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GORDONSVILLE ENERGY, LP v. VA ELECTRIC & POWER CO.


GORDONSVILLE ENERGY, LP

v.

VA ELECTRIC & POWER CO.


February 26, 1999
Record No. 980813

GORDONSVILLE ENERGY, L.P.

v.

VIRGINIA ELECTRIC AND POWER COMPANY

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Randall G. Johnson, Judge
Present: All the Justices
OPINION BY JUSTICE BARBARA MILANO KEENAN


In this appeal, we determine whether the terms
of a contract between Virginia Electric and Power Company
(Virginia Power) and Gordonsville Energy, L.P. (Gordonsville)
entitle Virginia Power to recover liquidated damages for an
11-day period in which Gordonsville’s electric power plant was
"shut down" due to a mechanical failure.

Under the parties’ "Power Purchase and
Operating Agreement" (the Contract), Gordonsville agreed to
build a $200 million electric power facility capable of producing
electricity for sale exclusively to Virginia Power. The
Gordonsville facility consists of two identical electric
generating plants, designated as Unit 1 and Unit 2. The outage at
issue in this dispute involves Unit 1.

Article 8 of the Contract, entitled
"Interconnection," provides in Sect. 8.2 that
Gordonsville "shall be responsible for the design,
construction, installation, maintenance and ownership of the
Facility." "The Facility" is defined as including
"all energy producing equipment."

The Gordonsville facility began operating in
June 1994. When Virginia Power requires electricity from
Gordonsville, Virginia Power "dispatches" Gordonsville
by notifying it of the number of kilowatts required. Gordonsville
responds by producing the electricity and supplying it to
Virginia Power’s distribution system. Since the Gordonsville
facility went into service in 1994, Virginia Power has
"dispatched" Gordonsville only about 15 to 20 percent
of the time. A typical dispatch of the Gordonsville facility
lasts four to six hours.

Virginia Power makes two types of payments to
Gordonsville under the Contract. The first type is made for
Gordonsville’s "Net Electrical Output," or the net
amount of kilowatt hours of electricity actually delivered by
Gordonsville to Virginia Power. This payment amount varies from
month to month.

The second type of payment, termed
"Capacity Payments," is a fixed monthly payment for
Gordonsville’s "Dependable Capacity," which represents
the amount of electricity available for dispatch at Virginia
Power’s request from the Gordonsville facility. The Capacity
Payments were designed to compensate Gordonsville for the costs
incurred in building its facility, as well as the fixed costs
related to operating and maintaining the facility. At the time
this dispute arose, Virginia Power was obligated under the
Contract to make Capacity Payments of about $1.2 million per
month, or $40,000 per day, for each of the two units in the
Gordonsville facility.

The Contract defines two types of
"outages" that may occur when either unit of
Gordonsville’s facility is unavailable for a potential dispatch
request from Virginia Power. A "Scheduled Outage" is a
planned interruption in the operation of a unit of the facility
that has been coordinated in advance with Virginia Power for the
purpose of conducting inspections or routine maintenance. During
Scheduled Outages, Virginia Power remains obligated to make
Capacity Payments to Gordonsville.

A "Forced Outage" is defined in
Sect. 1.18 of the Contract as "[a]n occurrence where:
(i) any or all of [a unit's] Dependable Capacity is not available
for Dispatch; or (ii) [a unit's] delivery of Net Electrical
Output deviates from Virginia Power’s Dispatch level by greater
than
?
5%." Section 1.20 defines a "Forced Outage Day" as
"[a] continuous twenty-four (24) hour period (a) beginning
with the start of a Forced Outage, regardless of the number of
actual outages that may occur during such twenty-four (24) hour
period(s), and (b) designated by [Gordonsville] as a Forced
Outage Day."

