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North. Ill. Gas Co. v. Energy Coop.





Appeal from the Circuit Court of Grundy County; the Hon. Richard R. Wilder, Judge, presiding.


An action was brought in the circuit court of Grundy County by Northern Illinois Gas Company (hereinafter NI-Gas), seeking a declaratory judgment that it had properly ceased performance under a long-term supply contract with Energy Cooperative, Inc. (hereinafter ECI). ECI counterclaimed for breach of contract and the jury returned a verdict for $305.5 million on ECI's counterclaim. The facts are as follows.

NI-Gas is a public utility which distributes natural gas to customers throughout the northern third of Illinois (excluding Chicago). As a public utility, NI-Gas is subject to regulation by the Illinois Commerce Commission (hereinafter ICC) under the Public Utilities Act (Ill. Rev. Stat. 1981, ch. 111 2/3, pars. 1 through 95).

In order to deal with a natural gas shortage in the early to mid-1970's NI-Gas received permission from the ICC to construct a supplemental natural gas (SNG) plant. The plant began operation in 1974 using various types of feedstock which were converted into natural gas. One type of feedstock was naphtha, which was supplied by Atlantic Richfield Company (ARCO), pursuant to a contract entered into with NI-Gas in 1973. The ARCO contract was assigned to ECI in 1976.

The contract was to remain in force for 10 years or until 56 million barrels of naphtha had been delivered to NI-Gas. By late 1979 and early 1980 it became apparent to NI-Gas that the demand for natural gas was decreasing while the price of naphtha was steadily increasing. These changes were caused essentially by Federal decontrol of natural gas supplies in 1978 and increases in the price of crude oil which determined the price ECI charged for naphtha.

Between 1974 and 1978 NI-Gas had been holding large amounts of gas in storage facilities. In 1980, the ICC denied NI-Gas' request for a rate increase partly because NI-Gas was holding, in ICC's opinion, an unreasonably large amount of gas in storage. Since NI-Gas was not permitted to raise its rates, it decided to reduce the inventory by cutting back on SNG production, which was its most expensive source of gas.

NI-Gas successfully negotiated reductions in SNG feedstock shipments with two of its suppliers. At the time of the ICC rate order, ECI had been voluntarily delivering reduced quantities of naphtha. Rather than seek further reductions, NI-Gas attempted to negotiate an end to the contract with ECI. When negotiations failed, NI-Gas terminated its performance as of March 31, 1980.

On March 17, 1980, NI-Gas filed suit seeking a declaratory judgment that it had no further obligations under the contract and that ECI's damages, if any, were limited to the amount specified by the liquidated damages clause of the contract. ECI counterclaimed for $230 million in damages (the alleged difference between the contract and market prices of naphtha on February 29, 1980, when ECI asserted it learned of NI-Gas' termination of the contract), and unspecified additional damages.

NI-Gas' reply to the counterclaim alleged as affirmative defenses that its nonperformance was justified by (1) circumstances beyond its control within the meaning of the force majeure provisions of the contract; (2) NI-Gas' obligation to comply with the Illinois Public Utilities Act; (3) the commercial impracticability of continued performance; and (4) circumstances beyond NI-Gas' control that had frustrated the purpose for which it had entered into the contract. NI-Gas further alleged that any relief to which ECI may be entitled is limited by the liquidated damages clause of the contract; that ECI is precluded from obtaining the relief requested because it failed to mitigate its damages; and that, with respect to any naphtha (or any product made from naphtha) disposed of by ECI to a third party, ECI's damages, if any, are measured by the difference between the contract and resale prices, less expenses saved by ECI as a result of NI-Gas' termination.

Subsequently, NI-Gas filed its second amended complaint, alleging the January 3, 1980, order of the ICC as a specific event of force majeure that excused its performance. The second amended complaint also added the allegations that ECI had deliberately overcharged NI-Gas for naphtha during the first three months of 1980, that ECI had not complied with its obligation of good faith in the performance of the contract and therefore had breached the contract, and, in addition, that NI-Gas had been damaged in an amount in excess of $3,000,000.

On June 10, 1982, the circuit court (1) denied NI-Gas' motion for summary judgment on the force majeure and liquidated damages defenses; (2) granted ECI's motion to strike NI-Gas' liquidated damages defense; and (3) granted summary judgment for ECI on NI-Gas' force majeure, frustration of purpose, and public utility defenses. Later, the trial court granted summary judgment for ECI on NI-Gas' allegations of fraud and breach of contract by ECI because of its alleged overcharges to NI-Gas during the first quarter of 1982. The trial court directed a verdict for ECI on NI-Gas' defense of commercial impracticability after the close of the evidence.

Prior to trial, the court entered judgment for NI-Gas for the amount of ECI's overcharge and precluded NI-Gas from referring to this judgment during trial. The court also granted ECI's motion in limine to exclude evidence concerning liquidated damages, force majeure and NI-Gas' status and duties as a regulated public utility.

