Present: All the Justices
WESTMORELAND-LG&E PARTNERS
OPINION BY
v. Record No. 961410 CHIEF JUSTICE HARRY L. CARRICO
June 6, 1997
VIRGINIA ELECTRIC AND POWER COMPANY
FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
Melvin R. Hughes, Jr., Judge
In an amended motion for judgment, Westmoreland-LG&E
Partners (Westmoreland) sought to recover from Virginia Electric
and Power Company (Virginia Power) damages resulting from
Virginia Power's alleged breach of a "Power Purchase and
Operating Agreement" (the Contract). Westmoreland appeals from
the award of summary judgment in Virginia Power's favor and the
dismissal of Westmoreland's action with prejudice.
Westmoreland makes three complaints on appeal. First,
Westmoreland says the trial court erred in holding that evidence
of trade custom and usage would not be permitted to explain the
meaning of certain contractual terms. Second, Westmoreland
contends the Contract is ambiguous and that the trial court erred
in ruling that parol evidence would not be allowed to show the
parties' intent and understanding with respect to certain of the
Contract's payment provisions. Third, relative to an alternative
basis for recovery, Westmoreland maintains the trial court erred
in failing to recognize that certain contractual language might
entitle Westmoreland to at least a partial recovery for Virginia
Power's alleged breach of the Contract.
The facts are not in dispute. Westmoreland, a Virginia
general partnership composed of Westmoreland Roanoke Valley, L.P.
and LG&E Roanoke Valley, L.P., is an independent power producer.
Virginia Power is a public utility providing electrical service
to its customers.
In the late 1970s, Virginia Power began purchasing
electricity from independent power producers. In 1988, Virginia
Power issued a request for proposals from a number of independent
power producers, including Westmoreland, for the supply of
electricity to Virginia Power. A model contract prepared by
Virginia Power accompanied the request for proposals.
Westmoreland responded with a proposal, which Virginia Power
accepted, and the two parties entered into the Contract on
January 24, 1989. 1 On or about the same date, Virginia Power
entered into agreements with approximately twenty other
independent power producers as a result of its request for
proposals.
In order to fulfill its obligations under the Contract,
Westmoreland constructed a $300 million power plant, known as
2
"ROVA I" (the Facility), near Roanoke Rapids, North Carolina.
The plant commenced commercial operations in May 1994 with the
capacity to produce approximately 150 megawatts of electricity.
Westmoreland is obligated under the Contract to supply this
capacity to Virginia Power upon demand for a term of twenty-five
1
The Contract was "amended and restated" in 1990 and 1991,
but the provisions in issue here have remained unchanged since
the 1989 version of the Contract was executed by the parties.
2
Virginia Power operates in North Carolina under the name
North Carolina Power. However, for convenience and clarity, we
will continue throughout this opinion to refer to Virginia Power
only.
years.
In the Contract, Westmoreland agrees to sell and Virginia
Power agrees to purchase "the Net Electrical Output of the
Facility." Also, Westmoreland agrees to sell and Virginia Power
agrees to purchase "Dependable Capacity from the Facility." "Net
Electrical Output" is defined in the Contract as "[a]ll of the
Facility's generating output made available for sale."
"Dependable Capacity" is defined as "[t]he amount of capacity set
by [Westmoreland based upon prescribed tests] and delivered from
the Facility" to Virginia Power.
Under the Contract, Westmoreland must "control and operate
the Facility consistent with [Virginia] Power's Dispatch of the
Facility." "Dispatch" is defined in the Contract as "[t]he right
of [Virginia] Power . . . to schedule and control . . . the
generating level of the Facility in order to commence, increase,
decrease, or cease the delivery of Net Electrical Output" to
Virginia Power. When Virginia Power dispatches the Facility by
providing notice to Westmoreland of the estimated needs for the
following week, Westmoreland must comply with the notice.
Virginia Power is obligated by the Contract to make two
types of payments to Westmoreland, one for net electrical output,
termed "Energy Payments," and the other for dependable capacity,
termed "Capacity Payments," based upon the different types of
costs incurred by Westmoreland. Energy Payments are designed to
compensate Westmoreland for the actual amount of electricity it
generates and delivers to Virginia Power and to reimburse
Westmoreland for its variable costs incurred to produce the
electricity.
