment used to

operate or maintain the Water System.” Section 4(c)(21).       The

County presented evidence of such expenses in the relevant years,

but the district court precluded these amounts from the calculation

of NOME.   Because the unambiguous language of the contract clearly

allows the County to include these expenses in calculating NOME,

the district court’s exclusion of them was erroneous.   The second

disputed provision states that “all expenses which are reimbursed


2
 There are several “maximum charges” listed in section 5, but,
based on the particular facts of the case, the only “maximum
charge” specified in section 5 that could be used to make this
necessary calculation under section 5(f) is the PPI rate under
section 5(d).
3
 ADM argues that “maximum charges” means all charges paid by all
customers. There is no support for this interpretation based on
the plain terms of the contract.

                                 31
by special fees, such as tap on fees” shall be excluded from NOME.

Section 4(c)(21)(ii) (emphasis added). The County, for example,

charges each customer a tap-on fee when it physically connects that

customer to the water system.    This fee pays for the labor and

plumbing supplies required to make the connection.      Because the

customer is required to reimburse the County for these particular

expenses by paying the fee, the County in effect incurs no net

expense.   Allowing the County to add its tap-on expenses to NOME

when they have already been directly reimbursed by the customer

would improperly inflate NOME and, more importantly, would violate

the terms of the contract.

     In addition to tap-on fees, the County charges acreage,

capacity, and availability fees.      Unlike tap-on fees, there is

evidence that these three fees do not directly reimburse the County

for any specific expenses incurred by the County.   If these fees do

not represent “expenses which are reimbursed by special fees,” they

should have no effect on NOME.    Nevertheless, the district court

ruled that the amount of revenue recovered by these fees should be

subtracted from NOME. NOME, however, is a calculation of expenses,

not revenues.   Based on the contract, not even tap-on fees are

actually subtracted from NOME; rather, the corresponding expenses

reimbursed by the tap-on fees are excluded from NOME.     Requiring

the County to subtract its revenues from the acreage, capacity, and

availability fees improperly reduces NOME and thus affects the


                                 32
determination of whether the County may charge ADM the higher NOME

rate in section 5(f).     Accordingly, the district court erred by

requiring, as a matter of law, the subtraction of these fees from

NOME.4

     The majority ignores the unambiguous language of the contract

and instead purports to decide the case, as a matter of law, based

on the parties’ so-called course of performance.          North Carolina

law provides that when a contract governed by the commercial code

“involves repeated occasions for performance by either party with

knowledge of the nature of the performance and opportunity for

objection to it by the other, any course of performance accepted or

acquiesced in without objection shall be relevant to determine the

meaning of the agreement.” N.C. GEN. STAT. § 25-2-208(1) (emphasis

added).    ADM    did   not   know   the   “nature   of   the   [County’s]

performance”     (i.e., how the County calculated the water rate)

until it first disputed the County’s new water rate in 1999.        After

ADM disputed the rate, the County provided copies of its internal

worksheets. Upon receiving the County’s internal calculations, ADM

did not “accept” or “acquiesce” in the County’s calculation.

Instead, ADM informed the County that the information “still does

not satisfy ADM that the new rate is in compliance with the terms



4
 At oral argument, counsel for ADM conceded that availability fees
do not directly reimburse any specific expenses. Counsel for ADM
also conceded that the County’s argument relating to acreage and
capacity fees has merit.

                                     33
of the contract,” and, most tellingly, ADM refused to pay the

increased rate imposed by the County.              Thus, there is no course of

performance between the parties, as defined by § 25-2-208, that is

“relevant to determine the meaning of the agreement” in this case.

Id.

      The    district    court’s    misplaced        reliance   on   course   of

performance necessarily affects the determination of the maximum

rate the County is allowed to charge ADM under the express terms of

the contract.      Accordingly, I would reverse the grant of summary

judgment in favor of ADM.

      Even   if    I   were   to   agree    that    the   parties’   course   of

performance qualifies as relevant evidence to help determine the

meaning of the agreement, I would reverse summary judgment and

remand for trial.         Instead of treating the parties’ so-called

course of performance as relevant evidence, the district court and

the majority essentially replace the parties’ written agreement

with what they consider to be the parties undisputed course of

performance.      This purported course of performance is, however,

disputed at its very core.          The County’s evidence shows that the

internal worksheets, which the district court and now the majority

basically treat as the new contract, were not used to calculate

ADM’s rate.       Instead of viewing this evidence in the light most

favorable to the County, which we must do in our summary judgment

review, the majority does its own weighing of the evidence and


                                       34
rejects it as unbelievable.5               A jury, rather than the majority,

should be allowed to decide which evidence to believe.

     Finally, the majority fails to consistently apply what it

deems   to    be     the   parties’    so-called       pre-litigation     course     of

performance.         In the worksheets, which the majority views as

sacrosanct for all other purposes, the County included depreciation

in NOME.     To be consistent, the majority would necessarily have to

conclude      that    this   too    was    part   of    the   parties’    course     of

performance.       Nevertheless, the majority insists that depreciation

cannot be included in this calculation because the express terms of

the contract prohibit the County from doing so. This conclusion by

the majority is internally inconsistent with its view of the

parties      so-called     course     of   performance,       and   it   is   also   an

incorrect ruling based on the evidence in the record.6




5
 The majority finds “it difficult to believe that any reasonable
jury would” believe the County’s denial that the worksheets were
used to set ADM’s rate. The majority’s prediction on what a jury
might do with this evidence might be correct, but that question is
for the jury to decide.
6
 At the very least, there is a question of fact whether
depreciation can be included in NOME. The express terms of the
contract allow the County to include capital maintenance and
operation expenses in NOME.     The County’s expert opined that
depreciation can be an appropriate way to estimate capital
maintenance and operation expenses. We must credit this testimony
in our review of a grant of summary judgment.

                                           35
