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‘BFI’: court may clarify contract with new language

 Five years ago, I wrote an op-ed for New England In-House questioning whether summary judgment was still a good investment in a contract case in light of a strange ruling by the Appeals Court respecting an ambiguity in whether the word “a” necessarily meant “one” (“Is summary judgment still a good investment in a contract case,” April 2006).

This spring, in BFI v. Casella Waste Management, 79 Mass. App. Ct. 300, the court gave in-house lawyers even more reason to be concerned about pursuing summary judgment on contract claims in Massachusetts when it affirmed the trial court’s decision to create from whole cloth an entirely new provision and engraft it onto a thoroughly negotiated contract.

Garbage in, garbage out

In 1999, the second and third largest waste management companies in the United States (Allied Waste Industries and BFI, respectively) proposed to merge.

After the U.S. Department of Justice’s Antitrust Division threatened an injunction, the companies agreed, among other things, to divest themselves of certain assets.

Included in those assets was a long-term agreement between BFI and a company that became known as Ogden Haverhill Associates, pursuant to which BFI was required to dispose fixed amounts of waste at the Ogden facility. If BFI failed to meet certain minimums, it was required to pay Ogden a penalty.

As part of the consent order pursuant to which BFI and Allied merged, BFI sold that asset to Casella Waste Management, a regional waste management company with plans for  significantly growing its New England business.

The transaction between BFI and Casella was heavily negotiated by counsel and executives from the two companies.

One of Casella’s objectives was to preserve the ability to utilize additional capacity at Ogden, while BFI was concerned with maintaining predictable volumes of deliveries from Casella because BFI remained liable to Ogden for its minimum deliveries.

The resulting agreement expressly gave Casella the right “to increase but not to decrease” its deliveries to Ogden, requiring 10 days written notice to BFI for such increases and limiting them to no more than 10 percent over the previous month’s deliveries.

From the outset in March 2000, Casella needed to  increase its deliveries to Ogden, giving serial informal notice of increases in the first four months of the agreement and raising its weekday baseline tonnage from 380 tons to 557 tons in that period.

Casella maintained those rates for the next four years, but ultimately decided it could dispose of its waste more cost effectively by building its own sanitary landfills.

In August 2004, Casella curtailed deliveries to Ogden and the following month informed BFI that it perceived no obligation to maintain a monthly minimum volume of deliveries.

BFI claimed that Casella was required to maintain not only the minimums set forth in the contract, but to maintain the higher volumes it had delivered since June 2000, citing the “increase but not decrease” provision.

Ultimately, BFI brought an action for declaratory relief in Superior Court, and Casella counterclaimed for rescission or for reformation permitting it to return to the baseline volumes.

After a bench trial, Judge Ralph Gants (now on the Supreme Judicial Court) concluded that the parties had never reached an understanding of the terms relating to Casella’s minimum deliveries obligation and ordered that the following term be engrafted onto the contract:

“If Casella increases the 380 tons per weekday and [50] tons per Saturday daily maximum tonnage, whether once or multiple times, Casella may decrease that daily maximum tonnage in increments of no more than [10] percent, once or multiple times, after giving advance written notice to BFI at least three months before the month the reduction is to become effective, provided that the decreases do not reduce the daily maximum tonnage below 380 tons per weekday and [50] tons per Saturday.”

As the Appeals Court pointed out, this new term allowed Casella to return to its baseline obligations by subtractions of up to 10 percent per month upon three months’ notice of each intended subtraction.

Affirming the wholesale creation of a new term in the parties’ agreement, the Appeals Court cited to its PECO decision, concluding that whether Casella could decrease its deliveries after having once increased them was something the parties never considered.

Here, as in PECO, merely because the parties disagreed on the interpretation of a term, and the extrinsic evidence did not clearly favor one position over another, the court was apparently free to re-write the contract.

According to the Appeals Court, the BFI case resolved a lingering question about the standards that permit “a court to furnish a term missing from an agreement by reason of the parties’ mutual mistake or negotiating oversight.”

In reality, it did no such thing.

The more things change …

While the trial judge and Appeals Court both nominally applied well-worn contract law precepts, the appellate decision does little to illuminate when a court should feel free to do as Judge Gants did — draft an entirely new contractual term even when the parties never considered it.

Before BFI, it was reasonably safe to assume that if the parties did not consider a term, then it was simply not a part of their agreement; there was no meeting of the minds. In this case, the court easily could have reached that conclusion and still fashioned an equitable remedy based on a reasonable interpretation of the terms on which the parties agreed.

For example, the term “increase but not decrease” seems fairly straightforward, as does the contract’s existing notice requirements and minimal tonnage.

While the court left that minimum in place, it imposed entirely new notice periods for Casella to decrease its deliveries.

According to the Appeals Court, the trial judge appropriately implemented “convergent lines of Massachusetts contract doctrine. If it is reasonably possible and equitable, the court will resolve indefinite language to salvage a workable agreement.”

While that proclamation sounds like the courts are going to support contractual rights aggressively in the future, the reality is far less clear.

In-house lawyers, who often practice in a wide array of areas, must now face the possibility that if they fail to consider some issue associated with performance of the contract, the courts will eschew the more traditional approaches associated with the mistake doctrines and impose their own view of what an “equitable” contractual provision should be.

Such an approach may fail to account for such elements as one party’s leverage in the negotiations. And while an effective trial team can educate a judge about the industry and the business objectives of the parties, it would be a rare jurist who could fully understand the totality of the circumstances prevailing at the time the contract was formed.

BFI confirms PECO’s primary lesson that in-house lawyers and businesspeople must be all the more explicit about their understandings respecting every term of a contract, no matter how obvious or simple the terms may be. And in order to preserve an evidentiary record, contemporaneous notes and memoranda detailing the course of negotiations may be an invaluable tool once performance has commenced.

If BFI and its approach to contractual ambiguities gains favor among the trial courts, in-house lawyers and their trial teams must be prepared not only to defend their perspectives respecting the appropriate construction, but also to advance evidence supporting a commercially reasonable new term.

Satisfying that latter consideration may require entirely different witnesses with unique expertise in the relevant industry, even if they played no role in the negotiation of the underlying contract.

Christopher M. Morrison is a partner at Jones Day in Boston.

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