Energy Payments are not in dispute here, but Capacity
Payments are. Capacity Payments are designed to compensate
Westmoreland for the costs it incurred in constructing the
Facility and for the fixed costs it incurs in operating and
maintaining the Facility.
Under § 10.15(a) of the Contract, Virginia Power is required
to make Capacity Payments in a fixed amount for a 25-year term,
"so long as the plant is available as required by the Contract."
Although paid monthly, the Capacity Payment is calculated at the
rate of approximately $200,000 per day.
The present controversy arose when Virginia Power withheld
Capacity Payments for each day it deemed to be a "Forced Outage
Day" within the meaning of the Contract. In its amended motion
for judgment, Westmoreland sought recovery for the total amount
withheld by Virginia Power.
Section 1.18 of the Contract defines a "Forced Outage" as
"[a]n interruption . . . of the Facility's delivery of the Net
Electrical Output [that] is not . . . the result of a Scheduled
3
Outage." Section 1.20 defines a "Forced Outage Day" as
[e]ach continuous twenty-four (24) hour period
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))
(a) designated by [Westmoreland] as a Forced
Outage Day,
(b) a Forced Outage Day which is determined
3
The Contract allows 30 days annually for scheduled outages.
Westmoreland says it is undisputed that Capacity Payments are
"never reduced on account of Scheduled Outages."
pursuant to Section 10.15(d).
Section 10.15(d) forms the entire basis of Virginia Power's
defense in this case. It is a unique section, found only in the
contract involved here and not in the agreements Virginia Power
executed with other independent power producers at or about the
same time. 4 Section 10.15(d) provides as follows:
For each instance where [Westmoreland] fails, after the
second oral notification (such notification shall not
be less than fifteen (15) minutes from the first
notification) from [Virginia] Power, to maintain the
operating level specified by [Virginia] Power pursuant
to Section 7.6, to within + five (5%) percent of the
Dispatched level then for each percent or portion of a
percent deviation from the above allowed + five (5%)
percent, then at [Virginia] Power's option, the payment
for that Day's Dependable Capacity shall be reduced two
(2%) percent. If such deviation reduces that Day's
payment for Dependable Capacity to zero (0) then that
Day shall be a Forced Outage Day. Example: If the
Facility is Dispatched at 100MW but is only able to
deliver 87MW then the payment for Dependable Capacity
for that Day would be reduced by 16%.
Because, under § 10.15(d), the 2% reduced payment scale
applies to each percent of deviation from the dispatched level,
or portion thereof, the reduction in the capacity payment reaches
100% and a Forced Outage Day occurs on any day when power
generation falls below 46% of the dispatched level, giving credit
for the + 5% allowance. This is the result derived from the
4
The parties tell us on brief that the Model Agreement
accompanying Virginia Power's request for proposals contained a
provision that a Forced Outage Day would occur when the net
electrical output deviated from the dispatched level by more than
+ 5%. However, because Westmoreland planned to use a low grade
fuel to generate electricity, with likely reductions in power
output below 95% of the dispatched level, the parties agreed to
the inclusion of § 10.15(d) in the Contract, which increased from
5% to 55% the permitted deviation from the dispatched level
before a Forced Outage Day occurred.
formula, 100 - 5 = 95 - 45 = 50 x 2 = 100.
Sections 10.15(g) and 10.18 also relate to Forced Outage
Days. Section 10.15(g) provides in pertinent part as follows:
[Westmoreland] shall be allowed thirty (30) Forced
Outage Days per full Capacity Test Period (May 1
through April 30). . . . Payments for Dependable
Capacity will be reduced five hundred thousand
($500,000) dollars as liquidated damages for each
Forced Outage Day that occurred or was designated by
[Westmoreland] during that period in excess of the
above allowances.
And § 10.18 provides in pertinent part as follows:
The parties agree that [Virginia] Power will be
substantially damaged in amounts that will be difficult
or impossible to determine if the Facility:
. . . .
(d) Exceeds the allowed number of Forced Outage
Days in Section 10.15(g).
Therefore, to the limited extent set forth in the
Agreement, 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.
