Watson Water Company, Inc. v. Indiana-American Water Company, Inc.

FILED
Oct 10 2017, 9:39 am
CLERK
Indiana Supreme Court
Court of Appeals
and Tax Court
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
J. Christopher Janak Mark J. Crandley
Bradley M. Dick Bart A. Karwath
Paul D. Vink Nicholas K. Kile
Bose McKinney & Evans LLP Barnes & Thornburg, LLP
Indianapolis, Indiana Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Watson Water Company, Inc., October 10, 2017
Appellant-Defendant, Court of Appeals Case No.
10A01-1607-CC-1542
v. Appeal from the Clark Circuit Court.
The Honorable Andrew Adams,
Judge.
Indiana-American Water The Honorable William A. Dawkins,
Company, Inc., Jr., Magistrate.
Cause No. 10C01-1402-CC-272
Appellee-Plaintiff.
Shepard, Senior Judge
[1] Watson Water Company, Inc., and Indiana-American Water Company, Inc.,
are water utility companies serving customers in Clark County. Watson and
IAWC executed an agreement in 1997, later amended in 2003, for the
construction of a water main, and then, additionally, for the purchase of a
certain volume of water. When Watson stopped performing under the terms of
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the contract, IAWC sued Watson for breach and for failure to properly exercise
a right-of-first-refusal clause in the contract. Watson counterclaimed, arguing
that it was due a refund of payments made to IAWC beyond the cost of
construction of the water main.
[2] After a two-day bench trial, the court issued findings and conclusions, holding
Watson liable under the contract and issuing declaratory relief. It concluded
that the agreement should remain in place and that Watson was obligated to
purchase water from IAWC under the terms of the contract. Watson now
appeals.
Issues
[3] The parties raise numerous issues, which we consolidate and restate as follows:
I. Whether the findings and conclusions support a judgment
against Watson for breach of contract;
II. Whether the prior-breach doctrine applies and whether the
trial court correctly interpreted the right-of-first-refusal
clause; and
III. Whether the Uniform Commercial Code applies to this
contract.
Facts and Procedural History
[4] On April 28, 1997, Watson and IAWC executed a water supply agreement.
Appellee’s App. Vol. II, pp. 3-7. IAWC agreed to provide to Watson during
the term of the contract, or any renewal or extension periods, “potable water in
such quantity as may be required by [Watson].” Id. at 3. IAWC also agreed to
provide all of Watson’s “future water supply requirements above and beyond
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the capacity of its present well fields.” Id. at 4. The term of the agreement was
for forty years, or until 2037, with automatic ten-year renewals, unless notice
was provided within a time set forth by contract. Id. at 6. Watson agreed to
pay IAWC for all water used, and IAWC agreed to submit monthly bills for
water delivered. Id. at 5. The agreement set forth when payment was due and
made provisions for additional fees if the bills became delinquent. Id.
[5] A right-of-first-refusal clause was included and reads as follows:
In the event [Watson] determines either to sell its entire water
system or any part thereof or to arrange for the operation of part
or all of the system by a third party under contract, or
contemplates a new or revised water purchase agreement,
[Watson] agrees that [IAWC] shall have a right of first refusal to
purchase, or provide contract operations, or to sell water to
[Watson] on the same terms and conditions offered by any third
party. [IAWC] shall have thirty (30) days from the receipt of notice
from [Watson] to exercise its refusal right and agree to purchase or
to provide contract operations pursuant to such terms and
conditions. If [IAWC] fails to exercise its refusal right, then such
refusal right will terminate. For purposes of this paragraph, a
transaction with a third party excludes a reorganization or
change in the type of Corporation or Company through which
the Corporation or Company, which is to be reorganized,
remains in effective control of the reorganized entity.
Id. at 6 (emphasis added).
[6] In late 2003, Watson and IAWC executed an amendment, which explicitly
stated it “shall amend the Water Supply Agreement executed between the same
parties effective April 28, 1997 (the “Agreement”).” Id. at 9. As a joint
competitive matter, the parties agreed to allow Watson to purchase water
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temporarily from Water One, Inc., to serve the Quarry Bluff Subdivision in
Clark County. IAWC did so to allow it “to plan, construct, and make
operational a new water main to serve the Quarry Bluff Subdivision in Clark
County.” Id. IAWC was to make all reasonable efforts to have the main
operational within one year of the amendment’s execution. Watson agreed to
perform certain other tasks as respects that joint venture, but these are not
points of contention in this appeal.
