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O.C.T.G., L.L.P. v. Laguna Tubular Products Corp.

Court of Appeals of Texas, Fourteenth District

May 31, 2018

O.C.T.G., L.L.P. AND SOJOURN PARTNERS, L.L.C., Appellants
v.
LAGUNA TUBULAR PRODUCTS CORPORATION AND LTP REAL ESTATE, L.L.C., Appellees

         On Appeal from the 190th District Court Harris County, Texas Trial Court Cause No. 2013-44749

          Panel consists of Chief Justice Frost and Justices Jamison and Busby.

          MAJORITY OPINION

          Martha Hill Jamison Justice.

         In this contract case involving a variety of claims and counterclaims between two affiliated companies as plaintiffs/counterdefendants and two affiliated companies as defendants/counterplaintiffs, we conclude that the evidence is legally insufficient to support the total amount of damages found by the jury as to breach-of-contract and breach-of-warranty claims by one plaintiff against one defendant.

         We also conclude that the trial court's award of actual damages to the other plaintiff on its breach-of-contract claim against the other defendant was legally sufficient. We affirm in part and reverse and remand in part.

         I. Factual and Procedural Background

         Oil country tubular goods are metal pipes used by the oil and gas industry "downhole." Laguna Tubular Products Corporation provided heat-treatment and hydro-testing services of tubular goods at its facility in Houston. These services are sometimes called "processing." O.C.T.G., L.L.P. provided services involving threading and inspecting pipe-sometimes called "finishing."

         A. The Purchase Agreement and the Easement Agreement

         Under the Purchase and Sale Agreement, Sojourn Partners, L.L.C., an affiliated company of OCTG, sold 26.48 acres of land to LTP Real Estate, L.L.C., an affiliated company of Laguna. Sojourn agreed to construct a rainwater retention pond on its remaining land for LTP's use, and LTP agreed to help pay for the construction. Under the Access Easement and Lease Agreement, LTP granted Sojourn an exclusive easement and right to use part of a building known as the Threading Area located on the land Sojourn had sold.

         B. The Finishing Agreement

         Laguna built and operated its finishing business on the land LTP bought from Sojourn. Laguna and OCTG entered into a Tubular Finishing Services Agreement. Under the Finishing Agreement, OCTG promised to provide finishing services, including but not limited to threading, full-length ultrasonic testing, and electromagnetic testing.

         Under the Finishing Agreement, OCTG warranted that all of OCTG's services would conform to applicable American Petroleum Institute standards and that when there is no specific API standard, OCTG's services would meet or exceed applicable industry quality standards.

         With exceptions not applicable to this case, the Finishing Agreement provides that "[OCTG] shall be in default if [it] fails to perform any of its duties or covenants hereunder, unless properly cured as set forth in Section 22.3." The non-defaulting party must give written notice of the acts, omissions, or failures constituting a default and provide the non-performing party with thirty days in which to cure the default.

         C. The Cimarex Complaint

         Cimarex, an end-user of Laguna's product, discovered numerous defects in Laguna-processed pipe joints. According to Laguna, it learned that OCTG was not using Level 2 inspectors, as required by API standards. In early 2013, a potential customer wanted to assess OCTG's methods for finishing and inspecting a Laguna product that the customer planned to buy. The customer audited OCTG in the presence of Laguna's quality manager, Jose Luis Diaz. OCTG did not pass the audit. Diaz concluded that OCTG's inspection did not satisfy API standards. Laguna hired a third-party inspector to do a reinspection, and on August 1, 2013, Laguna sent OCTG notice of termination of the Finishing Agreement.

         D. Filing of suit by Laguna and LTP

         Laguna and LTP sued OCTG and Sojourn, seeking money damages and removal of OCTG equipment from the Threading Area. The trial court granted Laguna and LTP a temporary injunction requiring OCTG to remove its threading machine from the Threading Area and enjoining it from conducting threading services in that area. OCTG and Sojourn filed an interlocutory appeal, and this court affirmed the temporary injunction. See O.C.T.G., L.L.P. v. Laguna Tubular Prods., Corp., No. 14-13-00981-CV, 2014 WL 3512863, at *2-5 (Tex. App.-Houston [14th Dist] Jul. 15, 2014, no pet.) (mem. op.).

         E. Summary Judgment and Trial

         The trial court granted partial summary judgment dismissing most of the counterclaims. The remaining claims, which included Laguna's claims, LTP's breach-of-contract claim, OCTG's counterclaim for breach of contract, and LTP's claim for trespass to real property against OCTG, proceeded to a jury trial.