The relationship between § 10.15(d) and the terms "Forced
Outage Days" and "Force Majeure Days" is also relevant to this
dispute. Under § 14.1, a delay in performance occurring on a
given day is excused if Westmoreland designates such day a "Force
Majeure Day." A Force Majeure Day may be designated when a delay
in performance is "due solely to circumstances beyond the
reasonable control of the Party experiencing such delay, [for
example,] acts of God; . . . war; riots; . . . or accidents."
A Force Majeure Day does not count against the thirty Forced
Outage Days allowed before the $500,000 per day liquidated damage
provision of § 10.15(g) may be invoked. However, under
§ 10.15(b) of the Contract, if a forced outage is designated as
an event of Force Majeure, "then [Virginia] Power's obligation to
pay the payments for Dependable Capacity specified in Section
10.15(a) above shall cease, prorated daily, until the condition
of Force Majeure has been overcome."
In awarding summary judgment in Virginia Power's favor, the
trial court found that the Contract was unambiguous and,
therefore, that evidence of trade custom and usage as well as
parol evidence concerning the parties' intent and understanding
would be inadmissible. The court found further that Westmoreland
had "failed to maintain power generation at greater than 45% of
the specified level" on the days for which it sought recovery.
Hence, the court held, § 10.15(d) of the Contract expressly
permitted Virginia Power to withhold Capacity Payments for those
days, including the days Westmoreland had designated as Forced
Outage Days, and to charge Westmoreland with all such days "for
the purpose of determining the liquidated damages provision of
the parties' contract pursuant to § l0.15(g)."
Admissibility of Evidence
Concerning Trade Custom and Usage
Westmoreland argues that it should have been permitted to
introduce evidence showing that "the terms 'Capacity Purchase
Price' and 'Forced Outage Day' have special meaning in the trade
custom and usage, under which the occurrence of such Days does
not diminish the monthly payment unless the annual Forced Outage
Day allowance is exceeded." Westmoreland submits that "[t]his
trade custom and usage, reflected in all of the contracts
resulting from the 1988 solicitation, 'form a part [of the
Contract] ... unless the terms of the writing [clearly exclude]
the usage or custom.'" (Quoting Walker v. Gateway Milling Co.,
121 Va. 217, 224, 92 S.E. 826, 828 (1917)). Westmoreland
maintains there is no language in the Contract that clearly
excludes consideration of custom and usage.
Noting that the trial court excluded the evidence of trade
custom and usage because it found the Contract unambiguous,
Westmoreland cites Doswell Ltd. Partnership v. Virginia Electric
& Power Co., 251 Va. 215, 468 S.E.2d 84 (1996), for the
proposition that such evidence is admissible to show that
contract phrases or terms have acquired a peculiar meaning by
trade custom or usage "even though the phrases or terms
themselves are unambiguous." Id. at 225, 468 S.E.2d at 90.
Hence, Westmoreland concludes, the trial court erred in excluding
its evidence of trade custom or usage.
While we confirm what we said in Doswell, we disagree with
Westmoreland. In our opinion, Westmoreland has not met the
threshold requirement for admission of the disputed evidence.
In Walker, supra, we said that evidence of trade usage is
proper "to permit the jury to consider the situation of the
parties and the circumstances leading up to the making of the
contract for the purpose of determining whether the usage in
question operated upon the minds of the parties in using the
language which was employed in the contract." 121 Va. at 226, 92
S.E. at 829 (emphasis added). However, "knowledge of the
existence of the custom must be brought home to the [contracting
parties], unless the evidence shows that it is so uniform and
notorious at the place where the parties to be affected by it
reside, as to raise a prima facie presumption that they knew of
it." Bowles v. Rice, 107 Va. 51, 55, 57 S.E. 575, 577 (1907).
Because the Contract and the other agreements resulting from
the 1988 solicitation were made at or about the same time, what
was done under the other contracts could not possibly have been
brought home to, or have operated upon the minds of, the parties
to the Westmoreland contract at the time of its execution. In
other words, Westmoreland has failed to establish the existence,
at the time the Contract was executed, of any trade custom or
usage relevant to the meaning of the language that was employed
in the Contract. The trial court did not err, therefore, in
excluding evidence of trade custom and usage.