[7] Once the main was operational, Watson agreed to purchase from IAWC a
minimum annual volume of water of 77,300,000 at the tariff rate established by
the Indiana Utility Regulatory Commission. The amendment explained that
the parties arrived at that volume based on the assumption that IAWC would
have made a capital investment of $600,000. The parties agreed that if the
actual cost varied from the assumed cost, the minimum purchase volume would
be adjusted. In 2007, the minimum volume was increased to 108,300,000
gallons per year because IAWC’s actual capital investment was $921,214.
[8] The parties also set forth the following addition to the 1997 Agreement’s right-
of-first-refusal clause:
[If] Paragraph #14 of the Agreement is invoked, and [IAWC]
either fails to exercise its refusal rights and/or does not become
the purchaser, contract operations provider, or seller of water to
[Watson] as provided in Paragraph #14, [Watson] agrees to
immediately pay to [IAWC] its actual cost to plan and construct
the main and make it operational.
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Id. at 10. The amendment explicitly stated, “All other terms and conditions of
1
the Agreement between the parties shall remain in full force and effect.” Id.
[9] In 2005, the water main extension became operational. As respects the
minimum volume purchase requirement, the parties’ course of performance
was inconsistent. In 2006 and 2009, Watson did not take and pay for the
minimum volume, and IAWC did not bill full price for the difference. In 2007
and 2008, Watson took the minimum volume. In 2010 and 2011, Watson did
not take the minimum volume, IAWC billed for the difference, and Watson
paid the difference. Beginning in 2012 to 2015, Watson did not take the
minimum volume and IAWC billed for the difference, but Watson refused to
2
pay full price for the difference.
[10] On January 17, 2012, Watson and River Ridge Development Authority
executed a reciprocal water supply agreement. Appellant’s App. Vol. II, pp. 84-
86. Put simply, both Watson and RRDA were willing, in “cases of emergency
from time to time to buy water” and sell it to each other on an “‘as needed’
basis.” Id. at 84. On October 26, 2012, the parties executed an addendum to
1
Watson, by counsel, attempted to limit the duration of the overall agreement, but the proposals involving
terms of ten years and fifteen years were each rejected. The parties, represented by counsel, in an arms-length
transaction, signed the amendment, incorporating the original forty-year duration of the contract.
2
In 2009, there was a problem with the meter, and IAWC did not charge Watson for the minimum volume.
Tr. Vol. II, p. 44.
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the reciprocal water supply agreement to document the cost of the construction
and installation of a connection point. Appellant’s Br. at 14.
[11] About July 23, 2013, Watson and RRDA executed a first amendment to the
reciprocal water supply agreement. Tr. Vol. XII. The amendment resolved a
conflict in the differing rates each party charged for water such that when water
was needed, the lowest rate charged by either party at that time, after
documentation was exchanged, would reflect the rate billed.
[12] IAWC sued Watson on February 27, 2014. As amended, the complaint alleged
breach of contract by Watson’s failure to purchase the required annual
minimum amount of water from IAWC. IAWC sought damages for Watson’s
breach and a declaratory judgment that the contract remained in force. Watson
counterclaimed arguing that it should be repaid all money above the cost of the
construction of the main. IAWC alleged that Watson’s outstanding balance by
the end of 2015, excluding late charges and attorneys’ fees was $813,271.66.
Watson, on the other hand, alleged under its theory that it was only required to
pay for construction of the water main, and that it had overpaid IAWC
$376,592.87.