         At the close of evidence, the trial court granted a directed verdict on several claims. The jury then rendered a verdict finding, as relevant:

• OCTG failed to comply with the Finishing Agreement by failing to provide inspection services in compliance with the API Standards.
• OCTG's failure to comply with an express warranty was the proximate cause of damage to Laguna.
• The value of LTP's land on which a rainwater detention area was to be built (because Sojourn had not built the promised pond) is $150, 000.
• The sum of $1, 562, 127 would fairly and reasonably compensate Laguna for its damages that resulted from OCTG's failure to comply with the Finishing Agreement.
• The sum of $1, 562, 127 would fairly and reasonably compensate Laguna for its damages that resulted from OCTG's breach of warranty.

         The parties agreed to try the attorney's fees issues to the bench. The trial court found that reasonable and necessary fees for Laguna's contract claims against OCTG and for LTP's contract claim against Sojourn were $1, 476, 235.06 for prosecution of the case in the trial court.

         The trial court denied various post-verdict motions and rendered judgment on the jury's verdict awarding (1) Laguna recovery against OCTG in the amount of $1, 562, 127 in actual damages, plus prejudgment interest, postjudgment interest, and court costs, (2) LTP recovery against Sojourn for actual damages, plus prejudgment interest, postjudgment interest, and court costs, and (3) Laguna and LTP recovery against OCTG and Sojourn jointly and severally in the amount of $1, 476, 235.06 for reasonable and necessary attorney's fees in the trial court and other conditional awards of appellate attorney's fees in favor of Laguna and LTP and against OCTG and Sojourn. The trial court also permanently enjoined OCTG and Sojourn from reinstalling a threading machine in Laguna's Threading Area and from conducting threading services in that area. The trial court denied OCTG and Sojourn's motion for new trial.

         II. Sufficiency Challenges

         In their first issue, OCTG and Sojourn assert various sufficiency challenges to the jury's findings. When reviewing the legal sufficiency of the evidence, we consider the evidence in the light most favorable to the challenged finding and indulge every reasonable inference that would support it. City of Keller v. Wilson, 168 S.W.3d 802, 822 (Tex. 2005). We must credit favorable evidence if a reasonable factfinder could and disregard contrary evidence unless a reasonable factfinder could not. See id. at 827. We must determine whether the evidence at trial would enable reasonable and fair-minded people to find the facts at issue. See id. The factfinder is the only judge of witness credibility and the weight to give to testimony. See id. at 819.

         A. Breach

         OCTG asserts that the trial evidence is legally and factually insufficient to support the jury's liability findings against OCTG on breach of the Finishing Agreement and breach of express warranty. OCTG asserts that the only trial evidence on these topics was conclusory testimony. Specifically, OCTG asserts that the testimony of Eddie Anaya (Laguna's CEO) and Jose Luis Diaz (Laguna's quality manager) was conclusory and therefore is not evidence that OCTG failed to comply with the terms of the Finishing Agreement. The Finishing Agreement required OCTG's inspections to meet API standards, procedures, requirements, and specifications.

         Under the Finishing Agreement, OCTG was required to provide many types of inspections. Diaz testified that one way OCTG inspected pipes was by processing them through an electromagnetic-induction-inspection machine. If the machine notices a suspected defect in the piping, the machine separates the pipe, and a "prove up inspector" or "prove up operator" evaluates whether the pipe is in compliance or out of compliance with the specification requirements.

         Trial evidence showed that OCTG's electromagnetic-induction-inspection machine could not pass inspection. Diaz explained that for the inspection process to work, the machine repeatedly must find defects that are a certain size. Diaz testified that the machine was unable to detect notches consistently, which is a violation of API specifications. According to Diaz, this created the risk that end users would receive defective pieces of pipe that would not comply with API standards.

         Diaz explained that in addition to not having a working electromagnetic-induction-inspection machine, OCTG did not meet API requirements for inspecting separated pipe and that the API specifies that an individual inspecting the pipe separated by the machine must be certified as a Level 1, 2, or 3 inspector. The API requires inspection companies to keep documentation of certification on hand. Diaz testified that he was present when one of Laguna's potential customers, Vallourec, audited OCTG. Despite being given multiple opportunities, OCTG never was able to produce certification of its prove-up inspectors or prove-up operators.

         OCTG asserts that the evidence that OCTG failed the audits is not any evidence that OCTG breached the Finishing Agreement because there is no evidence that the issues present during the audits were present when OCTG was performing work for Laguna. We disagree, as the evidence on this point went beyond the audits.

