Tractebel Energy v. E.I. Du Pont De Nemours

• Decision Date: 14 August 2003
• Docket Number: No. 14-02-00406-CV.,14-02-00406-CV.
• Citation: 118 S.W.3d 60
• Parties: TRACTEBEL ENERGY MARKETING, INC. and Tractebel Power, Inc., Appellants, v. E.I. DU PONT DE NEMOURS AND COMPANY, Appellee.
• Court: Texas Court of Appeals

118 S.W.3d 60

TRACTEBEL ENERGY MARKETING, INC. and Tractebel Power, Inc., Appellants, v. E.I. DU PONT DE NEMOURS AND COMPANY, Appellee.

No. 14-02-00406-CV.

Court of Appeals of Texas, Houston (14th Dist.).

August 14, 2003.

Laura Rowe, Houston, for appellants.

Charles T. Miers, John M. Ribarits, Houston, for appellee.

Panel consists of Chief Justice BRISTER and Justices FOWLER and FROST.

OPINION

SCOTT BRISTER, Chief Justice.

Tractebel Energy Marketing, Inc. ("TEMI") and Tractebel Power, Inc. ("TPI") appeal from an adverse judgment in their breach of contract action against E.I. DuPont de Nemours and Company. A jury found DuPont breached the contract and caused TPI damages of $1.2 million, but excused the breach due to commercial impracticability. However, the definition of impracticability given to the jury excluded two critical elements, neither of which was supported by any evidence at trial. Finding no evidence to support the only issue found in DuPont's favor, we reverse the judgment below and remand for judgment in accordance with the remainder of the jury's verdict.

TPI designs and builds power plants. EPA regulations require certain new sources of air emissions (like power plants) to offset anticipated increases in overall emissions by purchasing emission reduction credits from existing plants. Existing plants create these credits by installing better technology or shutting down operations. In connection with its plans to build a power plant in New England, TPI engaged TEMI (an affiliate in the commodity trading business) to find and purchase the credits it would need.

DuPont earned 7,649 tons per year of NOx emission credits in 1983 by reducing emissions from its Repauno Plant in New Jersey. New Jersey law provides that future regulations can reduce or eliminate these credits at any time,¹ a fact confirmed in a letter to DuPont from the New Jersey Department of Environmental Protection confirming the credits:

Should the regulation for an applicable criteria pollutant become more restrictive than that of the time of your reduction credit, the quantity banked will be discounted by the amount required by the new regulation.

In 1994, DuPont's credits were cut almost in half, with the NJDEP again issuing the same warning of potential future reductions.

TPI (through TEMI as its agent) contracted with DuPont to buy 1,000 tons of credits for $1 million on March 10, 1998.² Shortly thereafter, NJDEP revoked the credits, citing new regulations. Deprived of its credits, DuPont refused to perform. DuPont sued NJDEP for revoking the credits, and TPI³ sued DuPont. DuPont later abandoned its suit; TPI has not.

At trial, a jury found a contract had been formed, DuPont had repudiated it, and TPI had incurred $1.2 million in damages.⁴ The jury rejected DuPont's defenses that performance was excused by mutual mistake, unilateral mistake, or impossibility, but agreed with its defense that performance was excused due to commercial impracticability. On that basis, the trial court rendered judgment in DuPont's favor. TPI appeals, and DuPont cross-appeals.

Impracticability in Texas

First, TPI argues commercial impracticability is not recognized as a defense in Texas except in the context of the sale of goods.⁵ Though Texas courts rarely use that name, they have accepted the defensive doctrine under aliases.⁶

Section 261 of the Restatement (Second) of Contracts defines impracticability in the following terms:

§ 261. Discharge by Supervening Impracticability.

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.⁷

In three following sections, the Restatement addresses the general contexts in which the defense has been accepted: (1) the death or incapacity of a person necessary for performance,⁸ (2) the destruction or deterioration of a thing necessary for performance,⁹ and (3) prevention by governmental regulation.¹⁰

Texas courts have excused performance in each of these situations (though not using the term impracticability).¹¹ And in its most recent pronouncement on the subject, the Supreme Court relied on sections 261 and 264 of the Restatement in setting out the proper elements of the defense.¹² Although the Supreme Court referred to the defense as "impossibility" rather than impracticability, it is clear the Court approved the substance of the Restatement sections regardless of the name applied to the defense.¹³ Thus, we find the doctrine of commercial impracticability as defined in the Restatement does exist in Texas, and we overrule TPI's first issue.

