Court Opinion

ID: 2870472
Source: CourtListenerOpinion
Date Created: 2015-09-06 03:17:26.159376+00
Date Added: 2024-06-11T12:26:27.617695
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                      NO. 03-04-00172-CV

                             Southern Union Company, Appellant

                                                v.

                                  CSG Systems, Inc., Appellee

     FROM THE DISTRICT COURT OF TRAVIS COUNTY, 201ST JUDICIAL DISTRICT
           NO. GN-100403, HONORABLE PAUL DAVIS, JUDGE PRESIDING

                            MEMORANDUM OPINION

               Southern Union Company, a gas utility provider, contracted with CSG Systems, Inc.,

a printing company, to outsource Southern Union’s print-and-mail operations. The conversion of

services was more problematic than anticipated, causing Southern Union to cease operations and sue

CSG for breach of contract. Following trial, the jury found in favor of CSG. Accordingly, the trial

court entered a final judgment awarding damages to CSG. Southern Union appeals only the amount

of damages awarded and does not challenge liability. Because there is legally sufficient evidence

in the record to support the judgment, we affirm the award except as modified.

                                        BACKGROUND

               Beginning in the late 1990’s, Southern Union experienced technological difficulties

and realized that its computer system was no longer capable of printing and mailing approximately
one million bills per month to its customers.1 Southern Union investigated companies to which it

could outsource these operations and then requested proposals from several potential vendors. CSG

responded to Southern Union’s request in February 2000. Southern Union selected CSG’s bid from

the field of candidates, and the two companies engaged in formal negotiations from April until

September.

               A contract was finalized and signed by representatives from both Southern Union and

CSG as of October 13, 2000. The contract contained a “discontinuance fee” provision, obligating

Southern Union to pay a specified amount of damages to CSG in the event that Southern Union

terminated the agreement before its five-year term expired. The parties agree that the provision was

intended as a liquidated damages provision.

               After the contract was finalized, CSG provided Southern Union with a written project

plan contemplating December 1, 2000 as the date for CSG to “go live” with the print-and-mail

operations. In the months leading up to that deadline, implementation problems arose on both sides

and the conversion fell behind schedule. The companies continued discussions in an attempt to solve

the problems until the first week of January 2001, when Southern Union ceased work on the project.

Southern Union filed suit against CSG on February 7, asserting breach of contract among other

causes of action.

               In its verdict, the jury found that Southern Union and CSG were both in breach of the

agreement, but that CSG’s breach was excused, and that CSG would be fairly and reasonably

       1
         At the time, Southern Union had a contract with Pitney Bowes for that company to package
the mailings after Southern Union processed and printed them, but that contract was set to expire in
December 2001.

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compensated by an award of $2.1 million for the discontinuance fee; $111,000 for the cost of paper

and envelopes purchased by CSG; $1,045,944 for CSG’s lost profits; and $140,000 for the cost of

software licenses provided by CSG to Southern Union. Beneath the last element of damages, the

jury wrote “upon return of 300 licenses to CSG, the answer would be $0.” The trial court determined

that, as a matter of law, it was proper to award liquidated damages in lieu of actual damages, and

therefore entered a final judgment in conformance with the jury’s verdict, for a total amount of

$2,351,000, plus interest and attorney’s fees.

                                            ANALYSIS

               On appeal, Southern Union challenges the award of damages to CSG Systems,

claiming that CSG should not be awarded any liquidated damages pursuant to the discontinuance

fee provision, but rather that CSG’s recovery should be confined to $1,045,944 in lost profits.

Southern Union first asserts that, based on the timing of its breach, the proper calculation of the fee

results in a zero sum. Alternatively, Southern Union asserts that even if the proper calculation is

$2.1 million, CSG is not entitled to recover the award because that amount constitutes an illegal

penalty. Southern Union also claims that prejudgment interest should not be awarded on CSG’s

damages for the discontinuance fee or lost profits. Finally, Southern Union urges that it is entitled

to a remittitur of $140,000 because it returned the software licenses to CSG.