Although NI-Gas raises six main issues on appeal, we need only discuss five. They will be presented under the following three headings: (1) Liquidated Damages; (2) The Affirmative Defenses and; (3) The Court's Evidentiary Rulings.


NI-Gas argues that the trial court erred in denying its motion for summary judgment on the liquidated damages clause and in striking the liquidated damages defense. The court held that the liquidated damages clause of the contract (section 13) gave the non-breaching party the choice of recovering either actual or liquidated damages. ECI chose to pursue actual damages resulting in a jury award of $305.5 million.

NI-Gas contends that the liquidated damages clause is clear and unambiguous and provides the exclusive measure of damages in the event of default:

"XIII. Liquidated Damages:

If, prior to the delivery to PURCHASER of the total number of Barrels of Feedstock specified in Section III hereof, this Agreement is terminated by reason of either party's default, prior to the expiration of the term set forth in Section II above, then, upon demand of the party not in default, the defaulting party shall pay to the other as liquidated damages, a sum in cash determined by multiplying one cent ($0.01) by the difference between the total gallons specified in Section III, and the gallons actually delivered to PURCHASER pursuant to this Agreement.

It is further agreed that nothing herein contained shall prejudice the rights of either party to terminate this Agreement as hereinafter provided for and in the event the foregoing provision for liquidated damages is determined to be unenforceable for any reason, the party not in default shall not be precluded from exercising any other rights or remedies to which the party may be entitled under the terms of this Agreement or otherwise at law or equity."

According to NI-Gas' calculations, this section would limit ECI's recovery to a maximum of $13,576,002.30.

ECI responds that section 13 contains two conditions which must be satisfied before the liquidated damages clause may be invoked. ECI also argues that section 13 is presumed to be nonexclusive under section 2-719 of the Uniform Commercial Code (Ill. Rev. Stat. 1981, ch. 26, par. 2-719).

• 1 ECI interprets section 13 as being contingent upon a demand for liquidated damages and termination pursuant to section 14 of the contract:

"XIV. Default and Termination

In the event either party is in default of any of its obligations hereunder, in addition to any other rights or remedies available at law or equity, the party not in default may cancel this Agreement by giving not less than thirty (30) Days prior written notice to the party in default; provided that such notice of default shall not be effective if the party claimed to be in default shall cure such default within thirty (30) Days after having received such notice. Any such termination shall be an additional remedy and shall not prejudice the rights of the party not in default to recover any amounts due it hereunder for any damage or loss suffered by it by virtue of such default, and shall not constitute a waiver of any other remedy to which the party not in default may be entitled for breach of this Agreement. Waiver of any defaults shall not be deemed a continuing waiver or a waiver of any subsequent default whether of the same or a different provision of this Agreement."

ECI argues that liquidated damages are not available because ECI (the non-breaching party) did not terminate under section 14 and did not demand liquidated damages. We find that sections 13 and 14 do not have to be read together, nor may the non-breaching party avoid the liquidated measure of damages simply by failing to make a demand.

Section 13 clearly provides that liquidated damages are available when the contract is terminated by default. It does not say that the contract must be terminated pursuant to section 14, which simply provides the non-breaching party with a means of formally ending the contract while reserving the right to recover damages for the unperformed portion. An additional distinction between the two sections is found in the language of section 14 which states that "* * * any such termination shall be an additional remedy and shall not prejudice the rights of the party not in default to recover any amounts due hereunder * * *." This provision is inconsistent with any construction making termination pursuant to section 14 a prerequisite to recovery of liquidated damages. Section 14 is clearly an additional means of relief. This conclusion is also supported by similar language in section 13 stating that "* * * nothing herein * * * shall prejudice the rights of either party to terminate this agreement as hereinafter provided * * *." Inclusion of this language in both section 13 and 14 convinces us that the parties did not intend that the availability of relief under one section be conditioned on the operation of the other section.

• 2 ECI also contends that it has not made a demand for liquidated damages and, therefore, it has the option of seeking actual damages. Failure to demand a contractual right does not create rights greater than those bargained for. A liquidated damages clause is the agreement of the parties as to the amount of damages which must be paid in the event of default. (5 Corbin on Contracts sec. 1062, at 355-56 (1964).) Proof of liability is all that is required to entitle the injured party to recover the liquidated amount. (Weiss v. United States Fidelity & Guaranty Co. (1921), 300 Ill. 11.) If the non-defaulting party does not wish to demand this amount, he will not be forced to do so. But this does not create the right to seek a greater measure of damages than the amount bargained for.

Next, ECI relies on section 2-719(1)(b) of the Uniform Commercial Code, in arguing that the liquidated damages clause does not provide the exclusive measure of damages unless it is expressly agreed to be exclusive and labeled as such.

"Sec. 2-719. Contractual Modification or Limitation of Remedy. (1) Subject to the provisions of subsections (2) and (3) of this Section and of the preceding section on liquidation and limitation of damages,

(a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts; and

(b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy." ...

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