A "Force Majeure Day" is defined in
Sect. 1.19 as "a Forced Outage Day that is both (i)
excused under the provisions of Article 14 and (ii)
. . . designated as a Force Majeure Day by
[Gordonsville]." Section 14.1 of the Contract provides, in
relevant part:

[N]either Party shall be responsible or
liable for or deemed in breach hereof because of any
delay or failure in the performance of their respective
obligations hereunder to the extent that such delay or
failure is due solely to circumstances beyond the
reasonable control of the Party experiencing such delay
or failure, including but not limited to
acts of God;
unusually severe weather conditions; strikes or other
labor difficulties; war; riots; requirements, actions or
failures to act on the part of governmental authorities
preventing performance; inability despite due diligence
to obtain, maintain or renew required licenses; accident;
fire; damage to or breakdown of power generation
materials and equipment that is not caused by normal wear
and tear
; or transportation delays or accidents.
(Emphasis added.)

Under the Contract, Gordonsville is allowed a
specified number of Forced Outage Days during the facility’s
initial six months of operation and for each one-year period
thereafter throughout the 30-year term of the Contract. The
Contract further provides in Sect. 10.18:

The Parties agree that Virginia Power
will be substantially damaged in amounts that will be
difficult or impossible to determine if . . .
the Facility exceeds the allowance for Forced Outage Days
. . . Therefore, . . . the Parties
have agreed on sums which the Parties agree are
reasonable as liquidated damages for such occurrences. It
is further understood and agreed that the payment of the
liquidated damages is in lieu of actual damages for such
occurrences. [Gordonsville] hereby waives any defense as
to the validity of any liquidated damages stated in this
Agreement as they may appear on the grounds that such
liquidated damages are void as penalties or are not
reasonably related to actual damages.

For each Forced Outage Day in excess of the
allowed number, Sect. 10.15 of the Contract directs that
Virginia Power’s Capacity Payments will be reduced by $600,000
per day as liquidated damages. The Contract also states that this
liquidated damages provision does not apply if a Forced Outage
Day qualifies as a Force Majeure Day. However, the Contract
relieves Virginia Power of its obligation to make Capacity
Payments to Gordonsville for such Force Majeure Days.

In September 1995, while Unit 1 was operating
under a dispatch from Virginia Power, an alarm indicated an
electrical short circuit inside the Unit’s 100-ton steam turbine
generator. The generator had been manufactured for Gordonsville
by General Electric Company (General Electric), one of two
manufacturers of that type generator in the United States.
Gordonsville personnel performed tests on the generator for
several days, but were not able to determine the cause of the
short circuit. On September 9, 1995, Kenneth Nieman, the
executive director of the Gordonsville facility, decided to
"shut down" Unit 1 and "take it off line" so
that the generator problem could be diagnosed and repaired. On
September 12, 1995, Gordonsville notified Virginia Power that
Unit 1 was experiencing an event of Force Majeure and was
unavailable for dispatch until further notice. Personnel from
General Electric and Gordonsville disassembled the generator and
shipped its 17-ton rotor to a General Electric facility in
Richmond, where it was determined that a copper
"pole-to-pole" connector inside the rotor had failed.
Unit 1 was returned to service on September 20, 1995, 11 days
after it had been "shut down."

Virginia Power concluded that the 11 outage
days in September 1995, did not qualify as Force Majeure Days and
informed Gordonsville that, for this reason, those days
constituted unexcused Forced Outage Days under the Contract.
Virginia Power also informed Gordonsville that it previously had
exhausted its allowance of Forced Outage Days. Virginia Power
asserted a claim against Gordonsville for a total of $6.6 million
in liquidated damages under the Contract for the 11-day period,
and began withholding $600,000 per month from its payments to
Gordonsville.

