NO “COVER” BEFORE BREACH

TXU Portfolio Management Company, LP v. FPL Energy, LLC
Dallas Court of Appeals, No. 05-08-01584-CV (August 18, 2016)
Justices Francis, Evans (Dissent), and Whitehill (Opinion)

Kelli Hinson

Efforts to compensate for undelivered product do not constitute “cover” if they occur before the contract is breached. TXU Portfolio Management Company (“TXUPM”) contracted with several wind farms (the “Wind Farms”) for delivery of annual quantities of wind energy, but the Wind Farms were unable to fulfill their delivery obligations. Because TXUPM was required to meet its customers’ daily energy needs, it compensated for the lower-than-expected deliveries from the Wind Farms by purchasing energy from other sources throughout the course of the year. After a trial on TXUPM’s breach of contract claim against the Wind Farms, the jury found TXUPM suffered “market damages” of $8.9 million. But the jury also found that TXUPM had covered for the electricity the Wind Farms failed to provide. The jurors were instructed that “cover” meant “purchasing or producing electricity as a substitute for the electricity promised but not delivered under the Agreements.” Because TXUPM did not prove any “cover damages,” the trial court entered a take-nothing judgment against TXUPM.

The Dallas Court of Appeals disagreed. The Wind Farms’ delivery obligations were measured on an annual basis; so they did not breach their agreements until the year ended. Section 2.712(a) of the Texas Business and Commerce Code provides: “After a breach within the preceding section the buyer may ‘cover’ by 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.” (Emphasis added.) An aggrieved buyer may either cover or sue for market damages, but not both. The trial court held that TXUPM’s cover activities prevented it from recovering market damages. But the Court of Appeals held that the plain language of the statute restricts “cover” to activities post-breach. In this case, TXUPM purchased additional electricity on a daily basis before the annual delivery obligations were technically breached. Because of the ephemeral nature of electricity, TXUPM did not—and indeed could not—purchase electricity after the breach to make up for the daily pre-breach shortfalls. So TXUPM’s purchases did not constitute cover, and it was entitled to the $8.9 million market damages found by the jury.

Justice Evans dissented, arguing the Court was bound to evaluate the evidence based on the definition of “cover” presented to the jury—regardless of what the “correct” definition may be. TXUPM objected to the definition at trial, but not on the grounds that it was an inaccurate statement of the law. Because the definition in the jury charge did not include the “after breach” language from the statute, Justice Evans concluded the evidence was sufficient to support the jury’s finding of cover.