In August, 2020, TCJL filed an amicus curiae brief in Signature Industrial Services, LLC and Jeffry Ogden v. International Paper Company (No. 20-0396), a contractual damages case that arose from a $775,000 construction contract for the installation of machinery at a International Paper’s mill in Orange County. The contractor submitted numerous change orders without adequate backup, which IP disputed. After the contractor rejected the owner’s offer to settle the dispute, the contractor filed suit in a Jefferson County district court. The jury awarded the contractor $122 million, including $36 million in emotional distress damages. The owner’s appeal was transferred to the Corpus Christi Court of Appeals under the case equalization order. The Corpus Court reduced the damage award, including striking the $42 million award for loss of “company value,” but allowed to stand more than $14 million in consequential damages based on the unrealized book value of the contractor. The court of appeals also reversed a parallel amount awarded to the contractor’s principal owner in his individual capacity. All parties petitioned SCOTX for review. The contractor contended that the Corpus Christi court of appeals cut the damages too much, while the owner argued that the consequential damages award contradicts precedent established by SCOTX and every other Texas court of appeals.
TCJL’s brief argued that the problem with the Court of Appeals’ decision to recognize a wildly speculative measure of damages—an unrealized decrease in a company’s book value (in this case offered by an “expert” with minimal qualifications at best)—would be put to use to leverage settlements at a much higher value than the case should have based on the actual losses involved. If any garden variety contract dispute can be converted into a multi-million-dollar lawsuit by alleging that a breach caused an unrealized decline in the paper value of a claimant’s business, such a change would incentivize lawsuits with artificially inflated damages claims. TCJL’s experience over the past 35 years tells us that creating or expanding the availability of speculative damages inevitably destabilizes the judicial process by making every lawsuit a lottery ticket. Further, court of appeals’ decision effected a major expansion of liability for the Texas businesses community by creating a loophole around this Court’s precedents and permitting plaintiffs to recover speculative measures of damages.
In an opinion by Justice Blacklock handed down this week, SCOTX reversed the court of appeals’ decision to uphold the jury award of $12.4 in consequential damages to the contractor based on a loss of book value subsequent to the breach. In order to recover consequential damages in Texas, Justice Blacklock wrote, “Texas law requires consequential damages be both (1) foreseeable at the time of contracting, and (2) calculable with reasonable certainty” (citations omitted). SCOTX concluded that both the jury’s award of $56.3 million for loss of market value nor and 12.4 million award failed both prongs of the test. First, IP did not and could not have foreseen that the contractor’s proposed sale of his company would fall through as a consequence of the alleged breach of contract. To establish foreseeability, the contractor had to prove that “IP ‘contemplated at the time’ it agreed to the slaker contract that a catastrophic collapse in SIS’s market value far outpacing the 2.4 million IP refused to pay ‘would be the probable result of the breach’” (citations omitted). Justice Blacklock noted that the contractor did not pursue a conventional lost profits claim (based on the profits it lost due to IP’s breach) but instead asserted “a novel damages model premised on a decline in the company’s overall market value as an asset.” He declined to break new ground here, reasoning that “companies often do not understand the buying and selling companies like themselves, much less companies in other lines of work. As a result, specialized bankers and consultants are frequently hired when companies have reason to explore either their own market value or that of other companies.”
SCOTX thus declined to impose a new duty on parties to a contract to investigate “how their actions will affect the counterparty’s market valuation” and held that “[A]s a general rule, neither the counterparty’s market value nor the impact of breach on that value will be reasonably foreseeable at the time of contracting.” This is true even if the counterparty is otherwise familiar with the plaintiff’s business or has knowledge of the plaintiff’s financial position. Again, the contractor could have sought lost profits but chose not to do so (probably, we think, because they didn’t think they could establish them). Moreover, imposing such a duty “would encourage parties to contract only with large, established companies. Few rational parties would contract with a fledgling company for whom a $2.4 million non-payment might one day be worth $56 million in ‘company value’ damages.” (We made this point in our brief.)
SCOTX likewise rejected the loss of “book value” method of computing consequential damages because they, like the loss of market value, could not “be proved with reasonable certainty.” Noting that book value is an accounting concept and does not at all reflect market value, “a decline in book value . . . does not prove any actual losses—with reasonable certainty or otherwise.” Here the contractor attempted to use book value as a proxy for market value, a tactic that Texas courts have repeatedly rejected. As Justice Blacklock put it, “[Book value] tells the jury nothing about the underlying losses actually suffered by the company that contributed to the drop in book value, and it tells the jury nothing about the overall decline in the market value of the company as an asset.” Accordingly, the Court reversed the $12.4 million award as well.
The only fragment of the original $100 million verdict that survived was about $1.8 million in direct damages based on one of two unpaid invoices. The Court threw out one of the invoices—for about $622,000—because it was not authorized by the contract. With respect to the remaining invoice, the Court found legally sufficient evidence to support the jury’s award. Additionally, the Court held that IP was not entitled to indemnification from the contractor because §151.102, Insurance Code, bars indemnity in breach of contract cases. Finally, the Court tossed the individual claims of the contractor’s president, who alleged identical breach of contract and fraud theories and to whom the jury awarded the same $67 million it gave the contractor. SCOTX held that the president was not a party to the contract nor had privity with a party. The contract forbad assignment, so the Court rejected that argument. In response to the president’s claim to be an “agent” with an “interest” in the contract, giving him standing to sue for breach, the Court found that the president’s “hope that SIS would be paid and would in turn pay off tax debt as he had guaranteed is not a legally cognizable ‘interest in the subject-matter of the contract’ sufficient to authorize [him] to sue in his personal capacity for injuries to the company. . . . To hold that he can sue for breach of SIS’s contracts in his personal capacity would collapse the distinction between corporate entities and their individual owners or officers.” As Justice Blacklock notes, such a result would also result in “duplicative litigation and double recovery.”
We are pleased that SCOTX has taken such a strong and clear position on the contractor’s attempt to stretch the concept of consequential damages to encompass speculative and unverifiable measures such as “loss of book value” and “loss of market value” in breach of contract cases. This decision reaffirms the Court’s consistent view that contracts mean what they say and contract damages must be foreseeable and proven with reasonable certainty.