Complex Commercial Litigation: Breach of Contract or Negligence?

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by Jim Orr

The Texas Supreme Court has recently taken another look at the sometimes-puzzling distinction between contract remedies and tort remedies, a world that has been referred to as “contorts.”  El Paso Marketing, L.P. V Wolf Hollow I, L.P., 55 Tex. Sup. Ct. J. 877 (June 15, 2012).

A critical part of any lawsuit is determining what cause of action to assert.  However, deciding whether a claim sounds in tort or contract is often difficult.  As Justice Gonzales noted a decade ago, “[w]e have muddled the law of ‘contorts’ and an all encompassing bright line demarcation of what constitutes a tort distinct from breach of contract has proven to be elusive.”  Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (Tex.1991) (Gonzalez, J., concurring).

In Montgomery Ward & Co. v. Scharrenbeck, the Texas Supreme Court noted, “Accompanying every contract is a common-law duty to perform with care, skill, reasonable expedience and faithfulness the thing agreed to be done, and a negligent failure to observe any of these conditions is a tort, as well as a breach of the contract.” 146 Tex. 153, 157, 204 S.W.2d 508, 510 (1947) (citation and internal quotation marks omitted).

In Jim Walter Homes, Inc. v. Reed, 711 S.W .2d 617, 617 (Tex.1986), the court stated, “The contractual relationship of the parties may create duties under both contract and tort law.  The acts of a party may breach duties in tort or contract alone or simultaneously in both.  The nature of the injury most often determines which duty or duties are breached.” Id. at 618  (citations omitted).

In DeLanney, the court adopted a two-part test for determining whether a party’s cause of action sounds in contract, tort, or both:  a court (1) looks at the source of the duty giving rise to the injury, and (2) looks to the nature of the injury. See Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494–95 (Tex.1991).  Regarding the source of the duty: “If the defendant’s conduct … would give rise to liability independent of the fact that a contract exists between the parties, the plaintiff’s claim may also sound in tort.  Conversely, if the defendant’s conduct … would give rise to liability only because it breaches the parties’ agreement, the plaintiff’s claim ordinarily sounds only in contract.” Id. at 494.

In the recent El Paso Marketing case, Wolf Hollow, the owner of a gas-fired electric power generating plant, sued Enterprise Texas Pipeline LLC, the owner of the pipeline that supplied fuel to the plant.   The Texas Supreme Court considered whether the plant owner could assert a negligence claim against the pipeline owner or was limited to a breach of contract claim.  The case concerned agreements to supply natural gas to Wolf Hollow for the purpose of operating an electric power generating plant.  Wolf Hollow entered into a Gas Transportation Agreement with Enterprise and then, with Enterprise’s consent, immediately assigned the agreement to a third-party, El Paso Marketing, LP.  Thus, Enterprise supplied gas to El Paso who then supplied gas to Wolf Hollow (under a Gas Supply and Fuel Management Agreement (“the Supply Agreement”) between El Paso and Wolf Hollow.

Wolf Hollow’s lawsuit alleged that Enterprise had been negligent in: (a) causing four interruptions in gas delivery which resulted in Wolf Hollow having to purchase replacement power and (b) sometimes delivering gas contaminated with heavy liquid hydrocarbons and thus below the quality specified by the Transportation Agreement.  The Gas Transportation Agreement limited the types of damages that could be recovered for breach, and Wolf Hollow chose to assert claims sounding in negligence.

Wolf Hollow argued that its claims were for negligence and not breach of contract because it had assigned its rights in the Gas Transportation Agreement to El Paso and thus no longer had any contractual relationship with Enterprise.  The Supreme Court disagreed.  First, the court noted the general rule that “a party cannot escape its obligations under a contract merely by assigning the contract to a third party.”  Then, the court also emphasized that the “duties” in question were created and defined by the contract:

The gist of Wolf Hollow’s claims is not that Enterprise failed to act as a reasonable pipeline should have, which is the liability standard for negligence, but that it violated specific obligations that might or might not be unreasonable apart from the parties’ agreements.  For Wolf Hollow, firm service was crucial; another buyer might elect interruptible service, which contemplates that deliveries will not be constant.  Wolf Hollow’s plant depended on a certain quality of gas, while a gas processor would depend on a supply of raw gas.  Clearly, the duties Wolf Hollow alleges Enterprise violated were imposed by contract, not by law.

The court noted that “Wolf Hollow’s position is that it augmented its rights against Enterprise by assigning away the contract that created them in the first place.”

According to the court, “Wolf Hollow chose to limit its contractual rights against Enterprise, whether it kept those rights or assigned them away.”

The court also noted that Wolf Hollow could pursue breach of contract claims directly against El Paso or, through an assignment from El Paso, against Enterprise.

The Supply Agreement between El Paso and Wolf Hollow included a provision that required that the gas El Paso delivered to Wolf Hollow meet certain specifications, and that if it did not, El Paso must assign any claim it has against Enterprise to Wolf Hollow.  The Supreme Court held that Wolf Hollow could potentially recover its replacement-power damages under the contract and thus remanded the case for further proceedings.

The full opinion can be read here:

http://www.supreme.courts.state.tx.us/historical/2012/jun/110059.pdf