[co-author: Matthew Wheatley - Summer Clerk]

In Texas, lost profits can’t be recovered as damages unless proven to a “reasonable certainty”.

Question 1: What does that mean?

Question 2: Does it matter if the deal is in Bulgaria?

Let’s get rid of the second one first. Bulgaria or no Bulgaria, it doesn’t matter as long as Texas law applies.  The Texas Supreme Court examined the first one.

The Transactions

CBM Energy had a concession to explore for coalbed methane. It offered Carlton Energy a 48% interest in exchange for funding. Carlton then offered Phillips a 10% interest for $8.5 million. After signing a contract, Phillips informed Carlton that he would be unable to reach an agreement, while at the same time secretly dealing with CBM to take over Carlton’s position.

Carlton sued Phillips and his companies for breach of contract and tortious interference with its CBM contract, claiming damages for its 38% interest in the project.

Phillips’ Bulgarian Two-Step

Phillips tortuously interfered with Carlton’s contract by influencing CBM to terminate their agreement. He told Carlton he had no interest in continuing the project, while at the same time moving forward with CMB to take over Carlton’s interest.

Calculating Fair Market Value

A property’s fair market value is what a willing buyer would pay a willing seller, neither acting under any compulsion. It can be determined by (among other methods) capitalizing net income–that is, profits. Lost profits can be recovered only when the amount is proved with reasonable certainty, which leads to Carleton’s dilemma.

What was the fair market value of Carlton’s 38% interest in the project?

• Carlton’s engineer testified as to “a range” of the value of the reserves in the ground: $9 to $11 billion.
• He also testified about the value of the concession if a certain number of wells were drilled: $12 to $38 million.
• The amount Phillips agreed to pay Carlton for its interest in the project was $31.16 million.

The jury liked Phillips so much it awarded Carlton $66 million.  The trial court ordered a remittitur to $31.16 million.

Were the Damages Speculative?

Some were and some weren’t. Carlton’s lost profits on its 38% interest in the project was based on Phillips’ agreement to pay Carlton $8.5 million for a 10% interest (the third scenario). This was at least some evidence to prove lost profits with a reasonable certainty.

The alternatives were based on “sweeping assumptions” and “conjecture”; there was no basis for determining the reliability of volume predictions; certain assumptions were “demonstratively unrealistic”; the discount rate was arbitrary; he merely assumed that the gas, if produced, would have a market; and he did not characterize the range of values as fair market value.

Lesson

Even a “market of one” can determine fair market value. It’s real. If you’re betting the over-under on a damage award, don’t rely on guesses and unsupportable assumptions.

What if the Contract is Not Signed?

Philips denied there was an agreement with Carlton. But the parties behaved as if they had an agreement and they continued the project for some time as joint venturers.

If there is a mutual assent of the parties, signature and delivery are not essential to a contract unless signatures are explicitly required as a condition of mutual assent.

Did you Know? 

Bulgaria ranked 72nd in the world in 2011 world gas production.

A post mentioning the two step deserves a musical interlude.

Matthew Wheatley is a Gray Reed summer clerk and rising 3L at the University of Texas Law School.