Gordonsville filed a motion for judgment
against Virginia Power in the trial court, alleging breach of
contract based on Virginia Power’s "wrongful assessment of
liquidated damages" as a result of the September 1995
outage. In Count I, Gordonsville alleged that all 11 days of the
September 1995 outage were Force Majeure Days and that,
therefore, Virginia Power was not entitled to liquidated damages.
Gordonsville alleged in the alternative in Count II that even if
the September 1995 outage did not result from a Force Majeure
event, Gordonsville was entitled to count three of the outage
days as allowed Forced Outage Days. Thus, Gordonsville alleged
that Virginia Power was not entitled to $1.8 million of the $6.6
million claimed in liquidated damages. In Count V, Gordonsville
essentially alleged that the liquidated damages clause of the
Contract was an unenforceable penalty.
[1]

The trial court sustained Virginia Power’s
demurrer and plea of res judicata or collateral estoppel
addressed to Count V, holding that it was bound by its ruling on
the same issue in an earlier action between the parties, which
arose from two unrelated outages at the Gordonsville facility in
June-July 1994, and February 1995. In that earlier action, the
court had ruled that the liquidated damages provision of the
Contract was not an unenforceable penalty.

The trial court ruled in the alternative that
even if this issue was not barred by res judicata or
collateral estoppel, Virginia Power was entitled to summary
judgment on Count V. Based on its assumption that the evidence in
the pending case concerning the liquidated damages clause would
not differ from the evidence presented in the prior action, the
court awarded summary judgment for Virginia Power on Count V for
"reasons of judicial economy," but permitted
Gordonsville to submit a written offer of proof for the court’s
consideration. Following Gordonsville’s submission of the offer
of proof, the trial court entered an order affirming its award of
summary judgment for Virginia Power on Count V.

The trial court then considered the parties’
cross motions for summary judgment on Count II. In the prior
action between the parties, the jury had found that the June-July
1994 and February 1995 outages were caused by Force Majeure
events. Gordonsville argued that because of that finding, those
outage days could not be counted toward the number of Forced
Outage Days allowed under the Contract. Gordonsville argued,
therefore, that it still had three allowed Forced Outage Days
available to be applied to the September 1995 outage. The trial
court ruled that although the earlier 1994 and 1995 outage days
constituted Force Majeure Days, they also constituted Forced
Outage Days under the terms of the Contract, and that these
outage days must be counted in computing Gordonsville’s allowed
number of Forced Outage Days. The trial court awarded summary
judgment for Virginia Power on Count II.

The claims asserted in Count I were tried
before a jury. Thomas Butler, who qualified as an expert in
mechanical engineering, testified that the pole-to-pole connector
in the generator rotor of Unit 1 failed because it had been
improperly brazed, or soldered, during its manufacture and
assembly. Butler further testified that the connector did not
fail due to normal wear and tear, and that there was nothing
Gordonsville "could [have] or should have done" to
prevent failure of the connector.

Robert Hamilton, a retired mechanical engineer
who had worked for General Electric for about 36 years, also
testified as an expert witness. He explained that the General
Electric workers who manufactured and assembled the pole-to-pole
connector used in the Gordonsville generator were required to
follow detailed drawings. In essence, Hamilton testified that one
of the drawings contained a mistake and deviated from the actual
design requirements because the drawing showed a rigid, brazed
piece, rather than a flexible piece, extending into an area of
the connector. Hamilton concluded that the Gordonsville generator
failed due to the inability of the defective pole-to-pole
connector to withstand normal wear and tear. He further testified
that a properly manufactured pole-to-pole connector should not
wear out, but should "last forever." In Hamilton’s
opinion, if the Gordonsville pole-to-pole connector had been
manufactured in accordance with General Electric’s own design
requirements, the generator failure would not have occurred.

In contrast to Hamilton’s testimony, Robert
Fenton, a retired electrical engineer who was formerly a general
manager of generator design and engineering at General Electric,
testified that there was nothing General Electric could have done
differently that would have prevented the failure of the
pole-to-pole connector in Gordonsville’s generator. In Fenton’s
opinion, the failure of the Gordonsville generator was a
"random, unexpected failure."

Over Gordonsville’s objection, the trial court
gave the jury Instruction No. 10, which stated:

Gordonsville Energy is responsible to
Virginia Power under the parties’ contract for the design
and construction of Gordonsville Energy’s electric
generating facility, including the steam turbine
generator, its rotor and the rotor’s component parts that
failed in September, 1995. Although Gordonsville Energy
relied on General Electric Company to design and
construct the rotor, Gordonsville Energy is responsible
to Virginia Power for General Electric’s performance of
those activities just as if Gordonsville Energy had
performed them itself.

