Atlantic Track & Turnout Company v. Perini Corporation
1993 U.S. App. LEXIS 6248, 989 F.2d 541, 20 U.C.C. Rep. Serv. 2d (West) 426 (1993)
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Rule of Law:
Under UCC § 2-306, a seller in an output contract may tender a quantity of goods that is unreasonably disproportionate to a stated estimate, provided the reduction in output occurs in good faith and for a valid business reason.
Facts:
- The Massachusetts Bay Transportation Authority (MBTA) awarded Perini Corporation a contract to rehabilitate a section of railroad track, which would generate salvage materials.
- Perini solicited an offer from Atlantic Track & Turnout Company to purchase the salvage materials from the project.
- Between June 28 and 30, 1988, Atlantic issued five purchase orders to Perini for 'all available' railroad materials, which included estimates of the quantities that would be generated.
- In August 1988, the MBTA directed Perini to suspend the 'undercutting' operations that produced the salvage materials.
- On September 13, 1988, the MBTA permanently halted all undercutting operations due to fiscal constraints.
- Because the elimination of undercutting reduced the value of the main contract by 52%, Perini and the MBTA mutually agreed to terminate their contract.
- Consequently, Perini was only able to deliver approximately 15% of the estimated quantity of salvage materials to Atlantic.
Procedural Posture:
- Atlantic Track & Turnout Company filed a breach of contract action against Perini Corporation in the United States District Court.
- The parties filed cross-motions for summary judgment.
- The district court deferred ruling on the motions and ordered a limited trial on the issues of contract ambiguity and trade usage.
- After Atlantic presented its evidence, the district court entered a judgment on partial findings in favor of Perini.
- Atlantic, as appellant, appealed the district court's judgment to the United States Court of Appeals for the First Circuit, with Perini as appellee.
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Issue:
Does a seller in an output contract breach the agreement under UCC § 2-306 by tendering a quantity of goods that is unreasonably disproportionate to the contract's estimate, if the reduction in output was caused by a legitimate business reason?
Opinions:
Majority - Torruella, Circuit Judge
No. A seller in an output contract does not breach the agreement by tendering a quantity that is unreasonably disproportionate to an estimate, as long as the reduction is made in good faith. The court reasoned that under UCC § 2-306, the 'unreasonably disproportionate' clause primarily serves to prevent sellers from exploiting favorable market conditions by massively increasing output, not to penalize them for good faith decreases. For reductions in output, the sole test is whether the seller acted in good faith. A seller who reduces or ceases production for a valid, independent business reason—such as the termination of the underlying project that generates the output—is considered to be acting in good faith. In this case, Perini's output of salvage material ceased because its main contract with the MBTA was terminated for legitimate fiscal reasons, not because Perini sought to evade its obligations to Atlantic. Therefore, Perini acted in good faith and did not breach the contract.
Analysis:
This decision clarifies that for output contracts under the UCC, the good faith requirement is paramount when a seller significantly reduces production. It aligns the treatment of output contract reductions with the dominant judicial interpretation of requirements contract reductions, establishing that the 'unreasonably disproportionate' language does not create a rigid quantitative floor for sellers. The ruling allocates the risk of the seller's business changing for legitimate reasons to the buyer, giving sellers considerable flexibility to make sound business decisions without fear of breaching their output obligations. This precedent solidifies the principle that output contracts are governed by the seller's actual, good-faith operational needs, not by the estimates provided at the outset.
