131 F.3d 139 (4th Cir. 1997), 96-2811, Zenith Data Systems Corp. v. Electronic Data Systems Corp.

Docket Nº:96-2811, 97-1258.
Citation:131 F.3d 139
Case Date:December 08, 1997
Court:United States Courts of Appeals, Court of Appeals for the Fourth Circuit

Page 139

131 F.3d 139 (4th Cir. 1997)






Nos. 96-2811, 97-1258.

United States Court of Appeals, Fourth Circuit

December 8, 1997

Editorial Note:

This opinion appears in the Federal reporter in a table titled "Table of Decisions Without Reported Opinions". (See FI CTA4 Rule 36 regarding use of unpublished opinions)

Argued June 6, 1997.

42 Cont.Cas.Fed. (CCH) P 77,223

Appeals from the United States District Court for the Eastern District of Virginia at Alexandria. Claude M. Hilton, District Judge. (CA-96-14-A)

ARGUED: David Samuel Cohen, COHEN & WHITE, Washington, D.C., for Appellant.

Laura Kantrowitz Kennedy, SEYFARTH, SHAW, FAIRWEATHER & GERALDSON, Washington, D.C., for Appellee.

ON BRIEF: Russell James Gaspar, COHEN & WHITE, Washington, D.C., for Appellant. Daniel Marino, Kelley P. Doran, SEYFARTH, SHAW, FAIRWEATHER & GERALDSON, Washington, D.C.; Stewart C. Economou, ECONOMOU, FORRESTER & RAY, Alexandria, Virginia, for Appellee.

Before WILKINSON, Chief Judge, MICHAEL, Circuit Judge, and MICHAEL, Senior United States District Judge for the Western District of Virginia, sitting by designation.




In 1991, Plaintiff-Appellee Zenith Data Systems Corp. ("Zenith" or "ZDS"), Defendant-Appellant Electronic Data Systems Corp. ("EDS"), and other corporations competed against one another for the lucrative "Desktop IV" contract to supply computer hardware and software to the United States Air Force. In 1993, the Air Force awarded the contract to Zenith. EDS instituted a protest with the General Services Administration Board of Contract Appeals ("GSBCA"). Only a few days before the GSBCA was to issue a decision on the protest (April 19, 1993), EDS contacted Zenith to discuss the possibility of settling the dispute (on April 15, 1993).

By April 18, 1993, on the eve of the anticipated GSBCA decision, the parties had reached a settlement agreement memorialized in a document of the same title (hereinafter, "Settlement Agreement"); Dr. Joel Lipkin was the principal negotiator for Zenith, and Mr. Kim Luke occupied the same post for EDS. Pursuant to the Settlement Agreement, EDS withdrew its GSBCA protest, and Zenith agreed to give to EDS the applications software portion of the Air Force contract. By accepting this "carved out" portion of the contract, EDS agreed to provide ZDS certain software upgrades free of charge and to "stand in the shoes" of Zenith with respect to the software component of the Desktop IV contract as if the contract had been awarded to EDS directly.

The parties' arrangement proceeded relatively smoothly for some time, until 1995, when the Air Force took the position that a Microsoft Corporation ("Microsoft") 32-bit software program--known as Office 95--was an upgrade to be provided under the Desktop IV contract at no additional cost to the Air Force. Zenith insisted that EDS was bound contractually under the Settlement Agreement to deliver these upgrades and incur the associated costs. EDS countered that the Settlement Agreement, incorporating a collateral letter to EDS from Microsoft, exempted these specific applications from its general duty to supply software upgrades gratis.

To avoid defaulting on a government contract, Zenith supplied the Air Force with the Office 95 upgrades; subsequently it brought suit against EDS, demanding declaratory judgment and damages for EDS's alleged breach of the Settlement Agreement. EDS counterclaimed, asserting, inter alia, that Zenith had breached its duty of good faith and fair dealing imposed under Virginia law by refusing to propose cost-saving modifications to the parties' contract with the Air Force.

Zenith moved the court for partial summary judgment pursuant to Fed.R.Civ.P. 56 on EDS's counterclaim's count alleging breach of good faith and fair dealing (COUNT II). The district court (Ellis, J.) granted Zenith's motion for partial summary judgment. From this ruling, EDS appeals.

