Wahlcometroflex, Inc. v. Westar Energy, Inc.

FILED
United States Court of Appeals
Tenth Circuit
December 2, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
WAHLCOMETROFLEX, INC.,
Plaintiff-Counter-Defendant -
Appellant, No. 13-3268
v.
WESTAR ENERGY, INC.,
Defendant-Counter-Claimant -
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. No. 5:11-CV-04017-EFM-JPO)
William E. Corum (and David M. Buffo of Husch, Blackwell, L.L.P., with him on
the briefs), Kansas City, Missouri, for Plaintiff-Counter-Defendant - Appellant.
Michael E. Callahan (and Angela G. Nichols of Stinson, Leonard, Street, L.L.P.,
with him on the brief), Kansas City, Missouri, for Defendant-Counter-Claimant -
Appellee.
Before KELLY, LUCERO, and HARTZ, Circuit Judges.
KELLY, Circuit Judge.
This case involves a dispute over the meaning and application of a
liquidated damages provision under Kansas law. The district court held that
Defendant Westar Energy, Inc. (Westar) did not need to establish that Plaintiff
Wahlcometroflex Inc.’s (Wahlco) late delivery of equipment actually delayed
Westar’s production schedule in order to recover contractual liquidated damages.
Wahlcometroflex, Inc. v. Westar Energy, Inc., No. 11–4017–EFM, 2013 WL
5774846 (D. Kan. Oct. 25, 2013). We have jurisdiction over Wahlco’s appeal
under 28 U.S.C. § 1291, and we affirm.
Background
Westar is an electric company based in Topeka, Kansas that owns several
sources of electricity, including the Jeffrey Energy Center (JEC). The JEC is a
coal-fired power plant composed of three units: Unit 1, Unit 2, and Unit 3. In
2005, Westar began a project to upgrade the JEC’s existing flue gas
desulfurization (FGD) system.
Wahlco is a Delaware corporation that designs and manufactures a number
of products including FGD dampers. On December 22, 2006, Westar and Wahlco
entered into a contract under which Wahlco agreed to manufacture and deliver
dampers (Equipment) to Westar for Units 1, 2, and 3. The total contract price
was $6,229,185.50. The contract provided that the Equipment was to be delivered
by the “Latest Allowable Date[s]”: August 29, 2007 for Unit 1; July 29, 2008 for
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Unit 2; and March 16, 2008 for Unit 3.
Article 2 of the contract addressed liquidated damages in the event Wahlco
did not make timely delivery. In an introductory paragraph, the agreement
provided:
[Westar] and [Wahlco] recognize that schedule of delivery of
documents and Equipment and Material is critical to this Contract
and that [Westar] will suffer financial loss if such Work is not
completed within the period of time specified. [Wahlco] shall pay
[Westar] in accordance with the following paragraphs for each day of
schedule delay.
App. 272. The following paragraphs explain specifically: “In the event [Wahlco]
has not delivered each piece of Equipment and Material . . . by the latest
allowable delivery date . . . [Wahlco] shall pay [Westar] one and one half percent
(1.5%) of the total Contract Price per week for every week beyond the latest
allowable delivery date.” Id. The total liquidated damages for late delivery of
Equipment were “not [to] exceed ten percent of the total Contract Price.” Id.
Further, the agreement stated that “time is of the essence” and that Westar
“will sustain damage if [Wahlco] fails to . . . complete Equipment and Material
deliveries within the dates specified.” Id. at 271. It further provided that the
liquidated damages were “not penalties” and that “damages are difficult or
impossible to determine, otherwise obtaining an adequate remedy is inconvenient
and the liquidated damages constitute a reasonable approximation of the harm or
loss to [Westar].” Id.
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Wahlco completed delivery of the equipment for Unit 1 on November 15,
2007, two-and-a-half months after the “latest allowable date” for delivery. It
delivered the equipment for Unit 2 on October 3, 2008, two months late. And, it
delivered the equipment for Unit 3 on August 1, 2008, over four months late. Id.
at 288. Because of these late deliveries, Westar withheld $367,511.28 of the
contract price pursuant to the liquidated damages provision.
On February 11, 2011, Wahlco filed suit in Kansas federal district court to
recover this amount. Westar answered and counterclaimed seeking a declaratory
judgment that it was entitled to retain or recover liquidated damages totaling
$622,918.55 (Count I) and bringing a breach of contract claim for the same
amount (Count II).