The Discontinuance Fee Provision

               Southern Union’s first issue, asserting that the timing of Southern Union’s breach

results in zero damages for the discontinuance fee, turns on a construction of the provision’s terms.

                                                  3
We agree with the parties that the provision is unambiguous. We therefore review this issue as a

matter of law, looking only to the contract’s four corners and interpreting its plain meaning. See

French v. Chevron U.S.A., Inc., 896 S.W.2d 795, 796-97 (Tex. 1995). The discontinuance fee

provision states:

       The parties have mutually agreed upon the fees for the Services to be provided
       hereunder based upon certain assumed volumes of processing activity, and the length
       of the term of Agreement. Customer2 acknowledges and agrees that, without the
       certainty of revenue promised by the commitments set forth in this Agreement, CSG
       would have been unwilling to provide the Services at the fees set forth in the
       Agreement. Because of the difficulty in ascertaining CSG’s actual damages for
       a termination or other breach of the Agreement by Customer resulting in a
       termination of this Agreement before the expiration of the then-current term,
       Customer agrees that prior to such termination and in addition to all other
       amounts then due and owing to CSG, Customer will pay to CSG (as a contract
       and not as a penalty) an amount equal to a percentage of the total Subscriber
       Statement Minimum for the remaining term of the Agreement, as defined in
       Schedule C, times the then current ESP Processing Fees for the First Physical
       Page, as defined in Schedule C beginning with the calendar month in which
       termination occurs (“Discontinuance Fee”). If any such termination occurs
       prior to the first anniversary of the Effective Date of this Agreement, the
       percentage shall be fifty percent (50%). If between the first and second
       anniversary of the Effective Date it shall be thirty percent (30%) and if following the
       second anniversary of the Effective Date it shall be ten percent (10%). Customer
       acknowledges and agrees that the Discontinuance Fee is a reasonable estimation
       of the actual damages which CSG would suffer if CSG were to fail to receive the
       amount of processing business contemplated by this Agreement. Customer shall
       not be required to pay the Discontinuance Fee if CSG terminates this Agreement
       other than as a result of Customer’s breach of its obligations hereunder or if
       Customer terminates the Agreement for a material, uncured breach by CSG. The
       Discontinuance Fee shall be CSG’s sole remedy resulting from a termination or other
       breach of this Agreement by Customer resulting in a termination of this Agreement
       before the expiration of the then-current term. In the event of a sale or transfer of all
       or substantially all of Southern Union Company’s assets to a third party, the

       2
           The provision refers to Southern Union as “Customer.”

                                                  4
        percentages used to calculate the Discontinuance Fee shall be twenty-five percent
        (25%), fifteen percent (15%) and five percent (5%), respectively.

(Emphasis added.)

                The parties agree that, given the plain meaning of the relevant language, the proper

way to calculate the discontinuance fee for a breach within the first year of signing the agreement

is to multiply the applicable “Subscriber Statement Minimum” by the applicable “ESP Processing

Fees” and then take fifty percent of that total. The parties disagree, however, on how to determine

one factor of this equation: the Subscriber Statement Minimum. Southern Union asserts that,

pursuant to Schedule C, the minimum does not accrue until after the “commencement date.”3

Because Southern Union breached this agreement prior to the commencement date,4 it claims that

the minimum was zero, and that the total calculation should therefore be zero.

                CSG interprets the provision to mean that, although Schedule C prevents Southern

Union from having to pay the monthly minimum until after the commencement date, that time

restriction does not apply to Southern Union’s liability under the discontinuance fee provision. CSG

asserts that Southern Union’s interpretation is wrong because it allows Southern Union to breach the

contract without consequence, so long as it does so within ninety days of the commencement date,

regardless of the significant time and money invested by CSG during the implementation phase.

        3
          Schedule C states that, within the first year of the contract, the “minimums begin ninety
(90) days . . . following the initiation date of services (‘Commencement Date’). . . .” The contract
defines the commencement date as “the first day of the calendar month in which the Services
commence.” Schedule D discusses “services” as including a list of activities related to the printing,
inserting and mailing of customer bills in a specified carrier envelope, during specified billing cycles.
        4
         CSG agrees that the commencement date had not yet occurred at the time of Southern
Union’s breach.

