EL PASO MARKETING, L.P. аnd Enterprise Texas Pipeline LLC, Petitioner, v. WOLF HOLLOW I, L.P., Respondent.
No. 11-0059.
Supreme Court of Texas.
Decided June 15, 2012.
Rehearing Denied Dec. 14, 2012.
383 S.W.3d 138
Caroline C. Scahdle, D. Mitchell McFarland, Kerry R. McEniry, Harrison Bettis Staff McFarland & Weems, LLP, Houston, TX, for Petitioner El Paso Marketing, L.P.
Jacks C. Nickens, Solace Kirkland Southwick, McGuire Woods LLP, Jett Williams III, Henke Law Firm LLP, Houston, TX, for Wolf Hollow I, L.P.
Michael Hendryx, Suzanne Reddell Chauvin, Fernando De Leon Jr., Strong Pipkin Bissell & Ledyard LLP, S. Shawn Stephens, Baker & Hostetler, LLP, Houston, TX, for Petitioner Enterprise Texas Pipeline, L.L.C.
Frank T. Messina, Germer Gertz, L.L.P., Beaumont, TX, for Amicus Curiae Texas Association of Defense Counsel.
The owner of a gas-fired electric power generating plant sued the owner of the pipeline that supplies fuel to the plant for negligence in allowing interruptions in service and in delivering gas below contractual quality standards. The pipeline owner contends that the suit sounds in contract, not in tort. We agree and thus reverse the court of appeals’ judgment.1 We also consider whether all the plant‘s claimed damages are consequential damages that it agreed to waive. We remand the case to the court of appeals for further proceedings.
I
El Paso Marketing, L.P. manages the gas fuel supply for an electric power generating plant owned and operated by Wolf Hollow I, L.P. in Granbury, Texas. El Paso purchases the amount of gas needed by Wolf Hollow at a market hub near Pecos, Texas. The gas flows into a commercial pipeline owned by Enterрrise Texas Pipeline LLC. Wolf Hollow‘s plant is connected to the pipeline.
Wolf Hollow and El Paso operate under a Gas Supply and Fuel Management Agreement (“the Supply Agreement“). El Paso and Enterprise, in turn, operate under a Gas Transportation Agreement (“the Transportation Agreement“).2 That agreement was originally between Enterprise and Wolf Hollow, but Wolf Hollow immediately assigned the agreement, with
Wolf Hollow sued El Paso for breach of the Supply Agreemеnt and Enterprise for negligence. Wolf Hollow asserts two claims. One is based on four interruptions in gas delivery. El Paso and Enterprise contend that each interruption was caused by force majeure, which, under the Supply Agreement, excuses a failure to meet delivery obligations.6 Wolf Hollow disagrees. Wolf Hollow seeks to recover the cost of replacement power it purchased to meet its delivery obligations while its plant was down. El Paso contends that these arе consequential damages waived by the Supply Agreement.7 Wolf Hollow disputes this characterization and argues that, in any event, such damages are recoverable under Section 21.1 of the Supply Agreement. Section 21.1(a) provides that if El Paso fails to deliver gas as required, other than as excused by force majeure, it must immediately notify Wolf Hollow, which may then purchase replacement gas and recover the extra cost from El Paso.8 Sec-
Wolf Hollow‘s second claim alleges that from time to time Enterprise delivered gas contaminated with heavy liquid hydrocarbons and thus below the quality specified by the Transportation Agreement.11 Section 14.1 of the Supply Agreement requires that the gas El Paso delivers to Wolf Hollow meet those specifications, and that if it does not, El Paso must assign any claim it has against Enterprise to Wolf Hollow.12 Enterprise contends that this аssignment is Wolf Hollow‘s sole remedy for its quality claim. Wolf Hollow disagrees. Wolf Hollow seeks damages for plant repairs and equipment upgrades to prevent future harm to the plant (“plant damages“), as well as replacement-power
We need not detail all proceedings in the trial court. The trial court granted summary judgment motions brought by El Paso and denied summary judgment motions brought by Wolf Hollow. The trial court also grantеd, without comment, Enterprise‘s summary judgment motion contending that Wolf Hollow could not assert a negligence cause of action because its claims sounded in contract and its damages were precluded by the economic loss rule. The trial court rendered judgment for El Paso and Enterprise, specifically holding that:
- the four delivery interruptions were each caused by force majeure, excusing El Paso‘s performance under the Supply Agreement;
- all damages sought by Wolf Hоllow are consequential damages waived by the Supply Agreement (and by the Transportation Agreement);
- Wolf Hollow‘s exclusive remedy for its quality claim is an assignment of any claim El Paso has against Enterprise; and
- El Paso is entitled to declarations regarding force majeure and the exclusive remedy for Wolf Hollow‘s quality claim.13
The court of appeals agreed that the replacement-power damages and plant damages claimed by Wolf Hollow are consеquential damages waived in the Supply Agreement.14 The court did not address whether the gas delivery interruptions were excused for force majeure. And having held that Wolf Hollow cannot prevail on its claims, the court concluded that declarations denying the basis for those claims were moot.15 But the court held that because Wolf Hollow has no contract with Enterprise, it can sue for negligence, and that the action is not barred by the economic loss rule.16 The court vacаted the declaratory judgment and otherwise affirmed judgment for El Paso, reversed the judgment for Enterprise, and remanded the case to the trial court for further proceedings.17
El Paso and Enterprise petitioned this court for review, and Wolf Hollow conditionally petitioned for review. We granted all three petitions.18
We begin by considering whether Wolf Hollow‘s claims against Enterprise sound in tort or contract. We then turn to whether Wolf Hollow waived all the damages it asserts in the Supply Agreement. Finally, we consider whether the court of appeals erred in vacating El Paso‘s declaratory judgment.