The district court ordered discovery to be conducted in two phases. Phase
1 permitted limited discovery on the legal issue of Count I of Westar’s
counterclaim and directed that, following discovery, both parties were to submit
cross-motions for summary judgment as to that claim. No discovery was
conducted on the issue whether Wahlco’s late delivery actually delayed Westar’s
project.
The parties filed cross-motions for summary judgment on Count I of
Westar’s counterclaim addressing whether Westar was required to prove actual
delay to its project schedule to recover liquidated damages. The district court
granted Westar’s motion for partial summary judgment, holding that Westar did
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not need to establish delay to recover liquidated damages. Wahlcometroflex Inc.
v. Westar Energy, Inc., No. 11–4017–EFM/JPO, 2012 WL 2366693 (D. Kan. June
21, 2012). The court explained that the contract unambiguously required Wahlco
to pay liquidated damages in the event of late delivery regardless of delay to the
project. Id. at *3. It further explained that, under Carrothers Construction Co. v.
City of South Hutchinson, 207 P.3d 231 (Kan. 2009), the liquidated damages
clause was valid—not an unenforceable penalty—because it was reasonable in
light of the anticipated damages at the time the contract was signed. Id. at *4.
Under Kansas law, the court explained, courts do not inquire as to actual damages
with the “benefit of hindsight.” Id. Thereafter, the district court granted
Westar’s motion for summary judgment, rejected Wahlco’s invitation to
reconsider its previous ruling and entered final judgment in favor of Westar.
Wahlco then appealed.
Discussion
We review the district court’s grant of summary judgment de novo.
Mumby v. Pure Energy Servs. (USA), Inc., 636 F.3d 1266, 1269 (10th Cir. 2011).
Summary judgment is appropriate where a movant establishes “there is no
genuine dispute as to any material fact” and that “the movant is entitled to
judgment as a matter of law.” Fed. R. Civ. P. 56(a). We view the evidence, and
make all reasonable inferences therefrom, in the light most favorable to the non-
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moving party. Lifewise Master Funding v. Telebank, 374 F.3d 917, 927 (10th
Cir. 2004).
Wahlco argues that summary judgment was inappropriate for three reasons.
First, it contends that its contract with Westar required a showing of project delay
to trigger the liquidated damages provision. Aplt. Br. 9. Second, it contends that
under Kansas law, Westar must establish that Wahlco’s breach of contract caused
the event for which liquidated damages were designed to compensate—i.e., delay
to Westar’s project schedule. Id. at 12–17. Finally, Wahlco argues the liquidated
damages provision should be construed to require a showing of delay; otherwise,
it amounts to an unenforceable penalty. Id. at 17–23. We address each argument
in turn.
A. Does the Contract Require Project Delay for Liquidated Damages?
Wahlco argues its contract with Westar explicitly states that liquidated
damages are to be paid for “schedule delay” and argues that the district court, by
reading this language out of the contract, “ignored the parties’ clear and sole
intent in providing for liquidated damages.” Aplt. Br. 9. Wahlco argues the
intent of the parties is evident based on the testimony from Darreld Ellis,
Westar’s corporate representative. Ellis was asked if the liquidated damages
provisions were “calculated to anticipate some type of damage based on the delay
that would be caused to the project by their equipment not being delivered on
time.” He responded: “At the time of the contracting that was the assumption by
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both parties.” App. 279.
Under Kansas law, 1 the construction of a written contract is a question of
law for the court. Carrothers, 207 P.3d at 239. The primary duty of the court is
to ascertain the intent of the parties; if this intent is clear from the contractual
language, that language is binding on the court. Id. “The fundamental rule of
construction is that courts will not rewrite a contract by construction if it is clear
and unambiguous.” In re Marriage of Gurganus, 124 P.3d 92, 95 (Kan. Ct. App.
2005).
Despite Wahlco’s best attempts to create ambiguity in its agreement with
Westar, there is none. The contract clearly states: “In the event [Wahlco] has not
delivered each piece of Equipment and Material . . . by the latest allowable
delivery date . . . [Wahlco] shall pay [Westar] one and one half percent (1.5%) of
the total Contract Price per week for every week beyond the latest allowable
delivery date.” App. 272. Nothing about this provision suggests that actual delay
to Westar’s project is required to trigger liquidated damages. In fact, Wahlco
agreed that Westar “will sustain damage if [Wahlco] fails to . . . complete
Equipment and Material deliveries within the dates specified.” Id. at 271.