                                                   5
According to CSG, the liquidated damages provision is most necessary during this initial time period

because of the parties’ unequal contributions and because of the difficulty in calculating potential

damages before any actual profits have been made.

               We agree with CSG’s reading of the contract. Nothing in the provision limits its

applicability to a breach occurring after the commencement of services. The provision specifies the

circumstances in which Southern Union is excused from paying the discontinuance fee, and none

impose such a timing limitation. To the contrary, the provision’s express terms state that Southern

Union shall be liable for the discontinuance fee, at a rate of fifty percent, should it cause “any

termination” within one year of signing the contract.

               Testimony of witnesses from both Southern Union and CSG also supports CSG’s

assertion that the provision was intended to apply during the implementation phase, to protect the

significant up-front contributions made by CSG before it had received any profits from the

agreement. Pamela Vanlandingham, CSG’s Senior Vice President and General Manager of the

statement processing center, testified that during November and December, the CSG team “worked

around the clock” to complete the project, which included working “very hard over the holidays,”

and that “CSG [had] expended right at 500 to 600 hours” when Southern Union breached the

contract. Southern Union officials confirmed that the nature of this contract required front-loaded

efforts by CSG and that, prior to terminating the agreement, they were aware of the money CSG

invested on supplies and equipment, and of the hours CSG put toward programming, testing, and

implementing the new system. David Kvapil, the Chief Financial Officer for Southern Union,

testified that he knew CSG had worked “well beyond the number of hours they were going to

                                                 6
dedicate to the project,” that CSG had provided a “significant batch of bills” to Southern Union for

approval, and that CSG had spent over $100,000 on envelopes and paper by the end of December

2000. Christine Shores, a business analyst for Southern Union’s mail services division, testified that

Southern Union approved the order for paper and envelopes prior to CSG placing it, and that

Southern Union was aware of the time and money spent by CSG in its efforts to commence live

operations.

               Based on the plain meaning of the provision, as supported by the witnesses’

testimony, Southern Union’s liability for the discontinuance fee is not limited to a breach occurring

after the commencement of live operations. Southern Union is liable under the discontinuance fee

for its breach of the agreement during the implementation phase. The amount of fair and reasonable

damages pursuant to the discontinuance fee was therefore properly calculated by the jury, and

affirmed by the trial court, as $2.1 million. Southern Union’s first issue is overruled.

Liquidated Damages

               Southern Union claims in its second issue that, if the discontinuance fee is properly

calculated as $2.1 million, then CSG is not entitled to any recovery of that amount because it

constitutes an improper penalty.      For the purposes of this case, the parties agree that the

discontinuance fee should be treated as an award of liquidated damages.

               A liquidated damages provision may only be enforced when the court finds “(1) that

the harm caused by the breach is incapable or difficult of estimation and (2) that the amount of

liquidated damages called for is a reasonable forecast of just compensation.” Phillips v. Phillips, 820
S.W.2d 785, 788 (Tex. 1991). The party challenging the award of liquidated damages has the burden

                                                  7
to establish that the two-prong test is not satisfied and that, instead, the award of liquidated damages

is an unenforceable penalty. See Dominzo v. Progressive County Mut. Ins. Co., 54 S.W.3d 867, 875

(Tex. App.—Austin 2001, pet. denied). Whether the liquidated damages provision is enforceable

is a question of law. Phillips, 820 S.W.2d at 788.

    Difficulty of Estimation

               Southern Union seeks to satisfy the first part of its burden by claiming that CSG’s

damages were easy to estimate. Southern Union bases this claim on a “price projection” document

prepared by CSG before entering the agreement, which anticipated that CSG would earn a total profit

of $1,045,944 over the five-year term of its contract with Southern Union. Because the jury

ultimately awarded this exact amount to CSG as lost profits, Southern Union argues that CSG was

capable of precisely estimating its damages, and therefore the liquidated damages provision is an

unenforceable penalty from which CSG is not entitled to recover. The record, however, shows

otherwise.