Admissibility of Parol Evidence
Westmoreland contends that § 10.15(d) of the Contract is
ambiguous, even when viewed in isolation, because it does not
"define the financial consequence of treating a day as a Forced
Outage Day." And, Westmoreland says, when the Contract,
including § 10.15(d), is read as a whole, it does not
"unambiguously permit any reduction of the capacity purchase
price on account of allowed Forced Outage Days." Hence,
Westmoreland concludes, "there was no justification for the
Circuit Court's foreclosure of parol evidence of the parties'
intent and understanding."
Virginia Power contends on the other hand that § 10.15(d) is
unambiguous. Virginia Power says that the "2-for-1 reduced
payment scale established by § 10.15(d) applies to all shortfalls
in Westmoreland's generating capacity after the initial five
percent variance." Therefore, Virginia Power asserts, "[w]hen
Westmoreland's generation is 45% or less of the Dispatched level,
. . . Virginia Power has the right, in the words of § 10.15(d),
to reduce 'that Day's payment for Dependable Capacity to zero
(0).'" This shortfall occurred, Virginia Power says, "on each
day for which [it] made no Dependable Capacity payment" and,
hence, it was excused from making payment for each of those days.
But, Virginia Power insists, even when § 10.15(d) is read
along with the other provisions of the Contract, no ambiguity
appears. "Those other provisions," Virginia Power says, "have
nothing to do with the situation addressed by § 10.15(d) and do
not make that section ambiguous." Hence, Virginia Power
concludes, the trial court did not err in excluding parol
evidence of the parties' intent and understanding.
"The question whether a writing is ambiguous is one of law,
not of fact." Tuomala v. Regent University, 252 Va. 368, 374,
477 S.E.2d 501, 505 (1996). Thus, "we are not bound by the trial
court's conclusions on this issue, and we are permitted the same
opportunity as the trial court to consider the contract
provisions." Id.
In Doswell, supra, we reiterated the principle that
"'[p]arol evidence of prior or contemporaneous oral negotiations
are generally inadmissible to alter, contradict, or explain the
terms of a written instrument provided the document is complete,
unambiguous, and unconditional.'" 251 Va. at 222, 468 S.E.2d at
88 (quoting Renner Plumbing, Heating & Air Conditioning, Inc. v.
Renner, 225 Va. 508, 515, 303 S.E.2d 894, 898 (1983)). We also
said in Doswell:
Contracts are not rendered ambiguous merely because the
parties or their attorneys disagree upon the meaning of
the language employed to express the agreement. Even
though an agreement may have been drawn unartfully, the
court must construe the language as written if its
parts can be read together without conflict.
And, parol evidence may not be used to first
create an ambiguity and then to remove it. Finally, an
agreement is not rendered ambiguous merely because it
deals with a technical subject that may be considered
complex to the uninformed lay person who is not
familiar with the topic.
Id. at 222-23, 468 S.E.2d at 88-89 (citations omitted).
"A contract must be construed as a whole to determine the
parties' intent with respect to specific provisions." Hooper v.
Musolino, 234 Va. 558, 569, 364 S.E.2d 207, 212, cert. denied,
488 U.S. 823 (1988). "No word or clause in the contract will be
treated as meaningless if a reasonable meaning can be given to
it, and there is a presumption that the parties have not used
words needlessly." D.C. McClain, Inc. v. Arlington County, 249
Va. 131, 135-36, 452 S.E.2d 659, 662 (1995).
"'An ambiguity exists when language admits of being
understood in more than one way,'" Doswell, 251 Va. at 222, 468
S.E.2d at 88 (quoting Renner, 225 Va. at 515, 303 S.E.2d at 898),
or when "'language is of doubtful import,'" Galloway Corp. v.
S.B. Ballard Constr. Co., 250 Va. 493, 502, 464 S.E.2d 349, 355
(1995) (quoting Allen v. Green, 229 Va. 588, 592, 331 S.E.2d 472,
475 (1985)). And an award of summary judgment is improper when
"neither party has offered a construction of [contractual]
provisions that could be deemed so clear that it unambiguously
excludes the explanation offered by the opponent." Cascades
North Venture Ltd. Partnership v. PRC Inc., 249 Va. 574, 582, 457
S.E.2d 370, 374-75 (1995).
