S. Coal Corp. v. Drummond Coal Sales, Inc.

28 F.4th 1334

SOUTHERN COAL CORPORATION, James C. Justice, II, Plaintiff-Counter Defendants-Appellee-Cross Appellants,

v.DRUMMOND COAL SALES, INC., Defendant-Counter Claimant-Appellant-Cross Appellee.

No. 20-14560

United States Court of Appeals, Eleventh Circuit.

March 28, 2022

Jon Geoffrey Hogue, Counsel, Murray Hogue & Lannis, Pittsburgh, PA, John D. Dalbey, Chilivis Grubman, LLP, Atlanta, GA, Sarah Trevena Gordon, Smith Gambrell & Russell, LLP, Atlanta, GA, Timothy Murray, Murray Hogue & Lannis, Pittsburgh, PA, Michelle Dawn Smith, Murray Hogue & Lannis, Pittsburgh, PA, for Southern Coal Corporation

Jon Geoffrey Hogue, Counsel, Murray Hogue & Lannis, Pittsburgh, PA, John D. Dalbey, Chilivis Grubman, LLP, Atlanta, GA, Timothy Murray, Murray Hogue & Lannis, Pittsburgh, PA, Stefan C. Passantino, Michael Best & Friedrich LLP, Washington, DC, Michelle Dawn Smith, Murray Hogue & Lannis, Pittsburgh, PA, for James C. Justice, II

Huey Thomas Wells, III, William Anthony Davis, III, Benjamin T. Presley, Starnes Davis Florie, LLP, Birmingham, AL, Robert Conrad Khayat, Jr., The Khayat Law Firm, Atlanta, GA, for Drummond Coal Sales, Inc.

Before Wilson, Lagoa, and Ed Carnes, Circuit Judges.

Wilson, Circuit Judge:

Drummond Coal Sales, Inc.’s (Drummond) motion to amend this court's judgment is GRANTED. We vacate our prior opinion in this appeal, Southern Coal Corporation v. Drummond Coal Sales, Inc. , 25 F.4th 864 (11th Cir. 2022), and substitute for it this one. Accordingly, Southern Coal Corporation's (Southern Coal) petition for rehearing en banc of the now-vacated opinion is DENIED AS MOOT.

This appeal concerns a pricing dispute over a contract to transfer and store coal between plaintiff Southern Coal and defendant Drummond. The district court found Southern Coal breached the contract and awarded a judgment in favor of Drummond in the amount of $6,860,000 and $1,473,699.87 in prejudgment interest. Drummond appeals this judgment on the ground that the district court erred in finding a price escalation clause in the contract to be unenforceable. If this price escalation were enforceable, then Drummond would be entitled to even more damages under the contract for Southern Coal's breach. For its part, Southern Coal cross-appeals the district court's judgment, claiming that Drummond's actions excused Southern Coal's obligation to pay Drummond under the contract. Both parties challenge the district's court determination not to award attorneys’ fees to either party.

We affirm the district court's judgment against Southern Coal in the amount of $6,860,000 plus $1,473,699.87 in prejudgment interest for a total of $8,333,699.87. The district correctly found that Southern Coal was not excused from performing under the contract. Further, the district court correctly found the price escalation clause unenforceable. However, we reverse on the issue of attorneys’ fees and remand to the district court to award a reasonable sum to the prevailing party, Drummond.

I. BACKGROUND

The disputed contract in this case is called the Bulk Coal Transfer and Storage Agreement (Agreement). Southern Coal entered the four-year Agreement with Drummond in October 2013. Under the Agreement, Drummond would sublease port capacity located in Newport News, Virginia to Southern Coal. In exchange for Drummond's services under the Agreement, Southern Coal agreed to transfer through Drummond's port a minimum of 2 million metric tons of coal per year and pay Drummond a "minimum monthly Throughput Fee of $1,000,000." Southern Coal's then-president, James C. Justice II, contemporaneously executed a guarantee of Southern Coal's obligations under the Agreement.

Central to this dispute, § 6.14 of the Agreement provides that the base amount for the Throughput Fee would be adjusted upward based on increases in the "Peak Downs metallurgical benchmark price." "Peak Downs" refers to a mine in Australia owned by Australian mining company BHP Billiton (BHP). BHP is one of the leading coal exporters in Australia and produces high-quality metallurgical coal. Metallurgical coal, often referred to as coking coal, is a primary component of steel manufacturing. As used here, "benchmark" refers to a negotiated price between mining companies and Asian steelmakers. Beginning in the 1980s, BHP would negotiate a yearly benchmark price for its high-quality metallurgical coal with Japanese steelmakers. This benchmark was published in industry newsletters and the price would serve as the market price of metallurgical coal for the year and other coal companies would use the benchmark in negotiating their own contracts.