         Diaz testified that he received an email from an end-user-Cimarex-stating that Cimarex reviewed piping it received from Laguna and found a defective joint. Diaz testified that Laguna sent a representative to look at the joint and that the Laguna employee confirmed that the defective joint had been inspected and threaded by OCTG. Diaz testified that OCTG should have inspected and rejected the piece of pipe because it did not meet API specifications. The joint contained marks of grinding, which is permissible under API specifications. But Diaz explained that under the API specifications, if an operator grinds down the pipe, the pipe wall still must be a certain thickness to prevent "blowup." The joint sent to Cimarex had three markings ground down to a thickness below the API minimum requirement. Laguna confronted OCTG about this issue in an email. OCTG responded by explaining that it could not pinpoint the root cause of the issue, but that OCTG experienced significant turnover in its inspection department in August and September 2012. Diaz testified that after receiving OCTG's response, Laguna hired a company, JPF, to reinspect all of the material sitting in Laguna's yard. Diaz observed the reinspection, which had a 3.6 percent rate of rejection for joints that OCTG had approved, totaling 1, 169 joints.

         OCTG asserts Laguna did not present any evidence that OCTG used the electromagnetic-induction-inspection machine after the audit showed the machine was failing, but the evidence, taken as a whole, shows that OCTG was not meeting API standards and that products inspected by OCTG did not meet those standards. We conclude the evidence is legally sufficient to support the jury's breach findings in favor of Laguna.[1] See id. at 823; see also Nip v. Checkpoint Sys., Inc., 154 S.W.3d 767, 769-70 (Tex. App.-Houston [14th Dist.] 2004, no pet.).

         B. Causation

         OCTG next asserts that the trial evidence is legally and factually insufficient to support the jury's findings that Laguna's damages were caused by OCTG's failure to comply with the Finishing Agreement and OCTG's breach of warranty. OCTG argues that the evidence does not support these causation findings for the same reasons OCTG and Sojourn asserted the evidence does not support the jury's breach findings, an argument that we reject above.

         C. Limitation of liability provision

         OCTG and Sojourn assert this court must set aside the damages found by the jury in response to damage questions for Laguna's breach-of-contract and breach-of-warranty claims because, in the Finishing Agreement, the parties agreed that OCTG would not be liable for damages resulting from its breach of the Finishing Agreement. Instead, OCTG's sole obligation would "be to furnish substitute equivalent Services on substitute goods or, at [OCTG's] election, to repay or credit [Laguna] an amount equal to the price of the Services."

         Texas Rule of Civil Procedure 94 requires an affirmative pleading of certain specified defenses and of "any other matter constituting avoidance or affirmative defense." Tex.R.Civ.P. 94. A contractual limitation-of-liability provision constitutes an avoidance or affirmative defense that a party must plead affirmatively. See id.; see also Tacon Mech. Contractors, Inc. v. Grant Sheet Metal, Inc., 889 S.W.2d 666, 671 (Tex. App.-Houston [14th Dist.] 1994, writ denied). A party waives an avoidance or affirmative defense if the party fails to plead it and the issue is not tried by consent. See Tacon Mech. Contractors, 889 S.W.2d at 671. OCTG neither pleaded that its liability was limited under the Finishing Agreement, nor was the limitation-of-liability issue tried by consent. Thus, OCTG has waived this issue. See id.

         D. Damages

         OCTG asserts the trial evidence is legally and factually insufficient to support the jury's findings in response to the damages question for OCTG's breach of the Finishing Agreement and breach of express warranty. The jury found $1, 562, 127 in damages for OCTG's breach of contract and $1, 562, 127 in damages for OCTG's breach of warranty. OCTG and Sojourn argue that the evidence is legally and factually insufficient to support the jury's findings as to reasonable and necessary expenses under the legal standard set forth in Dallas Railway and Terminal Co. v. Gossett and its progeny. 294 S.W.2d 377, 382-83 (Tex. 1956); see also McGinty v. Hennen, 372 S.W.3d 625, 627-28 (Tex. 2012).

         1. Preservation

         Before discussing this legal standard, we first consider whether OCTG preserved these appellate complaints in the trial court. Laguna and LTP assert that OCTG did not preserve error. In their motion for judgment notwithstanding the verdict, OCTG and Sojourn asserted that the record contained no evidence to support the jury's finding of $1, 562, 127 in damages resulting from the breach of the Finishing Agreement. OCTG and Sojourn did not assert a lack of evidence to support the jury's finding of $1, 562, 127 in damages resulting from OCTG's breach of warranty. But, in their motion for new trial, OCTG and Sojourn asserted legal insufficiency of the evidence to support the jury's damages findings in response to both questions. The trial court denied the motion for new trial. Laguna and LTP appear to argue that OCTG was required to assert specifically that the evidence is legally insufficient as to the "reasonable and necessary" element of each question. We conclude that the complaints in the motion for new trial preserved error as to the legal-insufficiency arguments under OCTG's sub-issue. See Arkoma Basin Expl. Co. v. FMF Assocs., 249 S.W.3d 380, 387-88 (Tex. 2008).