               The language of the discontinuance fee provision supports the trial court’s

determination that an award of liquidated damages was proper because CSG’s actual damages were

not easy to estimate. The provision expressly states that it was included in the contract “[b]ecause

of the difficulty in ascertaining CSG’s actual damages for a termination or other breach of the

Agreement,” and that “CSG would have been unwilling to provide the Services at the fees set forth

in the Agreement” had Southern Union not promised “certainty of revenue” by obligating itself to

pay the discontinuance fee in the event that it breached the contract. This provision was a bargained-

for exchange, negotiated and approved by both companies.

                                                   8
               When a provision is mutually bargained for by equally competent parties, we give

deference to its enforcement. See Shel-al Corp. v. American Nat’l Ins. Co., 492 F.2d 87, 94 (5th Cir.

1974). Stanley Mayer, Southern Union’s Chief Information Officer, testified that the provision’s

terms were negotiated between attorneys representing both companies. From the face of the contract,

Southern Union understood at the time it entered the agreement that CSG’s damages would be

difficult to estimate and therefore agreed a liquidated damages provision was necessary.

               “[T]he fundamental purpose of a valid liquidated damages provision is to provide a

reasonable measure of compensation in the event of a breach where, at the time the provision is

agreed to the damages are indeterminable or will be otherwise difficult to prove.” 24 Williston on

Contracts § 65:3, at 250 (4th ed. 2002). It is well established that lost profits can be inherently

difficult to estimate. See Texas Inst., Inc. v. Teletron Energy Mgmt., Inc., 877 S.W.2d 276, 279 (Tex.

1994). Frequently, lost profits are too speculative to recover because their calculation depends on

“uncertain and changing conditions, such as market fluctuations,” and this uncertainty is heightened

where no profits have been made at the time the contract is breached. Id. The contract reflects that

Southern Union and CSG sought to avoid such speculation in agreeing to the liquidated damages

provision. The sliding scale of damages recognized the front-loaded value to be provided by CSG.

As argued by CSG, had there not been a discontinuance fee to rely on, in the event of a breach by

Southern Union—particularly early in the contract term—then CSG would have risked being unable

to recover because of the uncertainty in calculating its lost profits.

               That CSG prepared a projection of its prices, and that the jury looked to the projection

as a reasonable calculation for lost profits, does not satisfy Southern Union’s burden. The purpose

                                                   9
of the document was not to define CSG’s potential damages. Rather, as Vanlandingham testified,

the projection was an internal tool used by CSG to outline the prices it anticipated charging for its

print-and-mail services, so that CSG could make an informed bid in response to Southern Union’s

request for proposal. Vanlandingham also testified that the projection was prepared with a

“conservative accounting approach to pricing.” CSG excluded several items from its calculations

because, prior to entering the contract, the parties had not assigned a value to these items. This

increased the difficulty of estimating damages. CSG’s expert confirmed the difficulty of this

estimation by explaining several different ways that CSG’s lost profits could be calculated, with the

results ranging between approximately $1 million to $4 million. After hearing this evidence, the jury

determined that $1,045,944 was a reasonable award of lost profits. But their verdict does not

establish that the estimation was either an easy or precise one to make. Given the mutually agreed-

upon terms of the provision, and the evidence in support of its plain meaning, we are unpersuaded

by Southern Union’s assertion that CSG’s damages were easy to estimate.

    Reasonable Forecast of Just Compensation

               Southern Union seeks to satisfy the second part of its burden by showing that the

discontinuance fee provision is an unenforceable penalty because the amount awarded to CSG as

liquidated damages is unreasonable. Southern Union claims that this is established simply by the

fact that the $2.1 million awarded to CSG pursuant to the discontinuance fee is double the amount

found by the jury as lost profits.      A liquidated damages provision will be considered an

unenforceable penalty if the amount awarded is so disproportionate to the actual or anticipated

damages that it in effect punishes the breach, thereby coercing performance of the contract by

                                                 10
making it too costly to not adhere to its terms. 24 Williston on Contracts § 65:3, at 249 (4th ed.

