Supreme Court Of North Dakota: Where Contract Provided That Either Party Could Cancel Upon 30 Days’ Notice, The Non-Breaching Party Seeking Lost Profits Could Only Recover The Lost Profits It Would Have Earned During The Notice Period

by Pepper Hamilton LLP

Cont’l Res. v. P&P Indus., LLC, 2018 N.D. Lexis 20 (January 22, 2018)

In 2013, Continental Resources Inc. (“Continental”), an oil producer doing business in North Dakota, entered into a master servicing agreement, governed by Oklahoma law, with United Oilfield Services (“United”).  According to the contract, United agreed to provide transportation, water hauling, and related support services to Continental in support of Continental’s ongoing operations in North Dakota.  The contract also contained the following termination provision: “[I]t being understood and agreed that either party hereto may cancel this Contract by giving the other party thirty (30) days written notice of such cancellation.”

Approximately a year after the parties signed the contract, Continental alleged that United (i) violated state and federal limits and regulations regarding the number of hours a truck driver may drive, (ii) violated Continental’s policy limiting the number of hours an employee could work in a day, and (iii) engaged in improper and fraudulent billing.  Following its discovery of United’s alleged misconduct, Continental terminated its contract and filed suit against United and other related entities.

In response to Continental’s allegations, United answered and counterclaimed against Continental for multiple causes of action, including breach of contract.  According to United, Continental breached the agreement between the parties by terminating the contract without giving the requisite 30 days’ notice and, as a result, United was entitled to the full value of its business, any unpaid amounts for services and materials United provided under the contract, and other damages.

At summary judgment stage, the lower court ruled that if United prevailed on its breach of contract claim at trial, United’s damages would be “limited to the net profits it could have earned during the 30-day termination notice period, overall expenses of preparation, and its expenses in pursuit of reasonable efforts to avoid or minimize the damaging effects of the breach.”    Following an unfavorable result at trial, United appealed inter alia the lower court’s summary judgment ruling, arguing that the lower court erred in limiting the damages it could recover on its breach of contract claim against Continental.

On appeal, the Supreme Court of North Dakota affirmed the lower court’s summary judgment ruling.  According to the court, because the contract’s termination provision entitled Continental to terminate the contract at any time, United was not assured of performance or profits beyond the 30-day notice period.  Reciting Oklahoma law, the court explained that the non-breaching party is only entitled to the amount which would compensate it for the detriment proximately caused by, or would be likely to result from, the breach.  As a result, although Continental failed to abide by the terms of the contract, the court concluded that damages stemming from the breach could not exceed the net profits which could have been earned during the contract’s 30-day notice period because ruling otherwise would afford United greater recovery than it was entitled to expect under the terms of the contract.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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