         2. The Gossett principle

         The normal measure of damages in a breach-of-contract case is the expectancy or benefit-of-the-bargain measure. Mays v. Pierce, 203 S.W.3d 564, 577 (Tex. App.-Houston [14th Dist.] 2006, pet. denied). The purpose of this measure of damages is to restore the injured party to the economic position it would have occupied had the contract been performed. Clear Lake City Water Auth. v. Friendswood Dev. Co., 344 S.W.3d 514, 523 (Tex. App.-Houston [14th Dist.] 2011, pet. denied); Mays, 203 S.W.3d at 577. Here, the jury was instructed to consider only the following element of expectancy damages: "[t]he reasonable and necessary expenses incurred in the past by Laguna to re-inspect tubular goods previously inspected by [OCTG] and the reasonable and necessary expenses incurred by Laguna to secure alternative inspection and threading services, including transportation costs for a reasonable time following termination of the [Finishing Agreement]."

         The party seeking to recover the cost of completion in a breach of contract case has the burden to prove that the damages sought are reasonable and necessary.[2]Mustang Pipeline Co. v. Driver Pipeline Co., 134 S.W.3d 195, 200-01 (Tex. 2004). It is well settled that proof of amounts charged or paid does not raise an issue of reasonableness. Gossett, 294 S.W.2d at 383. Thus, evidence of the amounts charged or paid, by itself, is not legally sufficient evidence that these charges are reasonable and necessary; instead, separate evidence must be offered that raises a fact issue regarding the reasonableness and necessity of the expenses or costs in question. See Mustang Pipeline Co., 134 S.W.3d at 200-01; Gossett, 294 S.W.2d at 382-83; O & B Farms, Inc. v. Black, 300 S.W.3d 418, 422-23 (Tex. App.-Houston [14th Dist.] 2009, pet. denied). To have raised a fact issue as to reasonableness and necessity of expenses, Laguna had to show more than simply "the nature of the injuries, the character of and need for the services rendered, and the amounts charged therefor." Gossett, 294 S.W.2d at 383. Instead, some other "evidence showing that the charges are reasonable" is required. McGinty, 372 S.W.3d at 627.

         The Mustang Pipeline case illustrates this principle. In that case, Driver Pipeline Company agreed to build Mustang a pipeline. Mustang Pipeline Co., 134 S.W.3d at 196. Unexpected weather prevented Driver from completing the task on time, and it sought an extension. Id. Mustang then contracted with another company to finish Driver's portion of the pipeline and sued Driver for breach of contract. Id. at 197. The jury found that Driver had breached the agreement and awarded Mustang $2 million, its out of pocket cost of completion. Id. The trial court and court of appeals, however, set aside that award. Id. at 197-98. The court of appeals reasoned that Mustang did not establish that the $2 million it paid the new company was a reasonable cost for the completion of the pipeline. Id. at 198. The Supreme Court of Texas agreed. Id. at 201.

         Mustang's expert estimated the cost for the new company to complete the contract but did not opine about "whether that contracted amount was a reasonable cost to build a pipeline." Id. The high court noted that evidence of out-of-pocket costs alone "did not establish that the damages were reasonable and necessary." Id. Instead, the court found it "well settled that proof of the amounts charged or paid does not raise an issue of reasonableness, and recovery of such expenses will be denied in the absence of evidence showing that the charges are reasonable." Id. (quoting Gossett, 294 S.W.2d at 383). Because Mustang failed to produce evidence on the reasonableness of its damages, the supreme court held that the trial court correctly set aside the damage award. Id.

         In the McGinty case, the jury awarded the plaintiff, Hennen, both remedial and difference-in-value damages, and the trial court rendered judgment on the amount of remedial damages. 372 S.W.3d at 627. Hennen's expert provided the only evidence offered on reasonable remedial damages. Id. He derived his estimated costs of repair from an "Exactimate" program "that's used widely in the insurance industry." Id. The program had a Houston price guide, which he used to compare Houston prices to Corpus Christi prices and found them to be "within a percent or two difference." Id. The expert further testified that because not every price issued by the program is right, "we have to cross-reference and double check all our pricing." Id. And, finally, the expert testified that "some of the other costs came from subcontractors or historical data or jobs." Id.