II
blockquote“Tort obligations are in general obligations that are imposed by law — apart from and independent of promises made and therefore apart from the manifested intention of the parties — to avoid injury to
Wolf Hollow argues that because it no longer has any contractual relationship with Enterprise, having assigned the Transportation Agreement to El Paso, it is entitled to suе for negligence. Enterprise counters that Wolf Hollow cannot shed by assignment the Transportation Agreement‘s rights, duties, and limitations. “Generally speaking, a party cannot escape its obligations under a contract merely by assigning the contract to a third party.”22 But even assuming that Wolf Hollow‘s assignment relieved it of its rights and obligations under the Transportation Agreement, Wolf Hollow‘s argument is nevertheless flawed. It incorrectly assumes that Wolf Hollow must be entitled to sue Enterprise for something — if not breach of contract, then negligence. But Wolf Hollow, by its Supply Agreement, can look to El Paso, its gas supply manager, to answer for delivery interruptions, poor quality gas, and other gas supply problems.
Wolf Hollow can enforce Enterprise‘s gas quality obligations through an assignment of El Paso‘s claims against Enterprise, to which it is entitled by Section 14.1 of the Supply Agreement.23 But Wolf Hollow concedes, in this Court, that the consequential damages waivers in the Supply Agreement and the Transportation Agreement24 preclude it from recovering plant damages on a contractual claim. That explains why Wolf Hollow has refused to accept such an assignment and instead seeks to avoid the waivers by asserting an action for negligence. Wolf Hollow‘s position is that it augmented its rights against Enterprise by assigning away the contract that created them in the first place. We disagree. Wolf Hollow chose to limit its
El Paso and Enterprise argue that a Section 14.1 assignment is Wolf Hollow‘s exclusive remedy for its quality claim. Though Wolf Hollow cannot sue Enterprise for negligence, for the reasons we have explained, nothing in Section 14.1 suggests that it cannot sue El Paso for breach of the Supply Agreement in allowing poor quality gas to be delivered. Indeed, the general obligation to supply quality gas under Section 14.1 is El Paso‘s. But the consequential damages waivers that preclude Wоlf Hollow from recovering plant damages on an assigned claim against Enterprise also preclude recovery of such damages on a quality claim against El Paso. The question remains whether Wolf Hollow‘s claim for replacement-power damages is barred by the consequential damages waiver.
III
“Direct damages are the necessary and usual result of the defendant‘s wrongful act; they flow naturally and necessarily from the wrong.... Consequential damages, on the other hаnd, result naturally, but not necessarily....”25 Although Wolf Hollow argues that its replacement-power damages are direct, not consequential, these damages derive entirely from the agreements Wolf Hollow has with its customers and thus do not
Wolf Hollow nevertheless argues that they are not consequential damages for another reason. Thе parties agree that the Supply Agreement‘s consequential damages waiver is governed by the Uniform Commercial Code.26 The UCC definition of consequential damages excludes cover,27 defined as “making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.”28 Wolf Hollow contends that the extra costs it incurred to purchase replacement power to meet its own delivery obligations when its plant was shut down due to gas delivery interruptions and poor gas quality were cover and therefore not consequential damages. But the power Wolf Hollow purchased was not, strictly speaking, a substitute for the gas due; the power was a substitute for what was to be produced from that gas. Wolf Hollow argues that by purchasing replacement power, it discharged its obligations to its customers the same as if it had purchased replacement gas. But even assuming that replacement power is similar to replacement gas, it does not fit within the plain statutory language.
Parties may agree, however, to “remedies in addition to or in substitution for
- Section 21.1(a): If El Paso determines that it will not be able to make the required delivery of gаs or actually fails to do so, it must “immediately notify” Wolf Hollow, which can then attempt to cover by purchasing replacement gas.32
- Section 21.1(b): If replacement gas is not available, El Paso can offer replacement power, but Wolf Hollow is not required to accept it.33
- Section 21.1(c): If replacement power is either not offered or not accepted, Wolf Hollow can purchase replacement power and recover the extra cost from El Paso.34
The court of appeals held that Wolf Hollow did not comply with the first two steps, which are prerequisites to the third. But there is evidence that it did. El Paso did not notify Wolf Hollow of gas delivery failures until after they occurred. At that point, replacement gas could not avoid a plant shutdown that had already occurred or remedy the power shortage to Wolf Hollow‘s customers. Only replacement power could remedy that shortage.
It makes sense that the parties would provide for an alternate cover-type mechanism when obtaining replacement gas would be problematic. El Paso contends that Wolf Hollow‘s plant was connected to a second pipeline, from which it could have taken gas, but it is not clear whether Wolf Hollow had the right to do so. It is even less clear that such a gas source, if available, could have avoided a plant shutdown and the consequent damages to Wolf Hollow.
We thus conclude thаt there is evidence Wolf Hollow is entitled to recover replacement-power damages under Section 21.1(c) of the Supply Agreement, precluding summary judgment against Wolf Hollow based on the consequential damages waiver.
IV
We turn briefly to El Paso‘s contention that the court of appeals improperly modified the trial court‘s judgment by deleting its declarations as moot on the ground that all of Wolf Hollow‘s claims were barred by the waiver of consequential damages in the Supply Agreement. Because we have held that Wolf Hollow may pursue replacement-power damages under the contract, we reverse this part of the court of appeals’ judgment.
* * *
We hold: Wolf Hollow cannot assert its delivery and quality claims against Enterprise in an action for negligence, and though it could assert its quality claim