Zenith's claim of contract breach was resolved by the district court (Hilton, J.) after a bench trial. The district court awarded Zenith declaratory relief and damages for breach of contract, holding that, first, the Settlement Agreement unambiguously imposed a duty on EDS to deliver the upgrades at issue to Zenith, at EDS's sole cost; second, even if, arguendo, the Settlement Agreement were ambiguous, extrinsic evidence supports Zenith's interpretation of the contract; and, finally, even if the extrinsic evidence did not resolve the assumed ambiguity, the doctrine of contra proferentum (ambiguous contractual provisions are to be construed against the drafter) can be used as a tie-breaker to resolve any arguable contract ambiguity in favor of Zenith. From this ruling, too, EDS appeals.


As to questions of law, which here include the district court's grant of partial summary judgment to Zenith on the good faith and fair dealing claim and the district court's conclusion that the Settlement Agreement is unambiguous and clearly obligates EDS to provide the software upgrades at issue, review isde novo. Scarborough v. Ridgeway, 726 F.2d 132, 135 (4th Cir.1984).

As to factual conclusions reached by the district court, review is for clear error. Hendricks v. Central Reserve Life Ins. Co., 39 F.3d 507, 512 (4th Cir.1994). Such factual conclusions here include the district court's alternative finding that, even if the Settlement Agreement were ambiguous as to EDS's obligations to provide software upgrades, extrinsic evidence supports Zenith's contention that EDS was required to supply such upgrades. The district court concluded that extrinsic evidence indicates that the parties' purpose in referencing portions of the Microsoft letter in paragraph four of the Settlement Agreement was only to insure that the price of a particular software package to EDS from its supplier, Microsoft, would apply to the Desktop IV contract's software. The district court found that the extrinsic evidence never reveals an intention by EDS or Zenith to limit EDS's obligations to provide free software upgrades under the Settlement Agreement to Zenith or to the Air Force directly.

This stricter clearly erroneous standard of review "plainly does not entitle a reviewing court to reverse the finding of the trier of fact simply because it is convinced that it would have decided the case differently." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985). Nor may a reviewing court reverse because, had it sat as trier of fact, "it would have weighed the evidence differently." Id. at 574; see also Amadeo v. Zant, 486 U.S. 214, 227 (1988). The clearly erroneous standard of review imposes a particularly heavy burden on an appellant when the evidence before the district court was largely testimonial, because that court had the advantage of observing witnesses and evaluating their credibility firsthand, an opportunity a reviewing court lacks. See Hiram Walker & Sons, Inc. v. Kirk Line, 30 F.3d 1370 (11th Cir.) (internal citation omitted), cert. denied, 514 U.S. 1018 (1994). "Where there are two permissible views of evidence, the fact finder's choice between them cannot be clearly erroneous." Anderson, 470 U.S. at 574.

EDS argues that because the district court (Hilton, J.) largely adopted Zenith's proposed findings of fact, those findings consequently are entitled to less deference than ordinarily would be the case. EDS Brief at 12. Appellant's argument, however, is unpersuasive. "[E]ven when the trial judge adopts proposed findings verbatim, the findings are those of the court and may be reversed only if clearly erroneous." Anderson, 470 U.S. at 572 (citing United States v. Marine Bancorporation, 418 U.S. 602, 615, n. 13 (1974); United States v. El Paso Natural Gas Co., 376 U.S. 651, 656-657 (1964)). This court, then, must adhere to the clearly erroneous standard in reviewing the district court's factual determinations, be they adopted or not.


A. The Settlement Agreement is Unambiguous: EDS is Obligated to Provide Free of Charge All Applications Software and Upgrades During the Life of the Desktop IV Contract to ZDS or the Air Force.

1. The Settlement Agreement Incorporates Only Part of the Microsoft Letter and Only for the Limited Purpose of Setting the Software's Price.

Two provisions of the Settlement Agreement are implicated by the parties' current litigation.

a. Schedule B

The first provision, paragraph three, drafted by Zenith, references Zenith's obligations under "Schedule B" of the Desktop IV contract and incorporates them into the Settlement Agreement as EDS's responsibilities thereunder. This provision states, in pertinent part, as follows:

3.... The products and terms to which ZDS has obligated itself for Desktop IV and to which EDS agrees are provided in Schedule B (3 pages) attached to, and made part of[,] this Agreement....

Joint Appendix ("JA") at 493.

Continuing, Schedule B, in pertinent part, states as follows:

[1] EDS will, at its sole cost and expense, supply all such application software ... in full conformity with all requirements of the Desktop IV contract ...;

[2] EDS will assume all of the obligations of ZDS with respect to such application software to the same extent as if EDS were the contractor under the Desktop IV contract ...;

[3] EDS shall ... perform and comply with all ... software support requirements of the contract with respect to software and related documentation (including but not limited to ... provision of modifications, improvements, updates and upgrades when and as required and bear the costs of delivery of such items to the Government ...; and

[4] [EDS...

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