In its second issue, TPI contends the trial court should have determined impracticability as a matter of law rather than submitting the question to the jury. The states appear to disagree on the point.¹⁴ But in Texas, defenses to breach of contract are generally considered questions for the jury unless the facts are uncontested.¹⁵ Here, the very existence of a contract was hotly disputed, as were most of the elements required by the Restatement to establish impracticability. Under these circumstances, the trial court properly submitted the impracticability question to the jury.

Impracticability and Basic Assumptions

In its remaining issues, TPI challenges the form of the trial court's jury question on impracticability, and the sufficiency of the evidence to support the defense. We review the former for an abuse of discretion;¹⁶ we review the latter for any evidence supporting the verdict, considering it in a light that supports the judgment and disregarding all evidence and inferences to the contrary.¹⁷

Generally, impracticability excuses a party's breach of contract when the contract itself doesn't provide an escape clause and the doctrine's other requirements are satisfied. Because courts cannot simply rewrite the parties' contract, the excuse is limited to circumstances in which both parties held a basic (though unstated) assumption about the contract that proves untrue. This "basic assumption" requirement is reflected in the Restatement,¹⁸ the Uniform Commercial Code,¹⁹ and federal common law.²⁰

In the Texas cases recognizing the defense, the "basic assumption" of the parties is relatively obvious. In a contract for personal services, the death or incapacity of the person involved makes the contract impracticable for obvious reasons.²¹ Similarly, a contract to lease or insure a building is rendered impracticable if the building is destroyed.²² A change in the law that makes performance illegal also renders it impracticable.²³ In each of these circumstances, it takes little imagination to see that both contracting parties entertained a basic assumption about the contract that proved untrue.

In this case, DuPont clearly had its own credits in mind when entering the contract, but for this to be a basic assumption of the contract there must be evidence that TPI did as well.²⁴ The contract here did not specify the source or ownership of the credits being sold. Although parties may understand a specific thing is needed for performance based on prior dealings,²⁵ there were no such dealings here.

Instead, the evidence indicates a broker made the initial contact between the parties, but to protect his own position, did not disclose to either the identity of the other until a deal was struck.²⁶ Thus, TPI did not even know it was contracting with DuPont until the agreement was made, and could not have understood that continued validity of the Repauno credits was a basic assumption of the agreement.

DuPont contends the broker was acting as TPI's agent in the transaction, so his knowledge that DuPont was selling its own credits must be attributed to TPI. But this is not an invariable rule, as this Court has previously held:

If a broker, under his contract with his principal, is charged with no responsibility and is not obligated to exercise any discretion, but his duty consists merely of bringing the parties together so that, between themselves, they may negotiate a sale, and the sale is made in that manner, the broker is considered a mere "middleman" and is not necessarily the "agent" of either party.²⁷

There are good reasons here not to attribute the broker's knowledge about DuPont to TPI, as it is undisputed the broker kept the parties' identities confidential to protect his own position in the negotiations.

But even assuming TPI knew DuPont was selling its own credits, this does not mean TPI understood that to be a basic assumption of the contract. According to the Restatement, the defense of impracticability does not apply when both parties know of the intended source if it is not a basic assumption of both parties that there will be no contract if that source fails. This point is repeated in several illustrations:

• a seller's knowledge of a buyer's intended source of funds is not a basic assumption of the contract unless the seller understands there will be no sale if that source fails.²⁸

• a farmer's agreement to sell milk under a contract that does not specify the source is not discharged if the farmer's herd is subsequently destroyed due to disease.²⁹

• a manufacturer's contract to sell a product it makes is not discharged by the destruction of its factory so long as product meeting the contract is available elsewhere on the market.³⁰

In each case, one party's assumption about the source of supply—and the other party's knowledge of that assumption—is not enough to excuse performance if alternative sources of supply are still available to fulfill the contract.

In this case, credits from another source would have fulfilled the terms of the contract, and would have served TPI's purposes just as well.³¹ There is no evidence TPI contracted on the assumption that DuPont's...