The jury returned its verdict in favor of
Virginia Power, finding that "the [September 1995] outage
was not a force majeure event." The trial court
entered final judgment in favor of Virginia Power, and this
appeal followed.

Gordonsville first argues that the trial court
erred in granting Instruction No. 10 because the instruction
improperly directed the jury to impute to Gordonsville any act of
negligence by General Electric. Gordonsville also asserts that,
as a matter of law, the outage in September 1995 was a Force
Majeure event under the terms of the Contract because there was
no evidence of negligence by Gordonsville. Thus, it contends that
the jury was required by the evidence to find that the September
1995 outage was "beyond the control" of Gordonsville
and resulted in Force Majeure Days under the Contract. We
disagree with Gordonsville’s arguments.

In granting Instruction No. 10, the trial court
ruled that the Contract did not excuse Gordonsville’s failure to
perform under the Contract if the failure was caused by the
negligence of a subcontractor retained by Gordonsville to perform
functions for which Gordonsville was responsible. Under familiar
principles of contract interpretation, we reach the same
conclusion and hold that the trial court did not err in granting
Instruction No. 10.

It is the duty of the court, not the jury, to
interpret a contract when its terms are clear and unambiguous. D.C.
McClain, Inc. v. Arlington County
, 249 Va. 131, 135, 452
S.E.2d 659, 662 (1995); Winn v. Aleda Const. Co., 227 Va.
304, 307, 315 S.E.2d 193, 194 (1984). The court must interpret
the contract as a whole to determine the parties’ intent. Westmoreland-LG&E
Partners v. Virginia Elec. and Power Co.
, 254 Va. 1, 11, 486
S.E.2d 289, 294 (1997). Since the interpretation of plain and
unambiguous terms of a contract is a question of law, we are not
bound by the trial court’s determination and are afforded the
same opportunity as the trial court to review the contract
provisions. C.F. Garcia Enterprises, Inc. v. Enterprise Ford
Tractor, Inc.
, 253 Va. 104, 107, 480 S.E.2d 497, 498-99
(1997); Tuomala v. Regent Univ., 252 Va. 368, 374, 477
S.E.2d 501, 505 (1996); Langman v. Alumni Ass’n of the Univ.
of Va.
, 247 Va. 491, 498, 442 S.E.2d 669, 674 (1994).

In Sect. 8.2 of the Contract, the parties
agreed, in plain and unambiguous language, that Gordonsville was
"responsible for the design, construction [and] installation" of the Facility, which is defined in
Sect. 1.16 of the Contract as "all energy producing
equipment." In a later section of the Contract,
Sect. 14.1, the parties agreed that an outage would be
excused if it was "due solely to circumstances beyond
[Gordonsville's] reasonable control . . . including
. . . damage to or breakdown of power generation
materials and equipment that is not caused by normal wear and
tear."

The provisions of Sect. 14.1 do not
override or alter the allocation of responsibilities set out in
Sect. 8.2. By its plain terms, Sect. 14.1 does not
purport to address the duties of parties to the Contract.
Instead, that section addresses the circumstances under which the
failure of performance of contractual duties will be excused as
Force Majeure days. Thus, under the Contract, Gordonsville
remained responsible for the contractual obligations it
subcontracted to General Electric and was excused from
performance only if an outage also was "beyond the
reasonable control" of any subcontractors hired to perform
Gordonsville’s duties set forth in Sect. 8.2.

The evidence did not establish as a matter of
law that the September 1995 outage was beyond Gordonsville’s
reasonable control. The evidence showed that the failure of the
pole-to-pole connector was either a random, unexpected occurrence
or the result of negligence by General Electric. In returning its
verdict in favor of Virginia Power, the jury necessarily rejected
the proposition that the failure was a random, unexpected
occurrence.

