Case: 19-50850 Document: 00515941160 Page: 1 Date Filed: 07/16/2021
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
No. 19-50850 July 16, 2021
Lyle W. Cayce
Clerk
PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Windfarm
II, L.L.C.,
Plaintiff - Appellant
v.
LOWER COLORADO RIVER AUTHORITY,
Defendant - Appellee
************************************************************************
LOWER COLORADO RIVER AUTHORITY,
Plaintiff - Appellee
v.
PAPALOTE CREEK II, L.L.C., formerly known as Papalote Creek Windfarm
II, L.L.C.,
Defendant - Appellant
Appeal from the United States District Court
for the Western District of Texas
USDC No. 1:16-CV-1097
USDC No. 1:19-CV-284
Before DENNIS, ELROD, and COSTA, Circuit Judges.
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PER CURIAM:*
This appeal concerns the proper interpretation of the long-term Power
Purchase Agreement (PPA) between the parties and its provisions limiting the
parties’ liability and damages in the event of breach of the agreement. This
Court has twice before reversed district court orders compelling arbitration of
the parties’ underlying disputes. First, this court held that the district court
lacked jurisdiction to order arbitration of the question because at that time
there was no dispute ripe for adjudication. See Lower Colo. River Auth. v.
Papalote Creek II, L.L.C. (Papalote I), 858 F.3d 916 (5th Cir. 2017). Next, this
court held that the parties’ underlying dispute did not fall within the scope of
the PPA’s narrow arbitration clause. Papalote Creek II, L.L.C. v. Lower Colo.
River Auth. (Papalote II), 918 F.3d 450 (5th Cir. 2019). In this appeal, we are
called upon to decide whether, in a third action by the Lower Colorado River
Authority (LCRA) seeking a declaratory judgment, the district court erred in
interpreting the PPA and its key provisions to limit to $60 million LCRA’s
liability for damages for failure to perform its material obligations under the
agreement. We see no reversible error in the district court’s contractual
interpretation and summary judgment rulings. Therefore, we AFFIRM the
district court’s judgment.
I. FACTUAL AND PROCEDURAL BACKGROUND
The previous panels of this court, in Papalote I and Papalote II, described
the factual and procedural background of these cases, in pertinent parts, as
follows:
* Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH
CIR. R. 47.5.4.
2
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“Plaintiff–Appellee [LCRA] is a conservation and reclamation district
based in Austin, Texas, and a political subdivision of the State of Texas. LCRA
sells wholesale electric power to municipal-owned utilities and electric
cooperatives in Texas. In December 2009, LCRA entered into [the PPA] with
Defendant–Appellant Papalote Creek Wind Farm II, L.L.C. (Papalote), a
Delaware limited liability company that builds and operates wind farms.
Papalote planned to build an 87-turbine wind farm in Texas, and under the
PPA, LCRA agreed to purchase all of the energy generated by the Project at a
fixed price for an 18-year term.
....
Papalote completed construction of the [wind farm] in 2010, and in the
ensuing years, LCRA complied with its obligations under the PPA by
purchasing all of the energy generated by the Project. In April 2015, however,
LCRA initiated discussions with Papalote regarding the PPA. Although the
parties dispute the precise nature of these discussions, neither party appears
to have threatened to breach the PPA. Ultimately, in June 2015, LCRA sent
Papalote a letter stating that, pursuant to § 13.2, LCRA was initiating the
arbitration process to resolve the dispute between LCRA and Papalote
regarding LCRA’s limitation of liability under the PPA and its impact on
LCRA’s performance obligations. LCRA also noted that it intend[ed] to
continue to fully perform its obligations under the PPA during the arbitration
process. After Papalote requested more information about the purported
dispute, LCRA sent another letter explaining that the dispute was whether
LCRA’s liability is limited to $60,000,000 under the PPA.
....
