On February 21, 2017, Judge Silverstein of the Delaware Bankruptcy Court issued an opinion (the “Opinion”) in the Outer Harbor Terminal bankruptcy proceeding – Bankr. D. Del., Case 16-10283.  The Opinion is available here.  This Opinion decided the Debtor’s objection to a claim for breach of contract filed by Kawasaki Kisen Kaisha, Ltd. (“K Line”).  The claim objection objected both to the amount of the K Line claim, and to the very existence of the K Line claim.  The Opinion only addressed the claim’s validity and did not liquidate the claim.  That issue was reserved by Judge Silverstein for a later trial.  However, I’m of the opinion that the amount of the claim will be determined consensually, as most issues are in bankruptcy proceedings.

Background

In 2013, K Line entered into an agreement with the Debtor to provide stevedoring and terminal services at the Port of Oakland.  Opinion at *2.  Unfortunately, the Debtor was never profitable and, in 2016, declared bankruptcy.  With that action in mind, on January 21, 2016, the Debtor provided notice to K Line that it would be winding down operations and intended to cease handling vessels as of February 20, 2016 and cease handling gates as of March 19, 2016.  However, the Debtor serviced K Line through March 28, 2016.  In anticipation of the Debtor’s termination of services, on March 4, 2016, K Line found a new provider of services and entered an agreement accordingly.  K Line then filed a claim in this bankruptcy case, and the Debtor objected on November 4, 2016.  An evidentiary hearing was held January 12, 2017 and this Opinion followed.  Opinion at *2-4.

The Opinion

Judge Silverstein focused entirely on the Agreement and the actions of the parties, needing to look no further than the document and the testimony of the Debtor.  She cited to the following chain of logic in making her decision:  1) The Agreement allowed either party to terminate immediately upon certain events occurring, including bankruptcy, Opinion at *7; 2) The Agreement does not provide that termination is self-executing, Opinion at *8; 3) Neither Debtor’s counsel, nor the witness it presented at the hearing testified or argued that the Debtor communicated to K Line that the Agreement was terminated, Opinion at *8-9.

Judge Silverstein makes it clear that although the Bankruptcy Court is a court of equity, it will not rewrite contracts.  “Just as the Court cannot rewrite the Agreement to save ‘K’ Line from a bad bargain, it cannot rewrite the Agreement to save the Debtor from any perceived penalty resulting from its choice to be a good corporate citizen.”  Opinion at *10.  Judge Silverstein held that the announcements of upcoming work stoppage appear to have been a repudiation.  Opinion at *11.  Pursuant to California law, which controlled the Agreement, a party injured by repudiation can elect its remedy, either treating the repudiation as anticipatory breach and seek damages, or ignore the repudiation, await the time when performance is due and exercise remedies for the actual breach.  In this instance, however, neither party briefed the issue of anticipatory breach or damages.  Accordingly Judge Silverstein “grant[ed]” them the opportunity to brief the issue in connection with a damages trial.  Opinion at *12.

Contract law is a part of nearly every business transaction – from retaining employees, to selling goods or services, to finding ways to protect your assets and business opportunities.  While the Bankruptcy Court is a court of equity, at the end of the day, all of the judges have studied contract law (even if only in preparation for the bar), and will give parties to a contract the benefit (or loss) of their bargains.  It is my hope that all of you reading this post will not need to exercise contractual protections.  But in today’s volatile business environment, even if all the parties to a contract are acting in good faith, a good contract, and following it closely, is the best protection for your business.  Should you ever have a contract counter-party encourage you to push through an incomplete contract, it may do well to remind them, and yourself, that strong fences build strong neighbors.

John Bird practices with the law firm Fox Rothschild LLP in Wilmington, Delaware. You can reach John at 302-622-4263, or jbird@foxrothschild.com.