Wahlco relies on the general language stating “[Wahlco] shall pay [Westar]
in accordance with the following paragraphs for each day of schedule delay,” id.
1
The parties agree Kansas law applies to the case and that the Kansas
U.C.C. applies to the transaction. Aplt Br. 17; Aplee. Br. 16.
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at 272, suggesting that this language creates an ambiguity as to whether delay to
Westar’s project must be shown. It does not. The word “schedule” is a reference
to the “schedule of [Wahlco’s] delivery of documents and Equipment and
Material” referenced earlier in the same paragraph—not the “schedule” of
Westar’s project. Id. Further, even if it was a reference to Westar’s project
schedule, the provision is merely a general introductory clause that directs the
parties to determine any liquidated damages “in accordance with” the subsequent,
more specific paragraphs. Id. The specific paragraphs that follow address the
liquidated damages for late delivery of documents, liquidated damages for late
delivery of equipment, and the cap on total liquidated damages. Id. Under
Wahlco’s reading, Westar would also have to show that the late delivery of
documents caused delay to Westar’s project schedule in order to collect liquidated
damages. This interpretation is implausible.
Because the contractual language is clear, the statements of Westar
representative Darreld Ellis are irrelevant. See Carrothers, 207 P.3d at 239
(“Interpreting a written contract that is free from ambiguity is a judicial function
and does not require oral testimony to determine the contract’s meaning.”). Even
if Ellis’s statements were relevant, they do not show ambiguity in the contract.
Ellis’s beliefs as to what costs the liquidated damages were designed to
compensate are wholly compatible with the contract’s language indicating that
liquidated damages are triggered by late delivery, especially in light of the
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parties’ agreement that “damages are difficult or impossible to determine.” App.
271.
Thus, we reject Wahlco’s argument that the contract requires Westar to
establish actual delay in order to recover liquidated damages.
B. Does Kansas Law Require a Showing of Causation?
Wahlco next argues that under Kansas law, a plaintiff must establish
causation as an element of any breach of contract claim, including claims to
recover liquidated damages. Aplt. Br. 13 (citing Navair, Inc. v. IFR Am., Inc.,
519 F.3d 1131, 1137 (10th Cir. 2008)). Wahlco concedes that in Kansas, “a party
may recover liquidated damages without proving actual damages.” Aplt. Reply
Br. 7. However, it contends there still must be a “causal connection” between the
breach of contract and the “anticipated impact event for which the liquidated
damages were designed to compensate”—i.e., delay to Westar’s project. Id.
Wahlco argues the district court found that breach alone was sufficient to trigger
the liquidated damages clause and thus improperly eliminated the element of
causation required by Kansas law. We disagree.
Wahlco’s argument is nuanced, but once again amounts to nothing more
than a request to rewrite its contract with Westar. Wahlco agreed in the contract
that Westar “will sustain damage if [Wahlco] fails to . . . complete Equipment and
Material deliveries within the dates specified,” App. 271, and that Westar “will
suffer financial loss if such Work is not completed” within the period. Id. at 272.
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As Kansas courts have recognized, language in a liquidated damage provision is
“ordinarily accepted as controlling.” Carrothers, 207 P.3d at 241 (quoting Beck
v. Megli, 114 P.2d 305, 308 (Kan. 1941)). The contract language amounts to a
concession that Wahlco’s breach (failure to deliver equipment on time) would
cause damages (delay to the Project) and relieves Westar of the burden of proving
this in court. We decline the invitation to “relieve” Wahlco “from the
consequences imposed by the plain and unambiguous language in its contract.”
Id. at 244.
Moreover, adopting Wahlco’s argument would significantly undercut the
effectiveness of liquidated damages provisions. Liquidated damages provisions
allow parties “to protect themselves against the difficulty, uncertainty, and
expense” involved with determining damages in court. IPC Retail Props., LLC v.
Oriental Gardens, Inc., 86 P.3d 543, 550 (Kan. Ct. App. 2004), overruled on other
grounds by Carrothers, 207 P.3d 231. Requiring courts to look beyond the
language of a contract to discern whether the “anticipated impact event for which
the liquidated damages were designed to compensate” had transpired would defeat
the purpose of using such provisions.
