Here in the south, we know all bourbon is whisky, but not all whisky is bourbon. In El Paso Marketing, LP and Enterprise Pipeline LLC v. Wolf Hollow I, L.P., the Texas Supreme Court held that all natural gas is power, but not all power is natural gas.

The Dispute

This case was about a gas transportation and supply contract. Wolf Hollow (owner of a gas-fired power plant and buyer of gas) sued Enterprise (owner of the pipeline supplying gas to the plant) and El Paso (who managed the plant’s fuel supply). The problem was service interruptions and delivery of substandard gas. Wolf Hollow sought reimbursement for the cost of replacement power it bought to supply its customers while the plant was shut down. Wolf Hollow claimed the costs were Uniform Commercial Code “cover” damages. El Paso claimed the replacement power costs were consequential damages, waived by Wolf Hollow under the supply agreement.

The Ruling

The Texas Supreme Court sided with El Paso on the “cover” issue. The replacement power was not “cover” under the U.C.C.

The Rule

The UCC says that when a supplier fails to meet its delivery obligations, the buyer can “cover” by “making in good faith . . . any reasonable purchase of . . . goods in substitution for those due from the seller.” Under the U.C.C., consequential damages do not include cover damages. Thus, when a supplier breaches its delivery obligations, a buyer can “cover” and sue for damages even when the contract waives consequential damages.

The Rationale

Wolf Hollow claimed that by purchasing replacement power it discharged its delivery obligations to its customers just as if it had purchased replacement gas. El Paso argued the replacement was “substantially different” from the gas due under the agreement, and thus not “cover.” The court agreed with El Paso. The power Wolf Hollow bought was not a replacement for gas due under the contract; it was a replacement for the electricity Wolf Hollow was to produce from the gas. The gas was power, but the power was not gas.

Thankfully for Wolf Hollow, the agreement allowed Wolf Hollow to sue for the cost of replacement power if certain conditions were met even though the power was not U.C.C. “cover”.  The Court remanded the case to determine if those conditions had been met.

The Takeaway – You Need an Alternative Damage Clause

What does the case mean? No, not that you need a stiff drink. It shows the importance of  having a detailed alternative damage clause in your gas transportation and supply contract. When a supplier can’t meet its delivery obligations, it’s usually because of supply disruptions. That means replacement gas will be hard to find. If your contract contains a consequential damage waiver – and most do – you can’t buy replacement power or gas that is substantially different from the gas due under your contract and collect cover damages unless your contract contains an alternative damages clause. Without one, you may need a shot of bourbon yourself. I recommend Garrison Brothers from the Texas Hill Country.