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02/23/93 DANO RESOURCE RECOVERY v. DISTRICT

February 23, 1993

DANO RESOURCE RECOVERY, INC., PETITIONER
v.
DISTRICT OF COLUMBIA, RESPONDENT



Appeal from a Decision of the District of Columbia Contract Appeals Board.

Before Ferren, Steadman and Farrell, Associate Judges.

The opinion of the court was delivered by: Farrell

FARRELL, Associate Judge : This is a petition for review of a decision by the District of Columbia Contract Appeals Board (the Board) arising from the District government's termination of a $78,084,193 contract with Dano Resource Recovery, Inc. (Dano) for the processing and disposal of sludge and solid waste. Dano appealed the termination to the Board and sought an award of damages. When the District claimed removal and reprocurement costs from Dano, Dano filed a second appeal with the Board, which was consolidated with the first.

Following 84 days of hearings and review of a vast evidentiary record, the Board upheld the contract termination in a 73-page opinion and sustained the District's claim for removal costs, but denied its claim for reprocurement costs. Dano now petitions for review of the decision upholding the termination, contending, inter alia, that the Board's interpretation of the contract's performance requirements and termination provision was erroneous and that its factual findings as to Dano's performance under the contract were arbitrary, capricious, and unsupported by the record.

We hold, under the appropriate standard of review, that the Board's interpretation of the performance requirements and termination provision was reasonable, and sustain it. We also find substantial evidence in the record supporting the Board's findings that Dano defaulted on the performance requirements, that its default was not waived or excused, and that the District exercised reasonable judgment in terminating the contract despite the forfeiture of Dano's substantial capital investment which this exacted.

I. FACTUAL BACKGROUND

In March of 1982, Dano entered into a contract with the District to dispose of sludge and solid waste (referred to here collectively as "waste") by processing it into saleable compost at the District's Blue Plains water treatment facility. Dano received the contract without competitive bidding, partly in settlement of a breach of contract suit it had filed against the District for termination of two earlier waste processing contracts. *fn1 Under the present contract, Dano was to invest its own capital in building and operating the facility and recover its investment over time by the disposal and sale of the composted waste. Dano would lease 3 1/2 acres from the District at the Blue Plains site, where it would build the waste processing plant. The District would pay Dano for processing and removing a fixed amount of waste, and Dano would sell a specified amount of processed compost each year, with the District sharing in the profits.

To understand the performance requirements, we briefly outline the "Dano process" set forth in the contract. Dano was to receive daily amounts of waste from the District and place it in large tubular biostabilizers, which initiated the composting process by way of tumbling and aeration. The waste was to "stabilize" at a temperature of 140 degrees for twenty-four hours to help eliminate pathogens, then be discharged from the biostabilizers and sifted through grates. Any material not filtered through the grates was a "reject" to be transported to an incinerator or landfill. The remaining waste would be transported to a composting shed and held for twenty-one days at a constant temperature of 131 degrees to reach stabilization. After removal from the shed and screening to filter out unwanted matter, the compost would be hauled from the site for storage and sale.

The project described in the contract had two phases. Phase I was a ninety-day demonstration in which Dano would construct a small facility having two biostabilizers and prove the feasibility of the process. *fn2 If Dano failed this demonstration, it would lose its investment. If the District approved the process after the demonstrations Dano would proceed to Phase II. The first part of that phase was a seven month construction period ("pre-term phase") during which Dano would expand the facility to a full capacity plant with nine biostabilizers. It would then begin a five year term of operations to process waste into compost, increasing the output from 400 to 1,800 tons per day. All the while, Dano was to be paid for processing and removing the delivered waste from Blue Plains.

The demonstration began on September 17, 1982 and ended on December 2. While awaiting approval of the demonstration, Dano began the Phase II expansion. Although the District expressed concerns about the demonstration, *fn3 it formally approved the process on January 31, 1983, some two months later than the contract called for. *fn4 On April 11, 1983, however, the District sent Dano a letter asserting performance deficiencies and insisting that Dano bring itself into compliance within ten days. Dano responded with a letter acknowledging certain deficiencies but denying generally that it had defaulted on the contract requirements. Dano claimed that many of the stated deficiencies had been waived, were partially the fault of the District, or were beyond Dano's control. The letter proposed a complex ninety-day plan for correcting the compost removal and storage problem (including the temporary use of barges in the Potomac River), which the District reviewed and found to be unsatisfactory.