On October 10, 2016, LCRA notified Papalote that it would cease taking
energy under the PPA beginning on October 12, 2016, and that its resulting
liquidated damages would be capped at $60 million per § 9.3.” Papalote I, 858
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F.3d at 918–21 (internal quotation marks and alterations omitted). After
extensive litigation over whether this matter should be arbitrated, we ruled
that the PPA’s arbitration provision did not cover this dispute. See Papalote
II, 918 F.3d at 456–57.
In March 2019, LCRA filed suit in the federal district court seeking
declaratory judgment that its aggregate liability under the PPA is capped at
$60 million. The district court consolidated that suit with the case the Papalote
II panel remanded for further proceedings, heard oral arguments, and
proceeded to consider the merits of the parties’ claims and cross-motions for
summary judgment. On August 26, 2019, the district court denied Papalote’s
motion for summary judgment and granted LCRA’s cross-motion for summary
judgment. The district court concluded that the last sentence of Section 9.3 of
the PPA was unambiguous and subject to only one reasonable interpretation,
viz., that the PPA limits to $60 million the aggregate damages that LCRA must
pay to Papalote for LCRA’s failure to perform its material obligations under
the PPA; that section 9.4 of the PPA did not affect the application of section
9.3; and that the liquidated damages paid thus far by LCRA counted toward
the $60 million cap established by section 9.3.
After carefully considering the 48-page PPA, the oral and written
arguments of the parties, the record in this case, and the written reasons of
the district court, we are so thoroughly persuaded that the district court’s
interpretation of the PPA and its application to this case are correct, that we
set forth and adopt as our own the two most pertinent sections of the district
court’s written reasons:
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II. CONTRACT PROVISIONS 1
The Agreement contains several provisions concerning the damages and
remedies in the event of a breach by either party. For starters, the Agreement
provides for liquidated damages. Section 4.3 establishes that Papalote is
entitled to liquidated damages in the event LCRA fails to take and pay for all
energy produced by the wind farm. A corresponding provision, § 4.2,
establishes that LCRA is likewise entitled to liquidated damages in the event
Papalote breaches its obligation to deliver energy to LCRA.
In addition to liquidated damages, a non-breaching party gains access to
additional remedies under § 6.2 and § 6.3 if the breaching party defaults by
failing to remedy its breach in a timely fashion. In that circumstance, the non-
defaulting party gains the right to terminate the Agreement and “accelerate
all amounts then owing between the Parties.” The non-defaulting party may
also demand the defaulting party pay a Termination Payment, which is
calculated according to a formula set out in § 6.3.
Finally, and of particular importance here, § 9.3 imposes some limits on
aggregate liability. Because the parties’ dispute hinges on the interpretation
of § 9.3, the Court excerpts the provision in full:
9.3 Limitation on Damages for Certain Types of Failures.
Notwithstanding anything to the contrary in this Agreement,
Seller’s aggregate liability for (i) failure of Seller to construct the
Project and/or (ii) failure of one hundred percent (100%) of the
Project’s Turbines to achieve the Commercial Operation Date on
the Scheduled COD and/or (iii) failure of one hundred percent
(100%) of the Project’s Turbines to achieve the Commercial
Operation Date on June 1, 2011 and/or (iv) a Termination
Payment, shall be limited in the aggregate to sixty million dollars
($60,000,000). Buyer’s damages for failure to perform its material
obligations under this Agreement shall likewise be limited in the
aggregate to sixty million dollars ($60,000,000).
1 This section is quoted verbatim from the district court’s opinion.
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(emphasis added).
III. CONTRACT INTERPRETATION 2
When construing contracts, Texas courts look first to the language of the
parties’ agreement. Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 590
S.W.3d 471, 478–80 (Tex. 2019). If the text of a contractual provision can be
given a “certain or definite legal meaning or interpretation,” then that
provision is unambiguous and can be construed by the court as a matter of law
without the aid of extraneous evidence. Id. at 479. To determine whether a
contractual provision is ambiguous, the court must look at the language in
dispute and interpret the words used according to their “plain, ordinary, and
generally accepted meaning.” Pathfinder Oil & Gas, Inc. v. Great W. Drilling,
Ltd., 574 S.W.3d 882, 889 (Tex. 2019) (citation and quotation marks omitted).
