Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 8

FACTS Potomac Electric Power Company (PEPCO) is an electric utility serving the metropolitan Washington, D.C., area. Panda-Brandywine, L.P. (Panda) is a ''qualified facility'' under the Public Utility Regulatory Policies Act of 1978. In August, 1991, PEPCO and Panda entered into a power purchase agreement (PPA) calling for (1) the construction by Panda of a new 230-megawatt cogenerating power plant in Prince George's County, Maryland; (2) connection of the facility to PEPCO's high-voltage transmission system by transmission facilities to be built by Panda but later transferred without cost to PEPCO; and (3) upon commencement of the commercial operation of the plant, for PEPCO to purchase the power generated by that plant for a period of twenty-five years. The plant was built at a cost of $215 million.
The PPA is 113 pages in length, single-spaced, and is both detailed and complex. It gave PEPCO substantial authority to review, influence, and, in some instances, determine important aspects of both the construction and operation of the Panda facility. Section 19.1 of the PPA provided that the agreement was not assignable and not delegable without the written consent of the other party, which consent could not be unreasonably withheld.
In 1999, Maryland enacted legislation calling for the restructuring of the electric industry in an effort to promote competition in the generation and delivery of electricity. PEPCO's proposed restructuring involved a complete divestiture of its electric generating assets and its various PPAs, to be accomplished by an auction. The sale to the winning bidder was to be accomplished by an Asset Purchase and Sale Agreement (APSA) that included the PPA to which PEPCO and Panda were parties. Under the APSA the buyer was authorized to take all actions that PEPCO could lawfully take under the PPA with Panda.
On June 7, 2000, Southern Energy, Inc. (SEI) was declared the winning bidder. On September 27, 2000, the Public Service Commission (PSC) entered an order declaring, among other things, that the provisions in the APSA did not constitute an assignment or transfer within the meaning of Section 19.1 of the Panda PPA, that PEPCO was not assigning ''significant obligations and rights under the PPA,'' that Panda would not be harmed by the transaction, and that the APSA did not ''fundamentally alter'' the contract between Panda and PEPCO. The PSC thus concluded that Panda's consent to the proposed APSA was not required.
Panda disagreed and brought this lawsuit. The trial court ruled that the APSA effected an assignment of Panda's PPA and reversed the PSC order. PEPCO appealed and the appellate court concluded that, through the APSA, PEPCO effectively and improperly delegated its duties under the PPA to SEI.
DECISION Judgment affirmed.
OPINION Wilner, J. By prohibiting both non-consensual assignment and delegation, the PPA recognizes a nuance, or distinction, that is occasionally overlooked. In a bilateral contract, each party ordinarily has both rights and duties- the right to expect performance from the other party to the contract and the duty to perform what the party has agreed to perform. Although both are often the subject of transfer, the law does distinguish between them, using the term ''assignment'' to refer to the transfer of contractual rights and the term ''delegation'' to refer to the transfer of contractual duties. ***
RESTATEMENT § 317 defines the assignment of a right as ''a manifestation of the assignor's intention to transfer it by virtue of which the assignor's right to performance by the obligor is extinguished in whole or in part and the assignee acquires a right to such performance.'' Section 317(2) permits a contractual right to be assigned unless
(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, or materially impair his chance of obtaining return performance, or materially reduce its value to him,
(b) the assignment is forbidden by statute or is inoperative on grounds of public policy, or
(c) assignment is validly precluded by contract. (Emphasis added).
Section 318 speaks to the delegation of performance. Section 318(1) allows an obligor to delegate the performance of a contractual duty ''unless the delegation is contrary to public policy or the terms of his promise.'' (Emphasis added.) Section 318(2) provides that, unless otherwise agreed, a promise requires performance by a particular person ''only to the extent that the obligee has a substantial interest in having that person perform or control the acts promised.'' Finally, § 318(3) states that, ''unless the obligee agrees otherwise, neither delegation of performance nor a contract to assume the duty made with the obligor by the person delegated discharges any duty or liability of the delegating obligor.''
Although using somewhat different language, we have adopted those principles. *** [W]e [have] held that ''in the absence of a contrary provision … rights and duties under an executory bilateral contract may be assigned and delegated, subject to the exception that duties under a contract to provide personal services may never be delegated, nor rights be assigned under a contract where delectus personae was an ingredient of the bargain.''
These general statements *** regarding the extent to which rights may be assigned and duties of performance may be delegated are, as noted, subject to any valid contractual provision prohibiting assignment or delegation. Section 19.1 of the PPA very clearly prohibits both the assignment of rights and the delegation of duties of performance, absent express written consent. The issue, then, is not whether PEPCO can make such an assignment or delegation but only whether it has, in fact, done so. The answer to that lies in the effect that the [provisions of the APSA] have on the contractual relationship between PEPCO and Panda.
***
*** The APSA involves a great deal more than merely a resale of electricity purchased from Panda and even more than the effective substitution of one customer for another. Much of Panda's control over its own facility and business was subject to the approval and cooperation of PEPCO; indeed, to a large extent, the operation of the facility was, in many important respects, almost a joint venture. In agreeing to that kind of arrangement, Panda necessarily was relying on its perceptions of PEPCO's competence and managerial style. One does not ordinarily choose a business partner by auction or lottery, and there is no evidence that Panda did so in this case. Paraphrasing § 318(2) of the RESTATEMENT, Panda has ''a substantial interest in having [PEPCO] perform or control the acts promised.'' Under [the APSA], that control has been delegated irrevocably to SEI-a stranger to Panda-with the ability of SEI to delegate it to others.
*** Virtually none of the rights and responsibilities transferred to SEI under [the APSA] are permitted under § 19.1 of the PPA. *** We hold that [the APSA] constitutes an assignment of rights and obligations under the PPA in contravention of § 19.1 of that agreement and that it is therefore invalid and unenforceable.
INTERPRETATION The extent to which contractual rights may be assigned and duties of performance delegated are subject to any valid contractual provision prohibiting assignment or delegation.
CRITICAL THINKING QUESTION If the APSA had involved only the resale of electricity purchased from Panda would the court have permitted the delegation?