On May 9, 1983, the District terminated the contract on the ground that Dano had defaulted by failing to perform services required by the contract -- specifically, removal of the compost from Blue Plains -- within the cyclical required time of twenty-one days. In the termination letter the District stated:

It is now apparent that the District is confronted with an enormous problem as the result of material being stored in the compost sheds for more than 21 days. Therefore, disposing of it will be costly because it is only suitable for removal to a disposal facility such as a landfill or incinerator.

In addition to the 30,000 tons of material in the compost sheds, Dano has piled approximately 10,000 tons of other material outside the sheds. We estimate that it will cost the District at least $784,000 to dispose of this material which has been on the grounds of Blue Plains for more than 21 days. Because Dano apparently does not have the proper permits to remove the material currently in the compost sheds . . . Dano is not in a position to immediately dispose of the tons of material now at Blue Plains in excess of the time permitted by the contract. . .

Accordingly . . . Dano has defaulted on its contract by failing to remove material from the compost sheds 21 days after the composting process began.

Appealing the termination to the Board, Dano contended that there was no contractual requirement that compost be hauled from the site after twenty-one days. It further argued that even if there had been such a requirement initially, the District had waived it; that the contract did not allow for termination for this reason in any event; and that the District's notice to cure letter was legally defective. Dano also claimed that the District's own actions contributed substantially to the default, thus excusing any non-performance. Finally, it argued that the District abused its discretion in terminating based upon a mere "technical breach" without allowing sufficient time for so expensive a project to succeed. The Board rejected all of these arguments in its comprehensive opinion.

II. OVERVIEW OF THE CONTRACT

Since Dano's principal arguments in this court involve the Board's interpretation of the contract, an overview of the key provisions of the agreement is necessary. Entitled one "For: Disposal of Sludge and Solid Waste," the contract contains a standard preliminary section outlining "General Conditions," followed by the main body of the contract and a final section listing sixteen "Special Conditions." The main body is divided into two parts. Part I sets forth the requirements for the demonstration phase and includes the terms for lease of the property, a description of the "Dano Process," and criteria for evaluating the process after the demonstration phase. Part II explains the parties' rights and responsibilities during the five year "term contract." Part II contains two sub-parts, subsection A ("Conditions Precedent to Term Contract") describing the terms of the seven month phase-in or construction period, subsection B providing the terms for the balance of the five year contract period.

The present dispute centers around the interpretation of performance requirements in the main contract and the application of Special Condition 16, a default provision. Specifically, part I.A.3. defines the contractor's biostabilizer process to include, among other aspects:

e. Composting : The partially processed compost will be transported by front end loader to a hopper near the north west end of the compost shed. . . . The shed will be approximately 350 feet by 168 feet and will retain the partially processed compost for 21 days in piles 20 feet high. At the end of this period, the compost will be fully stabilized having been aerated and maintained at a temperature of more than 131 degrees Fahrenheit for the duration . . . Once fully composted, the mixture will be loaded on trucks and hauled from the site.

Part I also requires Dano to obtain permits for hauling and off-site storage and states (in part I.E.3.) that "due to lack of space, the contractor shall not be allowed to store compost at the Blue Plains facility." Part I.F.1. provides that if by the end of the demonstration period Dano has complied with the criteria set forth in the following subsection, "the District will issue its notice of approval of the Contractor's disposal process," and the contract shall be extended for the term of years set forth in part II. Part I.F.2. specifies criteria which "shall be used to determine whether the Contractor has demonstrated a satisfactory process." Part I.F.2.e. requires Dano to provide a list of locations for temporary compost storage during the extended contract term and written documentation, licenses or permits from the political jurisdictions authorizing storage within their boundaries.

Part II.A. ("conditions precedent to term contract") provides that "on approval of the Contractor's disposal process by the District in accordance with the provisions of section I.F., the Contractor shall commence performance as follows utilizing the approved disposal process." Part II.A.2. instructs Dano to continue "utilizing its proposed disposal process for approval of two biostabilizers" during the seven-month construction phase. Part II.B.2. makes the sale of compost an essential condition of the agreement and provides for termination by the District under Special Condition 16 if Dano fails to complete the sales as agreed upon. Part II.B.4. refers to specific sections of part I which "shall apply during the 5-year term period of this agreement." These include some of the performance requirements and the prohibition against on-site storage of compost, but not the specified biostabilizer process including the "composting" described above. ...


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