317 Cherokee County Cogeneration Partners, L.P. v. Dynegy Mktg. & Trade

Richard F. Brown

 
The following is not a legal opinion.   You should consult your attorney if the case may be of significance to you.
 
Cherokee County Cogeneration Partners, L.P. v. Dynegy Mktg. & Trade, 305 S.W.3d 309 (Tex. App.—Houston [14th Dist.] 2009, no pet.), held that a Gas Purchase Agreement, which permits the gas purchaser to recover the difference between the market value of undelivered gas and the agreed-upon purchase price, provides a measure of direct, not consequential, damages, with no obligation to “cover” the undelivered gas. Dynegy, as seller, and Cherokee, as purchaser, entered into a Gas Purchase Agreement (“GPA”). Dynegy was required to supply, and Cherokee was required to purchase, a fixed quantity of natural gas daily at an agreed-upon purchase price. Cherokee was authorized to use the purchased gas at its cogeneration facility or to resell the gas to a third party. After two hurricanes struck the Gulf Coast, Dynegy failed to deliver the full contract requirement of natural gas, the market price of natural gas spiked, and Cherokee operated its facility at a diminished capacity, but Cherokee did not attempt to purchase cover gas. Section 5.2 of the GPA provided that Cherokee’s right to recover damages for Dynegy’s failure to deliver the required quantities of gas was limited to an amount equal to the shortfall in delivery multiplied by the difference between the market price and the contract price. Section 5.4 of the GPA provided that “[n]either party shall be liable in any event for consequential, incidental, special or punitive damages or losses which may be suffered by the other as a result of the failure to deliver . . . the required quantities of gas.”
 
Dynegy argued that Cherokee sought only consequential or lost profit damages, which were excluded by Section 5.4 of the GPA. Because the GPA expressly waived or excluded consequential damages, Dynegy argued that Section 5.2 provided Cherokee a remedy only if Cherokee “suffered an actual out-of-pocket loss by purchasing ‘cover gas’ at a higher price on the spot market.”
 
The court found that it was not necessary for Cherokee to purchase cover gas to recover damages. The mere fact that undelivered gas could have been resold does not require a buyer who agreed to a consequential-damages exclusion to cover the seller’s non-performance or be faced with no remedy at all for the seller’s breach. “Consequential damages” was not defined in the GPA. Therefore, the court presumed the parties intended to use the ordinary or common law meaning of consequential damages. Under the common law, consequential damages may encompass some, but not all, claims for lost profits, and consequential damages “result naturally, but not necessarily, from the defendant’s wrongful acts.” If a party’s expectation of profit is incidental to the performance of the contract, the loss of that expectancy is consequential.
 
Direct damages flow naturally and necessarily from a defendant’s wrongful act. Direct damages compensate a plaintiff for a loss that is “conclusively presumed to have been foreseen by the defendant as a usual and necessary consequence of its wrongdoing.” “Profits lost on the contract itself—such as the amount a party would have received on the contract minus its saved expenses—are direct damages.”
 
The damages that Cherokee sought to recover represented built-in profits that were lost on the GPA itself. Accordingly, the damages Cherokee sought under Section 5.2 of the GPA represented direct, not consequential, damages. In reaching its conclusion, the court noted that the remedy that Cherokee sought under Section 5.2 was similar to the remedy outlined in the Uniform Commercial Code as a measure of direct damages that may be recovered together with consequential damages for non-delivery or repudiation by a seller.
 
The significance of this case is the holding that a gas purchase agreement, which permits the gas purchaser to recover the difference between the market value of undelivered gas and the agreed-upon purchase price, provides a measure of direct, not consequential, damages. Although, the recovery of damages requires the purchaser to prove the price a willing buyer would pay a willing seller, the mere fact that undelivered gas could have been resold does not require a buyer who agreed to a consequential-damages waiver or exclusion to cover the seller’s non-performance or be faced with no remedy at all for the seller’s breach.