2002); see also Kothe v. R.C. Taylor Trust, 280 U.S. 224, 226 (1930).

               But Southern Union fails to cite, and we are unaware of, any cases in support of its

claim that a two-to-one ratio of liquidated-to-actual damages is unreasonable per se. There is,

however, authority to the contrary. In Baker v. International Record Syndicate, Inc., our sister court

approved a liquidated damages award of $51,000, which was more than triple the $15,000 found as

actual damages. 812 S.W.2d 53, 56 (Tex. App.—Dallas 1991, no writ). The Texas Supreme Court

also upheld a trial court's judgment awarding $790,000 in liquidated damages, which was twice the

$395,000 found as actual damages. Sealock v. Texas Fed. Sav. & Loan Assoc., 755 S.W.2d. 69, 70

(Tex. 1988).

               Southern Union seeks to distinguish such cases by urging that, even if it is normally

reasonable to award liquidated damages in an amount that is double the actual damages, this ratio

is unreasonable in a case where the amount at issue involves millions rather than thousands of

dollars, as here. Again, while no cases support Southern Union’s claim, there is authority to the

contrary. In a case involving high-end commercial real estate, the Fifth Circuit held that a liquidated

damages award of $5 million was reasonable, despite an internal memorandum stating that the

anticipated damages were $1.4 million. Thanksgiving Tower Partners v. Anros Thanksgiving

Partners, 64 F.3d 227, 232 (5th Cir. 1995). Thus, as a matter of law, it is not unreasonable per se

to award liquidated damages in an amount that is double the actual damages. Moreover, in this case,

the reasonableness of CSG’s award is supported by the record.

                                                  11
               The discontinuance fee expressly states that it “is not a penalty” and that it “is a

reasonable estimation of the actual damages which CSG would suffer if CSG were to fail to receive

the amount of processing business as contemplated by this Agreement.” Although parties cannot

avoid a challenge to a liquidated damages provision simply by characterizing it as “reasonable,” such

express language is instructive of the parties’ intent when the terms are mutually bargained for

between equally competent parties. See Shel-al Corp., 492 F.2d at 94; Loggins Constr. Co. v.

Stephen F. Austin State Univ. Bd. of Regents, 543 S.W.2d 682, 685 (Tex. App.—Tyler 1976, writ

ref’d). Southern Union’s own witnesses testified that the language of the discontinuance fee

provision was bargained for and intended by the parties, and that the amount awarded under the

discontinuance fee was reasonable. In response to questions on cross-examination, Stanley Mayer

agreed that the provision was mutually negotiated, that he approved its terms, and that he knew

Southern Union would be responsible for paying the fee if it breached the contract. When David

Kvapil was asked whether he was aware at the time Southern Union filed suit against CSG “that the

calculation of the discontinuance fee would be approximately $2 million,” he responded that, “Yeah.

I think that’s what it calculates to.” Kvapil further agreed that Southern Union understood the

purpose of the discontinuance fee was “to compensate CSG for all the work they have done and all

their expectation” and that this was “fair.”

               The jury was asked to determine what amount would be “fair and reasonable” to

award CSG pursuant to the discontinuance fee, and it responded “$2.1 million.” A jury’s findings

on damages should be upheld if there is sufficient evidence in the record to show that the amount

is fair and reasonable compensation. Dillard Dep’t Stores, Inc. v. Silva, 148 S.W.3d 370, 371 (Tex.

                                                 12
2004). Here, the jury was entitled to make this finding based on both the express language of the

contract and on the testimony of Southern Union’s witnesses. We find that this is sufficient evidence

from which the jury could determine that it was reasonable to award CSG $2.1 million in liquidated

damages. Southern Union’s second issue is overruled.

Prejudgment Interest

               Southern Union urges in its third issue that, regardless of whether CSG is awarded

lost profits or the discontinuance fee, CSG is not entitled to recover prejudgment interest on either

award because both encompass elements of future damages, and section 304.1045 of the finance

code, as amended in 2004, specifically prohibits recovery of prejudgment interest on awards of future

damages. Tex. Fin. Code Ann. § 304.1045 (West Supp. 2004-05). CSG counters that the finance

code does not prevent prejudgment interest in this case because, by its express terms, the provision

only applies to cases involving “wrongful death, personal injury, or property damage.” Tex. Fin.