For more than twenty years, BHP set the yearly benchmark price for metallurgical coal. Around 2008, BHP announced that it wanted to transition from a yearly negotiated benchmark price toward a quarterly, monthly, and eventually, a daily negotiated price. The last annually negotiated benchmark price was settled in 2009 and by the second quarter of 2010, the industry began using a quarterly benchmark price. When the parties entered the Agreement in 2013, the industry was still using a quarterly benchmark, routinely negotiated and set by BHP. However, by the fourth quarter of 2016, BHP moved away entirely from quarterly pricing, which resulted in the published quarterly benchmark price being set by other Australian coal producers.

Starting in the fourth quarter of 2013, Drummond began invoicing Southern Coal for the monthly Throughput Fee of $1 million. Initially, Southern Coal paid these invoices without issue. During this time, the price of metallurgical coal was relatively low and the price escalation clause of the Agreement had consequently not been triggered. In the fourth quarter of 2016, however, the quarterly benchmark price of metallurgical coal, set by a company other than BHP, rose to $200 per metric ton. Drummond considered this price increase to trigger § 6.14 of the Agreement. Accordingly, Drummond sent Southern Coal an invoice on October 25, 2016 for $1,380,000, a figure which reflected a $380,000 increase in the minimum monthly Throughput Fee. Drummond invoiced Southern Coal for the same amount for November and December 2016.

In the first quarter of 2017, the quarterly benchmark price for metallurgical coal—as reported in industry publications—rose again to $285 per metric ton. Accordingly, Drummond sent Southern Coal an invoice on January 3, 2017, for $1,965,000, which included a $965,000 increase in the minimum monthly Throughput Fee. Southern Coal paid $1,000,000 of the invoice on February 6, 2017, but it refused to pay the remaining $965,000. After that payment, Southern Coal refused to pay any further invoices.

Southern Coal contested these invoices because it claimed that the "Peak Downs" benchmark to which § 6.14 of the Agreement referred ceased to exist as BHP was no longer setting the quarterly benchmark price. Therefore, there was no longer a mechanism for price adjustments under § 6.14 of the Agreement. Southern Coal sent a letter to Drummond on March 9, 2017, demanding adequate assurances that Drummond would not charge any increase to the Throughput Fee and would only charge the minimum $1 million. Drummond sent a reply letter to Southern Coal asserting its right to increase the Throughput Fee because § 6.14 still applied regardless of which company set the quarterly benchmark, and that Southern Coal had no right to withhold payments.

Southern Coal sued Drummond and asserted claims for a declaratory judgment and breach of contract. Drummond asserted counterclaims against Southern Coal and Justice for declaratory judgment, breach of contract, and breach of a corresponding guarantee. Both parties moved for summary judgment. The district court found that § 6.14 of the Agreement was ambiguous and sent the issue of the meaning of the term "Peak Downs metallurgical benchmark price" to trial. However, the district court concluded that Southern Coal was still liable for the minimum monthly Throughput Fee of $1 million.

At a bench trial, the district court heard testimony from both parties on the meaning of the ambiguous term. Ultimately, the district court found that the term "Peak Downs metallurgical benchmark price" was intended by the parties to be, specifically, the quarterly price set by BHP for its coal that was mined from its Peak Downs mine and sold to Japanese steelmakers. The district court found the testimony of Dennis Steul, Drummond's vice president of sales and the primary negotiator of the terms of the Agreement, to be the more credible and persuasive evidence of the parties’ intent. Accordingly, the district concluded that § 6.14 became unenforceable when BHP ceased setting the quarterly benchmark price for metallurgical coal. However, because the Agreement contained a savings clause, the district court determined that the price escalation clause could be severed and the remainder of the Agreement was valid. As a result, the district court granted judgment in favor of Drummond in the amount of $6,860,000 against Southern Coal and Justice.

Drummond raises three purported errors of the district court on appeal: (1) evidence of industry usage establishes that § 6.14 is unambiguous and therefore extrinsic evidence of the parties’ intent should not have been admitted in interpreting the Agreement; (2) instead of finding § 6.14 unenforceable, the Agreement should have been equitably reformed to reflect the parties’ intentions; and (3) attorneys’ fees should be awarded to Drummond as provided for in the Agreement. On the other hand, Southern Coal contends that the district court erred in not finding that Drummond's actions constituted anticipatory repudiation and material breach of the Agreement. It also argues that the guarantee should not be enforced against Justice.

II. DRUMMOND'S ISSUES ON APPEAL

A. Ambiguity of the Agreement

Drummond argues that the district court erroneously relied on extrinsic evidence of the parties’ intent to interpret the Agreement...