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3
[13] Sometime in 2014, after IAWC had filed suit, RRDA and Watson executed a
second amendment to their reciprocal water supply agreement. Appellee’s
App. Vol. II, pp. 20-24. The parties agreed as follows:
RRDA as Exclusive Provider of Watson Water’s Future
Needs. Subject to the terms of the Agreement and any rulings,
orders, and/or decisions by administrative agencies or courts
with legal jurisdiction (including, but not limited to, any
settlement reached by Watson Water in its pending litigation
with Indiana-American Water Co., Inc., Cause No. 10C01-1402-
CC-272), which may overrule, invalidate, supplement, or
otherwise modify the Agreement, including this Second
Amendment, Watson Water agrees that RRDA shall be the
exclusive source of Watson Water’s future water purchases when
it is unable to internally provide for the water needs of its
customers. In the event Watson Water contemplates a new or
revised water supply agreement, Watson Water agrees that
RRDA shall have a right of first refusal to sell water to Watson
Water on the same terms and conditions offered by any third
party. If RRDA fails to exercise its refusal right, then the
Agreement shall terminate.
Id. at 22.
[14] Counsel for Watson sent a letter to counsel for IAWC dated August 14, 2014,
discussing the possibility of mediation of the pending legal action and
confirming certain details of conversations. Tr. Vol. XII. Watson’s counsel
contended that he was aware counsel for IAWC had been supplied with a copy
3
The representative of RRDA and the Indiana Department of Natural Resources indicated that their
signatures were dated December 16, 2014. The representative for Watson has dated his signature as March
21, 2014.
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of the second amendment to the Watson/RRDA agreement. Id. Counsel also
claimed to have confirmed that IAWC received the documents from RRDA on
May 5, 2014, pursuant to a documents production request. Id. Watson
asserted that since IAWC had not exercised its right of first refusal within thirty
days of receipt of the documents, Watson concluded that IAWC did not wish to
exercise its right. Id. Watson then noted that if IAWC believed that it still held
a right of first refusal, the matter would need to be addressed at a future
meeting. Id.
[15] Watson and IAWC submitted the following stipulations for trial:
1. The total amount of money Watson has paid to IAWC from
January 2006 to the present under the Amendment to the Water
Supply Agreement is $1,297,806.87.
2. As of January 6, 2016, the total amount that IAWC has billed
Watson, and remains unpaid, is $813,271.66. A late payment
charge of $24,398.36 is also sought by IAWC.
3. Watson claims that it was entitled to invoke, and that it did
properly invoke, a right of first refusal clause, and that because
IAWC did not exercise its right, the Water Supply Agreement
and Amendment terminated as of September 13, 2014. IAWC
disputes these contentions on numerous bases. As of September
13, 2014, the total amount that: (1) IAWC billed Watson prior
to 2014 that remained unpaid; and (2) the amount IAWC would
have billed for 2014 through September 13, 2014 was
$438,801.04. IAWC claims that an additional $921,214.00
would also be owed. Watson disputes that this additional
amount would also be owed to IAWC by Watson.
4. Watson is not contending that it cannot take the 108,300,000
gallon annual minimum requirement from IAWC.
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5. Watson is not contending that IAWC forced water into
Watson’s system and is not contending that IAWC caused
Watson’s tank to flood and/or caused any damages to Watson’s
property.
Appellant’s App. Vol. II, pp. 179-80.
[16] After the conclusion of the two-day bench trial in March 2016, the court
entered findings and conclusions, issuing an order awarding IAWC the
following: (1) $813,271.66 in unpaid amounts under the contract; (2) late
charges of $24,398.36; (3) a declaratory judgment that the 1997 agreement and
the 2003 amendment remain in place and continue through the remainder of
the forty-year term up to and including 2037; (4) a declaratory judgment that
Watson is required to continue purchasing an annual minimum water volume
of 108,300,000 for the remainder of the duration of the contract (through 2037);
and (5) the trial court’s agreement to entertain a request for attorney’s fees and
costs assessed against Watson.
Discussion and Decision
Standard of Review
[17] Prior to trial, Watson filed a motion requesting findings under Trial Rule 52(A).
