Force Majeure Matters: Split Fifth Circuit Decision Reminds Energy Contract Drafters That Such Clauses Have Serious Consequences

January 30, 2013

While attorneys frequently treat force majeure provisions as a throw-away, a recent decision from the U.S. Court of Appeals for the Fifth Circuit underscores the importance of these provisions in energy contracts and contracts in other complex industries. That decision, Ergon-West Virginia, Inc v. Dynegy Marketing & Trade, determined that Dynegy's invocation of force majeure clauses in two natural gas contracts excused it from liability for failure to deliver natural gas in the wake of Hurricances Katrina and Rita. Notably, however, both the lower court and the dissenting Fifth Circuit judge reached the opposite conclusion with respect to one of the contracts.

While hurricanes might seem an obvious case of force majeure, Ergon argued that the clauses in its contracts with Dynegy excused Dynegy's performance only if Dynegy could not remedy the force majeure event with the exercise of due diligence. Because the contracts were general supply contracts, rather than contracts for delivery of gas from a specific source, Ergon argued that Dynegy could have met its delivery obligations by purchasing replacement gas on the open market. Ergon therefore sued, seeking to recover the cost it incurred to cover gas deliveries not made by Dynegy while Dynegy claimed force majeure from the hurricanes.

Under the specific force majeure provision of one Ergon contract, the lower court found that declarations of force majeure by Dynegy's downstream gas suppliers were sufficient to excuse its delivery obligations. The second contract, however, contained a different force majeure provision, which specified that a force majeure did not exist if Dynegy could overcome the force majeure by exercise of "due diligence." The lower court found that this provision obligated Dynegy to purchase gas on the open market to meet its delivery obligations, and that Dynegy was therefore liable for its failure to deliver. While two of the Fifth Circuit judges found this provision to be ambiguous and therefore overturned the trial court's decision, the third Fifth Circuit judge agreed with the trail court, and dissented from the majority opinion's conclusion on the second contract.

Thus, when the lower court's decision is considered together with the Fifth Circuit decision, two of the four judges reading the second force majeure clause concluded it was unambiguous and required Dynegy to purchase gas on the market to meet its delivery obligations. Two other judges reading the same contractual language, however, reached the opposite conclusions, finding it ambiguous and concluding that Dynegy's delivery obligation was excused. The case underscores the importance of careful drafting of force majeure provisions in complex markets like natural gas and electricity, where force majeure events are both more common and potentially more costly than in many other industries.

If you have any questions about the Fifth Circuit decision discussed in this post, or other matters related to the utility industry, contracts, taxation, or transactions, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have decades of experience in drafting complex energy contracts and in all other aspects of complex transactions in the energy and telecommunications industries and are regularly recognized as one of the best energy and natural resource practice groups both nationally and regionally.