Code Ann. §§ 304.101, .1045 (West 1998 & Supp. 2004-05). Southern Union asserts in response

that, despite its express terms, section 304.1045 prevents prejudgment interest here based on the

Texas Supreme Court’s holding that the statutory framework should be applied to all cases, not just

those involving “wrongful death, personal injury, and property damage.” Johnson & Higgins of Tex.,

Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 514, 530 (Tex. 1998). CSG argues, however, that

even if section 304.1045 prevents prejudgment interest on future damages in a breach-of-contract

case, it is still proper for CSG to recover prejudgment interest on the amount awarded as the

discontinuance fee because it is an award of liquidated, not future, damages. We review the trial

                                                 13
court’s award of prejudgment interest for an abuse of discretion. Purcell Const., Inc. v. Welch, 17
S.W.3d 398, 402 (Tex. App.—Houston [1st Dist.] 2000, no pet.).

                Southern Union and CSG agree that the discontinuance fee was intended to be a

liquidated damages provision. Liquidated damages are given in lieu of actual damages and thus they

are not considered “future damages,” even though aspects of the liquidated award may compensate

the party for what would have otherwise been recovered as future losses. See Lafarge Corp. v. Wolff,

Inc., 977 S.W.2d 181, 188 n.13 (Tex. App.—Austin 1998, pet. denied); Eberts v. Businesspeople

Personnel Servs., Inc., 620 S.W.2d 861, 864-65 (Tex. App.—Dallas 1981, no writ). Liquidated

damages are distinct from future damages because the measure of liquidated damages is stipulated

to before the occurrence of a breach and thus, unlike future damages, the amount of liquidated

damages can be immediately ascertained at the time of the breach. See Phillips, 820 S.W.2d at 788.

It is permissible for a trial court to award prejudgment interest when a contract “provides the

conditions on which liability depends and . . . fixes a measure by which the sum payable can be

ascertained with reasonable certainty.” Wheat v. American Title Ins. Co., 751 S.W.2d 943, 944-45

(Tex. App.—Houston [1st Dist.] 1988, no writ); see also Sealock, 755 S.W.2d. at 70 (upholding

award of prejudgment interest on liquidated damages); Perry Roofing Co. v. Olcott, 744 S.W.2d 929,

932 (Tex. 1988) (Wallace, J., dissenting) (“The Legislature has given contracting parties notice that

if they enter into and subsequently breach agreements in which damages are liquidated or otherwise

ascertainable, they may be held liable for prejudgment interest. Parties to contracts have always had

this corresponding obligation and right . . . .”).

                                                     14
               We decline to reach the issue of whether the finance code prevents recovery of

prejudgment interest on future damages in a breach-of-contract case because we agree with CSG’s

argument that liquidated damages are distinct from future damages and, as such, section 304.1045

does not prohibit the recovery of prejudgment interest on liquidated damages. The trial court

therefore did not abuse its discretion in awarding prejudgment interest to CSG on the $2.1 million

it recovered pursuant to the discontinuance fee.

Remittitur

               In its final issue, Southern Union asserts that the judgment should be modified to

remit $140,000 of CSG’s damages. The jury expressly stated in the verdict that if Southern Union

returned the software licenses provided to it by CSG, then CSG would be entitled to zero damages

for the licenses. It is undisputed that Southern Union returned the licenses. The trial court awarded

CSG $140,000 for the licenses, over Southern Union’s objection. CSG does not oppose a remittitur

of $140,000. Southern Union’s fourth issue is sustained and we modify the judgment accordingly.

In all other respects, the trial court’s judgment is affirmed.

                                               Jan P. Patterson, Justice

Before Justices Kidd, Patterson and Puryear; Justice Kidd not participating

Modified and, as Modified, Affirmed

Filed: January 27, 2005

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