Texas Court of Appeals Considers Effect of Consequential Damages Bar on Recovery of Damages for Delay By Owner

Tennessee Gas Pipeline Co. v. Technip USA Corp.
2007 Tex. App. LEXIS 9951, No. 01-06-00535-CV (Tex. App. Dec. 21, 2007)

The Court of Appeals of Texas for the First District was asked to review a trial court’s limitation of a jury award for damages to only those damages associated with defective work. In making its ruling, the Court of Appeals was asked to assess the extent of a waiver of consequential damages clause and which damages were considered consequential barred by said clause. After overlapping contract provisions and the damages sought, the Court of Appeals found that damages flowing from delay were recoverable so long as they were direct, meaning that they flowed naturally and necessarily from the delay.

The Tennessee Gas Pipeline Company (the “Owner”) hired Technip USA (“Technip”) to make certain improvements to a gas pipeline (the “Project”). The parties entered into a contract (the “Contract”) which Contract contained certain provisions pertaining to limitations on damages. Specifically, contract provided that the parties agreed to waive all “indirect, special, incidental or consequential” losses. Similarly, there was a cap on damages recoverable against Technip, capped at 50% of the total contract price. Additionally, the Owner agreed to remove a liquidated damages clause for delay damages in exchange for a reduction in the Contract Price.

Numerous delays occurred during the course of the Project. As a result of the delays, the Owner sought to recover increased costs due to the delays caused by Technip, including project delay costs and excess gas, lube oil and labor costs. Technip also sought to recover increased costs incurred due to the extended completion time. Technip filed for summary judgment asserting that the waiver of consequential damages clause barred the Owner’s claims for losses allegedly caused by the delay. The case was tried before a jury and the jury was directed to make a determination as to whether a breach of contract occurred and to award damages. The jury was instructed to disregard whether the damages were precluded under the terms of the contract because it was within the providence of the trial court to decide which damages were permitted or barred as a matter of law. The jury found that Technip breached the contract and awarded damages to the Owner both in the form of delay damages and defective work damages. Thereafter, the trial court granted in part and denied in part the parties’ respective post-trial motions. Ultimately, the trial court limited the jury award to damages associated with Technip’s defective work and excluded delay damages. Both parties appealed the trial court’s decision.

On appeal, the Owner argued that the delay damages sought by it were “direct” damages which damages were not limited by the waiver of consequential damages provision of the Contract. The Court of Appeals explained that direct damages flow naturally and necessarily from the breach and are those which are foreseeable or contemplated by the parties. In making a determination as to whether the Owner’s damages were barred by the waiver of consequential damages provision, the Court of Appeals dissected the applicable provision and examined this provision in conjunction with other provisions contained in the Contract. Specifically, the Court noted that the Contract contained a “Limitation of Liability” clause which limited Technip’s liability to 50% of the Contract Price regardless of the theory of liability, but which contained an exception as to Technip’s guaranty of timely completion. The Court also noted that another provision contained a guarantee whereby Technip guaranteed that the Substantial Completion would not be delayed. Consequently, the Court of Appeals concluded that the Contract as a whole did not preclude all delay damages sought by the Owner. The Court explained that to find that the waiver of consequential damages clause precluded all damages for delay would render the exceptions for guarantee of timely completion in the limitations of liability (i.e. cap on damages) and the guarantee provisions without effect.

Having concluded that the Owner was not precluded from seeking all damages for delay, the Court engaged in an analysis of which delay damages were direct (recoverable) or consequential (barred). The Court concluded that the Owner was entitled to recover its “project delay costs” including additional labor, travel, environmental contractors, inspectors, hauling wastewater and utilities. Because it was specifically contemplated by the provisions of the Contract that the Owner would incur such costs during the Project, these expenses were deemed direct damages because “a breach of the Contract by delay naturally and necessarily [] caus[ed] the costs to be extended over a longer period of time.” The Court also permitted recovery of damages associated with additional power to one of the stations since the Owner was responsible for providing power and it was a naturally flowing and necessarily resulting damage from the delay.

Other categories of delay damages were excluded by the Court. First, the Court concluded that “loss of efficiency” claims were akin to loss of use which were too remote to be considered direct damages and thus, such damages were barred by the waiver of consequential damages provision. Second, the Court denied recovery of damages associated with backup generator as being consequential in nature because such additional costs were naturally flowing from the breach but not necessarily resulting from the breach. Third, the Court concluded that the loss of interest or loss of use of funds was a consequential damage barred by the Contract. Specifically, the Court found that the fact that the Owner needed to pay for the Project out of its own funds was not contained within the Contract provisions and was inapposite to the situation in other cases where the parties stipulated in the contract that such losses were expected or the cases where third-party financing is expected and delays are expected to result in financing extensions and interest costs. Fourth, the Court denied the Owner’s claim for damages associated with energy purchased prematurely as a result of Technip’s delay. The Court found that the lack of reference to the Owner’s obligation to and the potential imposition of penalties by the utility company rendered such damages indirect and consequential.

Last, the Court considered the Owner’s claim for lost profits resulting from gas which was not marketable and sellable. The Court explained that lost profits may be considered direct (when the profits are lost on the breached contract) or consequential damages (when the expectation for profit is incidental to the performance). Here, the Court determined that the loss of profits via the sale of gas to customers was incidental to Technip’s performance of the contract and thus barred by the waiver of consequential damages clause. In sum, the Court only permitted two types of damages to be recovered by the Owner in connection with Technip’s delay.

In addition to the Owner’s appeal, Technip appealed the trial court’s decision to permit damages associated with alleged defective work. Technip argued that such claims were barred by an exclusive remedy provision which required the Owner to provide notice to Technip upon discovery of any alleged defect, and if Technip failed to cure the defect, notice that the Owner was going to make the repairs itself. Technip argued that such notice was not provided. Reviewing the evidence introduced at trial, the Court of Appeals agreed with Technip that the Owner failed to provide the requisite notice of defects which was a condition precedent to maintaining a claim for defective work damages.

Click here to view full opinion as PDF (provided with the permission of LexisNexis).

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