Upon review, we shall not set aside such findings or judgment unless clearly
erroneous. In re Marriage of Gertiser, 45 N.E.3d 363 (Ind. 2015). Appellate
courts will give due regard to the trial court’s opportunity to judge the
credibility of the witnesses. Id. We determine whether the evidence supports
the findings, and then whether the findings support the judgment, and do so
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without reweighing the evidence or reassessing the credibility of witnesses. Id.The trial court’s findings are controlling unless the record contains no facts
supporting them directly or by inference. Id. Our review of legal conclusions is
de novo. Id.I. Breach of Contract
[18] IAWC’s complaint alleges, in part, breach of contract. A breach of contract
action involves the elements of the existence of a contract, the defendant’s
breach of the contract, and resulting damages to the non-breaching party.
Murat Temple Ass’n, Inc. v. Live Nation Worldwide, Inc., 953 N.E.2d 1125 (Ind. Ct.
App. 2011), trans. denied. At the heart of the various challenges presented in this
appeal are the parties’ arguments about the interpretation of the terms of the
agreement and the amendment, which form their contract.
[19] Interpretation of a contract is a question of law which is reviewed de novo. Dunn
v. Meridian Mut. Ins. Co., 836 N.E.2d 249 (Ind. 2005). When a contract’s terms
are clear and unambiguous, courts must give those terms their clear and
ordinary meaning. Id. Instead of placing provisions of a contract’s terms in
conflict, courts should interpret those provisions to harmonize them. Id.[20] The explicit terms of the 1997 agreement and the 2003 amendment reflect that
the amendment “shall amend the Water Supply Agreement executed between
the same parties effective April 28, 1997 (the “Agreement”)”, and that “All
other terms and conditions of the Agreement between the parties shall remain
in full force and effect.” Appellee’s App. Vol. II, pp. 9-10. Thus, the court’s
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finding that “the Amended Agreement is a single, enforceable contract between
the parties”, is supported by the record. Appellant’s App. Vol. II, p. 24.
[21] Also explicit in the terms of the contract is the provision that Watson purchase
a certain volume of water. Although the volume of water required was initially
based on an assumed capital investment by IAWC of $600,000, the parties
explicitly agreed to a future modification of the volume based upon IAWC’s
actual capital investment. The volume was adjusted to 108,300,000 gallons per
year at IAWC’s tariff rate for the duration of the contract.
[22] Although the record reveals that Watson attempted to negotiate a limitation on
the duration of the minimum volume requirement, the negotiations failed and
the parties signed the amendment. The trial court’s finding that the purchase
requirement of the minimum volume of water lasted for the duration of the
contract, i.e., until 2037, is supported by the record.
[23] Next, we turn to the issue of Watson’s breach. Watson did not purchase the
minimum volume for 2012, 2013, 2014, and 2015. One of the stipulations in
advance of trial was that Watson did not contend that it could not take the
108,300,000 gallon annual minimum requirement from IAWC. Consequently,
the court’s finding of breach by Watson is supported by the record.
[24] As for damages, exclusive of late fees and attorney fees, as of January 6, 2016,
the total amount that IAWC has billed Watson, and remains unpaid, is
$813,271.66, an amount stipulated to by the parties prior to trial.
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[25] Therefore, the trial court’s findings that there was a contract, that Watson
breached the contract, and that IAWC was damaged by the breach, are
supported by the evidence. IAWC has met its burden of proving Watson’s
breach of contract. See Indiana-American Water Co., Inc. v. Town of Seelyville, 698
N.E.2d 1255 (Ind. Ct. App. 1998).
II. Prior Breach Doctrine and Right of First Refusal
[26] Watson contends that IAWC is foreclosed from enforcing the contract and
seeking damages for a breach thereof under the prior breach doctrine and
alleges the trial court is allowing IAWC to selectively enforce only those terms
of the contract it chooses. Watson argues that IAWC is being allowed to
enforce the minimum purchase agreement provision while disavowing the
right-of-first-refusal clause.
[27] “When one party to a contract commits the first material breach of that
contract, it cannot seek to enforce the provisions of the contract against the
other party if that other party breaches the contract at a later date.” Coates v.
Heat Wagons, Inc., 942 N.E.2d 905, 917 (Ind. Ct. App. 2011). The issue whether
a party has materially breached an agreement is a question of fact, dependent
on a variety of factors. Id. at 917-18.