However, when interpreting and assigning meaning to the terms used by the
parties, the court must also consider the context provided by the provision at
issue and the contract as a whole. See id. (“Contract terms cannot be viewed
in isolation[ ] . . . because doing so distorts meaning.”).
As noted above, the parties’ disagreement hinges on the meaning and
application of the last sentence of § 9.3, which states that “[LCRA’s] damages
for failure to perform its material obligations under this Agreement shall
likewise be limited in the aggregate to sixty million dollars ($60,000,000).”
Within the scope of this broader interpretive disagreement, the parties
specifically dispute: (1) whether the last sentence of § 9.3 purports to cap the
damages LCRA might owe to Papalote for LCRA’s failure to fulfill its material
obligations under the Agreement; (2) whether such a cap would apply to limit
damages owed by LCRA in aggregate or, conversely, whether the cap would
2This section is quoted verbatim from the district court’s opinion. Only the citations
and footnotes have been updated or omitted.
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only limit LCRA’s liability for a Termination Payment; (3) whether and to what
extent a separate provision, § 9.4, conflicts with or overrides any cap imposed
by § 9.3; and (4) whether liquidated damage payments voluntarily remitted by
LCRA should count towards any cap imposed by § 9.3.
The Court approaches these arguments sequentially and first assesses
whether § 9.3 functions to impose a cap upon damages owed by LCRA to
Papalote.
A. Does § 9.3 Purport to Limit the Damages that LCRA Owes to
Papalote?
LCRA contends the last sentence of § 9.3 limits the damages that LCRA
owes to Papalote in the event LCRA fails to perform its material obligations
under the Agreement. Papalote reads the disputed language differently.
According to Papalote, the phrase “LCRA’s damages” refers to damages that
LCRA would be entitled to receive if LCRA failed to perform its material
obligations. Thus, under Papalote’s preferred interpretation, the last sentence
of § 9.3 caps the damages that LCRA can receive for its own breach of contract
and, correspondingly, does not cap the damages that LCRA would owe to
Papalote for breach of contract. Papalote tacitly acknowledges its
interpretation of the disputed language makes no sense—why would LCRA be
entitled to receive damages for its own contractual breach?—but nevertheless
contends the Court must adopt its interpretation because, in Papalote’s view,
its preferred construction represents the only conceivable interpretation of the
phrase “LCRA’s damages.”
Black’s Law Dictionary defines “damages” as “[m]oney claimed by, or
ordered to be paid to, a person as compensation for loss or injury.” Damages,
BLACK’S LAW DICTIONARY (11th ed. 2019). This definition does not clear up the
interpretative dispute at issue here, which is how to interpret the phrase
“LCRA’s damages.” On the one hand, and when viewed in isolation, “LCRA’s
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damages” might be read to refer to money claimed by LCRA “as compensation
for loss or injury.” On the other hand, “LCRA’s damages” might also be read
to refer to money “claimed by, or ordered to be paid to” Papalote by LCRA.
Papalote insists the phrase “[LCRA’s] damages” can only refer to
damages that LCRA is entitled to receive, and admittedly, Papalote’s preferred
reading is perhaps the most common way to read the phrase “[LCRA’s]
damages.” But it is not the only possible reading. Indeed, LCRA has cited
many legal opinions which use the phrase “so-and-so’s damages” to refer to the
damages owed by that person to someone else. See, e.g., Ruppert v. Alliant
Energy Cash Balance Pension Plan, 726 F.3d 936, 940 (7th Cir. 2013)
(recounting defendant’s efforts “to moot the lawsuit and by doing so reduce the
defendant’s damages”); Medlock v. Ortho Biotech, Inc., 164 F.3d 545, 552 (10th
Cir. 1999) (considering whether jury should have been instructed “that
defendant’s damages could be limited based on events that took place after
[plaintiff’s] termination”); Fisher v. First Stamford Bank & Trust Co., 751 F.2d
519, 524 (2d Cir. 1984) (noting jury normally determines whether plaintiff
“could have mitigated defendant’s damages”). If the Court were forced to read
the phrase “[LCRA’s] damages” in isolation, that phrase would be ambiguous
because—in isolation—the phrase is susceptible of two divergent yet
reasonable readings.
