O.C.T.G., L.L.P. AND SOJOURN PARTNERS, L.L.C., Appellants
LAGUNA TUBULAR PRODUCTS CORPORATION AND LTP REAL ESTATE, L.L.C., Appellees
Appeal from the 190th District Court Harris County, Texas
Trial Court Cause No. 2013-44749
consists of Chief Justice Frost and Justices Jamison and
Hill Jamison Justice.
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
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.
Factual and Procedural Background
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."
The Purchase Agreement and the Easement Agreement
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.
The Finishing Agreement
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
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.
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.
The Cimarex Complaint
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.
Filing of suit by Laguna and LTP
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.).
Summary Judgment and Trial
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.
close of evidence, the trial court granted a directed verdict
on several claims. The jury then rendered a verdict finding,
• OCTG failed to comply with the Finishing Agreement by
failing to provide inspection services in compliance with the
• 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.
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.
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.
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.
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,
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
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.
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.
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.
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.
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. 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.).
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.
Limitation of liability provision
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
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.
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).
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).
The Gossett principle
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]."
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.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
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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.
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