Gordonsville next contends that the trial court
erred in holding that the Force Majeure Days from the previous
1994 and 1995 outages should be counted against Gordonsville’s
allowance of Forced Outage Days. Gordonsville argues that summary
judgment on Count II should have been entered in its favor,
because a Force Majeure day is an excused "Forced
Outage Day" for which Gordonsville merely loses its Capacity
Payment under Sect. 10.15 of the Contract.

In response, Virginia Power argues that the
Contract specifically designates Force Majeure Days as Forced
Outage Days. Thus, Virginia Power contends that the trial court
properly concluded that the earlier Force Majeure Days had to be
included in Gordonsville’s allotment of Forced Outage Days. We
disagree and hold that the trial court erred in granting summary
judgment in favor of Virginia Power on Count II.

As the trial court correctly noted,
Sect. 1.19 of the Contract defines a Force Majeure Day as
"a Forced Outage Day that is . . . excused under
the provisions of Article 14." When contract terms are clear
and unambiguous, the words used by the parties must be given
their plain and ordinary meanings. Hutter v. Heilmann, 252
Va. 227, 231, 475 S.E.2d 267, 270 (1996); Marina Shores, Ltd.
v. Cohn-Phillips, Ltd.
, 246 Va. 222, 225-26, 435 S.E.2d 136,
138 (1993). In the context of the Contract provisions, the usual
and customary meaning of the term "excuse" is "to
grant [an] exemption . . . to or from." Webster’s
Third New International Dictionary 794 (1993). The Contract only
limits the scope of the exemption for Force Majeure Days by
eliminating the Capacity Payment of about $40,000 to Gordonsville
for each such day.
[2] Since the Contract does not otherwise limit the
exemption provided for Force Majeure Days, such days are excused,
or exempted, under the Contract from being counted toward the
number of allowed Forced Outage Days.

This conclusion also is supported by the plain
language of Sect. 14.4, which provides that "each Day
of a Forced Outage excused under this Article 14 shall be
considered a Forced Outage Day unless [Gordonsville] appropriately designates such Day as a Force Majeure Day."
This language compels the conclusion that a day that is
appropriately designated as a Force Majeure Day and is excused
under Article 14 is not "considered a Forced Outage
Day" under the terms of the Contract. Thus, the trial court
erred in ruling that the earlier 1994 and 1995 Force Majeure Days
were Forced Outage Days chargeable to Gordonsville in computing
the number of Forced Outage Days allowed under the Contract.
Therefore, we conclude that the trial court erred in awarding
summary judgment for Virginia Power on Count II and in failing to
award summary judgment for Gordonsville on that Count.
[3]

Finally, Gordonsville argues that the trial
court erred in dismissing Count V of the motion for judgment
because Gordonsville’s offer of proof established that the
liquidated damages clause of the Contract constituted an
unenforceable penalty. Virginia Power responds, in part, that
Gordonsville is barred from contesting the reasonableness of the
liquidated damages clause since it waived in the Contract the
right to raise such an objection.
[4]

The Contract provides in Sect. 10.18 that
Gordonsville "waives any defense as to the validity of any
liquidated damages stated in this Agreement as they may appear on
the grounds that such liquidated damages are void as penalties or
are not reasonably related to actual damages." Nevertheless,
Gordonsville argues that it should be relieved from this
contractual obligation because such a waiver violates public
policy. We disagree with Gordonsville’s argument.

This Court has recognized that a liquidated
damages provision may constitute a penalty and, therefore, be
unenforceable when the amount agreed to is "out of all
proportion to the probable loss." Brooks v. Bankson,
248 Va. 197, 208, 445 S.E.2d 473, 479 (1994); Taylor v.
Sanders
, 233 Va. 73, 75, 353 S.E.2d 745, 746-47 (1987). Such
a provision also may constitute an unenforceable penalty if the
agreed amount is "grossly in excess of actual damages."
O’Brian v. Langley School, 256 Va. 547, 551, 507 S.E.2d
363, 365 (1998). However, it is equally well-settled that a term
of the parties’ contract becomes the law of the case unless such
term is repugnant to public policy or to some rule of law. Rash
v. Hilb, Rogal & Hamilton Co. of Richmond
, 251 Va. 281,
285, 467 S.E.2d 791, 794 (1996); D.C. McClain, Inc., 249
Va. at 135, 452 S.E.2d at 662.

