## Facts

- Drummond Coal Sales, Inc., an international coal supplier, pursued a “one-stop-shop” strategy to sell coal and bundled rail transportation to U.S. utilities.
- Drummond and Norfolk Southern Railway Company entered a long-term transportation agreement (as amended in 2010 and governed by Virginia law) providing guaranteed shipping at fixed rail rates.
- The agreement required Drummond to ship minimum annual volumes or pay “shortfall fees” for unmet volumes.
- Norfolk Southern had separate, confidential contracts with certain utilities that imposed liquidated damages if those utilities shipped coal under the Drummond agreement.
- From 2010 to 2016, Drummond shipped no coal under the agreement; it paid shortfall fees for 2010–2014 but refused to pay for 2015–2016.
- Drummond sued in federal court for declaratory relief and rescission, alleging Norfolk Southern’s conduct prevented performance and deprived Drummond of the agreement’s expected benefit.
- After a jury trial, the jury returned a special verdict finding Norfolk Southern materially breached the agreement by preventing Drummond from shipping coal, either through an express breach or breach of the implied covenant of good faith and fair dealing.
- The district court entered declaratory relief excusing future shortfall fees but denied full rescission and any refund of previously paid shortfall fees; it denied Norfolk Southern’s Rule 50(b) motion and Drummond’s Rule 59(e) motion.
- Norfolk Southern appealed the denial of Rule 50(b) and the material-breach finding; Drummond cross-appealed the denial of complete rescission and refunds.

## Issues

1. Whether sufficient evidence supported the jury’s finding that Norfolk Southern materially breached the agreement, including through breach of the implied covenant of good faith and fair dealing under Virginia law.
2. Whether asserted lack of proof of damages defeated a material-breach finding where the relief sought was primarily declaratory and equitable.
3. Whether the statute of limitations barred Drummond’s declaratory claims aimed at future shortfall-fee obligations.
4. Whether the district court abused its discretion in denying complete rescission and restitution of previously paid shortfall fees.

## Decision

- The Fourth Circuit affirmed the district court on both the appeal and cross-appeal.
- The court held the evidence did not support an express breach of the agreement’s rate provisions but did support a breach of the implied covenant of good faith and fair dealing and a resulting material breach.
- The court held proof of damages was not required for the jury to find material breach in this declaratory-judgment posture focused on defining future obligations.
- The court rejected the statute-of-limitations defense as applied to Drummond’s declaratory action framed against anticipated shortfall-fee claims.
- The court held the district court acted within its equitable discretion in denying rescission and refunds while granting limited forward-looking relief.

## Legal Principles

- Under Virginia law, the implied covenant of good faith and fair dealing prohibits exercising contractual discretion in a manner that deprives the counterparty of the contract’s expected benefit or evades the bargain’s spirit, even absent an express contractual prohibition.
- A material-breach determination can rest on a breach of the implied covenant where the challenged conduct effectively frustrates the contract’s central commercial purpose.
- In an action seeking declaratory and equitable relief to define future performance obligations, a jury may be asked to decide breach and materiality without quantifying damages.
- Rescission is a discretionary equitable remedy; even after a material breach, a court may deny rescission and restitution where equities and the parties’ course of dealing make unwinding the contract inappropriate.

## Conclusion

The Fourth Circuit sustained a jury finding that Norfolk Southern materially breached the agreement by violating the implied duty of good faith and fair dealing through confidential utility contracts that effectively blocked use of the Drummond arrangement, while also affirming the district court’s decision to grant only forward-looking relief and to deny complete rescission and repayment of past shortfall fees.


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