With this week’s orders list, the Texas Supreme Court issued two opinions and chose six more cases for oral argument this fall.
Liquidated damages clause: Not as “liquidated” as you might think
, No. 11-0050
In a technical case about renewable-energy credits in the (somewhat) deregulated electricity market, the most interesting (and widely applicable) holding is likely to be the Court’s treatment of liquidated damages. Here, the parties had agreed to a liquidated damages formula that led to a $29 million figure, while the evidence suggested that a true after-the-fact figure would have been closer to $6 million.
So, does the parties’ agreement about damages hold, or does a later court refuse to enforce the provision?
The Texas Supreme Court began with a two-part test, looking at (1) whether the harm is difficult of estimation and (2) whether the measure of liquidated damages is a reasonable forecast of just compensation. (Slip op. at 18) The Court stated that it “evaluate[s] both prongs of this test from the perspective of the parties at the time of contracting.”
Even so, the evidence of actual damages is not irrelevant. Rather, if they are “much less than the amount contracted for,” that can be evidence that the original estimate was (in hindsight) unreasonable.
Here, the Court found that the contract “on its face, reasonably forecast[s] damages,” but that was not enough. The Court looked at how the business relationships here, and the regulatory environment, evolved in the decade after the contract was entered. It noted that (by administrative rule) some of the possible “damage” was discharged when the contract was assigned to a different kind of energy company. It noted that a different provision was pegged to either $50 or twice the market value as determined by the PUC. The PUC, however, declined to announce such a price — so the parties fell back to the $50 figure.
The Court held that where there is “an unbridgeable discrepancy between liquidated damages provisions as written and the unfortunate reality in application, we cannot enforce such provisions.”
The Court stated that it was not making new law, but it also offered no guidance to parties about how to draft liquidated damages provisions in complex transactions that can be accurate enough. I don’t have a clear answer to that, either.
The most obvious reading of the holding is that, on these facts, a ratio of nearly 5:1 is simply too much to bear, no matter what risks the parties may have been allocating. Liquidated damages provisions are then a sort of presumption that can be defeated with proof of a competing measure of damages so low as to be “unbridgeable.”
A different reading of “unbridgeable discrepancy” would focus on the two specific factors the Court discussed in its analysis — both of which related to regulatory assumptions made by the parties that proved unfounded. In this view, the situation is more akin to mutual mistake, in which the parties did not mean to allocate those two regulatory risks at all. The question then would be whether there is a logical bridge, rather than a quantitative one.
You can take your pick. Or you can do what I’m likely to do: argue from both approaches.
Contractual subrogation clauses squeeze out possible equitable subrogation claims
, No. 12-0452
The Court applied its reasoning from Fortis Benefits v. Cantu that language about subrogation in an insurance contract prevented the insurer from relying on equitable remedies covering the same ground.
This case involved a subrogation clause, but also included clauses that imposed duties on an insured to make regular reports, to use due diligence, and not to make misrepresentations in applying for the policy, among others. The Court held that the insurer was bound to its contract language for these, and could not rely on equitable analogues to these defenses covering the same ground.
The challenge is to a recent City of Houston ballot item, raising questions about what standards to use in evaluating whether voters were adequately informed (by the ballot language or otherwise) about the contents of what they were being asked to approve.
Grants for Oral Argument
, No. 12-0045 : This petition raises several questions about shareholder suits in closely held corporations. Does the business judgment rule apply to closely held corporations? If so, does it preclude suits other than for fraud and self-dealing? And does this plaintiff even have standing as a shareholder because his interest is indirect?
, No. 13-0484 : When suing general partners for a liability owed by the partnership, does the statute of limitations run from the time of the partnership’s underlying debt, or does it start only when a judgment against the partnership has been secured?
, No. 13-0573 : Section 74.451 of the Civil Practice and Remedies Code restricts arbitration agreements between health providers and patients. Is that preempted by the Federal Arbitration Act? Or is it saved from preemption as a regulation of insurance by the federal McCarran-Ferguson Act?