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Watson Water Co., Inc. v. Indiana-American Water Co., Inc.

Court of Appeals of Indiana

October 10, 2017

Watson Water Company, Inc., Appellant-Defendant,
Indiana-American Water Company, Inc., Appellee-Plaintiff.

         Appeal from the Clark Circuit Court. The Honorable Andrew Adams, Judge. The Honorable William A. Dawkins, Jr., Magistrate. Cause No. 10C01-1402-CC-272

          ATTORNEYS FOR APPELLANT J. Christopher Janak Bradley M. Dick Paul D. Vink Bose McKinney & Evans LLP Indianapolis, Indiana

          ATTORNEYS FOR APPELLEE Mark J. Crandley Bart A. Karwath Nicholas K. Kile Barnes & Thornburg, LLP Indianapolis, Indiana

          Shepard, Senior Judge

         [¶1] Watson Water Company, Inc., and Indiana-American Water Company, Inc., are water utility companies serving customers in Clark County. Watson and IAWC executed an agreement in 1997, later amended in 2003, for the construction of a water main, and then, additionally, for the purchase of a certain volume of water. When Watson stopped performing under the terms of the contract, IAWC sued Watson for breach and for failure to properly exercise a right-of-first-refusal clause in the contract. Watson counterclaimed, arguing that it was due a refund of payments made to IAWC beyond the cost of construction of the water main.

         [¶2] After a two-day bench trial, the court issued findings and conclusions, holding Watson liable under the contract and issuing declaratory relief. It concluded that the agreement should remain in place and that Watson was obligated to purchase water from IAWC under the terms of the contract. Watson now appeals.


         [¶3] The parties raise numerous issues, which we consolidate and restate as follows:

I. Whether the findings and conclusions support a judgment against Watson for breach of contract;
II. Whether the prior-breach doctrine applies and whether the trial court correctly interpreted the right-of-first-refusal clause; and
III. Whether the Uniform Commercial Code applies to this contract.

         Facts and Procedural History

         [¶4] On April 28, 1997, Watson and IAWC executed a water supply agreement. Appellee's App. Vol. II, pp. 3-7. IAWC agreed to provide to Watson during the term of the contract, or any renewal or extension periods, "potable water in such quantity as may be required by [Watson]." Id. at 3. IAWC also agreed to provide all of Watson's "future water supply requirements above and beyond the capacity of its present well fields." Id. at 4. The term of the agreement was for forty years, or until 2037, with automatic ten-year renewals, unless notice was provided within a time set forth by contract. Id. at 6. Watson agreed to pay IAWC for all water used, and IAWC agreed to submit monthly bills for water delivered. Id. at 5. The agreement set forth when payment was due and made provisions for additional fees if the bills became delinquent. Id.

         [¶5] A right-of-first-refusal clause was included and reads as follows:

In the event [Watson] determines either to sell its entire water system or any part thereof or to arrange for the operation of part or all of the system by a third party under contract, or contemplates a new or revised water purchase agreement, [Watson] agrees that [IAWC] shall have a right of first refusal to purchase, or provide contract operations, or to sell water to [Watson] on the same terms and conditions offered by any third party. [IAWC] shall have thirty (30) days from the receipt of notice from [Watson] to exercise its refusal right and agree to purchase or to provide contract operations pursuant to such terms and conditions. If [IAWC] fails to exercise its refusal right, then such refusal right will terminate. For purposes of this paragraph, a transaction with a third party excludes a reorganization or change in the type of Corporation or Company through which the Corporation or Company, which is to be reorganized, remains in effective control of the reorganized entity.

Id. at 6 (emphasis added).

         [¶6] In late 2003, Watson and IAWC executed an amendment, which explicitly stated it "shall amend the Water Supply Agreement executed between the same parties effective April 28, 1997 (the "Agreement")." Id. at 9. As a joint competitive matter, the parties agreed to allow Watson to purchase water temporarily from Water One, Inc., to serve the Quarry Bluff Subdivision in Clark County. IAWC did so to allow it "to plan, construct, and make operational a new water main to serve the Quarry Bluff Subdivision in Clark County." Id. IAWC was to make all reasonable efforts to have the main operational within one year of the amendment's execution. Watson agreed to perform certain other tasks as respects that joint venture, but these are not points of contention in this appeal.

