Drummond Coal Sales, Inc. v. Norfolk S. Ry. Co. - 3 F.4th 605 (4th Cir. 2021)

Rule:

Every contract imposes an obligation of good faith and fair dealing between the parties in its performance and its enforcement. This obligation means neither party will do anything to injure or destroy the right of the other party to receive the benefits of the agreement. Violation of the duty of good faith and fair dealing constitutes a breach of contract. Moreover, this obligation contemplates that while the duty of good faith does not prevent a party from exercising its explicit contractual rights, a party may not exercise contractual discretion in bad faith, even when such discretion is vested solely in that party.

Facts:

Plaintiff guaranteed the defendant shipping services of coal at fixed rates. Plaintiff claimed that the defendant breached its implied duty of good faith and fair dealing. According to the plaintiff, the defendant entered into or amended confidential third-party contracts imposing millions of dollars in liquidated damages on utilities that elected to ship under the Agreement. Allegedly, it sought to penalize utilities from shipping under the Agreement, thereby depriving the plaintiff of the benefit of its bargain with the defendant—shipping rates to create a viable one-stop-shop contract for utilities. The district court ruled that the defendant breached its contract with the plaintiff. The defendant appealed.

Issue:

Did the defendant breach the contract with the plaintiff?

Answer:

Yes.

Conclusion:

The defendant’s imposition of liquidated damages on utilities for shipping under the contract was a bad faith exercise of its contractual discretion that deprived the supplier of the benefit of its bargain