[28] Watson has cited to Land Dev. Ltd v. Primrose Mgmt. L.L.C., 952 N.E.2d 563, 571
(Ohio Ct. App. 2011), for the proposition that the prior breach doctrine is
applicable only when the non-breaching party treats the contract as terminated
not continuing. A fair reading of the case, however, suggests that the Ohio
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court held that the non-breaching party may select whether to (1) terminate the
contract or (2) continue on with the contract, so long as the non-breaching party
also fulfills its obligations under the contract to avoid an inequitable result.
[29] Watson claims that IAWC later breached the agreement by failing to
acknowledge what Watson characterizes as its valid exercise of the right-of-first-
refusal clause.
[30] We have previously quoted the original language and amendment comprising
the right-of-first-refusal clause. Suffice it to say, to the extent Watson was
attempting to do so, we agree with the trial court that Watson did not properly
avail itself of the clause.
[31] First, Watson negotiated and executed an initial reciprocal agreement with
RRDA for the purchase and sale of water as needed. Watson did not provide
IAWC with the opportunity to match the terms of that agreement or refuse to
exercise that right. Even though the clause requires notice from Watson to
IAWC of any contemplated agreement with a third party, none was given.
IAWC became aware of the terms of Watson’s original and amended
agreements with RRDA only by way of RRDA’s response to a request for
production of documents after litigation had commenced. We conclude that
the thirty-day period for IAWC to exercise its option was never triggered.
[32] The agreement as amended between RRDA and Watson was contingent on the
outcome of the litigation between Watson and IAWC. Watson indicated that it
sought to eliminate its obligation to buy water exclusively from IAWC. The
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trial court’s finding that the agreement between RRDA and Watson was a
sham in order to avoid the contract is supported by the record.
[33] IAWC sued for damages for Watson’s breach and declaratory relief that the
contract remained in force. This position follows the terms of the contract. The
trial court rightly found so.
[34] The trial court correctly concluded that even if the right-of-first-refusal clause
was triggered, the only provision that would terminate was the clause, not the
entire contract. The clause explicitly states that the right of refusal terminates.
Appellee’s App. Vol. II, p. 6. Notably, the purported agreement between
RRDA and Watson provides that upon the failure to exercise the right of first
refusal, the agreement terminates. Id. at 22 (emphasis added). The trial court
did not err in its interpretation of the clause.
III. Applicability of the UCC and Damages Calculation
[35] Next, Watson contends that it is absolved from its breach of contract because
the UCC applies to an agreement involving the sale of goods. Watson cites to a
bankruptcy case applying Texas law, In re Sage Enterprises, Inc., 421 B.R. 477(B.R. N.D. Ill. 2009), for several propositions under the UCC. First, however,
we must determine the nature of this contract and whether it was for the sale of
goods.
[36] Indiana Code section 26-1-2-306(1) is the codification of the UCC’s provision
regarding output or requirements contracts. Indiana-American Water Co., Inc.,
698 N.E.2d 1255. That section reads as follows:
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A term which measures the quantity by the output of the seller or
the requirements of the buyer means such actual output or
requirements as may occur in good faith, except that no quantity
unreasonably disproportionate to any stated estimate or in the
absence of a stated estimate to any normal or otherwise
comparable prior output or requirements may be tendered or
demanded.
[37] “Generally, the buyer in a requirements contract governed by UCC § 2-306(1) is
required merely to exercise good faith in determining his requirements and the
seller assumes the risk of all good faith variations in the buyer’s requirements
even to the extent of a determination to liquidate or discontinue the business.”
Id. at 1261. “A requirements contract is one in which the purchaser agrees to
buy all of its needs of a specified material exclusively from a particular supplier,
and the supplier agrees, in turn, to fill all of the purchaser’s needs during the
period of the contract.” Id. at 1259. The good faith requirement imposed under
the UCC and Indiana Code section 26-1-2-306, prevents requirements contracts
from being illusory or too indefinite to be enforced. Id. at 1260.