         [¶7] Once the main was operational, Watson agreed to purchase from IAWC a minimum annual volume of water of 77, 300, 000 at the tariff rate established by the Indiana Utility Regulatory Commission. The amendment explained that the parties arrived at that volume based on the assumption that IAWC would have made a capital investment of $600, 000. The parties agreed that if the actual cost varied from the assumed cost, the minimum purchase volume would be adjusted. In 2007, the minimum volume was increased to 108, 300, 000 gallons per year because IAWC's actual capital investment was $921, 214.

         [¶8] The parties also set forth the following addition to the 1997 Agreement's right- of-first-refusal clause:

[If] Paragraph #14 of the Agreement is invoked, and [IAWC] either fails to exercise its refusal rights and/or does not become the purchaser, contract operations provider, or seller of water to [Watson] as provided in Paragraph #14, [Watson] agrees to immediately pay to [IAWC] its actual cost to plan and construct the main and make it operational.

Id. at 10. The amendment explicitly stated, "All other terms and conditions of the Agreement between the parties shall remain in full force and effect." Id.[1]

         [¶9] In 2005, the water main extension became operational. As respects the minimum volume purchase requirement, the parties' course of performance was inconsistent. In 2006 and 2009, Watson did not take and pay for the minimum volume, and IAWC did not bill full price for the difference. In 2007 and 2008, Watson took the minimum volume. In 2010 and 2011, Watson did not take the minimum volume, IAWC billed for the difference, and Watson paid the difference. Beginning in 2012 to 2015, Watson did not take the minimum volume and IAWC billed for the difference, but Watson refused to pay full price for the difference.[2]

         [¶10] On January 17, 2012, Watson and River Ridge Development Authority executed a reciprocal water supply agreement. Appellant's App. Vol. II, pp. 84-86. Put simply, both Watson and RRDA were willing, in "cases of emergency from time to time to buy water" and sell it to each other on an "'as needed' basis." Id. at 84. On October 26, 2012, the parties executed an addendum to the reciprocal water supply agreement to document the cost of the construction and installation of a connection point. Appellant's Br. at 14.

         [¶11] About July 23, 2013, Watson and RRDA executed a first amendment to the reciprocal water supply agreement. Tr. Vol. XII. The amendment resolved a conflict in the differing rates each party charged for water such that when water was needed, the lowest rate charged by either party at that time, after documentation was exchanged, would reflect the rate billed.

         [¶12] IAWC sued Watson on February 27, 2014. As amended, the complaint alleged breach of contract by Watson's failure to purchase the required annual minimum amount of water from IAWC. IAWC sought damages for Watson's breach and a declaratory judgment that the contract remained in force. Watson counterclaimed arguing that it should be repaid all money above the cost of the construction of the main. IAWC alleged that Watson's outstanding balance by the end of 2015, excluding late charges and attorneys' fees was $813, 271.66. Watson, on the other hand, alleged under its theory that it was only required to pay for construction of the water main, and that it had overpaid IAWC $376, 592.87.

         [¶13] Sometime in 2014, [3] after IAWC had filed suit, RRDA and Watson executed a second amendment to their reciprocal water supply agreement. Appellee's App. Vol. II, pp. 20-24. The parties agreed as follows:

RRDA as Exclusive Provider of Watson Water's Future Needs. Subject to the terms of the Agreement and any rulings, orders, and/or decisions by administrative agencies or courts with legal jurisdiction (including, but not limited to, any settlement reached by Watson Water in its pending litigation with Indiana-American Water Co., Inc., Cause No. 10C01-1402-CC-272), which may overrule, invalidate, supplement, or otherwise modify the Agreement, including this Second Amendment, Watson Water agrees that RRDA shall be the exclusive source of Watson Water's future water purchases when it is unable to internally provide for the water needs of its customers. In the event Watson Water contemplates a new or revised water supply agreement, Watson Water agrees that RRDA shall have a right ...

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