It’s not nice to renege on a deal—just ask the city of Albuquerque, New Mexico.
Not only did it lose a lower federal court ruling that it should not have backed out of a fixed-price contract with Davidson Oil Company for city fuel needs, it now has lost an appeal with the Tenth Circuit Court of Appeals in Denver.
The case developed when Albuquerque cut the deal with Davidson and shortly afterward, fuel market prices took a nose dive. When the city asked for a price reduction, Davidson said ‘no’ and explaining it had entered into hedge contracts that needed to be protected.
That’s when Albuquerque terminated the contract so Davidson Oil went to the U.S. District Court for the District of New Mexico for breach of contract and won. The court found that while the city did not breach the explicit terms of the contract, it violated an implied covenant by terminating the contract in bad faith to secure a better bargain elsewhere.
After reviewing the case, the Tenth Circuit Court of Akppeals affirmed the lower court’s decision. The Tenth Circuit held that the City of Albuquerque breached the contract by exercising the termination for convenience clause solely to obtain a better deal from another supplier.
The court emphasized that such an action violated the implied covenant of good faith and fair dealing inherent in the contract. The court also upheld the district court’s award of damages, including the hedge contract losses, as incidental damages under the Uniform Commercial Code, finding them to be commercially reasonable and directly resulting from the breach.