However, when interpreting and assigning meaning to the words used
by the parties, the court must also consider the context provided by the rest of
the contractual provision as well as the contract as a whole. Pathfinder, 574
S.W.3d at 889. Here, the context provided by the rest of the sentence
demonstrates the phrase “[LCRA’s] damages” is susceptible of only one
reasonable interpretation. Under LCRA’s preferred reading, the phrase refers
to damages that LCRA would owe to Papalote in the event that LCRA “fail[ed]
to perform its material obligations” under the Agreement. That reading of the
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phrase “LCRA’s damages” makes sense in the context in which it appears.
Conversely, under Papalote’s preferred reading, the phrase refers to damages
that LCRA would receive for failing to perform its own material obligations.
That makes no sense at all, because in the event that LCRA breached its
material obligations, Papalote would be the party entitled to receive damages,
not LCRA.
In sum, the phrase “[LCRA’s] damages” is susceptible of two reasonable
interpretations when viewed in isolation. Because only LCRA’s reading of
“[LCRA’s] damages” makes any sense when that phrase is read in the context
of the sentence in which it appears, the Court concludes that the phrase
“[LCRA’s] damages” is unambiguous and that it refers to damages that LCRA
would owe to Papalote in the event LCRA failed to fulfill its material
obligations under the Agreement.
B. Does § 9.3 Only Limit LCRA’s Liability for a Termination
Payment?
Since the Court concludes § 9.3 caps the damages that LCRA might owe
to Papalote, the Court now turns to assess the manner in which that cap
applies. Papalote contends that because the last sentence of § 9.3 states that
LCRA’s damages are “likewise” limited to $60 million, LCRA’s damages must
be limited in the same way that § 9.3 limits the damages that LCRA can receive
from Papalote.
Section 9.3 limits Papalote’s liability for damages in four separate
scenarios. Three of these scenarios are inapplicable to LCRA because they
involve liability for failure to construct or operate the wind farm. Since
Papalote is the party responsible for constructing and operating the wind farm
and since LCRA does not participate in either of those obligations, there is no
coherent means by which LCRA’s liability in such scenarios might be “likewise”
limited.
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The fourth scenario delineated by § 9.3 concerns Papalote’s liability for
a Termination Payment. Papalote contends that by “likewise” limiting LCRA’s
damages, the last sentence of § 9.3 similarly limits LCRA’s liability for a
Termination Payment, but not for liquidated damages due under § 4.3.
There are two problems with Papalote’s proposed reading of “likewise.”
First, it doesn’t make a lot of sense. Of the four ways in which § 9.3 cabins
Papalote’s liability for damages, only one could possibly apply to LCRA.
Second, and even more saliently, Papalote’s reading would require ignoring the
fact that § 9.3 explicitly limits LCRA’s “damages for failure to perform its
material obligations.” (emphasis added). Papalote’s preferred reading elides
this limitation and instead rewrites the last sentence of § 9.3 so that it limits
LCRA’s damages “for a Termination Payment” instead. But as Papalote has
repeatedly pointed out, this Court is constrained to interpreting the language
of the Agreement as written—it cannot rewrite the last sentence of § 9.3 to
impose the narrower liability limitation that Papalote would prefer.
Papalote protests that if the Court reads § 9.3 to limit LCRA’s liability
“for failure to perform its material obligations,” then the word “likewise” will
have no meaning and will be rendered surplusage. The Court disagrees.
“Likewise” cannot reasonably be interpreted to mean that LCRA’s liability for
damages is only limited with respect to a Termination Payment. “Likewise”
can, however, be reasonably interpreted to mean that just as Papalote’s
liability is limited in certain circumstances to $60 million, LCRA’s damages
owed to Papalote for failure to perform its material obligations are also limited
in the aggregate to $60 million. Under this reading, the word “likewise” simply
means “also.”