Guided by these principles, we reach the conclusion that the
Contract is ambiguous. In the first place, the language of
§ 10.15(d), even when read in isolation, admits of being
understood in more than one way, Doswell, 251 Va. at 222, 468
S.E.2d at 88, and, hence, is of doubtful import, Galloway, 250
Va. at 502, 464 S.E.2d at 355.
The penultimate sentence of § 10.15(d) contains the crucial
language. The sentence states that "[if the deviation from the
dispatched level on a given day] reduces that Day's payment for
Dependable Capacity to zero (0) then that Day shall be a Forced
Outage Day." If emphasis is placed upon the words, "reduces that
Day's payment for Dependable Capacity to zero," the language of
(d) may be taken to mean that the result of such a deviation
would be no capacity payment for that day. If, however, emphasis
is placed upon the words, "then that Day shall be a Forced Outage
Day," the language of (d) may just as well be taken to mean that
the only result of such a deviation would be the counting of the
day in question against the thirty Forced Outage Day allowance
provided by § 10.15(g) before the $500,000 per day liquidated
damage provision may be invoked.
Hence, this case presents a situation in which "neither
party has offered a construction of these provisions that could
be deemed so clear that it unambiguously excludes the explanation
offered by the opponent." Cascades North Venture, 249 Va. at
582, 457 S.E.2d at 374-75. This alone is sufficient to justify
the admission of parol evidence concerning the parties' intent
and understanding at the time they entered into the contract.
However, there is more. When § 10.15(d) is read in context
with other provisions of the Contract, the ambiguity becomes even
more apparent. First, a reading of § 10.15(b) demonstrates that
when the parties wished to make clear under what circumstances
Virginia Power would not be obligated to make Capacity Payments
for a Forced Outage, they knew how to accomplish the task, using
clear and precise language. Section 10.15(b) states that when
Westmoreland "designates [a] Forced Outage as an event of Force
Majeure, then [Virginia] Power's obligation to pay the payments
5
for Dependable Capacity . . . shall cease." As Westmoreland
suggests, the absence of such an explicit provision in § 10.15(d)
casts doubt upon the correctness of Virginia Power's assertion
that § 10.15(d) unambiguously relieves it from the obligation to
make Capacity Payments for all Forced Outage Days, however they
occur.
Virginia Power argues that § 10.15(b) is consistent with
§ 10.15(d) in that both "relieve[] Virginia Power of any
obligation to pay Westmoreland for capacity Virginia Power does
not receive." However, this assumes the correctness of Virginia
5
Similarly, § 5.3 of the Contract provides that Virginia
Power "shall not be obligated to make payments for Dependable
Capacity" during periods allowed to cure defaults under the
Contract.
Power's position and begs the question to be decided, i.e.,
whether § 10.15(d) really does relieve Virginia Power of the
obligation to make Capacity Payments for Forced Outage Days
occurring under § 10.15(d).
Virginia Power also argues that § 10.15(d) applies only to
those days on which Westmoreland's facility is dispatched to
produce electrical power while § 10.15(b) applies even if
Westmoreland is not so dispatched. But this argument misses the
point, viz., if it was necessary to say explicitly in
§ 10.15(b) that Capacity Payments cease for Force Majeure Days
occurring under that section, was it not just as necessary to say
explicitly in § 10.15(d) that payments cease for Forced Outage
Days occurring under that section? In any event, we do not think
it appears as a matter of law that the distinction drawn by
Virginia Power would make a difference in its obligation with
respect to Capacity Payments for Forced Outage Days, but perhaps
parol evidence submitted by the parties on remand will reveal
whether the distinction was intended to make a difference.
Second, § 10.15(g) allows Westmoreland thirty Forced Outage
Days annually before the provision for liquidated damages in the
amount of $500,000 per day may be invoked. Section 10.18
provides that "the payment of the liquidated damages is in lieu
of actual damages" Virginia Power may suffer if Westmoreland
"[e]xceeds the allowed number of Forced Outage Days in Section
10.15(g)." As Westmoreland maintains, these provisions support
the implication that liquidated damages may be the only penalty
Westmoreland must suffer for Forced Outage Days, and such an
implication is completely inconsistent with Virginia Power's
position that § 10.15(d) permits it to withhold Capacity Payments
for all Forced Outage Days in addition to collecting $500,000 per
day in liquidated damages if the number of such days exceeds the
thirty days allowed annually.
