Allapattah Services, Inc. v. Exxon Corporation
61 F.Supp.2d 1326 (1999)
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Rule of Law:
Punitive damages are not recoverable for a breach of contract, even if the breach is intentional or in bad faith, unless the conduct constituting the breach also amounts to an independent tort. A breach of the Uniform Commercial Code's implied covenant of good faith and fair dealing does not, by itself, constitute such an independent tort.
Facts:
- Exxon Corporation entered into 'Sales Agreements' with its gasoline dealers (Plaintiffs) to supply them with wholesale gasoline.
- These agreements obligated Exxon to set the wholesale price for the gasoline.
- Plaintiffs allege that Exxon had a good faith obligation under the contracts to set this price fairly.
- Exxon implemented a program that charged dealers a three percent fee on their customers' credit card transactions.
- The dealers claim that Exxon breached its contractual duty of good faith by failing to reduce the wholesale gasoline price to offset this new credit card fee.
- The dealers characterized Exxon's conduct as a willful, wanton, and oppressive breach of the contract.
Procedural Posture:
- Plaintiffs, Exxon dealers, initiated a class action lawsuit against Defendant Exxon Corporation in U.S. District Court, alleging breach of contract.
- The action is a diversity case, implicating the laws of numerous states.
- As the case approached trial, Plaintiffs filed a Motion for Leave to Assert a Claim for Punitive Damages against Exxon.
- The motion sought to amend their complaint to allege that Exxon's breach of contract was tortious and oppressive, thereby warranting punitive damages.
- The U.S. District Court is now ruling on this motion.
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Issue:
Does a party's alleged intentional and oppressive breach of the implied covenant of good faith and fair dealing in a commercial contract constitute an independent tort that can support a claim for punitive damages?
Opinions:
Majority - Gold, District Judge
No. A breach of the implied covenant of good faith and fair dealing is a breach of contract, not an independent tort that can support a claim for punitive damages. The fundamental purpose of contract damages is to provide compensation for the non-breaching party's loss, not to punish the breaching party. Under both the Uniform Commercial Code (UCC) and general common law, punitive damages are unavailable in contract actions unless the defendant's conduct constitutes a separate and independent tort, meaning it violates a duty imposed by law rather than a duty created solely by the contract. The UCC's duty of good faith is an interpretive tool tied to the contract's terms and does not create an independent tort cause of action. Furthermore, allowing punitive damages would undermine the well-established principle of 'efficient breach,' which permits a party to breach a contract and pay compensatory damages if doing so is more economically efficient than performance. Because the dealers' claim is fundamentally about Exxon's performance of its contractual obligations, their only remedy lies in contract law, which does not permit punitive damages.
Analysis:
This order reinforces the traditional boundary between contract and tort law, emphasizing that remedies in contract are compensatory, not punitive. By rejecting the argument that a breach of the UCC's good faith covenant is an independent tort, the court prevents parties from transforming ordinary contract disputes into tort cases to seek higher damages. This decision upholds the 'economic loss rule' and promotes predictability in commercial relationships, as parties can contractually allocate risks without fear of unforeseen punitive liability for what amounts to a willful but non-tortious breach.
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