background image
F A L L 2 0 1 3
is agreed that on such Party's giving
notice and full particulars of such
force majeure...the obligations of
the Party giving such notice so far
as they are affected by such force
majeure, shall be suspended during
the continuance of any inability so
caused but for no longer period, and
such cause shall as far as possible
be remedied with all reasonable
The term "force majeure" as
employed herein shall mean acts
of God...hurricanes...or partial or
entire failure of wells.
The Fifth Circuit found that the
construction of the contract turned on the
meaning of the term "remedied with all
reasonable dispatch" and that a party to
the contract was only entitled to invoke
force majeure if that party "remedied
with all reasonable dispatch" the force
majeure event.
It rejected the district
court's conclusion that the language
was latently ambiguous and instead
found that what was reasonable was "a
question of fact that must be answered by
looking to the circumstances of the case,
including `the nature of the proposed
contract, the purposes of the parties, the
course of dealing between them, and
any relevant usages of trade.'"
on Seller's expert testimony at trial that
it is standard practice in the natural gas
industry for a seller to simply pass on
force majeure if its upstream suppliers
have declared force majeure, the Fifth
Circuit found that it was reasonable for
the district court, as the trier of fact,
to conclude that Seller's responses
to Hurricanes Katrina and Rita were
enough to satisfy the reasonable dispatch
requirement in the Buyer 1 contract.
The force majeure provision in
the Buyer 2 contract differed from the
Buyer 1 provision. Like its counterpart
in the Buyer 1 contract, it enumerated
certain force majeure events, including
hurricanes and well failures, but then it
ended with a catch-all category: "and any
other causes, whether of the kind herein
or otherwise, not within the control of the
party claiming suspension and which by
the exercise of due diligence such party
is unable to prevent or overcome."
The Fifth Circuit held that because
Seller stipulated that it could have
purchased some gas on the open
market at some price after its suppliers
declared force majeure, the case turned
on whether the final clause modified
only the "other causes" or whether it
modified each of the enumerated force
majeure events as well.
Seller argued
that the final clause applied only to
other, unenumerated causes, and so the
provision did not require a party to use
due diligence, such as attempting to buy
replacement gas on the open market, to
overcome an enumerated cause, such
as a hurricane. Buyer 2 argued that the
due diligence clause applied to all force
majeure events.
The Fifth Circuit found that both
possibilities were reasonable and
had support in Texas case law (which
governed per both contracts).
With both
Seller and Buyer 2 proffering conflicting
reasonable interpretations of the force
majeure provision, the Court found the
contract to be ambiguous and held that
the district court should have considered
the same extrinsic evidence that it relied
on to illuminate the Buyer 1 contract to
clarify the Buyer 2 contract.
The Court
therefore ruled in Seller's favor as to both
From a practitioner's standpoint, the
lesson to be learned from the Dynegy
decision is an obvious one: Be very
clear in drafting a contract about what
is required of a party in the event of a
force majeure event. Counsel for a buyer
should consider including language that
provides that the seller's duty to deliver
the goods is not excused even where
an enumerated potential force majeure
event occurs when the seller can obtain
replacement goods at a comparable
price. To avoid any argument over what
is "comparable," counsel likewise might
want to establish a maximum percentage
over the price currently being paid by
the seller that the seller is obligated to
pay (e.g., "seller's performance is not
excused where replacement goods can
be obtained at a price not exceeding X%
over the price currently being paid by
the seller to obtain said goods...").
Conversely, counsel for a seller will
want to make clear that the seller has no
duty to procure replacement goods if a
force majeure event disrupts whatever
source the seller has chosen to supply
the goods. Language should be included
indicating that the contract is a single
source agreement, and the source should
be identified by name. The potential
force majeure events should be broad
and all-encompassing.
As the Fifth Circuit noted, there
is case law supporting both a duty to
find replacement goods and a non-duty
where the force majeure language is
less than clear on the issue. Careful and
precise drafting is therefore a necessity
to ensure that "boilerplate" force
majeure provisions adequately reflect the
intention of the contracting parties.
1 Ergon-West Virginia, Inc. v. Dynegy Marketing & Trade,
706 F.3d 419, 424 -425 (5th Cir. 2013)
2 Id. at 425 (citing Christy v. Andrus, 722 S.W.2d 822,
824 (Tex.App.-Eastland 1987, writ ref'd n.r.e.))
3 Id.
4 Id.
5 Id. at 425-26.
6 Id. (Comparing Va. Power Energy Mktg., Inc. v. Apache
Corp., 297 S.W.3d 397, 407 n. 13 (Tex.App.-Houston
[14th Dist.] 2009, pet. denied) (noting that the Texas
trial court ruled that the gas buyer was not obligated to
purchase gas on the open market after a force majeure
event and citing Tejas Power Corp. v. Amerada Hess
., No. 149800346, 1999 WL 605550, at *3 (Tex.
App.-Houston [14th Dist.] Aug. 12, 1999, no pet.), in
support of its conclusion), with Tractebel Energy Mktg.,
Inc. v. E.I. Du Pont De Nemours & Co
., 118 S.W.3d
60, 68 (Tex.App.-Houston [14th Dist.] 2003, pet.
denied) ("[O]ne party's assumption about the source of
supply--and [even] the other party's knowledge of that
assumption--is not enough to excuse performance if
alternative sources of supply are still available to fulfill
the contract."))
7 Id. at 426.