Virginia Power says, however, that § 10.15(g) "relates to a
different subject matter than § 10.15(d)," that "[n]either
section refers to the other," and that § 10.15(g) "has nothing
whatsoever to do with Virginia Power's obligation to make
Dependable Capacity payments." However, both sections mention
and deal with the subjects of Forced Outage Days and payments for
Dependable Capacity -- § 10.15(d) states that a Forced Outage Day
occurs when the deviation on a particular day reduces that day's
Dependable Capacity payment to zero and § 10.15(g) states that
payments for Dependable Capacity will be reduced by $500,000 for
each Forced Outage Day that exceeds the thirty-day allowance.
Moreover, § 10.15(d) is implicitly incorporated by reference
into § 10.15(g) because, in its final sentence, the latter
section states that "[p]ayments for Dependable Capacity will be
reduced five hundred thousand ($500,000) dollars as liquidated
damages for each Forced Outage Day that occurred or was
designated by [Westmoreland] during [a capacity test] period in
excess of the above allowances." (Emphasis added.) If a Forced
Outage Day is not designated by Westmoreland, it can only occur
as a result of the reductions required by the sliding scale set
forth in § 10.15(d).
Therefore, it is not correct to say categorically, as
Virginia Power would have us say, that § 10.15(g) has "nothing
whatsoever to do with Virginia Power's obligation to make
Dependable Capacity payments." Rather, Westmoreland should have
the opportunity to show by parol evidence on remand what the
parties intended by the language they employed in the Contract.
We hold that it was error for the trial court to exclude
parol evidence concerning the parties' intent and understanding
with respect to Forced Outage Days and Capacity Payments at the
time they executed the Contract.
Alternative Basis of Recovery
Westmoreland's amended motion for judgment contained an
alternative claim of breach of contract for Virginia Power's
withholding of Capacity Payments for days that Westmoreland
designated as Forced Outage Days pursuant to § 1.20(a) of the
Contract. The trial court's award of summary judgment in favor
of Virginia Power encompassed this alternative claim.
Under § 1.20, a Forced Outage Day occurs when "(a)
designated by [Westmoreland] as a Forced Outage Day," or "(b)
determined pursuant to Section 10.15(d)." Westmoreland argues
that "[e]ven if § 10.15(d) could be read as depriving [it] of
[capacity] payments attributable to days that are classified as
Forced Outage Days by [the section's] own operation, its impact
[should] be limited to such days." Hence, Westmoreland
concludes, it was "entitled, at a minimum, to a judgment for the
amount attributable to the days covered by § 1.20(a)." Virginia
Power says the trial court did not err in denying Westmoreland a
partial recovery for designated days.
The trial court stated no reason for the inclusion of
Westmoreland's alternative basis for relief in its award of
summary judgment. As Westmoreland suggests in a footnote to its
brief, the trial court's disposition of this phase of the case
may have been inextricably entwined in the court's conclusion
that § 10.15(d) unambiguously "permits Virginia Power not to make
dependable capacity payments on days for which [Westmoreland]
seeks payment," which necessarily included Forced Outage Days
designated by Westmoreland pursuant to § 1.20(a). Since we hold
supra that the Contract is ambiguous, we think the trial court on
remand, if Westmoreland is unsuccessful on its principal claim
for breach of contract, should have the opportunity to consider
further the question whether Virginia Power is entitled to
withhold Capacity Payments for Forced Outage Days designated by
Westmoreland pursuant to § 1.20(a).
Conclusion
We will affirm the trial court's action in excluding
evidence of trade custom and usage. For the error in excluding
evidence concerning the parties' intent and understanding with
respect to Forced Outage Days and Capacity Payments, we will
reverse the judgment of the trial court and remand the case for
further proceedings consistent with the views expressed in this
opinion.
Affirmed in part,
reversed in part,
and remanded.