Thus, we find that Westar did not need to establish that Wahlco’s breach
actually caused the event for which liquidated damages were provided.
C. Was the Liquidated Damages Provision a Penalty?
Finally, Wahlco argues Westar should be required to prove schedule delay
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to collect liquidated damages because otherwise, the liquidated damages clause
amounts to an unenforceable penalty. Aplt. Br. 17–23. Because we conclude that
the liquidated damages provision is not an unenforceable penalty, we reject this
argument.
The burden of proving that a liquidated damages clause is in fact a penalty
falls on the party challenging the provision. Carrothers, 207 P.3d at 241. This
“promote[s] a public policy favoring settlement and avoidance of litigation, and
allow[s] parties to make, and live by, their own contracts.” Id. Liquidated
damages clauses in contracts involving the sale of goods are governed by the
Kansas U.C.C., see Kvassay v. Murray, 808 P.2d 896, 900 (Kan. Ct. App. 1991),
which provides:
Damages for breach by either party may be liquidated in the
agreement but only at an amount which is reasonable in the light of
the anticipated or actual harm caused by the breach, the difficulties
of proof of loss, and the inconvenience or nonfeasibility of otherwise
obtaining an adequate remedy. A term fixing unreasonably large
liquidated damages is void as a penalty.
Kan. Stat. Ann. § 84-2-718(1) (emphasis added). Thus, three factors are relevant
to whether a liquidated damages provision is an “unenforceable penalty”: (1)
whether the amount is reasonable in light of anticipated or actual harm; (2) the
difficulty of proving actual damages; and (3) the difficulty of obtaining an
otherwise adequate remedy. Kvassay, 808 P.2d at 900.
Here, Wahlco expressly agreed that: (1) the liquidated damages provided
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for were “not penalties” but “a reasonable approximation of the harm or loss”
Westar would suffer in the event of late delivery; (2) actual damages would be
“difficult or impossible to determine”; and (3) “otherwise obtaining an adequate
remedy is inconvenient” to Westar. App. at 271. Such language is “ordinarily
accepted as controlling unless the facts and circumstances impel a contrary
holding.” Carrothers, 207 P.3d at 241; see also Hutton Contracting Co. v. City of
Coffeyville, 487 F.3d 772, 781 (10th Cir. 2007). No facts or circumstances do.
Testimony was presented to the district court that “[a]t the time of entering into
the Contract, Westar anticipated that late delivery of the equipment by Wahlco
would result in damages, including from potentially extended outages, which
could result in damages of multiple hundreds of thousands of dollars per day.”
App. at 288.
Wahlco presented no evidence that the liquidated damages were
unreasonable in light of the harm anticipated at the time the contract was made.
Instead, Wahlco simply contends that the liquidated damages were unreasonable
in light of actual damages, or as it alleges, the lack thereof. Aplt. Br. 32–33. But
the text of § 84-2-718(1) only requires that the liquidated damages be reasonable
in light of “anticipated or actual damages.” While some courts in other
jurisdictions have interpreted this language to require liquidated damages to be
reasonable in light of both anticipated and actual damages, see 2 Roy Ryden
Anderson, Damages Under the Uniform Commercial Code § 13:9, at n.10 (2014),
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Kansas does not. See Kvassay, 808 P.2d at 901 (analyzing whether liquidated
damages were reasonable in light of actual damages after concluding they were
likely unreasonable in light of anticipated damages); see also Anderson, supra, at
n.13. Because the liquidated damages provision does not amount to an
unenforceable penalty, we reject Wahlco’s invitation to construe the provision to
require a showing of project delay.
AFFIRMED.
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13-3268 – Wahlcometroflex, Inc. v. Westar Energy, Inc.
HARTZ, Circuit Judge, concurring:
I join Judge Kelly’s opinion. I cannot reconcile Wahlco’s causation argument
with the decision of the Kansas Supreme Court in Carrothers Construction Co. v. City of
South Hutchinson, 207 P.3d 231 (Kan. 2009), which held that a liquidated-damages
provision in a contract is enforceable in accordance with its terms so long as those terms
were reasonable at the time of execution of the contract, without the benefit of hindsight,
see id. at 240‒43.