Gordonsville Energy, L.P. v. Virginia Electric & Power Co.

Present: All the Justices

GORDONSVILLE ENERGY, L.P.

v. Record No. 980813 OPINION BY JUSTICE BARBARA MILANO KEENAN
February 26, 1999
VIRGINIA ELECTRIC AND
POWER COMPANY

FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Randall G. Johnson, Judge

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 § 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

2
$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 § 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 § 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

3
[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 § 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.

4
 For each Forced Outage Day in excess of the allowed number,

§ 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

5
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

6
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

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

7
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.

8
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,

9
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

10
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

11
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 § 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 § 1.16 of the Contract as "all energy producing

equipment." In a later section of the Contract, § 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 § 14.1 do not override or alter the

allocation of responsibilities set out in § 8.2. By its plain

terms, § 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

12
the reasonable control" of any subcontractors hired to perform

Gordonsville's duties set forth in § 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

§ 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

13
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, § 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

§ 14.4, which provides that "each Day of a Forced Outage excused

under this Article 14 shall be considered a Forced Outage Day

2
This limitation of exemption is contained in § 10.15(b)

14
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

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.

15
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 § 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

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.

16
"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

17
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 § 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.

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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