APPEAL FROM THE DISTRICT COURT OF THE VIRGIN ISLANDS DIVISION OF ST. CROIX; CHRISTIANSTED JURISDICTION (D.C. Civil No. 77-00012)
Before Hunter, Van Dusen and Sloviter, Circuit Judges.
This appeal is taken from a judgment for the plaintiff, Action Engineering ("Action"), in a suit against Martin Marietta Aluminum ("MMA") for wrongful termination of a construction contract. The District Court of the Virgin Islands applied a "reasonableness" standard in deciding whether MMA's termination of the contract before completion was within its contractual rights to terminate "(if) in Owner's (MMA's) opinion, contractor (Action) fails to carry on the work diligently and on schedule." Because we conclude that the district court should have applied instead a "good faith" standard to the termination of the contract, we vacate the judgment and remand for further proceedings.
In May 1976, MMA and Action entered into a written agreement for the construction of a lime storage facility at MMA's facility on St. Croix, United States Virgin Islands. As required under MMA's "General Terms and Conditions for Construction Contracts," Action promised to submit to MMA a progress schedule, and agreed that time was of the essence. Paragraph 7 of the contract provided that "(if) in Owner's opinion, contractor fails to carry on the work diligently and on schedule ... Owner shall have the right ... to terminate this contract forthwith."
Under the original progress schedule, work was to be completed by November 1, 1976. Construction delays required a modification of this timetable, and on November 10, 1976, the parties agreed to a revised construction schedule with a completion date of December 25, 1976. On December 1, 1976, without advance notice, MMA terminated the contract and ordered Action to leave the construction site. MMA claims that its decision to terminate the contract was based on its opinion that the job could not be completed by the revised deadline.*fn1
Action brought this suit against MMA, alleging a wrongful termination of its contract.*fn2 In a detailed opinion, the district court considered whether MMA's termination constituted a breach of the contract. As a starting point to the court's analysis, it determined that MMA's termination must be judged under an objective standard of reasonableness. The court noted:
"The termination clause stated that if MMA was of the "opinion' that Action was behind schedule, MMA could terminate the contract. Mere "opinion' cannot be the basis for a termination clause, for, if it were, the contract would be illusory. Reasonableness must be read into the termination clause (see Restatement of Contracts § 265, illustration No. 4). If there was a reasonable basis for MMA's opinion that Action was behind schedule on December 1, then MMA properly terminated the contract. If there was no such reasonable basis for MMA's action, it breached the terms of the contract."
Action Engineering v. Martin Marietta Aluminum, Memorandum Opinion at 9 (D.V.I. Civil No. 77-00012, June 2, 1981).
The court made a careful study of the conflicting evidence regarding the extent of work completed as of December 1, 1976. Based on its evaluation of the expert witnesses' testimony, the court concluded that the job was 66% complete as of termination on December 1. Finding that 73% of the contract time under the revised schedule had elapsed by December 1, the court computed that if Action continued to work at the same pace, it would have completed roughly 89% of the contract by December 25, 1976. The court also found that if "faced with the possibility of loss of the job, the necessary effort would have been made" by Action for substantial completion of the job by the December 25 deadline. Memorandum Opinion at 10. The court concluded that since "a finding of substantial completion would have been fully warranted," id., MMA unreasonably terminated the contract. The court held that MMA had breached its contract with Action and awarded damages to Action by way of restitution in the amount of $60,256.32, plus interest, costs, and attorney's fees.
MMA appealed the judgment to this court, arguing that the district court used the wrong legal standard in analyzing MMA's decision to terminate the contract. MMA claims that instead of using a reasonableness test, the district court should have considered whether MMA acted in good faith on its opinion that the contract would not be completed by December 25. Furthermore, MMA alleges that even if it is liable for breach of contract, restitution is not a proper measure of damages.
In selecting the proper standard to use in reviewing MMA's termination of the contract, we must first address the question of what law applies to this dispute. The parties argued both before the district court and in their briefs before this court that the Restatement of Contracts provides the governing law, and the district court similarly relied upon the Restatement in its opinion. The restatements of the law approved by the ...