         The Supreme Court of Texas concluded that Hennen's evidence on reasonableness was quite similar to what the court found insufficient in Mustang Pipeline. Id. Estimated out-of-pocket expenses, like paid out-of-pocket expenses, do not establish that the cost of repair was reasonable. Id. at 627-28. Some other evidence is necessary. Id. at 628. Neither Hennen's damages expert nor any other witness testified that the estimated cost was reasonable. Id. Hennen argued that his expert testified extensively about how he derived his pricing estimate, which Hennen asserted is the same as reasonableness. Id. But, the high court concluded that although the expert explained how the figure was derived, that testimony did not in itself make the figure reasonable. Id.

         The McGinty court stated that "[i]n some cases, the process will reveal factors that were considered to ensure the reasonableness of the ultimate price." Id. But, the court concluded that the process in McGinty did not show such factors, and therefore, the trial evidence did not raise a fact issue as to whether the estimated cost of repair was reasonable. See id.

         Today, we must apply the Gossett line of cases to determine whether the trial evidence is legally sufficient to support the jury's finding of damages based on the reasonable and necessary expenses incurred by Laguna. In response to both damages questions, the jury found the amount of damages incurred by Laguna to be $1, 562, 127. Laguna sought damages based on three categories: (1) reinspection costs, (2) transportation costs, and (3) amounts paid to Cimarex as reimbursement for reinspection expenses that Cimarex had incurred. We presume without deciding that the trial evidence is legally sufficient to support a finding that Laguna actually paid the amounts it alleges to have incurred in each of these categories, and we address whether the evidence is legally sufficient to show that the reinspection costs and the reimbursements to Cimarex were reasonable and necessary expenses.

         3. Reinspection costs

         Laguna asserts that it paid $327, 632 to have joints reinspected and that these expenses were reasonable and necessary. Proof that Laguna incurred these reinspection costs, by itself, is legally insufficient to show that the expenses were reasonable and necessary. See McGinty, 372 S.W.3d at 627-28; Mustang Pipeline Co., 134 S.W.3d at 200-01; Gossett, 294 S.W.2d at 382-83.

         No trial witness explicitly testified that these reinspection expenses were reasonable and necessary. However, William Rowland, Laguna's Chief Operating Officer, testified that after Cimarex's discovery of a nonconforming joint, the audit reports showing defective equipment and personnel issues, and an investigation confirming the audit results, Laguna decided that the prudent course was to reinspect every accessible joint, although many of the joints already were downhole. Moreover, Diaz, Laguna's quality manager, testified that a single defective joint can damage an entire well. Under the applicable standard of review, we conclude that the trial evidence is legally sufficient to support a finding that the reinspection costs were necessary. See City of Keller, 168 S.W.3d at 823; Nip, 154 S.W.3d at 769-70.

         As to the reasonableness of those costs, Rowland testified that he selected the reinspectors as follows:

We went through their [quality management systems]. We looked at their abilities to inspect. Also, who had the ability to do it on-site. We had 32, 000 joints to inspect, so wanted to get it done on-site. And also somebody that could do a reasonable price and on time because it was going to take a little while to get this done.

         After reviewing the trial evidence under the applicable standard of review, we conclude that the trial evidence regarding the process by which Laguna selected the reinspection contractors revealed factors that were considered to ensure the reasonableness of amount paid for reinspection. See McGinty, 372 S.W.3d at 627- 28.

         We conclude that under the Gossett line of cases, the trial evidence is legally sufficient to support a finding that the reinspection costs were reasonable and necessary expenses, and thus the evidence is legally sufficient to support a finding of at least $327, 632 in damages for Laguna's breach-of-contract and breach-of-warranty claims. See id.

         4. Cimarex costs

         Laguna offered evidence at trial showing that it had reimbursed Cimarex $276, 850 for amounts Cimarex had paid to reinspect pipes. Proof that Laguna incurred these expenses, by itself, is legally insufficient to show that the expenses were reasonable and necessary. See id.; Mustang Pipeline Co., 134 S.W.3d at 200- 01; Gossett, 294 S.W.2d at 382-83. No trial witness testified that these reinspection expenses were reasonable or that they were necessary. We presume for the sake of argument that these expenses were necessary.

         Though Rowland testified as to how he chose contractors who performed reinspection services for Laguna, no trial evidence showed how Cimarex chose reinspection contractors. No witness testified that Cimarex chose contractors who would charge a reasonable price.

         After reviewing the trial evidence under the applicable standard of review, we conclude that, as to the costs that Laguna reimbursed to Cimarex for reinspection services, the trial evidence did not reveal factors that were considered to ensure the reasonableness of the amount paid. See McGinty, 372 S.W.3d at 627-28. So, applying the standard from the Gossett line of cases, we conclude that the trial ...


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