FPL Energy, LLC v. TXU Portfolio Management Co.
426 S.W.3d 59
| Tex. | 2014Background
- TXUPM (a power marketer) acquired contracts from TXU Electric to receive renewable electricity and RECs from FPL-owned wind farms; FPL failed to deliver contracted electricity and RECs for several years.
- FPL counterclaimed that TXUPM failed to provide sufficient transmission capacity, causing ERCOT curtailments and FPL’s production shortfalls.
- Trial court granted partial summary judgments: (1) contracts required TXUPM to provide transmission capacity; (2) liquidated-damages provisions ($50/REC) were unenforceable. Jury later returned take-nothing judgments; court of appeals reversed the summary rulings, holding TXUPM had transmission duties and the liquidated-damages clauses were enforceable.
- Texas Supreme Court granted review to decide (a) whether TXUPM had a contractual duty to provide transmission capacity, (b) whether liquidated damages apply to electricity and RECs or only RECs, and (c) whether those liquidated-damages provisions are enforceable.
- Court held: (1) contracts do NOT require TXUPM to provide transmission capacity (risk of inadequate capacity allocated to FPL as an Uncontrollable Force); (2) liquidated-damages clauses apply only to REC deficiencies; and (3) those clauses are unenforceable as a penalty in light of the disparity between the contract formula and actual REC-market outcomes.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether TXUPM owed a contractual duty to provide transmission capacity | TXUPM: responsibility limited to delivering Net Energy after the Delivery Point; congestion is an Uncontrollable Force and risk falls on FPL | FPL: section 2.03’s “including without limitation Transmission Services…from the Renewable Resource Facility” imposes a duty to secure capacity from generator to load | Held for TXUPM — contracts unambiguous when read as whole: TXUPM’s duty begins at Delivery Point; lack of capacity fits Uncontrollable Force and risk allocated to FPL |
| Whether liquidated-damages provision covers both electricity and RECs | TXUPM: REC accounting mechanism covers both energy and RECs; Article IV treats them together | FPL: provision references only RECs and ties remedies to PUC REC rules; Indian Mesa contract deletes clause if RECs disappear | Held for FPL on scope — liquidated damages apply only to REC deficiencies |
| Whether $50/REC liquidated-damages clause is enforceable | TXUPM: damages hard to estimate; $50 is reasonable forecast; provision not limited to regulatory penalties | FPL: clause will operate as an unenforceable penalty because it can produce amounts grossly disproportionate to actual REC-market damages | Held for FPL — although damages were hard to estimate, the clause is unenforceable as a penalty because its operation (reliance on PUC determinations and $50 cap) can produce an unreasonable disparity from actual REC value |
| Remedy / next step | TXUPM: seeks enforcement of liquidated damages and recovery | FPL: seeks damages for TXUPM’s alleged breach and argues liquidated damages invalid | Court: TXUPM did not breach (no duty to provide capacity); liquidated damages void; remand to court of appeals to determine appropriate damages consistent with opinion |
Key Cases Cited
- Dynegy Midstream Servs., Ltd. P’ship v. Apache Corp., 294 S.W.3d 164 (Tex. 2009) (addresses contract ambiguity and interpretation principles)
- Gilbert Tex. Constr., L.P. v. Underwriters at Lloyd’s London, 327 S.W.3d 118 (Tex. 2010) (definiteness and ambiguity in contract interpretation)
- Coker v. Coker, 650 S.W.2d 391 (Tex. 1983) (primary intent in construing contracts)
- Frost Nat’l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310 (Tex. 2005) (construe contracts to give effect to all provisions)
- Gym-N-I Playgrounds, Inc. v. Snider, 220 S.W.3d 905 (Tex. 2007) (freedom to allocate contractual risk)
- Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) (two-prong test for enforceability of liquidated damages: difficulty of estimation and reasonable forecast)
- Stewart v. Basey, 245 S.W.2d 484 (Tex. 1952) (courts will not enforce punitive contractual damages)
- Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008) (enforce parties’ negotiated commercial terms; courts interpret text)
- Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640 (Tex. 1996) (courts will not rewrite agreements to insert omitted terms)