The Court thus concludes the last sentence of § 9.3 means what it says
and serves to limit the aggregate damages owed by LCRA to Papalote “for
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[LCRA’s] failure to perform its material obligations” and not just for a
Termination Payment.
C. Does § 9.4 Conflict with or Override § 9.3?
Papalote next argues § 9.4 conflicts with and overrides § 9.3 for purposes
of calculating LCRA’s liquidated damages under § 4.3. In relevant part, § 9.4
states that “for any provision for which an express and exclusive remedy or
measure of damages is provided, such express remedy or measure of damages
shall be the sole and exclusive remedy, [and] the obligor’s liability shall be
limited as set forth in such provision[.]” Papalote contends that because § 9.4
states “liability shall be limited as set forth” in provisions setting forth
exclusive remedies, liability limitations appearing in other provisions—such
as § 9.3—are ineffective.
The problem with this argument is that § 9.4 does not explicitly state
liability shall be limited solely as set forth in provisions establishing exclusive
remedies. Papalote implies the Court should insert the word “solely” into § 9.4,
so that it would then read: “[T]he obligor’s liability shall be limited solely as set
forth” in any provision providing “an express or exclusive remedy or measure
of damages.” (hypothetical insertion in italics). But the Court eschews such
an interpretation here because “Texas law generally mandates that one
contract provision not be interpreted in a way that nullifies another provision.”
Greater Hous. Radiation Oncology, P.A. v. Sadler Clinic Ass’n, P.A., 384 S.W.3d
875, 886 (Tex. App. 2012).
On the other hand, § 9.3 does explicitly limit LCRA’s damages. What’s
more, the liability limitations contained within § 9.3 apply “[n]otwithstanding
anything to the contrary in this Agreement.” For these reasons, the Court
concludes that § 9.4 does not affect or nullify the liability limitations
established by § 9.3.
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D. Do Voluntary Payments Count Towards the Cap?
Finally, Papalote argues that even if § 9.3 caps the aggregate damages
that LCRA owes to Papalote, the cap does not take effect until LCRA “fail[s] to
perform its material obligations.” Papalote contends LCRA has not yet failed
to perform its material obligations because, although LCRA is refusing to
accept or pay for energy from Papalote, it has been making liquidated damage
payments as required by § 4.3. In this vein, Papalote argues the liquidated
damage payments made by LCRA thus far should not count towards the $60
million cap because they are not damages for failure to perform.
The Court rejects Papalote’s argument and concludes the damages paid
by LCRA under § 4.3 qualify as “damages for failure to perform its material
obligations.” Indeed, § 4.3 describes the payments as damages, and LCRA is
paying them because it has been refusing to accept or pay for energy produced
by Papalote’s wind farm. In turn, accepting and paying for energy produced
by the wind farm are two of LCRA’s material obligation under the Agreement.
Because liquidated damages payments made by LCRA constitute damages
“paid for failure to perform . . . material obligations,” the Court concludes those
payments count towards the $60 million cap established by § 9.3.
IV. CONCLUSION
After considering the arguments of the parties and the well-crafted
opinion of our dissenting colleague, we remain persuaded by the writing and
authorities set forth by the district court, and we AFFIRM its judgment for the
reasons it assigns. The dissent and Papalote raise no argument that has not
been considered and rejected as meritless by the district court. Their principal
argument that the last sentence of § 9.3 of the PPA, which caps LCRA’s
aggregate damages at $60 million, has been nullified by other provisions of the
PPA, violates the principle of Texas law that “generally mandates that one
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contract provision not be interpreted in a way that nullifies another provision.”
Greater Hous. Radiation Oncology, P.A., 384 S.W.3d at 886.
***
For these reasons, the judgment of the district court is AFFIRMED.
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JENNIFER WALKER ELROD, Circuit Judge, dissenting:
Papalote Creek II, L.L.C. invested hundreds of millions of dollars to
construct a massive wind farm, relying on the Lower Colorado River
Authority’s eighteen-year commitment to purchase the farm’s entire output of
wind energy. To enforce the obligation to purchase the farm’s output at the
contract price, even when the market price of electricity falls below the contract
price, Section 4.3 of the Power Purchase Agreement requires LCRA to either
take the full output or pay a penalty of liquidated damages on the difference. 1
Under Section 4.3, then, LCRA has two options to perform on the contract: take
or pay.