[38] From time-to-time, there will be variations in the buyer’s requirements. “The
essential ingredient of the buyer’s good faith under such circumstances is that
he not merely have had second thoughts about the terms of the contract and
want to get out of it.” Id. at 1261. On the other hand, if a buyer has a
legitimate business reason for eliminating its requirements, instead of a desire to
simply avoid the contract, then the buyer is acting in good faith. Id.
[39] Here, Watson stipulated that it was not contending that it cannot take the
108,300,000 gallon annual minimum requirement from IAWC. The inference
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to be drawn from the evidence is that Watson attempted to avoid its contract
with IAWC. Additionally, the record reflects that one of the reasons Watson
executed the agreement with RRDA and sought to modify it in both capacity
and duration was to “eliminate an existing water supply agreement they have
with Indiana-American Water Company.” Appellee’s App. Vol. II, p. 19.
[40] Under a definitional provision, Indiana Code subsections 26-1-2-105(1) and (2)
(1995), goods are defined as follows:
(1) “Goods” means all things (including specially manufactured
goods) which are movable at the time of identification to the
contract for sale, other than the money in which the price is to be
paid, investment securities (IC 26-1-8.1), and things in action.
“Goods” also includes the unborn young of animals and growing
crops and other identified things attached to realty as described in
the section on goods to be severed from realty (IC 26-1-2-107).
(2) Goods must be both existing and identified before any interest
in them can pass. Goods which are not both existing and
identified are “future” goods. A purported present sale of future
goods or of any interest therein operates as a contract to sell.
[41] Watson’s argument here is another attack on the duration of the contract, this
time under the UCC, and would have an impact on the damages calculation.
The dispositive provision of Indiana’s codification of the UCC, Indiana Code
section 26-1-2-309 (1986), pertaining to the absence of specific time provisions
and notices of termination, provides as follows:
(1) The time for shipment or delivery or any other action under a
contract, if not provided in IC 26-1-2 or agreed upon, shall be a
reasonable time.
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(2) Where the contract provides for successive performances but
is indefinite in duration, it is valid for a reasonable time but
unless otherwise agreed may be terminated at any time by either
party.
(3) Termination of a contract by one (1) party, except on the
happening of an agreed event, requires that reasonable
notification be received by the other party, and an agreement
dispensing with notification is invalid if its operation would be
unconscionable.
[42] The parties agreed to a duration of the contract terms, which remained in place
after negotiations for a shorter term failed. We agree with the trial court that
Watson’s argument for a “reasonable time” evaluation under the UCC fails.
[43] Next, regarding damages, Watson argues that the trial court erred by
concluding that IAWC may recover under the parties’ contract only to the
extent of the UCC, because the UCC allows recovery under Indiana Code
section 26-1-2-708 (1986).
[44] That section provides as follows:
(1) Subject to subsection (2) and to the provisions of IC 26-1-2-723
with respect to proof of market price, the measure of damages for
nonacceptance or repudiation by the buyer is the difference between
the market price at the time and place for tender and the unpaid
contract price together with any incidental damages provided in IC 26-
1-2-710, but less expenses saved in consequence of the buyer's breach.
(2) If the measure of damages provided in subsection (1) is inadequate
to put the seller in as good a position as performance would have
done, then the measure of damages is the profit (including reasonable
overhead) which the seller would have made from full performance by
the buyer, together with any incidental damages provided in IC 26-1-2-
710, due allowance for costs reasonably incurred and due credit for
payments or proceeds of resale.
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Again, the parties agreed to a minimum purchase volume over the course of
forty years. IAWC’s rates were regulated by the IURC, a fact that was
acknowledged by the parties. Thus, the parties were aware that IAWC could
not have resold the water for a profit. Further, much like the duration
provision, the parties explicitly agreed to a minimum purchase of a volume of
water over the course of forty years. The volume requirement was based on the
capital investment by IAWC, but was not limited to recoupment of that
investment.
[45] We find no error in the trial court’s holding that Watson was bound by the
terms of the agreement with which it agreed at arm’s length with IAWC,
acknowledging the cost of the production of water in addition to the capital
expenditure.
Conclusion
[46] In light of the foregoing, we affirm the trial court’s findings, conclusions, and
judgment.
[47] Affirmed.
Kirsch, J., and Pyle, J., concur.
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