We decline to hold that Gordonsville’s
contractual waiver of the right to object to a liquidated damages
clause is "repugnant to public policy." We long have
recognized that a party may enter into an agreement in which he
waives a significant right. See e.g., Blue Cross
of Southwestern Va. v. McDevitt & Street Co.
, 234 Va.
191, 196-97, 360 S.E.2d 825, 828 (1987) (waiver of right to claim
damages); Flintkote Co. v. W.W. Wilkinson, Inc., 220 Va.
564, 570, 260 S.E.2d 229, 232 (1979) (waiver of right to jury
trial on amount of attorney’s fees); VNB Mortgage Corp. v.
Lone Star Indus., Inc.
, 215 Va. 366, 369, 209 S.E.2d 909, 912
(1974) (waiver of right to file mechanic’s lien).

Generally, a party may waive by contract any
right conferred by law or contract. See Roenke v.
Virginia Farm Bureau Mut. Ins. Co.
, 209 Va. 128, 135, 161
S.E.2d 704, 709 (1968); Woodmen of the World Life Ins. Soc. v.
Grant
, 185 Va. 288, 299, 38 S.E.2d 450, 454 (1946). If the
party being charged with relinquishment of a right had knowledge
of the right and intended to waive it, the waiver will be
enforced. Roenke, 209 Va. at 135, 161 S.E.2d at 709; Woodmen,
185 Va. at 299, 38 S.E.2d at 454.

Gordonsville raised no allegation at trial and
presented no evidence that it entered into Sect. 10.18 of
the Contract under duress, or as the result of fraud or mistake,
or under any other circumstances that might serve as a basis for
declaring the waiver unenforceable. Instead, the evidence at
trial established that the entire Contract resulted from
extended, "arms-length" negotiations between two
sophisticated corporate entities, both represented by counsel.
Therefore, we conclude that Gordonsville’s contractual waiver is
enforceable and bars its claims alleged in Count V.
[5]

For these reasons, we will affirm the trial
court’s judgment in favor of Virginia Power on Counts I and V. We
will also reverse the trial court’s judgment on Count II and
enter final judgment in favor of Gordonsville on that Count.

Affirmed in part,

reversed in part,

and final judgment.

 

FOOTNOTES:

[1] Gordonsville alleged two other Counts
in its motion for judgment that are not at issue on appeal.

[2] This limitation of exemption is
contained in Sect. 10.15(b) of the Contract.

[3] Virginia Power argues on appeal that
an additional, independent basis exists for affirming the trial
court’s award of summary judgment in its favor on Count II.
Virginia Power argues that Gordonsville’s motion for judgment
alleged that the last three days of the September 1995
outage should be counted as allowed Forced Outage Days, when
Gordonsville should have alleged that the first three days
of the outage were allowed. Since this claim was not raised
before the trial court, we will not address it for the first time
on appeal. See Rule 5:25.

[4] We find no merit in Gordonsville’s
contention that Virginia Power is procedurally barred from
asserting that Gordonsville waived its objection to the
Contract’s liquidated damages provision, because Virginia Power
did not assign cross-error to an alleged ruling by the trial
court that the waiver was unenforceable. The trial court did not
rule on this issue in this action and did not expressly adopt
such a ruling from the earlier action. Thus, an assignment of
cross-error was not required under Rule 5:18.

[5] Since Gordonsville waived any objection to the
reasonableness of the liquidated damages clause, we do not
address Gordonsville’s assignment of error concerning the trial
court’s application of res judicata or collateral estoppel
to bar relitigation of the validity of the liquidated damages
provision.

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