The contract also includes, in Sections 6.1 through 6.3, a termination
provision that either party can invoke should the other default on its
performance. Section 9.3, in addition to limiting Papalote’s liability for three
other specific, inapplicable situations, limits Papalote’s liability for a
termination payment to $60 million. Section 9.3 then goes on to say,
“Buyer[ LCRA]’s damages for failure to perform its material obligations under
this Agreement shall likewise be limited in the aggregate to sixty million
dollars.”
On its face, the quoted sentence from Section 9.3 makes no sense: the
Buyer, LCRA, cannot be awarded damages for its own failure to perform.
Indeed, at arbitration, LCRA argued that the sentence was simply a mistake
introduced in the final stages of drafting. Before the district court and this
court, however, LCRA insists that there is no mistake and no problem because
“Buyer’s damages” really means “Buyer’s liabilities,” i.e., the damages that
LCRA owes to Papalote. LCRA then claims that Section 9.3 limits the
1The contract imposes, in Section 4.2, a corresponding obligation on Papalote to either
provide the whole output of the farm or pay a penalty to LCRA.
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aggregate damages—including LCRA’s Section 4.3 payments as “liquidated
damages”—to $60 million. The majority and the district court agreed. But see
Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal
Texts 134 (2012) (“To give meaning to what is meaningless is to create a text
rather than to interpret one.”).
While reading “damages” to mean “liability” is itself a stretch, the bigger
problem lies in reading Section 9.3 to supersede and nullify Section 4.3.
Properly construed, the payment of liquidated damages under Section 4.3
constitutes performance on the contract, not termination of the contract—
LCRA did not breach the contract and incur liability until it stopped making
its Section 4.3 payments. Until that point, Section 4.3 defines the “sole and
exclusive” remedy for failure to take. We know this because Section 9.4 of the
contract says so. Section 9.4 also says that “the obligor’s liability shall be
limited as set forth in such provision [i.e., Section 4.3].” Section 9.4 thus tells
us that if there is a limitation to LCRA’s aggregate payments under Section
4.3, that limitation must come from Section 4.3 itself. Grafting an irrelevant
liability limitation from Section 9.3 onto Section 4.3—as the majority opinion
does—brings Sections 9.3 and 9.4 into unnecessary conflict.
By nevertheless including LCRA’s Section 4.3 payments in a $60-million
cap under Section 9.3, the majority gives LCRA a $60-million option to back
out of the contract at any time, for any reason. That reading renders Sections
4.3 and 9.4 surplusage and, in doing so, materially alters the purchase contract
in a way that makes no sense. Papalote expended hundreds of millions of
dollars to construct a massive windfarm, and yet LCRA can buy its way out for
$60 million? Read on its own terms and in light of the contract as a whole,
Section 9.3 imposes no such liability limitation. See URI, Inc. v. Kleberg Cnty.,
543 S.W.3d 755, 770 (Tex. 2018) (“[C]ourts cannot rewrite the parties’ contract
or add to or subtract from its language.” (quoting Fischer v. CTMI, L.L.C., 479
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S.W.3d 231, 242 (Tex. 2016))); Fischer, 479 S.W.3d at 239 (stating that courts
may not “consider only the parts [of a contract] favoring one party and
disregard the remainder” (quoting City of Keller v. Wilson, 168 S.W.3d 802, 811
(Tex. 2005))).
Because I believe that the majority incorrectly interprets Section 9.3 to
cap LCRA’s payments for liquidated damages under Section 4.3, in
contravention of Section 9.4, I dissent. 2
2 As I would hold that Section 9.3 does not impose a cap on Section 4.3 payments, I
would not reach the issue of whether voluntary Section 4.3 payments should count towards
that cap. If I were to reach that issue, I would hold that they do not and therefore should not
be deducted from the cap.
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